Royalties Will Increase Oil Revenue in Brazil by About 80% in 2022

The Estimate Is Mainly Based On The Rise In The Appreciation Of Oil Royalties In Brazil In Recent Years

The revenue from Brazil’s oil royalties could grow 80% and reach R$ 66 billion in 2022. This is the speculation from Firjan (Federation of Industries of the State of Rio de Janeiro), a federal unit focused on over 80% of Brazil’s oil reserves.
The rise in oil profits is a result of the appreciation of Brent crude oil and the devaluation of the real against the dollar.

According to official data from the ANP (National Agency of Petroleum, Natural Gas and Biofuels), by 2021, Brazil had collected approximately R$ 36 billion in revenue from oil.
The forecasts made by Firjan’s oil and gas management also consider the current level of oil production growth in the country.
Thiago Valejo, coordinator of the Strategic Content Division of Oil Management at the agency, explains that the resource capacity could be even greater, as it does not account for the special participation fee, paid for direct exploration of high-yield fields, based on production capacity.

“Services are being distributed to the three levels of government: the Union, the states, and the municipalities. If we look closely, the more states and municipalities collect resources, the more they can invest in strategic areas, such as education and health, which bring significant benefits to the community,” said Valejo.

The State of Rio de Janeiro, according to the ANP, holds over 80% of Brazil’s certified oil resources. As a result, it will be the state that sees the largest increase in oil profits above the average.

“We expect an 85% increase in royalty revenue in the year 2022, rising from R$ 8 billion to R$ 14 billion. The same significant movement is expected in municipalities, especially in Niterói and Maricá,” comments Valejo.

What Are Royalties

Royalties are fees paid by oil companies to the Union and state and municipal governments for the right to explore oil. The special participation fee is an additional compensation and is charged when there are high production costs or high profits.
These amounts are part of the so-called uncontrolled revenue and are based mainly on three factors: the price of oil, the exchange rate, and production capacity.

“Two of these three factors behave excessively: the price of a barrel of oil and, in particular, the exchange rate. The exchange rate is responsible for this record revenue,” said the co-director of CBIE.

Explanation for Record Profits in the Oil Industry

The price of Brent crude oil – the international benchmark – has returned to pre-pandemic levels from 2021 and, in October, reached US$ 85, an unprecedented value since October 2018. This rise in oil prices is due to an economic recovery and also to rising natural gas prices, which have increased demand for oil in power generators.

In recent days, the dollar has surpassed the US$ 5.50 mark again, and it has had a rise of about 6% per year against the real. Last year, it increased by around 30%. Until early 2019, it was below R$ 4.
The financial market currently projects an exchange rate of R$ 5.25 by the end of 2021 and for 2022 amidst political and financial uncertainties, anticipation of the electoral crisis, and declining economic performance expectations through 2022.

CBIE’s annual revenue estimates forecast an average oil barrel price of US$ 70, an average exchange rate of R$ 5.20, and an increase of about 7% in oil production in Brazil, averaging US$ 3.26 million barrels per day for the year 2021.

Analysts also point to the dollar as the main “villain” of the rising prices of gasoline and diesel in Brazil.
A survey conducted by economist Walter de Vitto from Tendências Consultoria shows that, in September 2018, when a barrel of oil was being sold for around US$ 80 and the exchange rate was R$ 4.12, the average price of fuel per liter at the pumps was R$ 4.64, compared to R$ 6.08 in September 2021. According to analysts, if the dollar were at R$ 4.50 today, the average price of gasoline for consumers in Brazil would be 10% cheaper.

Utilization of Resources

Compared to the period from January to July 2021, revenue from royalties and the government’s share amounts to an additional R$ 7 billion for the Union and for state and municipal governments.

According to studies, the Union’s budget reached R$ 12.54 billion, compared to R$ 10.49 billion in the first 7 months of 2020. In contrast, the amounts transferred to states and municipalities increased by about R$ 2.4 billion, to R$ 11.35 billion and R$ 8.07 billion, respectively.

The record collection of royalties in Brazil amid rising fuel prices for consumers and ongoing inflation raises the possibility of a public debate about the use of resources derived from oil exploration.

“Unfortunately, in recent years, both the Union and states and municipalities have taken this excellent money from royalty collections and have not invested it for the benefit of the people. There is a lack of information about where this money goes,” said the director of CBIE.

The specialist even suggests that a portion of the royalty funds be used as a source of income to establish a savings fund.