Article

Government take

The Brazilian National Agency of Petroleum Natural Gas and Biofuels (ANP) has issued a series of statutes relating to the obligations of concession-holders and pursuant to the directives in Law No. 9478 of August 6, 1997; Law No.12276 of June 30, 2010 Law No.12351 of December 22, 2010 and Decree No. 2705 of August 4, 1998. The latter sets out the criteria for calculating and paying over the government’s participation in exploration and production activities, following the main concepts and respective regulations briefly described in this section.

 

In 2017, the Government take in Brazil  totaled approximately R$ 41 billion, an  increase of 126%  compared to 2016, coming from royalties (R$ 15,3 billion), special participation (R$ 15,2 billion), subscription bonus (R$ 10 billion) and occupation fee (R$ 0,2 bi).

 

Government take by regulatory regime

Source: ANP. Deloitte Analysis.

 
 
 
 
 
 

Subscription Bonus

The subscription bonus established by item I, Article 45 of Law No. 9478 of August 6, 1997, introduced a compensation for the State in exchange for the right to a concession to engage in oil and natural gas exploration activities. The bonus corresponds to the amount bid to obtain the oil and natural gas concession and is to be paid upon signing the contract. The minimum bid is established in the tender protocol of each bidding round.

Even though the criteria and weights to define the winner of the bidding rounds (in concession regime) have changed over time, the subscription bonus has always been present, as specified below. However, after the local content was withdrawn from the award criteria, and the subscription bonus given 80% of weight, it became even more important to win a concession bid in Brazil, and can help explain the high amount of bonus paid in the last bids (14th and 15th).

Bidding Rounds’ award criteria

Source: ANP Bidding Round Site (2016)

Collected Signature Bonus in Bidding Rounds under Concession Agreements (Million R$)

Source: ANP. Deloitte Analysis.

For Production Sharing Contracts (PSC), the subscription bonus is set by item II, Article 42 of Law No.12351 of December 22, 2010 and corresponds to a fixed value due to the State by the contractor. The signature bonus for the sole area (Libra block) awarded in the first Pre-Salt Round (2013) was set at R$ 15 billion, which is more than the sum of bonus paid in the other 9 blocks acquired in the PSC bids 2, 3 and 4.

Collected signature bonus in bidding rounds under PSC (million R$)

Source: ANP. Deloitte Analysis.

Royalties

Royalty payable under item II of Article 45, Law No. 9478 of August 6, 1997 and under by Article 5, Law No.12276 of June 30, 2010, constitutes financial compensation due by the concession-holders for oil and natural gas exploration production.

The royalties are to be paid monthly in Brazilian currency, as from the date on which each field initiates commercial production, and in an amount corresponding to ten per cent (10%) of gross revenues of oil and natural gas production. ANP may include in the bid notice a reduction in the percentage of royalties to a minimum rate of five per cent (5%), when considering geological risks, production expectations, and other pertinent factors.

The royalties paid in 2017 had a rise of circa of 30%, amounting R$ 15.3 billion, due to mainly the higher price of crude oil and the increase in production.

Collected Royalties (Billion R$)

Source: ANP 2016

For production sharing contracts, royalty is payable at a flat rate of 15%. Royalty is payable on monthly production from a producing field and is determined as royalty rate x value of production. The value of production is derived as the price x volume of oil and/or gas produced.

Special Participation

The Special Participation (PE) introduced in item III of Article 45, Law No. 9478 of August 6, 1997, governs extraordinary financial compensation to concession-holders in respect of huge production volumes or high profitability of a field. The special participation fee is calculated quarterly per field of each concession area and is paid on or before the last working day of the month subsequent to each quarter of the year.

In addition to item III of Article 45, Law No. 9478 of August 6, 1997, and Chapter VII of Decree No. 2705 of August 4, 1998, ANP Technical Ruling 12 of February 21, 2014, establishes the calculation procedures for concession-holders of oil and/or natural gas production activities.

The PE is calculated by applying progressive rates to the quarterly net revenues accrued by each field, according to the location of the drilling work being performed, the number of years, and the volume of production involved.

Decree No. 2705 of August 4, 1998 defined the net revenues as a result of the following operation:

  • Gross production revenues
  • (Less) Royalties payments
  • (Less) Exploration expenditures
  • (Less) Operating costs
  • (Less) Depreciation and other charges

To supplemental Decree No. 2705 of August 4, 1998, ANP Technical Ruling 12 of February 21, 2014 defines parameters for deductions from gross revenues, to determine the net base for calculation of the PE (i.e., the net revenue of the quarterly production of each field, on table below).

Below is an example of a PE chart for an offshore location with a water depth over 400 meters and in its third year of production:

Source: Decree No. 2705 of August 4, 1998

[1] Quarterly net revenue from each field, expressed in Brazilian Real (BRL)

[2] Volume of quarterly production from each field, expressed in 1,000 cubic meters (Mm³) of oil equivalent.

The special participation rose more than 150% in 2017, in relation to 2016, reaching circa of R$ 15.2 billion.

Collected Special Participation (Billion R$)

Source: ANP Deloitte Analysis.

Production sharing contracts do not levy special participation.

Payment for Occupation or Retention of an Area

The payment for occupation or retention of an exploration area, according to item IV of Article 45, Law No. 9478 of August 6, 1997 and Decree No. 2705 of August 4, 1998, is to be calculated for each calendar year as from the date the concession agreement is signed and paid on January 15 of the following year. If the concession agreement is cancelled, the payment should be made on the date established by the ANP as the return date. This payment has to be computed considering the unit values, expressed in BRL per square kilometer (R$/km2) or fraction of the concession area, that are set in the bidding notice and concession agreement. Such values will be updated every twelve (12) months from the contract signing date, according to changes in the General Price Index – Domestic Availability (IGP-DI) within the same period.

Decree No. 2705 of August 4, 1998 also establishes the maximum and minimum limits of the unit values that will be set in the bidding notice and concession agreement, as follows:

  • Exploration phase - between R$10 and R$500 per km² or fraction.
  • Extension of the exploration phase – double the unit value established for the first exploration period.
  • Development period of the production phase – between R$20 and R$1,000 per km².
  • Production phase - between R$100 and R$5,000 per km².

The unit values above will be updated annually, in January 1st, by the General Price Index – Domestic Availability (IGP-DI).

Collected Occupation Fee (Million R$)

Source: ANP. Deloitte Analysis.

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