Oil and Gas: New royalty rates for mature fields

Posted on: Sep 25, 2018

The National Agency of Oil, Natural Gas and Biofuels (Agência Nacional do Petróleo, Gás Natural e Biocombustíveis – “ANP”) enacted on September 24, 2018, the Resolution No. 749/2018, regulating procedures to allow reduction of royalty rates over incremental production on mature fields.

Royalties are one of the most traditional forms of government take applicable to oil and gas E&P concessions in Brazil, which are established by the Petroleum Law (Law No. 9,478/97), at a default rate of 10%. The Petroleum law allowed ANP to reduce royalties to consider geological risks, production expectations and other factors to up to 5%, but such provision still lacked further regulation. Last year, the CNPE (National Council of Energy Policy) issued Resolution No. 17/2017, which specified ANP’s authority in connection with reducing royalty rates over incremental production of mature fields.

A field is considered “mature” if it has been in production for more than 25 years or which cumulative production corresponds to at least 70% of the volume of its proven reserves. ANP may reduce the royalty rate to as low as to 5%, provided there is evidence of economic benefit to the relevant government entities (Federal, State and Municipal) and depending on the additional volumes produced.

Resolution 749/2018 does not clearly establish how such economic benefit to the relevant government entities will be demonstrated. Some industry players argued during the public consultation that preceded the approval of Resolution 749 by the ANP that this requirement adds some uncertainty as to what a concessionaire would need to evidence to the ANP – considering the incentive is only attributed to incremental production, one could argue that the very realization of investments, and the increase in collection of royalties due to the consequent extension of the field’s life, could already serve as evidence of economic benefit.

Other industry requests during the public consultation weren’t also fully addressed by the regulation: There were claims to grant royalty rate reduction to marginal fields, fields without reservoirs and even the entire production of a given mature field, instead of just its the incremental production.

The Resolution establishes that the eligibility of each field to the reduction will be assessed upon a royalty rate reduction request by the relevant concessionaire, based on the most recent Annual Report of Resources and Reserves (Boletim Anual de Recursos e Reservas – “BAR”) submitted to the ANP. The request must attach a review of the field’s development plan and will be analyzed within 180 days of the request.

According to the ANP, there are currently approximately 241 oil exploration fields classified as mature in Brazil, all which would be able to benefit from Resolution No. 749/2018.