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Constitutional Property Rights over Oil Investments in Brazil

By Maria Maldonado

  I. Introduction

On November 8, 2007, the head of upstream regulator of Brazil Agencia Nacional do Petróleo (ANP) confirmed the discovery of a huge amount of ultra-deep oil field in Tupi [1], which increased 50% of Brazil's total oil reserves. [2] It is expected that in 2015, the exploitation of this oil field will allow Brazil to export up to one million of barrels per day [3] and will position Brazil as the eighth leading country with largest oil reserves in the world, between Nigeria and Venezuela. [4] As a result, it has become in an attractive place for U.S. oil investments in the upstream business.

This find might be an alternative to the new energy policies that President-elect Obama plans to implement, according to his New Energy for America Program, which includes the aspiration of eliminating current imports from Middle East and Venezuela before 2018. [5] Brazil might very well help to minimize the threat to US oil supply stability by becoming the next U.S. crude oil supplier.

One of the main factor investors evaluate when deciding to invest in a foreign country is its position toward the protection of property rights. Therefore, this article will provide an analysis of the constitutional provisions of Brazil, examining both property rights in general, and the treatment of property rights to petroleum.

  II. Private Property and Ownership of Petroleum

The soundness of a country's legal system and its position toward the importance and protection of property rights crucially influences one's incentive to obtain or extend ownership, manage property, and eventually to make an investment in a certain country or business. [6] Therefore, U.S. Oil investors should become accustomed to the Brazilian property rights system which is different from the one established in the U.S. For instance, unlike the U.S. Constitution, whose text was adopted on September 17, 1878 and which remains almost completely intact, having been amended only 27 times, [7] Brazilian constitutional law has been highly dynamic. For instance, the current Constitution of the Federative Republic of Brazil was promulgated on October 5, 1988 [8] and has been amended 56 times. The most recent amendment was passed on December 20, 2007. [9] More significantly, as opposed to the U.S. Constitution, whose Constitution recognizes the right to property in broad term, leaving the further development of such right to the Legislature, property rights in Brazil are extensively regulated in its Constitution.      

Private rights to property are recognized and guaranteed for all the persons in the country under Article 5 of the Brazilian Constitution and, as a general principle, these rights are conceived as inviolable. Similar to the conception of property in countries such as Colombia [10] and Venezuela, [11] the Brazilian concept of property incorporated its social function, and thus Article 5, indent XXIII states that "[p]roperty shall fulfill its social function". Consequently, expropriation will be allowed not only for public necessity or use, but also for social interest prior just compensation (Article 5, indent XXIV). [12]

Upon reading this, one cannot help but wonder what does "social function" refers to and how is it different from the concept of public need? Unfortunately, there is little guidance as to what it really means, [13] and thus, investors should be aware that according to Brazilian legal system, private property rights will have to be exercised in accordance with the interest of society and will be subject not only to cases of public need but also to the fulfilling of undefined societal interests.

In Brazil, there is an intermediate treatment of confiscation that falls between expressed total abolishment (e.g. Argentina)[14] and recognition of confiscation under special circumstances (e.g. Colombia).[15] In fact, Article 5, indent XXV states that in the of imminent public danger, the competent authority can use private property "provided that, in case of damage, subsequent compensation is ensured to the owner," as opposed to the payment of just compensation prior due process of law set forth in the Fifth Amendment to the U.S. Constitution.

As said by Article 20, indent IX of the Brazilian Constitution mineral resources, including those in the subsoil (e.g. petroleum), are the property of the Brazilian Union. Moreover, according to Article 177, Brazil has a monopoly of the prospecting, production, refining, transportation, mining, importing and exporting activities of petroleum and natural gas. [16] This means that whoever owns property on the surface of the land has no ownership rights on the underground resources. In other words, property owners are simply concessionaires, because minerals, like crude oil, along with the greater part of the natural resources are owned  by Brazil.

In 1953, Petróleo Brasileiro S.A. - PETROBRAS - was incorporated to "undertake oil activities in Brazil on behalf of the Union." [17] From its outset and until 1995, Brazil, influenced by the wave of nationalization of the times, allowed PETROBRAS to have a Monopoly of oil exploration and production operations, as well as all other activities associated with the oil, natural gas, and derivatives sector, except for the wholesale distribution and retail via service stations. However, in 1995 the Ninth Amendment to the Brazilian Constitution was passed to include the possibility that any company other than an oil company controlled by the Brazilian Government may participate in the execution of the activities exclusively carried out by PETROBRAS up to that year. [18] As a consequence, as of such date, PETROBRAS lost its monopoly of the oil industry in Brazil. However, the Brazilian Union remains the owner of the petroleum located within its territory.

