An initiative by Rio de Janeiro state government to withdraw from Brazil's nation-wide treaty exempting taxes on investments in oil exploration has become a major concern for the country's oil sector, said industry sources on Monday, August 27.
"If Rio quits the treaty, other states will be able to do whatever they want. That changes the rules, breaks the sector's stability," said João Carlos de Luca, president of trade group Brazilian Petroleum Institute (IBP) and head of Repsol-YPF in the country.
De Luca said the plan could discourage investors ahead of November's ninth annual auction of oil exploration and production concessions in Brazil, which has become one of the biggest sources of new crude in the Western Hemisphere.
"If that really happens, our evaluation shows that fields with 80 million to 100 million barrels (of reserves) will be made unviable," Luca said during an industry event.
Rio do Janeiro state argues it does not get an adequate share of taxes from the oil industry despite having almost 80% of Brazil's oil production off its coast.
The state government has unnerved oil companies before with two taxes – one on imports of oil rigs and another on production at wellhead. The taxes have not been enacted but the industry views them as a constant threat.
José Sérgio Gabrielli, Brazil's government oil company Petrobras CEO, expressed worry that the move against the tax exemption would hinder investment. But he said he believed a negotiable solution would be found with mutually acceptable rates and a transition period.
The tax exemption, valid through 2020, allows oil companies based in Brazil to import components and equipment for use in oil exploration and production. Without the exemption a tax of up to 19% would apply.
Seeking to keep the exemption deal intact, IBP has proposed to the Rio do Janeiro government that oil companies pay a 2% tax directly or a 5% levy with future compensation of value-added state sales tax charged elsewhere along the production chain. The negotiations continue.
The world's leading oil companies are involved in Brazil. However Petrobras still accounts for nearly all of Brazil's petroleum production of around 1.8 million barrels per day.