Bernardo Mendes Vianna is a partner and head of the shipping practice at Vieira Rezende Advogados, recognised by his great expertise in shipping litigation, notably by acting in casualties and major cargo claims. His clients include shipowners, carriers, traders, financial agents and insurers. Bernardo is the current chair of the Brazilian chapter of the Ibero-American Institute of Maritime Law.
Daniela Ribeiro is the head of the oil and gas practice and is a managing partner at Vieira Rezende Advogados. She is a pioneer in oil and gas regulation in Brazil, with remarkable expertise in operational leasing transactions under the form of project finance and the use of rigs and multipurpose vessels. Her main clients are oil companies, financial institutions and service providers to the offshore oil and gas industry, notably shipowners and charterers.
Flavia Melo is an experienced senior associate, well known for her work in both dry and wet shipping. She focuses her practice in marine casualties, incidents and cargo claims, but also deals with industry typical contracts, complex insurance claims and provides consulting in regulatory affairs. She is a founding member and also a board member of Women’s International Shipping and Trading Association Brazil.
GTDT: What is the current state of the shipping industry in your country?
Bernardo Mendes Vianna, Daniela Ribeiro and Flavia Melo: The shipping industry in Brazil is still struggling with the reduction of oil and gas (O&G) exploration activities by Petrobras (the Brazilian state-owned oil company), and the consequent revision of the orders to local shipbuilding industry.
In regard to international navigation, Brazil is a large producer and exporter of commodities (products include soy, iron ore, crude oil, cars, sugar, poultry meat, cellulose, coffee, aircrafts, bovine meat, among others), but highly dependent on foreign ocean carriers to distribute its products overseas. In 2017, Brazilian currency devaluation led to a reduction in commodities prices, which proved positive for export trade and directly influenced the charter market, which remains very attractive to foreign vessels. The main giant traders are established in Brazil and we have seen the north and north-eastern ports substantially raise their participation in the export trade, with a consequential increase in foreign shipowners operating cargo available in that region.
Due to historic governmental protection policies, coastal navigation is primarily reserved for Brazil-flagged vessels, which are prioritised in relation to foreign-flagged vessels in cabotage, inland, port support and offshore support navigation activities. In cabotage and inland transportation we have seen a steady growth over the past 10 years primarily caused by infrastructure investments made to facilitate the agribusiness products outflow. Expectations for 2019 are that cabotage and inland navigation will continue to expand.
Further, for more than a decade, the shipping industry in Brazil benefited from the governmental incentives to the offshore O&G sector. The Brazilian government used Petrobras and Transpetro, Petrobras’ shipping company subsidiary, to artificially foster the development of a local shipping industry. The Brazilian government has also made available to interested parties credit lines with low interest rates with funds obtained from the Merchant Marine Fund (FMM) through state-owned banks such as the Brazilian Development Bank (BNDES), and the possibility of obtaining guarantees through the Naval Construction Guaranteeing Fund (FGCN).
However, the deterioration of the Brazilian economy and the public accounts, the steep fall of the oil prices worldwide and the reduction of Petrobras’s financial capacity led the Brazilian government to push Petrobras for a reduction of O&G exploration activities prioritising O&G production activities with a direct impact on the offshore support and the shipbuilding sectors. Because of that, the Brazilian offshore shipping industry, highly dependent on Petrobras investments, has in the past couple of years witnessed a flood of idle vessels for the lowest hires and the interruption of construction projects in local shipyards.
Petrobras announced in 2015–2016 a drastic reduction of its non-core investments, with cancellation and divestment of projects, termination of charter contracts and revision of shipbuilding contracts, and a sizable assets sale programme. All those actions carried out by Petrobras have already resulted in a better financial position for the company, and this is confirmed by looking into Petrobras’s numbers in 2017 and the first quarter of 2018.
Alongside Petrobras’s financial recovery, the Brazilian government sees the recovery of the O&G sector as being vital to the country’s economic development in the long run. Hence, the government has already taken several measures to foster the recovery of the O&G sector, including the successful bids for relevant new oil fields in 2018, as we will further explain on this interview.
Therefore, in 2017–2018 the Brazilian economy has been experiencing a timid positive reaction to the measures taken by the Brazilian government. However, due to instability caused by the unpredictable upcoming 2018 presidential elections, any impact on the offshore shipping industry is only expected to happen in 2019, when Brazil has a new government.
“The boom in the oil and gas and shipbuilding industries from 2007 to 2014, led the Brazilian shipping market to witness a high demand for offshore support vessels mainly by Petrobras.”
GTDT: What are the prevailing shipping market trends affecting your country?
BMV, DR & FM: The boom in the O&G and shipbuilding industries from 2007 to 2014 led the Brazilian shipping market to witness a high demand for offshore support vessels mainly by Petrobras. As a consequence of said demand, Brazilian shipowners invested to increase their fleets by either contracting new vessels with local shipyards or establishing joint ventures with foreign shipowners who were interested in hiring their vessels to Petrobras. Likewise, some foreign shipowners decided to make a bigger impact and entered the Brazilian market by establishing a branch and contracting a local yard to build vessels in Brazil, while bringing in similar foreign vessels under charter agreement. These investments in shipbuilding were quite high and the plan at that time was to have the vessels employed by Petrobras immediately after the termination of construction.
