The petroleum industry works under a distinct business dynamics. Petroleum companies are constantly changing its assets portfolio across the globe guided by a combination of factors, which include the reorientation of its strategic planning, new evaluation of the investment scenario (including interpretation of geological data, economic feasibility and political risks) and new business opportunities in different locations. Furthermore, the perception of the risk involved in each project and the appetite to assume risks are important drivers in the companies' decision making process on whether investing in determined country or area. Thus, while a geological, economic and political assessment carried out by one company may persuade it to disinvest in determined area, the scrutiny of the same area by other company may recommend it to step in or to increase of its current investments in such area.

In this regard, the transfer of petroleum exploration and production ("E&P") rights play a crucial role in the petroleum industry, being an opportunity to host countries and petroleum companies to, respectively, attract more investments and have additional access to petroleum assets, especially when the bid rounds for the granting of petroleum E&P rights are not held so frequently. A good example was the gap between the 10th Bid Round (2008) and the 11th Bid Round (2013) in Brazil. It also may work as an financing instrument by petroleum companies, since the consideration paid by the buyer may be used by the seller to finance its work commitments in the same area or elsewhere.

Worldwide, the transfer of petroleum E&P rights is performed under two principal mechanism: the farm-in/farm-out transactions (i.e., asset acquisition) and the share acquisition. While the first one involves the direct acquisition of interest in a determined petroleum agreement and associated assets from the company which holds them, the second regards to the acquisition of the majority or all of the shares in the company which hold interests in a determined petroleum agreement and underlying assets, which results in a change of control of the ultimate beneficial owner of the E&P rights.

In line with the international practice, the Petroleum Law (Law No. 9478/97), under the general legal authorization granted by the Brazilian Constitution, expressly provides for the possibility of the transfer of rights under concession and production sharing agreements for the E&P of hydrocarbons, provided that such transfer is previously and expressly approved by the National Agency of Petroleum, Natural Gas and Biofuels ("ANP") and that the transferee meets the technical, economical and legal criteria establish by the ANP. The concession and production sharing agreements, on its turn, will establish the premises under which a specific transaction shall be regarded as a transfer of concession rights for purpose of the prior approval by the ANP and the formalities to be observed for the effectiveness of such transfer.

According to the latest version of concession agreement (11th Bid Round, held in May 2013), the following transactions are considered as transfer of concession rights and subject, therefore, to the prior approval of the ANP: (i) total or partial transfer of ownership or rights and obligations arising from the concession agreement (asset acquisition); (ii) merger, spin-off and amalgamation of the concessionaire; (iii) change of operator or guarantor; and (iv) change of the corporate control of the concessionaire (share acquisition). The production sharing agreement of the 1st Bid Round, the only that happened until now, have similar language including the change of corporate control and the cases of merger, spin-off and amalgamation.

The inclusion of the share acquisition in the list of events subject to ANP's prior approval was an innovation introduced in the concession agreement for the 11th Bid Round. The previous versions of the concession agreements entered with the ANP in the earlier Bid Rounds do not deal with the transfer of control as a hypothesis of transfer of concession rights for purpose of ANP's prior consent. Under such agreements, only transactions that would result in the direct acquisition/change in the ownership of concession rights, including the merger, spin-off and amalgamation of the concessionaire, would require the previous approval of the ANP. The only possibility that a share acquisition with change of control required prior approval of ANP was the case which there was a substitution of the performance guarantee.

The performance guarantee form a controlling company is required when the concessionaire does not meet the financial qualification for owning the E&P rights. In many cases companies create a subsidiary to allocate a certain E&P rights and the controlling companies have to present the performance guarantee. The sale of shares of such companies (vehicles for sales) would necessarily involve a substitution of performance guarantee and therefore require prior approval of ANP as if it was an asset sale. Before the 11th Bid Round, only transfer of control with substitution of performance guarantee would require prior approval of ANP. The situation changed with the 11th Bid Round and for such new agreements now any direct or indirect change of control would require prior approval. Although very broad because it includes direct or indirect transfer, the language of the concession agreements after the 11th Bid Round have a clear definition of transfer of control being the transfer of 50% plus one share or quota with voting rights. In case of the production sharing agreement, the definition is broader as it includes any transfer of control and the transfer of the majority of the capital stock (without specifying the voting rights).

In both cases the direct and indirect transfer is part of the definition, and the groups with interest in exploration rights in Brazil will need to take into consideration this fact for any indirect sale. This may even be a problem in case of sale of stock of public traded companies, as there is no exception provided by the agreements.

Due to the languages of the different agreements and the period of time for obtaining ANP approval, any acquisition of E&P rights in Brazil should be analyzed carefully and take into consideration the bid round involved for the definition of the acquisition structure to be adopted. Another great concern for the groups with exploration rights from recent bid rounds is the prior approval necessary for indirect transfer of control, which may affect worldwide and large transactions of such nature.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.