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Pre-salt profits will lead to more investment in education and healthcare

Oil and Gas

Part of the proceeds from oil exploration will be split between the federal government, states and municipalities. Resources are a valuable boost for society
published: Oct 26, 2017 12:00 AM last modified: Oct 26, 2017 12:12 PM

Pre-salt profits will lead to more investment in education and healthcare

The royalties paid by oil companies in exchange for oil exploitation help boost the economy, finance public services - such as healthcare and education - and, in some cases, are an essential financial boom for areas in which exploration activity is the main source of revenue.

According to the current rules, part of the profits obtained from oil exploration is divided between federal, state and municipal governments. In addition to the signing bonus that companies must pay upfront after winning auctions, they must also offer a minimum percentage of the oil extracted to the federal government (the so-called 'production sharing' regime).

With the return of oil auctions, especially the pre-salt rounds, the expectation is that these funds will again generate benefits for society. According to estimates by the National Petroleum, Natural Gas and Biofuels Agency (ANP), the upcoming rounds scheduled for 2017-2019 are expected to generate profits in excess of US$ 100 billion.

Financial boost and social impacts

Antônio Guimarães, Executive Secretary of Exploration and Production at the Brazilian Petroleum, Gas and Biofuels Institute (IBP), emphasises the positive impacts of the pre-salt profits beyond tax revenue, since these resources are also significantly invested in healthcare and education.

"In addition to the economic impact, the distribution of royalties has a very large social weight, since part of the pre-salt proceeds are earmarked for healthcare and education, providing a further welcome revenue boost to the federal government, states and municipalities at a moment of fiscal fragility, expected to last for some time yet," he pointed out.

States such as Rio de Janeiro, where economic activity is closely linked to the exploration of oil and natural gas, now have the prospects of once again relying on these revenue streams within the next few years. The pre-salt auctions alone are expected to inject R$ 2.5 billion in royalties into the state's economy in the next decade, according to the Brazilian Association of Petroleum Services Companies (Abespetro).

Aluízio Junior, mayor of Macaé (a city in Rio state), points out that his municipality's economy is directly dependent on oil dividends. "Today, oil represents 30% of the Gross Domestic Product of the state of Rio de Janeiro, and for the region it is almost an economic anchor," he said, adding that "the expectation now is that the industry will pick up again. It's as if it could re-emerge from these new auctions".

How are royalties calculated?

Dividends are paid to the national treasury by the last day of the month following the one in which production occurred, and then passed on to their respective beneficiaries. Payments are calculated based on the royalty rate of each producing field (which varies from 5% to 10%), monthly output and the reference price of the raw material.

What about the pre-salt? How does it work?

The royalty rate for the production of both oil and natural gas in the pre-salt is of 15%. Because it has a lower investment risk (since the possibility of finding oil in these areas is very high), the applicable rate is higher.