Besides putting pressure on fuel prices, high oil prices are likely to contribute this year to a greater-than-expected growth in revenues from royalties and special participations — an additional amount levied on specific fields — collected by the federal government, states and municipalities.
The total value of government participation may increase to R$111.5 billion this year, potentially an all-time high, compared with R$77.82 billion last year, according to calculations by the Brazilian Center for Infrastructure (CBIE) prepared at the request of Valor.
For states and cities, the combined amount could increase to R$59.6 billion this year from R$41.6 billion last year. The distribution, however, is concentrated and benefits relatively few states and cities.
Of the total revenues from royalties and special participation projected for this year, R$42.5 billion are expected to be collected by the federal government. Part of this amount – whatever exceeds the federal government’s budget forecast – can be allocated to the fund to mitigate the ups and downs of fuel prices in the domestic market. Royalties and special participations intended for states and municipalities are unlikely to be affected. The proposal, however, is still being debated.
Currently, of the royalties received by the federal government, about 25% are allocated to the special fund, which is expected to transfer resources to states and municipalities. The remainder goes to the Navy Command and the Ministry of Science, Technology and Innovation. In the case of special participation, 80% goes to the Ministry of Mines and Energy and 20% to the Ministry of Environment.
The former director of the National Petroleum Agency (ANP) and now fiscal advisor to the Legislative Assembly of Rio (Alerj) Magda Chambriard says there is flexibility in the allocation of the portion of royalties and participations that remains with the federal government, which would allow the government to direct part of the resources to the new fund of equalization. Ms. Chambriard, who has already worked in this division, says that it is difficult to change the portion destined for the social fund, which serves Health and Education, but that it is possible to redirect the rest of the resources sent to the Navy and ministries.
“The federal government usually allocates part of these resources to specific bodies in the structure of ministries to reduce the primary deficit. But funding for [Health and Education] actions is more rigid,” she says. For her, the equalization fund is a good way out, but it should have a temporary nature, under the risk of draining resources from the federal government in a scenario of continuous rise in oil prices. “Money is short, so it is not appropriate to give this instrument a permanent character.”
According to CBIE projections, R$36.2 billion in government participation are expected to be allocated this year for the states and R$ 23.4 billion for cities. The other participations, such as the rate of occupation or retention of area, signature bonus payments and others, are seen as totaling R$9.4 billion.
The calculation considered an increase in the production of oil and liquid natural gas (LNG) to 3.1 million barrels a day in 2022 from 2.9 million barrels a day on average last year. It also considered an average price this year of $95 a barrel, 34% higher than the average price of $70.86 last year. The average exchange rate for 2021, of R$5.4 to the dollar, was maintained for this year. The 2022 values were projected based on the governmental participations received last year.
The expected increase in revenue from royalties and special participation, therefore, has a structural component, from the increase in production already expected for 2022 and for the next few years, and a cyclical component, given mainly by commodity prices, said Adriano Pires, head of CBIE.
The production of the sector this year is expected to virtually double by 2027 to between 5 and 6 million barrels per day, Mr. Pires said. Such an increase is likely to be driven by oil from the pre-salt layer, a vast reserve off the coast that accounts for 70% of production and is expected to reach 90% in five years, he said.
Even if prices fall in relation to current levels, Mr. Pires said, the collection with participations related to oil is expected to grow due to the higher production volume. “This money can cause a revolution in the public accounts and it is necessary that governments start thinking about what to do with it.”
Economist Sol Garson, a specialist in public accounts, says that high oil prices are expected to raise revenues with royalties and special participations, but in a very concentrated way among states and municipalities, since they are determined by the existence of oil wells.
Ms. Garson, Rio’s former finance secretary, is also concerned about what additional funds from oil would mean for public accounts. Even if states set aside these funds for social security, for example, they can reduce the contribution of the Treasury in the year and thus free up resources for other functions. In São Paulo, the resources are fully allocated to SPPrev, an agency that manages the state’s pension system.
According to the CBIE projections, Rio de Janeiro is expected to receive 76.6% of all governmental participations paid to states, while São Paulo gets a little more than 10% and Espírito Santo will have 8.9%.
In Rio de Janeiro, Secretary of Finance Nelson Rocha said that higher production and oil international prices, now intensified by the Russia-Ukraine war, made the initial forecast for the state collection of royalties and special participations from oil in 2022 jump to R$30 billion from R$19 billion.
Secretary technicians point to an amount of R$31.7 billion, a calculation that takes into account the Brent barrel at $102.11 and the dollar at R$5.50. As a rule, most of the resources are transferred to state social security, which is in deficit, shared between municipalities and municipal funds. The last ANP official projection, published on February 9, before the war, therefore, indicated collection of $26.54 billion for Rio in the year.
If the Rio’s forecast is confirmed, oil revenues will be 63.8% higher than the R$19.35 billion of 2021. For comparison, the amount is equivalent to almost a third of the net revenue contained in the Annual Budget Law, of R$92.9 billion. It is also similar to the net current revenue of Rio’s capital city in 2021 (R$31.3 billion), discounting the proceeds from the concession of water utility Cedae’s services (R$6.2 billion).
In Espírito Santo, 40% of the oil royalties and 15% of the special participations go to the state’s sovereign fund, which aims to generate intergenerational savings mechanisms and to help and to finance the state’s economic development projects.
The Espírito Santo state government has also been following oil swings and has revised the estimates of participations revenues for 2022, said Luiz Claudio Nogueira, coordinator of the Espírito Santo oil and gas team. The projection for this year’s collection of royalties and special participations of oil rose to R$2.5 billion from R$1.4 billion. The estimate, he said, considers a barrel at $90 and exchange rate at R$5.50 to the dollar.
Source: Valor International