However, as explained in our answer to the question above, with the economic crisis and the decline in Petrobras’ demand for vessels, the scenario drastically changed. Nowadays, there are more service providers and vessels available than contractors and services to be rendered, and part of the Brazilian fleet is currently unemployed. Consequently, Brazil-flagged vessels are more than ever being prioritised in relation to foreign-flagged vessels. This happens due to the protective policy in force, which demands that, if a contractor decides to hire a foreign-flagged vessel, it must inform the market the main characteristics of the intended vessel and the service to be provided prior to contracting a foreign one. According to the applicable law, a Brazil-flagged vessel with similar specifications may block the envisaged chartering of a foreign-flagged vessel in case it is capable of providing the same services. This continues to be the main trend in Brazil due to the excess of vessels.
Foreign players continue to seek mechanisms to put vessels under the Brazilian flag to avoid blocks and remain in the game, either through partnerships with Brazilian owners or other business structures, to bareboat charter those vessels and register same under the Brazilian Special Registry, enabling the temporary suspension of the original flag and the flying of the Brazilian flag.
GTDT: Are there any recent domestic or international political or legislative developments that may have an impact on your country’s shipping market?
BMV, DR & FM: As previously mentioned, the recovery of the local O&G offshore industry is a government priority in Brazil. An understanding was solidified that to strengthen the O&G industry and as a consequence the offshore shipping industry, Petrobras could not be the sole client and to change that situation other oil companies must develop more relevant positions in Brazil. Therefore, at the end of 2016, the Brazilian government issued Law No. 13.365/2016, softening the rules for the mandatory participation of Petrobras in the exploration and development of the pre-salt areas (gigantic ultra deep-water light oil reserves). According to this new rule, Petrobras has priority but is no longer obligated to participate in all projects.
This measure, together with the Brazilian National Agency of Petroleum, Natural Gas and Biofuels’ successful bid rounds in 2017 and 2018, offering new O&G offshore exploration areas, which included fields in the pre-salt of Campos and Santos basin, had already attracted new players: giant companies such as Exxon Mobil, Statoil, Shell, Total and Chevron. A revitalisation of the market is expected from 2019, through new projects and contracts in connection with these new acquisitions, which shall necessarily include the employ of vessels, either through charter, construction or acquisition.
GTDT: What are the key regulatory and compliance issues for your country’s shipping market?
BMV, DR & FM: Part of the key regulatory issues regarding the offshore shipping market have been successfully addressed by the Brazilian government. Repetro, which is a special tax regime created to lower costs and ease the importation of equipment used in O&G activities, which also applies to foreign vessels entering the Brazilian market, had its list of contents extended and its application permitted until 2040.
After long discussions between the Brazilian industry and the Brazilian government, the latter agreed to increase flexibility in its requirements on compliance with local content, ie, O&G companies’ obligations to buy services and goods from local providers. In certain cases, the requirements were significantly reduced, with new regulations applying retroactively to contracts executed from 2013 onwards.
However, the chartering of vessels remains Brazil’s Achilles’ heel. Under the existing rules, only a Brazilian shipping company can charter a vessel to be employed in coastal navigation activities, which include the offshore support services. It has never been a problem for Petrobras, as it is authorised to act as a Brazilian shipping company, but this is not the same for other oil companies. The issue has been taken to the Brazilian Agency on Waterway Transportation, which acknowledged it as ‘complex to resolve’ and did not take any further measures to solve the problem.
GTDT: What are the shipping industry’s current sources of finance? How do you predict they will develop, and what are the advantages and challenges to financing a vessel in your country?
BMV, DR & FM: The Brazilian government has established fostering funds to develop the local shipbuilding industry. Since 1958, the FMM has been the primary source of finance to shipbuilding projects in Brazil. Later in 2008, after the discovery of the pre-salt O&G reserves (gigantic ultra deepwater light oil reserves), the government also established the FGCN to provide guarantees and foster the upcoming related projects.
With an underdeveloped shipowners’ market, Brazil lacks alternative forms of fundraising, as opposed to more mature markets such as the Norwegian bond market for the shipping and offshore industries. Typically, the ship-financing sources in Brazil are BNDES, with lines of credit provided by the FMM, and the Federal Savings Bank (CAIXA), a state-owned financing institution, with guarantees offered by the FGCN.
The FMM is managed by the Merchant Marine Fund Directing Council within the Brazilian Ministry of Transports, aiming to provide resources to the development of the Brazilian shipping industry. The resources come from the Freight Additional for the Renewal of the Merchant Marine, a tax instituted by Decree-Law 2.404/87 and collected over freight rates. Decree 5543/05 established BNDES as the financial agent responsible for managing the operations. The FMM is active and announced 3.8 billion reais in funds to develop the Brazilian shipping industry in 2018.