Likewise, in 1997, the Brazilian Legislature passed Law number 9,478, which opened up oil industry activities in Brazil to exploitation by private initiative. Effective January 2, 2002, Brazil deregulated prices for crude oil and oil products. [19] And similarly, in 2002, Brazilian Legislature established "an excise tax on the sale and import of crude oil, oil products and natural gas products (Contribution for Intervention in the Economic Sector, or CIDE)". [20]

Following the breaking of the monopoly of PETROBRAS, as of December 31, 2007 32.4% State-owned, [21] several oil fields have been discovered that have given Brazil not only self-sufficiency, but turned it into a potential oil exporter; and thus, an attractive place for oil investments in the upstream business.

III. Conclusion

Since the 1990s Brazil has clearly demonstrated a commitment to consistent and attractive investment regimes. The country has changed its legislation in energy matters allowing the private sector to participate and compete in the oil business. However, there is still work to do; for instance, it is imperative that in the near future the Brazilian authorities define the social function of property rights to be uniformly applied across the Union to procure legal certainty; and ultimately attract more foreign investments.

[1] Petroleum Economist Magazine (May 2008), available at http://www.petroleum-economist.com/default.asp?Page=14&PUB=46&SID=705927&ISS=24734

[2] Andrés Openheimer, Brasil: La Nueva Potencia Petrolera, El Periódico de Mexico, Dec. 9, 2007, available at http://www.elperiodicodemexico.com/nota.php?id=149841

[3] Tupi Convierte a Brasil en Potencia Petrolera, http://www.casamerica.es/es/opinion-y-analisis-de-prensa/cono-sur/tupi-convierte-a-brasil-en-potencia-petrolera

[4] Openheimer, supra note 2, at 1.

[5] http://my.barackobama.com/page/content/newenergy_more#oil (last visited Nov. 5, 2008). 

[6] Satya Thallam, International Property Rights Index (IPRI) 2008 Report, Property Rights Alliance, available at http://www.internationalpropertyrightsindex.org/UserFiles/File/022508ot-report%20(2).pdf

[7] U.S. Const.

[8] C.F. www.presidencia.gov.br/legislacao/ (follow "Constituiçao" hyperlynk; then follow "Constituiçao 1988").

[9] http://www.planalto.gov.br/ccivil_03/Constituicao/Emendas/Emc/quadro_emc.htm (last visited Nov. 9, 2008).

[10] Colom. Const. of 1991, art 58 states that "[p]ublic or social interest shall prevail over private ones, for reasons of public use or social interest."

[11] Venez. Const. of 2000, art. 115 states that "expropriation can be declared for reasons of public benefit or social interest by final judgment, with timely payment of just compensation."

[12] In this regard, C.F., art. 170 reads as follows: "The economic order, founded on the appreciation of human work and on free enterprise, is inteded to ensure everyone a like with dignity, in accordance with the dictates of social justice, with due regard for the following principles: II. private property, III. the social function of property."

[13] Flavia Santinoni, The Social Function of Property Rights in Brazil, http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1033&context=bple (last visited Nov. 11, 2008). 

[14] Const. Arg., art. 14 states the following: "the confiscation of property is hereby abolsihed forever from the Argentine Criminal Coded. No armed body may make requisitions nor demand assistance of any kind."

[15] Colom. Const., art. 59 states that "[p]ublic domain may be decreed by National Government without just indemnification in the event of war. In such case, real property may only be temporarily occupied to attend to wartime needs, or to use its products to satisfy such needs. The State shall always be responsible for expropriations decreed by itself or through its agents."

[16] Article 177 states that "[t]he following are the monopoly of the Union: I. prospecting and exploitation 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 gas natural of any origin; V. prospecting, mining, enrichment, reprocessing, industrialization and trading of nuclear mineral their products."

[17] http://www2.petrobras.com.br/ingles/ads/ads_Petrobras.html (last visited Nov. 9, 2008).   

[18] C.F., art. 177 Paragraph 1 (amended 1995) reads as follows: :"[t]he Union may contract with state-owned or with private enterprises for the execution of the activities under the conditions set forth by law." In contrast, original text read: "Paragraph 1. The monopoly set forth by this article includes the risjs and results derived from the activities mentioned, the Union being forbidden of granting or chartering any kind of participation, in cash or valuables, in the exploration of reservoirs of oil or natural gas, excepted the provisions of article 20, paragraph 1."

[19] http://www.sec.gov/Archives/edgar/data/1119639/000136231008002879/c73239e20vf.htm#134 (last visited Nov. 9, 2008).   

[20] Id.

[21] http://www.sec.gov/Archives/edgar/data/1119639/000136231008002879/c73239e20vf.htm#124 (last visited Nov. 9, 2008).

[22] Latin America Oil: Winners and Losers, http://www.latinbusinesschronicle.com/app/article.aspx?id=1087 (last visited Nov. 9, 2008).

Full post as published by The Journal of the Business Law Society on November 12, 2008 (boomark / email).