Changing oil royalties could boost revenues and unlock refinery sales

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A proposal by the Jair Bolsonaro (PL) government to change the calculation of oil royalties three years ahead of schedule could generate a new legal war with oil companies operating in the country, as occurred in 2017.

The government argues that the measure raises the revenues of producing states and municipalities and unlocks the process of selling Petrobras refineries, a priority agenda for the Minister of Mines and Energy, Adolfo Sachsida.

The oil companies, however, complain that the anticipation of the review generates regulatory instability and are considering going to court against the proposal, which approximates the reference price used in the collection of royalties to international oil quotations.

The most visible effect of the change is to increase revenue from oil by at least R$6 billion a year from 2023. But there is also a tax impact, which would make the domestic sale of oil more attractive, which serves the interests of the largest refiner. Brazilian private sector and potential investors in refineries.

When oil is sold within Brazil, the tax is levied on the sale price, which reflects international oil prices. In exports, the charge is applied using the reference price, which is lower.

In practice, selling abroad allows oil companies to pay less tax and increase their profitability. The change in the reference price would mitigate this advantage.

In June of this year, Acelen, owner of the Mataripe Refinery, even approached Minister Paulo Guedes (Economy), an ally of Sachsida, to ask for a solution to the problem. The company said that the price charged by Petrobras exceeded by US$ 2 the value charged per barrel for the oil company’s exports.

In August, Bolsonaro issued a decree to anticipate the revision of the calculation of royalties, which was only scheduled for 2025, with the beginning of validity in 2026. Then, according to reports made to the Sheetthe MME sent a letter to the ANP asking for an analysis of the matter.

The proposed change in the calculation of royalties surprised the oil market, which claims that the change in rules harms investments already contracted and reduces predictability for future projects, since the government has not imposed a minimum period between revisions of reference prices.

Small oil companies complain that the proposal prepared by the ANP (National Agency for Petroleum, Gas and Biofuels) goes against the government’s own determination to encourage production in smaller projects.

“Many of these companies will not be able to bear the financial impact of this increase in their activities,” said Anabal Santos Jr.

The companies also question the assertion that it will have an effect on exports, since domestic sales are increased by the ICMS, which is not levied on either exports or imports of oil.

Royalties are financial compensation for the extraction of natural resources, paid to the Union and to the producing municipalities and states. They are calculated on the sale price of the production or on a reference price established by the ANP, whichever is higher.

In 2021, oil companies collected a record amount of BRL 78.4 billion in royalties and special participations, a kind of income tax levied on large fields. In the first half of 2022, with oil on the rise after the start of the war in Ukraine, revenue totaled BRL 51 billion.

The reference price simulates the value of each type of oil extracted in the country according to the variety of fuels it produces. If an oil is lighter, it produces derivatives with greater added value and, therefore, must be more expensive.

To justify the anticipation of the revision of the reference price, the government claimed that the scenario changed with the pandemic, the war in Ukraine and with greater restrictions on sulfur emissions from maritime transport, which increased the value of pre-salt oil (which has low content of this substance).

However, people involved in the discussion admitted to the Sheeton condition of anonymity, that the proposal is fundamental for the privatization of other Petrobras refineries, an agenda that is on Sachsida’s list of priorities.

The difficulty in accessing raw materials and the lack of supply contracts are points raised by investors who came to negotiate with the state-owned company. Petrobras put eight refineries up for sale, but only managed to advance in two, in Manaus and Bahia.

When contacted, the MME did not respond to questions about the impact of the change on the sale of refineries. The ministry sent a note, published in August, in which it states that the review of the calculation of royalties “guarantees an adequate return for society on the production of national oil resources”.

“The measure maintains the governance, legal certainty and predictability of the regulatory process, which are driving forces for attracting investments and developing Brazilian oil production,” said the ministry. The note also lists the technical factors that supported the proposed amendment.

The calculation of royalties was last revised in 2017, effective from 2018, also with the aim of reducing the discount between the reference price and the Brent quotation, the world price reference negotiated in London.

The process was troubled, the target of lawsuits by the oil companies and the federal government itself, but ended up being concluded by virtue of a court injunction requested by the government of Rio de Janeiro, the main beneficiary.

The Michel Temer government (MDB) gave in to pressure from oil companies and created a transition period for the adoption of the new formula, in addition to imposing a minimum period of eight years for a new review, which was undone with Bolsonaro’s new decree.

Acelen and IBP (Brazilian Institute of Oil and Gas), which brings together the big oil companies, did not manifest.

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