Battle Over Royalties Continues in Brazil

By Andrew Willis, Senior Contributing Reporter

RIO DE JANEIRO, BRAZIL – A result of the ongoing battle over oil royalties paid in Brazil, is an increased attention to royalties paid in the mining and hydroelectricity energy sector. Meanwhile, the long-running dispute over oil royalties took a further twist on December 17th when a supreme court judge blocked an upcoming congressional vote intended to override a presidential veto.

Brazilian oil royalties – about ten percent of company revenue – are expected to total roughly R$14.3 billion (US$6.8 billion) this year, with a further R$3.6 billion coming in the form of ‘special participation rates’ for large fields.

The dispute over Brazil’s oil royalties has pitted so-called ‘producer’ versus ‘non-producer’ states, with the former – Rio de Janeiro, Espírito Santo and São Paulo – keen to hold on to their disproportionate slice of the money paid by oil companies operating in the country.

Now the squabble has drawn attention to other industries, with hydroelectric firms expected to pay R$2.2 billion in royalties this year. At present, 45 percent of this goes to state governments where the energy is produced, with a further 45 percent going to municipalities within those states. This leaves just ten percent for federal agencies.

Mining royalties are expected to generate R$1.9 billion this year, with 23 percent going to state governments where extraction takes place, 65 percent for municipalities within those states and twelve percent for the federal government.

“There are several justifications for this,” Antenor Lopes, a researcher with the government’s Ipea think-tank, told The Rio Times. “In the case of hydroelectric plants, all states and municipalities that are affected – i.e. those who lose land areas due to the flooding caused by the reservoirs – receive financial compensation.”

“In this case, the justification would be that the ‘damage’ occurs locally and therefore should be compensated only for those who suffer from it. Mining follows a similar logic.”

While lower than their oil equivalents, hydroelectric and mining royalties have grown roughly 65 percent since 2007. According to government analyses, they could potentially double further in size if plans to construct eleven hydroelectric plants and to increase mining rates are carried out.

Current efforts to reform Brazil’s mining code also include proposals to create a powerful new independent regulator for the sector, endowed with powers to auction mining concessions and set minimum investment levels for companies.

Minas Gerais and Pará are the states that collect the most mining royalties, with iron ore accounting for roughly eighty percent of payments. Brazilian miner Vale, the world’s largest iron ore producer, recently started paying the government R$1.4 billion in back-dated royalties, part of a decade-old dispute between the two sides.

In the most recent twist in the oil royalties battle, on Monday, December 17th supreme court judge Luiz Fux granted an injunction to Rio State legislators, blocking an upcoming congressional vote to override the recent veto by President Dilma Rousseff. The president had vetoed Article 3 of the new bill, blocking re-distribution of oil royalties from existing oil concessions.