Keywords

1 Introduction

World energy demand is projected to grow, especially as the economies of the Global South grow. Demand for hydrocarbons is on the core of this dependency, driving the need for discovery and development of new oil and gas fields, including unconventional sources such as shale gas, which aims to compensate for the projected decrease of production from conventional sources and source regions.

In this regard, law has a crucial role on regulating the market, giving the necessary background for the development of the oil and gas industry, as a means to guarantee the energy security of the countries (KONOPLYANIK 2008) and, at the same time, safeguard the environment, operations, investors and society, especially when it comes to the use of new and controversial technologies, such as hydraulic fracturing.

With the aforementioned proposition in mind, this chapter will analyze the stage of development of hydraulic fracturing in Brazil, demonstrating the country’s major energy sources and the role played by natural gas in this context. This chapter will also analyze how the exploration and production of shale gas could positively contribute to the country’s energy security. Further, we will describe the Brazilian legal system and legislation applicable to oil and gas exploration and production, providing details about the existing regulation for hydraulic fracturing activities. We will also provide information of the social conflicts and legal cases arising out of the possibility of exploration and exploitation of shale gas in the country with the use of hydraulic fracturing.

Finally, it concludes that although the development of the operations for the production of unconventional gas could conceivably improve the country’s energy security, there is a lot yet to be done to develop and implement the applicable regulations for the performance of hydraulic fracturing in Brazil.

2 Energy Sources in Brazil

During the last few years Brazil has increased its dependency on non-renewable energy, with oil (together with its by-products) and natural gas the most significant sources used in the country, playing, therefore, an important role in its energy security.

In the year 2016, according to the Ministry of Mines and Energy (BRASIL 2007), the Brazilian domestic market for energy sources was based on 43.5% of renewable energy sources and 56.5% of non-renewable energy sources. Natural gas corresponded to 12.3% of the market, while oil and its by-products corresponded to 36.5%, mineral coal to 5.5% and uranium to 1.5%. The renewable sources were based on sugarcane biomass (17.5%), hydropower (12.6%), wood and charcoal (8%) and other sources (6.1%) (Fig. 19.1).

Fig. 19.1
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Brazilian energy sources. (Source: Ministry of Mines and Energy, “Boletim Mensal de Energia”, June 2017)

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With specific regard to exploration and production of oil, Brazil ranks amongst the top oil producers in the world, with proven reserves of 12.6 billion barrels of oil equivalent (BOE) and nearly 800 hydrocarbon producing areas under concession. In 2016, the country produced an average of 2730 million BOE per day. The recent discovery of large oil reserves in the so-called pre-salt layers, covering an area of around 800 km across the Brazilian continental shelf, has generated considerable enthusiasm for hydrocarbonbased economic development. The federal government estimates that the country’s reserves could amount to nearly 100 billion BOE which, if proven, will indeed place Brazil amongst the most important oil producers in the world (AGÊNCIA NACIONAL DO PETRÓLEO, GÁS NATURAL E BIOCOMBUSTÍVEIS 2017).

The feasibility of profitable exploration and production (E&P) projects in the post-salt and pre-salt layers just offshore but in Brazilian territorial waters has led to investments from major companies worldwide. With this in mind, the oil industry in Brazil will likely remain a magnet for domestic and overseas investment in the energy sector.

Recent studies estimated that by 2022 the daily production of oil in Brazil will range around 5.5 million BOE. Accordingly, it is expected that Brazil may have a major role in the world’s oil market in the next 10 years, acting not only as an exporter of crude oil, but also as an exporter of its by-products, in view of the recent oil discoveries and of the expected enlargement of the countries’ refining capacity – currently 18 refineries.

When it comes to natural gas, although demand is not as strong as that for oil and its by-products in the country, it should be noted that currently the Brazilian natural gas consumption is not met entirely through domestic production; thus, there is a need for importation of natural gas to fulfill the country’s domestic needs.

For that reason, in order to guarantee the country’s energy security, one may conclude that the development of the exploration and production of natural gas should one of the government’s top priorities. According to the latest official statistics, from 2004 to 2016, proven reserves of natural gas in Brazil increased 50%, mostly from newly-discovered offshore resources (AGÊNCIA NACIONAL DO PETRÓLEO, GÁS NATURAL E BIOCOMBUSTÍVEIS 2017).

