Brazil: Unitization In Brazil

The unitization in Brazil follows the basic principles of unitizations in the international oil and gas industry. In terms of specific regulations, it is adapted to the Brazilian regime which today involves concession, production sharing and the onerous assignment to Petrobras.

The unitization as in any other country applies to the situations that a reservoir extends the boundaries of a contracted block. The goal is to regulate the participation of the parties form the different contracted blocks or between the parties from one block and the Government in case the reservoir extends to an area not yet granted to an oil company. The concept is that the parties would be entitled to a fair interest of the reservoir considering the original participation in the blocks involved in the unitization. The main goal is to prevent predatory field production and optimize costs and results.

In Brazil, the unitization is regulated and supervised by the National Petroleum Agency ("ANP"), having the authority to approve the contracts and to impose the terms and conditions if the parties do not reach an agreement.  The Federal Law 12,351/2010 and ANP Resolution 25/2013 are the legal framework of the unitization in Brazil. They define the main requirements of the unitization contract, the rules for the non-contracted areas, local content, government take among many other rules.

Although the agreement needs to be approved by ANP, the parties are entitled to freely negotiate its terms under certain requirements of the legislation. The definition of the parties vary depending on the location of the reservoir. If it is located on a contracted area with different companies or consortiums, the companies or consortiums therein located must execute a unitization agreement. This is the ordinary situation which the oil companies define the conditions of the agreement.

A different situation can happen with contracted areas of the same company or consortium with identical composition and percentages of participation with a reservoir crossing both areas, such company or consortium shall execute a Commitment Term of Unitization of Production. Such document is necessary as the different areas have different agreements and obligations. Therefore, it is necessary to define the participations, the rules of local content and the government take.

A third situation involving a non-contracted area is also possible and it has been happening in different cases in Brazil. If a reservoir is located in a contracted area and extends to a non-contracted area, the Brazilian Government will be the party of the unitization agreement. This does not prevent the area to be offered in a bid round, but the future holder of the rights of the area (concession or production sharing agreement) will be subject to such agreement. In this case after definition of the future concessionaire or contracted party, the unitization agreement may be adjusted.

The unitization of non-contracted areas will also vary depending of the location of the reservoir. If the shared reservoir is located in the pre-salt area or in strategic area and extends to a non-contracted area, the Brazilian Government will be represented by Brazilian Pre-salt Public Company - PPSA^[1] ("PPSA"). Otherwise, if not located in such areas, the government will be represented by ANP.

An interesting situation can happen because of the recent change of the legislation in Brazil creating the production sharing regime. Some areas of the pre-salt were granted before the new legislation under the concession regime and there could be an unitization of an area under the concession regime and another under production sharing regime. It is also possible the execution of the PPSA unitization agreement with a party holder of a concession in the pre-salt. In such situations the unitization agreement will also have to deal with the differences of the regimes, government take etc.

The expenses of the parties should be proportional to the interest the parties would have in the reservoir subject to unitization. Although the parties could set different terms in the agreement, that is unlikely to be agreed by parties. In case of a unitization with a non-contracted area, the Government would also be responsible for its interest in the expenses. However, the legislation sets forth that the Government should not make any disbursement to pay the costs for its interest, being its share of costs of production and investments in the development phase deducted from the amount to which is entitled in the production of the shared reservoir. Such deduction shall not exceed the amount equivalent to 20% of the monthly production of the shared reservoir. Although, the rationale of upstream in Brazil is that the Government should not make investments, this rule could turn an economic viable reservoir into non-viable. It is not just the carrying aspect, but mainly the limitation on the deduction which makes this rule over protective in favor of the Government.

The redetermination is another important topic of unitization. This is one of the requirements of the law and it is a standard of the industry to have limitations and rules for the request of redetermination by one of the parties. Besides the rules of the agreement, ANP may request a redetermination is made when technically justifiable. This is another provision criticized for situations of unitization in non-contracted areas. Such rule could be used by Government to request redeterminations above the limits provided for in the agreement. 

Local content which is one of the main concerns of the oil companies in Brazil also has some specific rules in case of unitization. In the exploration phase, the parties shall comply with the commitments of local content following the provisions in the agreements that govern the contracted areas that contains the shared reservoir, subject to individualized inspections. In the stage of development of the production phase, the local content shall comply with the proportionality, calculated based on the consideration between the original volume of equivalent oil of the areas subject of unitization; and  the respective commitments of local content defined in the agreements that govern the contracted areas that contains the shared reservoir. For the non-contracted areas it shall be considered the local content commitments of the contracted areas.

If the Parties do not voluntarily execute the Unitization Agreement within the period established by ANP, a petition shall be submitted to ANP by the parties informing what prevented the execution of the unitization agreement and the petition shall comprise a proposal for solution. Based on these information provided by the parties and other information that ANP may request, a technical report will be prepared either by ANP itself or by third parties accepted by ANP. The report shall be submitted to ANP's Board which will define the terms for the unitization agreement to be executed by the parties.

With the increase of the offshore production over the years, unitization agreements in Brazil became more frequent and it tends to become even more frequent in the future. According to Brasil Energia Petróleo e Gás magazine^[2], a research made by GEE, a group of economy and energy of the Federal University of Rio de Janeiro (UFRJ) indicates that there are 20 to 25 billion of oil barrels in fields that will require unitization of production and oil company officers estimate that 50% to 60% of the oil to be produced in the year of 2020 will come from assets of areas that will need unitization. The same article informed that PPSA expected to conclude 6 cases of unitization this year but had already identified another 19 areas that may be subject to unitization due to the extent of the reservoir to non-contracted areas in the pre-salt polygon. 16 out of these 19 cases were foreseen to start production between the years of 2014 and 2015.

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.