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July 03, 2019

Opportunities in Oil, Gas & Biofuels - Financing

Oil & Gas

Infrastructure Bonds and Reserve Based Lending - RBL

The Ministry of Mines and Energy (MME) together with the oil, gas and biofuels sectors’ regulator (ANP) have issued two long awaited and now celebrated rulings respectively on infrastructure bonds dedicated to oil, gas and biofuels projects, and on the mechanics for structuring security packages on transaction, such as reserves based lending (RBL).

(1) Oil, Gas & Biofuels Infrastructure Bonds (debêntures incentivadas)

The MME has just included oil, gas and biofuels projects within the spectrum of sectors that benefit from the so-called debêntures incentivadas, a type of project bond dedicated to so-called priority sectors (including but not limited also to energy and transportation).1

Those bonds are benefited by an income tax rate of 0% to Brazilian resident individual investors and to non-resident investors. Non-resident investor also has a reduction to 0% on the tax on financial transactions (IOF).2

Infrastructure Bonds already applied to other industries that have achieved a successful track record as a financing alternative. On power projects, for instance, they have represented an average of 58% of the projects’ CAPEX, according to the Ministry of Finance.

(2) Reserve Based Lending - RBL

RBL is a widely used financing structure for producing or under development assets.

Amongst the many important features of an RBL, the perfection of the security package is key. And it is on that direction that ANP has ruled on the structuring and enforcement requirements for RBL transactions.

After more than two decades of open upstream market and a proven track record of regulatory stability, ownership rights security, fixed and tested contract terms, and positive performance of ANP, the rules recently published have created a straightforward guideline that works essentially according to the following principles, regardless of whether the licensing system is a concession or a production sharing contract):

1.   Security may be given over contract rights, including but not limited to the very title over the contract itself (to the extent it does not represent a risk for the compliance of the obligations of the relevant E&P contract) and/or shares of the project company.

2.   The main test for the requirement of previous authorization from ANP is whether there will be: (i) change to the relevant contract title3 ; (ii) change of concessionaire/contractor; (iii) change of operator; or (iv) exemption or substitution of performance guarantee.

3.   Creation/perfection of the security requires previous authorization from ANP in the following case: (i) the security is over contract rights; and (ii) the debtor (i.e. the concessionaire of contractor) will cease to be in charge of the contract management.

4.   Enforcement of the security requires previous authorization from ANP, in the following cases: (i) in the case of contract rights, only if there is a change of contract title, and (ii) in the case of shares of the project company, only if it involves a substitution of the performance bond.

It is undisputed that ANP has acted proactively to create an RBL market in Brazil, essentially in terms practiced globally within the oil and gas industry. Together with the inclusion of oil, gas and biofuels projects within the priority sectors that may issue infrastructure bonds, Brazil becomes yet more competitive in those sectors.

Our Oil & Gas practice is available for clarifications.

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1 Besides E&P and offloading projects, the benefits also apply for example to priority projects on gas storage and transportation, LNG, gas processing, biofuels production and storage, and to local gas pipeline services.
2 The Ministry of Infrastructure is pushing for the inclusion of Brazilian domiciled legal entities within the 0% IR tax benefit (currently set at 15%, what already represents a reduction vis-à-vis other regular debt instruments). That would certainly boost yet more the debêntures incentivadas market.
3 The concept of “contract transfer” includes the execution of any instrument with the purpose of interfering by any means whatsoever in the underlying E&P contract management or operation.

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