Hence, the production of natural gas in the country is focused on conventional sources, with offshore fields the major contributors – in 2016 offshore production corresponded to 83.3% (AGÊNCIA NACIONAL DO PETRÓLEO, GÁS NATURAL E BIOCOMBUSTÍVEIS 2017) of the total amount of natural gas produced in the country.

In the year 2016, the production of natural gas reached 37.89 billion m3, with conventional gas representing 28.54 billion m3 of such production (AGÊNCIA NACIONAL DO PETRÓLEO, GÁS NATURAL E BIOCOMBUSTÍVEIS 2017). Even so, demand is such that in order to fulfil domestic needs, the country must import natural gas, mainly from Bolivia.

For that reason, although the exploration and production of shale gas is currently under close scrutiny in respect to environmental and regulatory issues related to its development, the reserves of such unconventional resources may lead Brazil to pursue accelerated development, contributing to the enforcement of the country’s energy security, as it would play an important role for the fulfillment of the country’s domestic needs.

According to the estimates recently released by the U.S. Energy Information Administration (2015), Brazil may have a shale gas reserve of approximately 226 trillion m3, the tenth largest reserve of the world and the 2nd largest in South America.

The most promising deposits of shale gas in the country are located in (i) Parecis Basin, in the state of Mato Grosso; (ii) Parnaíba Basin, in the states of Maranhão and Piauí; (iii) Recôncavo Basin, in the state of Bahia; (iv) Paraná Basin, in the states of Paraná and Mato Grosso do Sul; and (v) São Francisco Basin, in the states of Minas Gerais and Bahia. See Map 19.1.

Map 19.1
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Onshore sedimentary basins with prospect for shale gas in Brazil. (Callum Foster, UWE Cartography)

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Currently, shale gas operations in the country are concentrated in the southern region of Brazil, more specifically in the city of São Mateus do Sul, located at Paraná State - - the so-called Unit of Operation and Industrialization of Shale (“SIX”), operated by Petroleo Brasileiro SA (“Petrobras”), the Brazilian national oil company. In 2016 the volume of shale processed in the country was 1.6 million of m3, decreasing on 8.4% when compared with 2015 (AGÊNCIA NACIONAL DO PETRÓLEO, GÁS NATURAL E BIOCOMBUSTÍVEIS 2017). From exploitation of the aforementioned SIX reserves, are obtained the following energy products: shale gas, liquefied petroleum gas (“LPG”), naphtha and fuel oil. Also produced area number of non-energetic by-products. When evaluating the estimate reserves of shale gas and its volume of production in the country, one may conclude that, although Brazil may have important reserves of such unconventional source, its exploration, production and processing are not yet significant.

The production of shale gas in 2016 was of 5.2 tons, being 33.4% less than the production of 2015. The same happened with LPG, which production in 2016 decreased by 14.5%, being produced 20.6 thousand m3 (AGÊNCIA NACIONAL DO PETRÓLEO, GÁS NATURAL E BIOCOMBUSTÍVEIS 2017) (Table 19.1).

Table 19.1 Volume of processed shale oil and production of shale oil products
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When evaluating the estimate reserves of shale gas and its volume of production in the country, one may conclude that, although Brazil may have important reserves of such unconventional source, its exploration, production and processing are not yet significant.

There are several causes for the shale gas slow development in Brazil, but the most important one seems to be related to the uncertainties brought up by the current legislation/regulations in place. Accordingly, specific laws need to be enacted with regard to the particulars of the operation and environmental impacts linked to application of hydraulic fracturing for energy production.

3 Overview of the Oil and Gas Industry and Regulations in Brazil

Before dealing directly with the regulations related to the production of shale gas in Brazil, we offer an overview of the country’s oil and gas industry and its applicable legal framework.

The 1988 Brazilian Federal Constitution grants to the Federal Union ownership over mineral resources within the Brazilian territory, which are deemed an independent asset from the soil wherein they are located.

