The Brazilian oil and gas sector does not frequently use
project financing and debt capital markets (DCM) to fund its
activities unlike in other Brazilian capital-intensive sectors
(for example, energy and toll roads) or in other oil markets
(for example, onshore US). This results in reduced capital
returns and creates difficulties for independent oil companies.
Two recent regulations may change this situation.
The first regulation concerns project financing via
reserve-based lending (RBL). The Brazilian oil regulator
– ANP – passed Resolution 785 (Resolution) in
May 2019 to regulate the assignment of exploration and
production (E&P) concession contracts. In Brazil, reserves
in the ground cannot be granted as collateral, so Brazilian RBL
transactions rely on liens over the concession interest or the
concessionaire shares – which require ANP approval to
The Resolution confirms that concession rights, including
the contractual position itself (undivided contractual
interest), may be given as collateral and that the parties
involved require neither to give advance notice to ANP nor to
seek ANP's consent as regards the security documents. However,
security documents must not allow lenders to influence, in any
way, the management or operation of the concession nor restrict
concessionaires' voting rights in these activities.
As far as the ANP is concerned, the oil company must retain
the management and operation of the concession and its ability
to fulfill concession obligations. In short, before foreclosing
on the collateral, lenders may only monitor the performance of
The extent of such limitation is uncertain. Typical
financing provisions like negative covenants will require
analysis to ensure compliance with the regulation. However,
such restrictions are lifted once lenders start enforcement.
From then on, restrictions do not apply to measures necessary
to preserve the assets, guarantee the fulfillment of
concessionaire's obligations or conclude the assignment and
transfer of operations.
The means to secure step-in rights have also been granted by
ANP. If the lender has a power of attorney in its favour, it
can inform ANP that a default has occurred and, having obtained
any necessary consent from other consortium members, the lender
can act in lieu of the debtor as regards ANP and effect an
out-of-court assignment. If the lender acts, the debtor loses
its standing as regards ANP. As in other out-of-court
foreclosures, lenders must ensure they do not abuse their
rights in carrying out such procedures.
Security over concessionaire shares is also an option.
Approval from ANP is required for a change in control if the
concessionaire has a parent guarantee to support its technical
or economic capacity. Parent guarantees must be replaced if the
link of corporate control between concessionaire and parent is
broken, and the replacement is treated like a concession
assignment. If no guarantee exists, giving notice to ANP
This Resolution has improved the landscape enabling RBL as
an alternative for finance oil companies in Brazil. A recent
acquisition of mature fields from Petrobras was the first RBL
under the new regulation.
The second regulation involves DCM funding via local project
bonds (also known as infrastructure debentures). Since 2011,
Brazilian law has granted tax benefits to local individuals and
foreign entities that buy bonds whose proceeds are used to fund
projects deemed a priority by a ministry. Historically, oil and
gas projects have rarely used this alternative. The only
upstream project to have done so was Petrobras' investment in
the onerous assignment area, which achieved qualification in
2015. The benefiting bonds relating to that project, however,
have only recently been issued.
On June 17, the Ministry of Mines and Energy updated its
regulations. It simplified procedures and added activities that
could enjoy tax benefits: underground gas storage, gas
liquefaction and regasification, and production and storage of
fuels and biofuels. Oil and gas production, outflow and
transportation, as well as gas treatment, processing and
distribution remained on the list. A local gas distribution
company in São Paulo (COMGAS) has achieved qualification
for the first project under the new regulation.
The new regulations have improved the legal framework for
financing oil and gas activities in Brazil. As a result, one
should expect new financiers in these sectors, diversifying
lenders' profiles and fostering the arrival of new players.