Related Articles
Forward article link
Share PDF with colleagues

Brazil takes step closer to new licensing rounds

Reforms have finally passed allowing changes to the energy sector

Brazil’s lower house of Congress passed a long-delayed oil-sector royalty reform bill on 6 November, the last in a series of oil industry reforms proposed after the country’s first major offshore discoveries were made. The law will likely face constitutional challenges, but it opens the door for two hotly-anticipated licensing rounds to be held starting next year.

In the end, the contentious legislation passed by a comfortable margin of 288 to 124 in the Chamber of Deputies. It  was approved by the Senate last year. The new law allows for oil royalties to be divided more equitably among Brazil’s 26 states.

The new royalty payments differ for pre-salt developments and those outside the pre-salt, and apply to existing and future concessions. Under the framework, payments to non-producing oil states from projects outside the pre-salt will rise from 8.75% to 40%. Oil-producing states, such as Espirito Santo and Rio de Janeiro, will see payments fall from around 26% to 20%. The remainder will be divided between the federal government and local municipalities where oil activity takes place.

For future royalties received from production under the new pre-salt concessions, producing states will receive a 22% share and municipalities in those states will receive 5%. Non-producing states and municipalities will split   51% of the royalties. The federal government will receive the remaining share of royalty revenues.

The new royalty distribution mechanism will be phased in over a six-year period, with rates making an initial smaller adjustment in 2013 before taking full effect in 2019.

In 2011, Brazil saw oil-royalty revenues surge by 31% to BRL12.987 billion ($6.33bn). A total of BRL8.21bn, or nearly two-thirds, went to states and municipalities, with Rio de Janeiro state the biggest benefactor raking in BRL2.47bn. Brazil’s earnings from oil royalties have more than doubled since 2005 as oil production and prices have grown, but non-producing states have seen little benefit from the bounty. 

The royalties bill proved to be the most controversial in  a series of oil industry reform measures put before Congress  after the discovery of the  pre-salt play. The reforms included the creation of a new government agency, Petrosal, to oversee the development of the pre-salt region and the drafting of a new production sharing agreement for pre-salt projects. It also included the shares-for-oil deal which allowed the government to take a bigger ownership share in Petrobras by transferring development rights to 5bn barrels of pre-salt reserves.

With the last of the major reform bills now passed, Brazil is expected to push ahead with the 11th and 12th licensing rounds. Under mounting pressure from the industry, Brazilian president Dilma Rousseff pledged in September to hold the 11th round as soon as May 2013.It was initially expected to be announced in 2009.

The 11th round is expected to see 174 blocks, evenly split between on- and offshore tracts, up for grabs, and includes acreage in little-explored basins. Blocks in the offshore Equatorial Margin play, in the northeast, is expected to attract significant attention. These blocks lie near acreage in French Guiana and Suriname which have been snapped up by majors Shell and Total.

The much-anticipated 12th licensing round, which is expected to put pre-salt blocks up for auction for the first time since the Lula (then known as Tupi) field was discovered in 2006, should go ahead shortly afterwards.

Opposition from oil-producing states, though, may still complicate these plans. Sérgio Cabral, the governor of Rio de Janeiro state, claimed the new royalty bill threatened his state’s ability to pay for the facilities and infrastructure improvements necessary for 2014 World Cup and the 2016 Olympics. He added the bill would cost his state around BRL77bn ($37.5bn) by 2020.

Cabral and other governors from producing states urged Rousseff to veto the bill. But that is unlikely to happen. Vetoing the bill would once again throw the fate of the new licensing rounds into doubt, alienating important foreign investors who are already started to cool on Brazil because of labour and other policies that have made the country a challenging place to operate.

Moreover, the sooner new acreage is opened up, especially in the pre-salt, the sooner new petro-dollars will start to fill everyone’s coffers.

Also in this section
US carbon fight moves to Washington state
23 October 2018
The lack of political enthusiasm for a federal-level US carbon tax contrasts with more positive undercurrents in Washington state’s heated carbon referendum
UK resumes fracking after seven-year hiatus
23 October 2018
Fracking is underway again in northern England, but don’t expect a US-style shale boom any time soon
Saudi Arabia's Vision 2030 looks blurry in Khashoggi aftermath
18 October 2018
International reaction to the disappearance of prominent Saudi journalist Jamal Khashoggi will lead, at very least, to delays to the kingdom’s ambitious reform programme