New Unitization Regulation for Offshore Brazil

On September 8, 2017, the National Agency for Petroleum, Natural Gas and Biofuels ("ANP") published Resolution No. 698 (“Resolution”) for the purpose of establishing rules on the unitization procedures for oil and natural gas production in the event that the deposits extend beyond a block under the concession regime, production sharing regime or transfer of rights areas.

Based on the guidelines established by the National Energy Policy Council (“CNPE”) through Resolution No. 8 of December, 2016, the ANP adjusted the regulation on this subject – in the form of Resolution No. 25/2013 (“Resolution 25”) - as well as updated its text to reflect the ending of Petrobras’ role as sole operator.

The main changes put forward by the Resolution  refer to (i) the  procedures to be adopted while the non-contracted area (“open acreage”) is not contracted, (ii)  the alteration of the reporting term to the ANP about the possible existence of a shared deposit and (iii) the rules regarding appropriation and division of production.

According to the Resolution, while the open acreage is not contracted, the oil company operating in the contracted area may choose to suspend the contractual term, until such area is contracted, or may choose to continue its activities in the area of ​​occurrence of the shared deposit, provided that it is authorized and under the conditions defined by the ANP.

Furthermore, while the open acreage is not contracted, the operator of the unitized area shall be the operator of the contracted adjacent area. However, in the event that the shared deposit extends over more than one contracted area, the parties shall define the operator in the unitization agreement. After the open acreage is contracted, the concerned parties will be able to freely appoint the operator of the unitized area.

This Resolution has also altered the reporting term to the ANP about the possible existence of a shared deposit. Resolution No. 25 established a ten (10) business day term after the detection of said existence, however, the new regulation employs the term “promptly” as a time frame for reporting.

In the event that the beginning of production of the shared deposit is prior to the effective date of a unitization agreement involving the open acreage, the production of the shared deposit shall be fully appropriated by the holders of exploration and production rights of the contracted area, including long term tests.

Concerning the expenses incurred by the holder of the contracted area, before the effective date of the unitization agreement, the regulation establishes that the recovery will occur only if there is a declaration of commerciality of at least one discovery in the unitized area, and this recovery will be up to the limit of production to which the Union is entitled. In this context, the resulting balance between the recorded amounts of revenue and expenses shall be paid by the debtor.

Finally, it should be mentioned that the new regulation is expressed in terms of expenses that cannot be recovered, namely: (i) the payment of signature bonuses and execution of the minimum exploratory program, and (ii) expenses incurred in activities in the contracted area that have not produced data and information on the shared deposit nor contributed to its demarcation.