Article 176. Mineral deposits, under exploration or not, and other mineral resources and the hydraulic energy potential form, for the purpose of exploitation or use, a property separate from that of the soil and belong to the Union, the concessionaire being guaranteed the ownership of the mined product. Paragraph 1 – The prospecting and mining of mineral resources and the utilization of the potentials mentioned in the caption of this article may only take place with authorization or concession by the Union, in the national interest, by Brazilians or company organized under Brazilian laws and having its head office and management in Brazil, in the manner set forth by law, which law shall establish specific conditions when such activities are to be conducted in the boundary zone or on Indian lands. Paragraph 2 – The owner of the soil is assured of participation in the results of the mining operation, in the manner and amount as the law shall establish. Paragraph 3 – Authorization for prospecting shall always be for a set period of time and the authorization and concession set forth in this article may not be assigned or transferred, either in full or in part, without the prior consent of the conceding authority. Paragraph 4 – Exploration of a renewable energy potential of small capacity shall not require an authorization or concession. (BRASIL 1988, free translation).

During the mid-1990s, certain constitutional amendments were introduced in order to create the basis for an open market policy and minimum state intervention in the Brazilian economy. In such scenario, constitutional amendment EC No. 09/1995, which modified article 177 of the 1988 Brazilian Federal Constitution, authorized the Federal Union to hire both state-owned or private companies to perform activities related to oil and gas exploration and production. Up to that moment, only Petrobras, the Brazilian national oil company, was entitled to perform such activities.

Article 177. The Following are the monopoly of the Union: I – Prospecting and exploration of deposits of petroleum and natural gas and of other fluid hydrocarbons; II – refining of domestic or foreign petroleum; III – import and export of the products and basic by-products resulting from the activities set forth in the preceding items; IV – ocean transportation of crude petroleum of domestic origin or of basic petroleum by-products produced in the country, as well as pipeline transportation of crude petroleum, its by-products and natural gas of any origin; V – prospecting, mining, enrichment, reprocessing, industrialization and trading of nuclear mineral ores and minerals and their by-products. Paragraph 1 – The Union may contract with state-owned or with private enterprises for the execution of the activities provided for in items I through IV of this article, with due regard for the conditions set forth by law. Paragraph 2 – The law referred to in paragraph 1 shall provide for: I- a guarantee of supply of petroleum products in the whole national territory; II- the conditions of contracting; III – the structure and duties of the regulatory agency of the monopoly of the Union. Paragraph 3 – The law shall provide with respect to the transportation and use of radioactive materials within the national territory. Paragraph 4 – The law which institutes the contribution of intervention in the economic order levied on activities of importation or commercialization of petroleum and its by-products, natural gas and by-products and alcohol fuel shall observe the following: I- the rate of the contribution may: a) be established in accordance with the product or its use; b) be decreased and re-established by act of the Executive Power, the provisions of article 150, III, b no being applicable; II – the proceeds shall be used for: a) the payment of subsidies to prices or transportation of alcohol fuel, natural gas and by-products and petroleum by-products; b) the funding of environmental projects related to the gas and petroleum industry; c) the funding of infrastructure of transportation. (BRASIL 1988, free translation).

Said EC No. 09/1995 was followed by the enactment of Law No. 9.478/1997, also known as the Petroleum Law, which changed the entire legal framework of the oil and gas sector in Brazil. The Petroleum Law introduced the concession regime for the exploration and production of oil and gas in the country. With this new approach, the government authorized different economic agents to explore and produce oil and gas under par-ticular concession agreements, upon bid proceedings conducted by the National Agency of Petroleum, Natural Gas and Biofuels (“ANP”).

The concession regime has been successfully used in Brazil since the opening of the oil and gas market to private companies. Under the Concession Agreement that is entered into by and between ANP and the companies that win its bid proceedings, the exploration and production activities are carried out at the sole risk of the oil companies, who will have the sole ownership of the oil and gas so produced.

Later on, the discovery in 2007 of large oil and gas reserves concentrated in the pre-salt layers encouraged the Brazilian government to enact Law No. 12.351/2010 (the “Pre-Salt Law”), which created a new regime for the pre-salt and strategic areas, by imposing the Production Sharing Agreement (“PSA”) in lieu of the concession agreement that is still applicable to all other areas. According to the Pre-Salt Law, Petrobras, the Brazilian national oil company, will have the preference to be the operator and hold a minimum stake of 30% in any consortium formed with private oil companies that win the public ANP bid proceedings. Such preference was regulated by Decree No. 9,041/2017, which provides the rules and definitions that shall be applied for the execution of such preference by Petrobras.

