Brazil: Debate On Brazillian Pre-Salt Royalties

Last Updated: 14 November 2011
Article by Ted Rhodes

Introduction

The Brazilian Senate voted on 19th October 2011 in favour of a proposal to change the allocation of oil revenues amongst Brazil's federal government, its 26 states and 5564 municipalities. For this to become law, it now needs to be approved by Congress. The proposed reform will have the effect of redistributing royalties away from the oil producing states of São Paulo, Rio de Janeiro and Espírito Santo, in favour of non producing states and municipalities. It is estimated that Rio de Janeiro alone will lose US$2.42 billion in 2012 and US$4.23 billion in 2013. While, at first sight, the internal wrangling between states of the Brazilian Federal Republic may not appear to be of great importance and will not, for example, affect the level of royalties payable by oil companies, the completion of this debate is critical for the oil and gas industry in Brazil. Until this dispute is resolved and the accompanying legislation is put in place, the 11th licensing round, which was originally expected this year and is now scheduled to take place in 2012, may not be launched.

Historical Background

Ever since the discovery of the huge pre-salt oil reserves offshore Brazil, the government has been deliberating on exactly how to distribute its oil wealth. Most of Brazil's oil is found in offshore fields located in its South-Central continental shelf, mainly in the basins of Santos, Campos and Espirito Santo. The state that benefits the most from the current arrangement is Rio de Janeiro, due to its extensive coastline and proximity to Brazil's most productive oil fields. As a result, Rio is home to the majority of Brazil's oil and gas industry.

An inter-ministerial commission was formed in 2008 with the specific task of putting forward suggestions as to how to reform the regulatory regime. The commission put forward proposals for a new regulatory regime in 2009, including plans which would require oil companies to share a percentage of production with the Federal Government, it held off from dealing with the allocation of tax revenues from oil production among Brazil's states and municipalities. In part, this was due to the potential for a long, arduous and heated debate on the subject, with all stakeholders seeking to promote their interests. This type of inter-state and inter-municipality discussions are common in Brazil, where states and municipalities regularly feud over the distribution of tax revenues. The uneven geographical distribution of oil reserves within the Brazilian territory has further aggravated the political climate.

Current Dispute

As can be seen from the table below, the present distribution of royalties is weighted heavily in favour of the oil producing states and municipalities, with only 8.76% being distributed among the non producing states and municipalities. Under previous legislative proposals, it was hoped that the Federal Government would step in and give-up some of its allocation, (which currently stands 30% for royalties and 50% of the Participaçao Especial) in order to break the deadlock but this has not happened. Ex president, Luiz Inácio Lula da Silva, was initially in favour of equal royalties for all states but, under pressure from the oil producing states, he changed his mind to support their more favourable treatment. Lula's proposal was not accepted by the political representatives of non producing states, who put forward an amendment, the "Emenda Ibsen", named after its chief sponsor, Congressman Ibsen Pinheiro, which proposed that royalties would be distributed equally among all states without preferential treatment in favour of producing states and municipalities. The Emenda Ibsen extended this treatment to all exploration blocks, including those outside the Pre-Salt area, and retrospectively to blocks which had already been auctioned.

The Emenda Ibsen, however, was vetoed by Lula in the final days of his presidency. Consequently, the whole issue returned to the Senate for further deliberation, where the current bill was approved and now awaits the consideration of Congress, which may not take place until 2012. As a result, the political debate has now intensified. Congress is likely to vote in favour of the proposal, which would result in the oil producing states losing a significant share of oil revenues in favour on non producing states and municipalities, as shown in the table below. Both Sergio Cabral, the Governor of Rio de Janeiro, and Edison Lobão, the Minister for Mines and Energy, have indicated that if the previous veto by President Lula is annulled, they will initiate legal proceedings to stop the implementation of the proposed law. Indeed, things could get ugly; Senator Magno Alta, a prominent Rio politician, recently promised to paralyse the country in defence of Rio's royalties.

Conclusion

There are valid arguments of a legal and political nature from both camps. On the one hand, the Brazilian constitution provides that the ownership and exploitation of oil reserves is a prerogative of the federal government, as opposed to individual states and municipalities. On the other hand, dividing oil revenues equally amongst Brazil's states and municipalities, may limit the incentive and resources of local policymakers in oil producing states, for promoting the development of oil exploration, infrastructure and industry-friendly regulations within their respective territories.

Whichever way Congress votes, it is likely that the debate will continue for some time, with the possibility of legal challenges following any change to the law. This is relevant for the oil industry and the private sector, as will affect the timing of the next licensing round and the next wave of investment in exploration and production. Despite the announcement in August 2011 by Edison Lobão, that the next round would take place in 2012, this is by no means guaranteed until the ongoing political and legal wrangling is resolved.  Brazil has not offered any offshore acreage since the 9th licensing round in 2007, so this continuing delay risks reducing projected investments and future oil revenues at a time when Brazil is seeking to attract inward investment to its oil and gas sector.

Table showing changes in the allocation of oil revenues under the current proposals

Exploration Blocks Already Auctioned – Concession Model

Participaçao Especial (PE)

 

Current

2012

2020

Federal Government

50%

42%

46%

Producing States

40%

34%

20%

Producing Municipalities

10%

5%

4%

Affected Municipalities

0%

0%

0%

Non Producing States

0%

9.5%

15%

Non Producing Municipalities

0%

9.5%

15%

Royalties

 

Current

2012

2020

Federal Government

30%

20%

20%

Producing States

26.25%

20%

20%

Producing Municipalities

26.25%

17%

4%

Affected Municipalities

8.75%

3%

2%

Non Producing States

1.76%

20%

27%

Non Producing Municipalities

7%

20%

27%



 

Exploration Blocks to be Auctioned in the Future – Production Sharing Model

Royalties

 

Lula Proposal

2012

2020

Federal Government

22%

22%

20%

Producing States

25%

22%

22%

Producing Municipalities

6%

5%

5%

Affected Municipalities

3%

2%

2%

Non Producing States

22%

24.5%

25.5%

Non Producing Municipalities

22%

24.5%

25.5%



This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 08/11/2011.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.