Brazil gets oil windfall as output poised to soar

As of 2005, the Brazilian oil sector accounted for approximately 2% of world oil production, 1% of world oil reserves, and 2% of Brazilian GDP. Offshore oil accounts for the vast majority of output. Oil in Brazil is inextricably linked to Petrobras, the oil multinational controlled by the Federal Government, which completely dominates the industry. Brazil’s President-elect Jair Bolsonaro is staring at an oil windfall. After a decade of stagnant production, Brazil’s offshore mega-projects are about to deliver a double whammy with exports set to surge and Brent prices comfortably above $70/bbl. The essentially monopolistic structure of the industry, the oil sector is heavily regulated. The industry regulator is Agencia Nacional do Petróleo, Gas Natural and Biocombustíveis (ANP). One of the many important functions of ANP is to oversee the calculation of royalties due on each oilfield, collect the payment, and distribute it to the various recipients. In Unpublished Appendix 1 we give a detailed description of the (very complicated) rules for the allocation of royalties. Here we summarize the main points.

Federal law mandates that Petrobras pay close to 10% of the value of the gross output from its oilfields in the form of royalties. The recipients of royalties include: some federal entities, state governments, and municipal governments, the latter two both directly, and indirectly through the division of a “special fund” into which some of the royalties are paid. Municipal governments are the ultimate beneficiaries of about 30% of the royalty pie, i.e. roughly 3% of the value of gross oil output. This can result in substantial royalty revenues for some municipalities: in the top 25 municipalities by per capita oil output, royalties accounted for about 30% of municipal revenues in 2000. The oil turnaround gives the government more than just cash — it promises to revive the fortunes of Petrobras, the much-maligned state-controlled state oil company that’s a source of pride for many Brazilians but which has spent the past few years mired in scandal.

A municipality’s royalty income depends on several factors. Some of these factors are purely geographic, and we discuss them in greater detail below. Other determinants of royalty participation, however, are not geographic. For example, municipalities on whose territory is located infrastructure for the storage and transportation of oil and gas or for the landing of offshore oil, or are even only “affected” by such operations, are also entitled to some. Furthermore, some components of the royalty allocation scheme depend on the size of the municipality’s population. For these reasons, royalty income is not a credible exogenous measure of the windfall received by municipalities due to oil. This consideration plays an important role in our identification strategy. “With elections behind us, eyes now turn to the transition government and the selection of the names for the next cabinet,” Bradesco analyst Fernando Barbosa said in a note to clients on Monday.

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