Brazil Confident New Rules Will Protect Oil Rights

Source: Reuters 9/16/2014, Location: South America

Brazilian regulators were confident that new regulations will trump provisions of the country's 2010 oil law that threaten to strip oil companies such as Royal Dutch Shell Plc of rights to operate major oil fields.

"We're pretty sure that the rules will stand up to any legal challenge," Thiago Macedo, the lead attorney for oil regulator ANP, said at an industry event. "Besides, the government has no interest in taking away operator rights to those concessions."

The rules, known as ANP Regulation 25, do not prohibit Brazil from giving operator rights to some existing fields to state-run oil company Petroleo Brasileiro SA, the regulators said. Instead it interprets the law to allow operators of existing fields to keep running them when the related oil reserve extends into unsold areas subject to the new law.

Under that interpretation, the government would be a minority partner leaving control to existing operators, Macedo said.

The rules are Brazil's latest effort to patch up problems caused by the new legislation. Aimed at boosting state control and revenue from big new offshore finds, the law's passage was followed instead by stagnating output, rising costs and falling investor interest in one of the world's most promising oil frontiers.

"The new law clearly increases the judicial and political risk for some oil companies operating in Brazil," said Pedro Dittrich, a partner specializing in oil at TozziniFreire Advogados, a Rio de Janeiro law firm.

Dittrich, who helped draft the 2010 law as a legal advisor, said the ANP regulations resolve some of the uncertainties created by the new law, but only on a case by case basis.

The problem starts with the 2010 law's requirement that Petrobras, as Brazil's state-run oil company is known, own at least 30 percent and serve as operator - or lead partner - in all new development in an area known as the Subsalt Polygon.

The Polygon, which stretches along Brazil's coast near Rio de Janeiro, was already home to 80 percent of Brazil's output before the law was changed. Much of it was already leased under concession contracts to Petrobras, Shell, Chevron Corp and other companies. The government promised that the new law would not break those contracts.

Brazilian law also requires adjoining exploration areas sharing a common reservoir to be run as a single unit with a single operator, a process known as "unitization."

With the law requiring Petrobras to operate all future Polygon development, many said that would require Petrobras to take control of any new Polygon area subject to unitization, such as Shell's Gato do Mato prospect in the BM-S-54 Block.

Shell owns 80 percent of BM-S-54 and France's Total SA owns 20 percent. The two companies have paid for all development to date. Shell said talks with the ANP were proceeding in a transparent and constructive environment.


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