Shale gas in Brazil

What are the environmental and legal challenges?

Natural Gas pipeline under construction near Sao Paolo, Brazil.
Natural Gas pipeline under construction near Sao Paolo, Brazil.

Luciana Vianna Pereira Trench, Rossi e Watanabe Advogados Rio de Janeiro

Shale gas has been pointed out as a promising new energy source in Latin America. However, in the largest country in Latin America - Brazil - shale gas is currently under close scrutiny with respect to environmental issues related to its development. What ultimately happens in Brazil may be an indicator of what is likely to occur in other nations in the region.

In Brazil, the Petroleum, Natural Gas and Biofuels Agency (ANP) had a resolution on hydraulic fracturing open for public comments until November 18. The resolution contains several measures aimed at mitigating environmental risks, such as an obligation for risk assessment on the field, the imposition of a minimum distance from the area affected by the hydraulic fracturing and known water reservoirs, and a requirement for an environmental license to be issued by the appropriate environmental agency. The latter requires the license to be issued at least 90 days before beginning any drilling activity.

The resolution is intended to guide shale developers, including participants in the 12th Bid Round, which occurred Nov. 28 and 29. That event was staged to help identify areas for possible exploitation of unconventional resources, including shale gas, in Brazil.

In all, there were 240 potential areas available for bidding, including 110 identified as "new frontiers" in the Acre, Parecis, São Francisco, Paraná, and Parnaíba bays and 130 in mature bays of Recôncavo and Sergipe-Alagoas.

While the new ANP Resolution seems to be in accord with the best environmental practices worldwide, it seems to us that environmental agencies are still a little behind the times in relation to new activity.

The legal environmental framework exists and must be noted by investors. For example, with respect to environmental liability, Brazilian law establishes that it is strict, meaning that no argument on degree of care of fault may be claimed by the polluter to avoid its liability and joint and several, meaning that any party that contributed to the damage may be imposed with the duty to support the costs of recovery and/or indemnification for the entire damage. Criminal and administrative sanctions are also foreseen in case of damage.

However, certain questions remain, especially in relation to the environmental licensing proceeding. For example, as shale gas exploitation is conducted onshore, as a general rule the state environmental agencies will be tasked with conducting the environmental licensing proceedings and subsequent inspection of the activity.

On the other hand, since some of the development activities may affect more than one state, in these cases it may be necessary for the Federal Environmental Agency (IBAMA) to assume regulatory responsibility. Some of the potential environmental risks include the risk of contamination of water reservoirs and the excessive use of potable water.

At this time, there has been no definitive statement as to the exact conditions when IBAMA might assume responsibility for environmental licensing.

Another example related to environmental impact studies, required as a condition for the issuance of the license and which serve as the basis for environmental agency to impose conditions and restrictions in the license or even deny the license, would be if the environmental impact is too significant or affects environmentally-sensitive areas. However, the guidelines for the studies have not been issued yet, so much of this is still preliminary.

Brazilian law allows possible changes to the license or the denial of its renewal in case future risks are shown to be significantly higher than initially verified in the studies. But changing the conditions after a license is issued would trigger insecurity in the market, which would certainly have a negative impact on the credibility of the country and the success of future bid rounds.

As with the ANP, we believe it is important for Brazil's environmental agencies to seek information from other countries with ongoing experience in the exploitation and development of shale reserves.

In this sense, it would be instructive to observe how different states in the USA have dealt with the shale development and hydraulic fracturing. Illinois, for example, has recently published rules on the closing of the fields, the definition of environmental liability, the management of fluids used in the proceeding, etc. Other states, such as New York and New Jersey, have not allowed shale gas development within their boundaries.

Similarly, in Europe, while the European Union fixed the end of 2013 as the date for completion of environmental risks assessments with respect to the activity, countries debate about the acceptance or complete banishment of shale exploitation within their borders. While France and Bulgaria have banished the activity, Romania, Poland and, recently, the United Kingdom have authorized the development of shale gas.

We can conclude that shale gas in Brazil will effectively start, but the lack of the specific rules mentioned above, represent uncertainty for potential investors. Although the ANP is a good start, it would be ideal if environmental agencies would also make an effort to enact the guidelines for the environmental studies and fill in the other blanks of existing legislation. Failure to do so may discourage investment.

About the author

Luciana Vianna Pereira is a specialist in environmental law. She is a senior associate with the environmental practice group at the Rio de Janeiro office of Trench, Rossi e Watanabe Advogados, which is associated with Baker & McKenzie, a Swiss verein. She received her law degree from the Rio de Janeiro Catholic University.

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