Exclusive Q&A on Energy & Natural Resources with Carlos Vilhena
Can you outline the current energy & natural resources landscape in your jurisdiction?
There is a lot of expectation for the next four years with respect to the energy and natural resources Sector in Brazil. The new Government that took office on 1 January 2019 has promised a number of things that can have an enormous effect in the sector. These are: revising the production sharing regime for oil & gas, privatizing parts of Petrobras and Eletrobas, the state-owned oil & gas and power companies respectively, amending power regulations, boosting nuclear energy generation, and introducing legislation to attract more investments, including from a tax nature. We will have to wait and see what they can deliver.
Have there been any recent regulatory changes or interesting developments?
Specifically concerning mining, in 2018, the Brazilian Government issued two decrees. The first regulates royalties payable to municipalities affected not by mining itself, but by associated infrastructures. The other decree institutes new regulations to the Mining Code. This effort adds up to the set of Federal Government initiatives targeted at overhauling and updating the Brazilian regulatory framework for the mineral industry and supervenes the current rules that have been in place for nearly 50 years by now.
The erstwhile regulations (instituted by Decree No. 62,934 of 2 July 1968) were outdated, more so because the Mining Code itself has undergone several changes over the last 50 years – while the rules themselves remained unchanged. The 1996 overhaul even expressly stated that the mining code rules should be updated, but this has never come into being. This led to dysfunctional rules whose practical applicability and reliability waned as doubts arouse on account of their purported incompatibility with the Mining Code or the presence of obsolete concepts.
The new regulations have thus come at the right time. The initiative details and updates several provisions and mechanisms already envisaged in the Mining Code. For a start, the Regulations address the scope of authority of the recently-created National Mining Agency (ANM), such being instrumental to establish the duties of ANM (currently under implementation) within the realm of the current Mining Code. Besides, the Regulations set out several concepts germane to the mining industry, which contributes greatly to legal certainty and stability (considering the high technical aspects involved in this sector). More specifically, the Regulations embrace several internationally established concepts, such as mineral resources and reserves. They also deal with current industry issues, such as (re)use of tailings and industrial waste.
As for the exploration license and mining concession regimes, the new legislation details the rights and obligations of the holders of mineral rights, as well as the procedures expected from the Public Administration. More specifically, it is worth citing the possibility of carrying out exploration works even after submitting the final exploration report and before the mining stage. Besides, relevant issues (such as closure of a mine and compliance with the National Dams Safety Policy) were incorporated.
The new prescriptions have come into force in December 2018.
Are there any barriers or restrictions to foreign investment for energy and natural resources in your jurisdiction?
Except for investments in mining in the Border Area and also in nuclear minerals and nuclear power generation, there are no barriers to or restrictions to foreign investment.
The Border Area is a 150km wide strip along the Brazilian territorial borders. In this area, foreign investment in mining is limited to a 40% stake. There is a chance the new Government that took office on the first day of 2019 may want to revise these restrictions, as a manner to attract investments to areas that have seen very little exploration. The restriction to foreign investment is an outdated legislation that really make no more sense. If majority foreign stake is welcome in Brazil’s most valuable natural resources – i.e., the vast offshore oi l& gas reserve – there should not be a restriction to exploration and mining of minerals in the Border Area.
As for nuclear minerals and nuclear power generation, the Brazilian constitution imposes a 100% state monopoly. So not only foreign invested is prohibited, but also national private investments. The new Government has said it will look into boosting nuclear power generation. In order to achieve this, there will probably be a need to bring in private investor. To do so, the state monopoly will have to be somehow changed. Perhaps into something similar as happened with oil & gas in the 90’s, when the Constitution was amended to end the state monopoly and allow for the introductions of a concession system for oil & gas. These changes have proved very beneficial for the Brazilian economy.
How has the domestic landscape impacted, positively or negatively, the ability to conduct cross-border business?
The offshore oil & gas market will keep providing relevant opportunities, as it has been announced that the National Petroleum Agency will keep an aggressive schedule of rounds of bids over the next years. In addition, the possible change to the production sharing regulations will likely generate more investments opportunities.
In the power sector, the fact that the new government has reiterated the will to carry on with the privatization of Eletrobras (the Country´s state owned power generation and distribution giant) is very positive from an investment opportunity perspective.
The new government has mentioned their intention to focus on nuclear power generation. If this is really the case, there will certainly be big opportunities.
As to the mining sector, zinc and copper have recently attracted interest, so has gold, potash and niobium.
What are the main benefits and challenges surrounding developments in nuclear technology?
Brazil has a closed state monopoly over nuclear minerals, nuclear energy and nuclear technology. The new National Government has clearly stated they wish to boost nuclear power generation. In order to do so, I believe the state monopoly will have to end or somehow be made more flexible, so as to allow private investments, both national and foreign. In this scenario, there will be ample room for development of nuclear technology and investments in this area.
In an ideal world what would you like to see implemented or changed?
In an ideal World, my wish list would include prevalence of the rule of law; elimination (or at least severe reduction) of corruption; improved and enforced accountability of politicians, government officials and executive of corporations; stable and efficient application of the law; full security of tenure; less government intervention in business; reasonable government takes; responsible and efficient use of tax revenues; serious environmental and community concerns.
All of these are within the stated proposals of the National Government that took office on January 1st. Hopefully they will deliver at least on part of these matters.
Carlos Vilhena is a Partner of Pinheiro Neto Advogados. He has been a Partner at the firm, since 2001 and coordinates the firm's mining law and government relations practices. His practice areas include mining and government relations. In recent years, Mr. Vilhena has given legal advice for a large number of clients, including major and junior mining companies, in all areas related to the mining sector, including policy, regulatory, M&A, land, community relations, infrastructure, indigenous populations, processing, sales, tax, environment, power, contracts, corporate, financing and litigation.
Carlos Vilhena can be contacted on +55 61 3312 9492 or by email at email@example.com