National Petroleum Agency projects R$90.3bn revenue amid rising production, market conditions

05/20/2024

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Vilma Pinto — Foto: Wenderson Araujo/Valor

This year’s oil production increase in Brazil is projected to generate R$90.3 billion in royalties, marking a 20.4% rise compared to the R$75 billion collected last year, according to the National Petroleum Agency (ANP). The early months of 2024 confirm the agency’s forecast of higher production for the year. The ANP anticipates higher government revenue from these participations in the coming years.

From January to March, the latest available data, Brazil’s average oil production was 3.441 million barrels per day, a 6.96% increase year-on-year. The average natural gas production between January and March was 148.8 million cubic meters per day, 4.26% higher than the same period last year, according to the ANP.

Revenues generated from increased production bolster public coffers at a favorable time, with rising barrel prices, and provide relief to the federal government, oil-producing states, and municipalities amid discussions on fiscal balance.

Experts consulted by Valor say the federal government can freely use the money from royalties and special participations (an additional royalty paid to the government on large-volume fields), except for the portion allocated to the social fund. Fields under the production-sharing regime allocate 22% of royalties to the Social Fund. For states and municipalities, there are restrictions. Federal law prohibits using royalties and special participations to pay active public employees and settle debts, with exceptions for public school teachers’ salaries and debts to the federal government.

Vilma Pinto, director of the Independent Fiscal Institution (IFI), a Senate-affiliated fiscal policy watchdog, notes that it is inappropriate to use royalties to increase current expenditures, as this type of revenue is “sensitive to the cycle.” “Using it to expand recurring expenses can create future fiscal imbalances. This applies to both the federal government and states and municipalities,” she said.

Between January and April, Brent crude was priced at an average of $82.95 per barrel, 0.95% higher than the average for the same period last year, which was $82.16, according to Valor Data. In May, Brent continued to rise, closing on Friday with a weekly gain of 1.41%, at $83.98. The price of the barrel and exchange rates are key in calculating government participation in the oil sector.

On Thursday, the ANP reported that it allocated R$8.3 billion to the federal government, states, and municipalities related to the payment of special participation corresponding to January through March this year.

ANP data also indicate that federation entities will see increased revenue from royalties and special participations in the coming years. The ANP’s projections suggest that revenue from these government participations is expected to reach R$404.1 billion between 2024 and 2027, 12% above the R$360.9 billion that filled the coffers of the federal government, states, and municipalities between 2019 and 2023.

The projection assumes an oil price slightly below $80 per barrel. There is no forecast yet on when the data that underpins the survey, conducted in 2023, will be updated.

Symone Araújo, a director at ANP, said that historically, government participation hit a record high in 2022 due to rising oil prices and increasing production. There was a decline in revenue in 2023 compared to 2022 due to falling oil prices after the peak: “Government participation in the coming years is likely to increase due to the expected rise in oil and gas production, with new production units coming online, positively impacting public revenue,” she told Valor.

Economist Gabriel Barros Leal, former director of the IFI, said that royalties and special participations give the federal government more flexibility in their use compared to taxes and contributions, as they do not have a specific destination, except for the part allocated to the Social Fund. “This additional revenue could help pay down debt and improve the primary balance. It could also help if the government wants to finance expenditures,” said Mr. Barros Leal, who warns that the risk is that government-financed expenditures are generally mandatory and have low returns. “The government spends more than it collects and spends poorly, taking money from society and transferring it incompetently,” he said. The best use of the money, he added, would be to reduce the public debt, which he deems as “high and expensive.”

Economist and public finance expert Raul Velloso added that higher royalties and special participation revenue this year, if confirmed, offer an opportunity to reduce consolidated public sector debt. Ms. Araújo, with ANP, said the agency is not responsible for evaluating the use of revenue by entities benefiting from government participation: “This responsibility lies with the state and municipal audit courts. The agency only calculates and transfers the funds, leaving it to the entity managers to decide on resource use, without ANP interference.”

Royalties are financial compensation paid by oil and natural gas producers to the federal government, states, the Federal District, and municipalities benefiting from the exploitation of these activities. Royalties are calculated based on a rate applied to the producing field (ranging from 5% to 15%), the field’s monthly production, and the reference price of oil or natural gas. The ANP supervises the funds.

The legislation stipulates that 40% of royalties are allocated to the federal government, 22.5% to producing states, and 30% to producing municipalities. The remaining 7.5% is distributed among all states and municipalities in the federation. Within the federal government, the funds are divided between the Navy and the Ministry of Science and Technology. “Royalties are a simple and direct form of taxation,” said Décio Hamilton Barbosa in the book “Tributação do Petróleo no Brasil e Outras Jurisdições” (“Petroleum Taxation in Brazil and Other Jurisdictions”).

Special participations, on the other hand, are extraordinary financial compensations paid by oil companies for oil and natural gas fields with large production volumes. Compensation is made quarterly, and the destination of funds depends on the type of field.

The federal government also benefits from oil reserves even before production begins. In area auctions, the Brazilian State receives funds from companies winning the bids. Under the concession regime, companies winning blocks pay a signature bonus, based on the prior perception of resource generation. Under the production-sharing regime, adopted for part of the pre-salt fields, area winners allocate a portion of production, called profit oil, to the federal government through the state-run Pré-Sal Petróleo (PPSA), which later sells it on the market in its auctions.

Eduardo Pontes, a partner at consultancy Infis Consultoria, said that 69% of the revenue obtained from oil sales in the country is allocated to the federal government in the form of taxes, royalties, and special participations. “And in the pre-salt, the federal government gets 70%, 80% of the profit oil, which is a form of special participation, both from Petrobras and other companies,” said Mr. Pontes.

Petrobras is the main contributor to public revenue, being the largest oil company in the country, with oil and gas production around 3 million barrels of oil equivalent per day. The company injected R$420.5 billion into public coffers in royalties, special participations, and other categories (such as signature bonuses) between 2016 and 2023.

In a statement, Petrobras said, “In 2023, we collected R$61.4 billion in government participations (royalties and special participations), whose amounts are distributed by the ANP to the National Treasury, states, and municipalities, based on criteria defined by law. Additionally, our contribution in the form of taxes collected to the federal government in 2023 was R$87.4 billion.”

In adverse geopolitical scenarios, the state-run company tends to benefit from increased revenue from oil sales and potential increases in the prices of oil products in the domestic market, as well as possible hikes in the dollar exchange rate. However, there are negative effects of rising oil and product prices on inflation, which tends to make both Petrobras, a state-run company, and the government delay price increases when necessary. On the other hand, the higher the Brent price, the more viable exploration and production activities become. Petrobras has been seeking to explore new areas to replenish its portfolio in regions such as the Equatorial Margin and the Sergipe-Alagoas and Pelotas basins, concerned about the decline of its fields.

With the current reserves maintained, without exploring new frontiers, studies indicate that production is expected to continue to increase until it declines around 2030. “The trend is for government participation to follow production, with increases in the coming years and declines from 2030, 2031, if new reserves are not incorporated,” said Ms. Araújo, with the ANP.

The current pace is of reserve growth, which is likely to translate into increased production. According to ANP, total proven oil reserves (which have a reasonable certainty of commercial extraction) increased by 6.98% in 2023 compared to 2022. Natural gas reserves increased by 27.12% last year compared to the previous year.

Por Fábio Couto, Rafael Rosas — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/