The FGCN was created by Law No. 11.786/08 and is managed by CAIXA, using funds raised by the Brazilian Federal Entity. It aims to assist the development of the Brazilian naval market by guaranteeing financial operations related to the construction of vessels and the performance risks attached. It is available to Brazilian shipyards for the construction of vessels to the Brazilian shipping industry and maritime units to be employed in O&G offshore activities.
GTDT: Have there been any recent significant domestic or foreign court decisions or arbitration awards that impact on your country’s shipping market?
BMV, DR & FM: Recently, a very important precedent was established in relation to foreign mortgages.
First, it is important to highlight that the great majority of the shipping conventions have not been signed or adopted in Brazil. Therefore, shipping matters are usually treated according to domestic law when addressed to the Brazilian courts. However, in regard to mortgages, Brazil has adopted the 1926 Brussels Convention on Liens and Mortgages and the Bustamante Code.
In 2015, when the OGX Group was declared insolvent, creditors commenced countless lawsuits against its subsidiaries to try to recover the funds lent. BTG Pactual, a Brazilian bank, filed an enforcement lawsuit in Brazil against OSX 3 for a debt of US$27.3 million, requesting the seizure of a floating production storage and offloading installation (FSPO). Nordic Trustee, as mortgage creditor of the FPSO, alleged priority in receiving the funds raised by its eventual sale, based on the existence of a mortgage registered in Liberia, where the FPSO was registered.
Both the first instance judge and the São Paulo Appellate Court denied Nordic Trustee’s request based (in sum) on the fact that Liberia is not a signatory jurisdiction of either the 1926 Brussels Convention on Liens and Mortgages, or the Bustamante Code. According to the Rapporteur Justice Nelson Jorge Junior, Nordic Trustee was aware of the risks of employing the FPSO in Brazil, especially in relation to the enforcement of the mortgage guarantee.
However, a special appeal was then filed before the Brazilian Superior Court of Justice (STJ), which modified the São Paulo Appellate Court ruling by applying the Bustamante Code, as to finally decide that mortgages have extraterritorial effects and are therefore valid in any country. The decision was received with great relief by the Brazilian shipping community, as most of the platform and vessels financed and employed in Brazil (and worldwide) are registered under convenience flags, whose nations have not adopted many of the international conventions on shipping matters.
“The Brazilian economy is slowly recovering from the recession of 2016–2017.”
GTDT: What is the outlook for your country’s shipping market?
BMV, DR & FM: The Brazilian economy is slowly recovering from the recession of 2015–2017. However, considering the upcoming presidential elections, great developments are not expected in 2018, but rather in 2019 through a wave of new contracts following the 2017–2018 bids. At first, we can envisage an increase in need for research vessels and oil rigs, naturally followed by construction vessels, FPSOs and supply vessels.
Petrobras and other major oil companies are getting ready to operate alone or through joint ventures, which, as described above, is the main driver to increase the levels of occupancy in the Brazilian offshore shipping industry.
Therefore, considering the recovery perspectives of the Brazilian economy, we still envisage opportunities for those wishing to establish themselves in Brazil by acquiring assets at lower costs, taking advantage of the currency devaluation and the financial difficulties of local players.
The Inside Track
What are the particular skills that clients are looking for in an effective shipping lawyer?
Due to the diversification of the shipping industry in Brazil, we believe clients have started to look for one-stop shop firms with specific shipping expertise instead of having to manage various firms (ie, one for a regulatory shipping matter, another for shipping finance matters and another for taxes related to shipping activities) or engaging individuals with small practices. As the shipping businesses got more dynamic, sophisticated and even more international, clients doing business in Brazil prefer to rely on receiving efficient assistance at competitive costs from shipping lawyers who are part of a larger team available 24/7 with international experience, deep involvement in the industry and availability to be present where clients need whenever necessary. Also, due to increasing global compliance requirements shipping lawyers have increasingly been required to build sophisticate internal structures to be able to comply with clients’ policies and requirements for service providers.
What are the key considerations for clients and their lawyers when arranging finance for a shipping transaction?
As a starting point, it will be crucial to identify the source of the funds, which, as explained, in Brazil, will most likely involve the Merchant Marine Fund. Subsidised financing from the Merchant Marine Fund is subject to the specific rules set out in Law No. 10.893/2004 and related decrees from both the perspective of eligibility, destination of the available funds and guarantees to be provide to secure the debt. Elements of major concerns shall vary on a case-by-case basis, but the assessment on the primary and collateral securities as well as on a possible limited recourse structure will always be of crucial relevance, both in the creditor and debtor’s point of view.
What are the most interesting and challenging cases you have dealt with in the past year?
For experienced marine lawyers, 2018 was a very busy year, remarkable for marine incidents. Our firm was involved in the emergency response and subsequent investigations and procedures related to two explosions on board vessels with fatalities, one flooding, two allisions with large claims on loss of profits and a very complicated grounding case, almost all of them involving foreign vessels. The biggest challenge was to be at different places simultaneously dealing with complicated matters, remaining available to personally attend clients with their daily needs.
Bernardo Mendes Vianna, Daniela Ribeiro and Flavia Melo
Vieira Rezende Advogados
Rio de Janeiro