By Felipe Ferenzini, Trench, Rossi e Watanabe

There is no doubt about the importance and impacts of shale gas in the world economy and geopolitics. Over the past two decades the United States has profited from its shale gas resources, its innovative technology, among other key factors, changing the energy game.

Other countries that have shale gas reserves are on a quest to really start producing this new source of energy and surf the same wave.

In Brazil, until this month, there was no specific regulation about unconventional resources, so the same rules on conventional exploitation applied. As a result, oil companies were a bit hesitant to bid on unconventional resources in the 12th Bidding Round carried out by Brazilian National Petroleum Agency (ANP) in November 2013.

Now Brazil has started its race toward shale exploitation by setting up a specific regulatory framework to that effect. The ANP published Resolution #21 on April 11, 2014, to regulate the use of hydraulic fracturing (fracking) for unconventional resources.

The resolution defines the rules for oil companies (concessionaire of the exploration/production rights) obtaining ANP's prior approval for fracking activities. The focus is on environmental protection, and the main aspects can be summarized as follows:

Disclosure of composition of fracking fluids

One of the most relevant innovation brought by the ANP is the requirement for oil companies to publish on their website the list of chemical products used in the process, indicating its quantities and compositions.

This requirement is aligned with the claim from the environmental groups that ask for such disclosure. There is great controversy with respect to the composition of the fracking fluids and its pollution hazard.

Restriction for the use of human consumable water

Due to the large amount of water needed for the fracking, the ANP established that the water used for fracking shall preferably be: effluent generated in the fracking, water improper for human consumption and water resulting from industrial and commercial effluents, provided that it receives the proper treatment for such use.

Control of fracking water origin and disposal

The oil companies shall submit to the ANP an environmental management system, with a plan for control, treatment and disposal of the effluents generated.

The website of the oil companies shall indicate the origin, volume, type of treatment and final disposal of the water used in the fracking.

Project to ensure well's integrity

The oil companies shall submit a project for the well that ensures the integrity of the casing throughout its life cycle, avoiding effluent leakage to soil and aquifers. Approval will only be granted if there is no risk of fractures extending to water wells or aquifers.

Protection of aquifers

Concern with the quality of the aquifer is reinforced by the prohibition to fracking in wells that are less than 200 m (656 ft) from the water wells. Oil companies shall also submit a report from an independent lab related to the lakes, lagoons and water reserves in a radius of 1,000 m (3,281 ft) from the wellhead.

In view of this new regulation, it is important that oil companies intending to exploit and produce shale gas in Brazil comply with the requirements of ANP's Resolution 21/2014 and ensure the compliance from service providers, to the extent applicable, in order to avoid imposition of penalties.

Penalties may vary from fines up to termination of the concession agreement for exploration and production. The value of the fines may reach up to about $900,000 plus twice the value of the gas produced during the infringing period.

Brazil is taking an important step with regulation for the production of this new unconventional resource that has been changing global geopolitics. Irrespective of potential discussions, it is expected that with the new resolution, the future bidding rounds in Brazil involving unconventional resources will be a bigger success due the establishment of the specific legal framework.

Felipe Ferenzini is an oil and gas lawyer at Trench, Rossi e Watanabe Advogados in Brazil.