Oil, natural gas and iron ore will generate higher-than-expected collection, according to calculations by think tank Ibre/FGV

06/07/2022

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Braulio Borges — Foto: Ana Paula Paiva/Valor

The federal gross collection of revenues related to extractive industries – especially oil, natural gas and iron ore – is seen as reaching an annual average of 2.11% of GDP between 2022 and 2030, more than double the average rate of 0.92% of GDP per year seen from 2011 to 2020. The calculation by economist Braulio Borges, a researcher at Fundação Getulio Vargas’s Brazilian Institute of Economics (FGV/Ibre), conservatively considers a barrel of oil traded at $65. The additional collection would total R$1.03 trillion at constant values from this year through 2030 compared to the previous decade.

Mr. Borges ponders that the scenario involves volatility and contingencies, such as those related to oil prices and the production curve. He also highlighted that these additional revenues have not yet been considered in the longer-term fiscal projections, whether internal or produced by international organizations.

According to his analysis, in 2021 the extractive industries will expand gross federal revenues by around 1% of the GDP. With that help, that federal revenue reached 22.3% of GDP, up from 21% on average from 2014 to 2019. In the 12 months through March 2022, he said, the total federal collection reached 23.2%, which indicates a new increase this year. The recent movement was driven by the high international prices of these commodities impacted by cyclical factors.

Even as prices expected for the next two years are adjusted, these items are expected to continue increasing tax collection until 2030, Mr. Borges said. In this longer term, the revenues from extractive industries will be based on the increase in production volume and driven by already defined taxes, which is expected to gain ground due to the increase in the share of oil and gas extraction under the sharing regime.

Experts warn that the high volume of revenue coming from this temporary change, although lasting and based on finite resources, should not be seen as a panacea. This additional revenue, they point out, requires careful allocation by the federal government.

According to Mr. Borges, even in a scenario of a lower oil price, of $45 a barrel of Brent, the federal gross revenue from the same activities would yield an annual average of 1.68% of GDP from 2022 to 2030, still more than 0.7 percentage points above the average annual rate seen between 2011 and 2020. Considering a barrel at $85, the federal revenue would be 2.6% of GDP on average annually.

Mr. Borges’s calculation shows that in 2021 the total revenue from royalties, special participations, dividends paid by Petrobras to the state and taxes paid by the extractive industries, except social security contributions, totaled 1.85% of GDP, higher than the average of 1.06% of GDP from 2018 to 2020 and 0.93 percentage point above the annual average from 2011 to 2020. The performance largely explained the jump in total federal gross revenues in 2021.

Revenues from royalties and special participations grew to 1.08% of GDP in 2021 from 0.76% the year before. Petrobras’s dividends reached 0.24%, the highest rate relative to GDP since 2001. Federal taxes complete the picture. Revenue from taxes and contributions from extractive industries, including oil, yielded 0.52% of GDP for the state in 2021, almost double the 0.27 percentage point seen in the previous year.

The revenue projection, Mr. Borges said, shows that the extractive industries will continue to increase the state’s gross revenue until the end of the decade. The expected increase in production, especially of oil, natural gas and iron ore, is expected to contribute to this. These three commodities represent virtually 89% of the royalties collected from natural resource exploration in Brazil. The projections are included in a study that is the subject of an article by economist Luiz Guilherme Schymura, to be published by Ibre in the magazine “Conjuntura Econômica.”

In the study, Mr. Borges considered the 10-Year Energy Expansion Plan 2031, in which Energy Research Company (EPE) projects growth of little more than 80% in the production of oil and gas by 2030, with an increase from pre-salt exploration. This comes in the wake of production growth of 50% in the last decade and expansion of 150% in 20 years. Iron ore production is expected to grow 30% by the end of the decade, considering mining giant Vale’s estimates.

Another factor that will contribute to revenue growth is the so-called “profit oil,” a still small collection for the state established when the sharing regime was created, in 2010. That meant an increase in taxation on the extraction of oil and natural gas, Mr. Borges said. As production subject to the sharing regime is expected to increase, the revenue from profit oil, almost insignificant until 2021, is likely to grow until 2030.

Based on data from PPSA, the state-owned company created to represent the state in the sharing contracts, Mr. Borges projected the impacts on revenue. “It is worth saying that two-thirds of Brazil’s oil extraction in 2030 is expected to be under the sharing regime.”

Royalties, special participations, Petrobras dividends and revenues from profit oil combined are expected to reach 1.7% of GDP between 2022 and 2030 on average. Last year, it was 1.33% of GDP. In the 10 previous years, the annual average was 0.7%. For 2030, the projection is 2.25% of GDP – considering, as previously mentioned, a barrel of Brent crude oil at $65. The collection of federal taxes paid by extractive industries is expected to add 0.4% to 0.45% of GDP on an annual average from 2022 to 2030, totaling 2.11% of GDP in this period.

The most recent rise in the contribution of extractive industries to the state’s gross revenue is due in large part to the surge in commodity prices, under the impact of the pandemic and, more recently, the shock of the Russia-Ukraine war. Because of this, Mr. Borges said, the expected adjustment in prices is likely to drive down tax collection linked to extractive industries over the following two years, with a minimum level projected for 2024 at 1.6% of GDP.

From 2025 on, with the increase in domestic production of oil and gas, these revenues are likely to rise again and reach 2.71% of GDP, considering the baseline scenario with Brent crude at $65 a barrel.

Even with the energy transition, Mr. Borges said, oil demand is expected to still be high for 15 to 20 years, and “Brazil is well-positioned to meet this demand.” At the same time, he says Brazil has the third-largest nickel reserves in the world, a production that can grow a lot if the energy transition accelerates and boost royalty collection. This was not included in the projection, he said.

Mr. Borges points out that this commodity windfall brings volatile revenues based on finite natural resources. “A number of factors can make oil extraction in Brazil grow more or less,” he said. “The additional revenue will apparently materialize between now and the end of the decade, but it is not necessarily eternal. The projections, in fact, are that in the decade following 2030 Brazilian oil production will start to fall.”

Source: Valor International

https://valorinternational.globo.com/