Brazilian state threatens new oil tax over royalty dispute

*Oil platform at Guanabara Bay, Rio De Janeiro in the background.

*Oil platform at Guanabara Bay, Rio De Janeiro in the background.

15 December 2015, Rio De Janeiro – Brazil’s state of Rio de Janeiro, home to the bulk of the country’s oil production, threatened on Monday to impose a new tax on oil and natural gas in the state if the country’s oil regulator ANP does not adjust its royalty calculation.

The state, whose budget has been hurt by a nearly 40 percent decline in the price of Benchmark Brent crude oil in the last year, has been pressuring the regulator to change the way it determines the so-called oil reference price.

If the calculation is not changed, the government plans to apply a 2.71 real (69.8-cent) per barrel tax on each barrel of oil or natural gas equivalent produced in fields located in state waters.

That would raise about 1.8 billion reais ($464 million) in 2016, slightly more than the 1.6 billion reais it is losing because of the current calculation, state officials told Reuters on Monday.

Rio de Janeiro produces 67 percent of Brazil’s oil and 40 percent of its natural gas. Among the state’s main producers are state-run oil company Petroleo Brasileiro SA, BG Group Plc, Royal Dutch Shell Plc.

The state’s financial crisis has reached the point where the government is intentionally delaying payments and universities and hospitals have seen their services reduced.

Some public servants are still waiting to receive their full November salaries. Local organizers of the Rio de Janeiro 2016 Olympic Games have been forced to make cuts to their remaining budgets.

Royalty payments are paid as a percentage of the reference price for each barrel of oil produced. The reference price has typically been far below the Brent price because the bulk of Brazilian crude has been low-grade, low-price heavy crude.

According to Rio de Janeiro-state Governor Luiz Fernando Pezão, the calculation, first developed in the 1970s, fails to properly account for large amounts of higher-grade medium and light crude being produced from new subsalt fields south of Rio de Janeiro.

“We have a request in with the ANP and Petrobras where we show that the price per barrel or oil or gas is wrong and out of date,” Pezão told reporters on Monday. “Brazil is producing another type of oil.”

Royalties typically range from 10 percent to as much as 40 percent depending on the size, productivity and profitability of the field.
*Rodrigo Viga Gaier; Jeb Blount; Ken Wills – Reuters

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