Under the production sharing regime, oil companies shall bear all the risks of the activity, even though the production is the property of the federal government. In case of a commercial discovery, oil companies will then recover the costs and investments made and they will be entitled to a certain percentage of the remainder of the production, according to the provisions of the PSA. The parties to the PSA shall be the Federal Union, represented by the Ministry of Mines and Energy (“MME”); ANP, as the regulatory and supervising agency; PPSA, the state-owned company that was created to manage the PSAs; Petrobras (if it used its preference right) and other relevant oil companies.

Although the execution of the PSA is usually preceded by a bid proceeding, Petrobras may also be directly hired, whenever such measure is deemed relevant for preserving national interests and the attainment of the energy policy’s goals.

When it comes to activities related to natural gas, Law No. 11.909/2009 (the “Gas Law”) regulates the transportation, treatment, processing, storage, liquefaction, regasification and commercialization of natural gas, as well as the import and export thereof.

The Brazilian natural gas market is also regulated by the ANP along the entire value chain, from exploration and production sites to end user. From there on, regulatory agencies in each state are responsible for the regulation of the distribution of such products to final con-sumers. Both State and private companies, either national or international, are free to participate in all stages of the gas value chain. The Brazilian Federal Constitution authorizes the states to exploit either directly or through concessions the services related thereto. Therefore, such activity is regulated by the states and their respective agencies.

In Brazil, natural gas is mainly used in the domestic market by the industry and transport sectors, since the country’s climatic and geographical features make LPG of major use in the residential sector.

4 Shale Gas – Regulation and Exploration

Currently, the only piece of regulation dealing exclusively with exploration and production of shale gas in Brazil is Resolution No. 21/2014, issued by the ANP on 10 April 2014, aiming to regulate the operations of hydraulic fracturing in unconventional gas fields in the country. After protracted discussion with the oil and gas industry, the enactment of this Resolution was mainly motivated by the fact that the 12th ANP Bidding Round, which was held in 2013, included under its offered assets areas with potential for exploration and production of unconventional gas through the use of hydraulic fracturing. Among other provisions, Resolution No. 21/2014 imposes the obligation for operators to adopt an environmental management system and to perform previous technical studies, in order to obtain approval for the operations (i.e. fracturing simu-lations and risk analysis). Also, environmental licences, with specific authorization for operations of hydraulic fracturing are required prior to ANP’s authorisation for the hydraulic fracturing activities.

Moreover, said Resolution No. 21/2014 also implements standards to be observed by operators during the activities of hydraulic fracturing, as well as requiring determines the preparation of an emergency response plan.

It should be noted that Resolution No. 21/2014 is the subject of numerous complaints, mainly from the Brazilian Public Prosecutor’s office and other society representatives, mostly because it may surpass, without the required knowledge and technical basis, the powers and obligation of the environmental authorities. That is mainly because, nowadays, Brazil does not have specific procedures or recommendations from the environmental authorities regarding precisely the activities of exploration and production of shale gas.

This fact brings uncertainties and lead to several discussions in regard to the safety of hydraulic fracturing operations, especially in view of the risks of contamination of water reservoirs and the need for excessive use of potable water.

Accordingly, one of the main issues discussed in Brazil is related to which is the key competent authority to assume responsibility for the licensing procedures and required inspections to environmental licenses for hydraulic fracturing. According to the Brazilian environmental legislation, specifically Resolution CONAMA No. 237 (BRASIL 1997), article 5th, for activities conducted onshore, member states’ environmental agencies should be the authorities responsible to perform environmental licensing procedures and the consequent inspection of the operations to be implemented

Considering the location of some fields, specific operations of hydraulic fracturing may affect the territory of more than one member state. In this case, according to Resolution CONAMA No. 237 (BRASIL 1997), article 4, it would be required the involvement of the Brazilian Federal Environmental Agency (“IBAMA”) to perform licensing procedures, as well as to assume all of the applicable environmental regulation. However, there is no definition of the specific situations related to hydraulic fracturing where it would be required the involvement and transference of environmental regulation to IBAMA. On other words, it remains unclear which is the competent authority to deal with the environmental licensing for activities of exploration and production of unconventional gas in Brazil.

