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 change hands.
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 concession.
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 suffices.
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.