Another important matter currently discussed is the need for official guidelines for the performance of environmental impact studies required for hydraulic fracturing activities. Such studies would serve as a basis for imposing restrictions to the relevant environmental licenses or even to sustain its denial, if such studies conclude that the impacts to the environment would cause major risks to the affected environment wherever applicable.

Such inconsistencies and regulatory gaps led to judicial disputes related to the legality of the aforementioned 12th Bidding Round, and consequently of the concession agreements subsequently executed (related to areas for exploration and production of unconventional gas) and, thus, caused several discussions regarding the feasibility of the implementation of hydraulic fracturing in the country.

5 Conflicts Related to Hydraulic Fracturing Activities

As mentioned under item “IV” above, following the 12th Bidding Round of concessions for the exploration and production of unconventional gas on certain areas located in the Parecis, Recôncavo, Acre, Parnaíba, São Francisco and Paraná basins, several Public Civil Claims were filed in different courts of the country, which areas were included in the scope of the 12th Bidding Round.

Accordingly, the aforementioned Public Civil Claims received different numbers, and were filed before the Federal Courts of the State member which the areas, as per the table below:

Number of the Lawsuit

Court

Area of Fracturing

0005610-46.2013.4.01.4003

Federal Court of Piauí

Parnaíba River Basin

0030652-38.2014.4.01.3300

Federal Court of Bahia

Recôncavo Basin

0800366-79.2016-4.05.8500

Federal Court of Sergipe

Sergipe-Alagoas Basin

0001849-35.2015.4.01.3001

Federal Court of Acre

Acre Basin

5005509-18.2014.4.04.7005

Federal Court of Paraná

Paraná River Basin

The intention of such Public Civil Claims was mainly to block the exploration of shale gas in the aforementioned areas with the use of hydraulic fracturing, con-sidering the lack of proper regulation and technical studies capable to address and avoid environmental damages that could arise out of such activities. In this sense, it has been required under the aforementioned lawsuits (i) to recognize the nullity of the effects arising out of the 12th Bidding Round, as well as of the concession agreements, and (ii) the prevention of ANP to perform new bidding rounds and/or to execute new concession agreements for operations in such areas.

As a result, several injunctions and other judicial decisions were issued (some of the claims do not have a final decision yet), granting the aforementioned Public Civil Claims, so as to prevent the exploration and produc-tion of shale until (i) new regulations are enacted for the use of hydraulic fracturing and (ii) further environmental procedures and studies are performed, so as to avoid risks to public health, economy, and environment.

It shall be noted that the population itself has also reacted against the 12th Bidding Round and organized a protest in the city of Toledo, at Paraná State (where it is located the greater part of the Brazilian shale reserve), when approximately 1000 people participated. Such protest was led by the organization called COESUS – Coalização Não Fraking Brasil, which is composed by Brazilian scientists, environmentalists, engineers, among other professionals, and constantly acts, mainly through the participation of hearings with Brazilian authorities and publication of articles, against the exploration and production of shale gas in the country.

6 Conclusions

Considering the existing national reserves, the exploration and production of shale gas can play an important role in energy security, since Brazil was listed as one of the most promisor producers.

Although the development of the operations for the production of unconven-tional gas can lead Brazil to a promising position as a natural gas producer and contribute for the enforcement of the country’s energy supply, there is yet a long way to go before the development and implementation of such activities. The main concerns are related to the lack of an appropriate legal framework, which is capable to address the potential risks that hydraulic fracturing may pose on the environment, society and local economy.

As we also see in other countries, mainly in Europe, the activities dealing with unconventional gas in Brazil are in the early stages. It is advisable that the Brazilian government should commission studies and exchange information with other nations (that have experi-ence in the exploration and production of shale gas), in order to create a proper legal framework — especially environmentally oriented — addressing authorities and society’s concerns as well as removing uncertainties for companies and potential investors. If these steps are taken, Brazil may finally be in the right track for a sustainable development of its shale gas exploration and production.