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SPE 69593

Government Share and Economic Analysis: Case Study of Campos Basin, Brazil
Dcio H. Barbosa, ANP, and Jos Gutman, ANP

Copyright 2001, Society of Petroleum Engineers Inc.

admission regime applied to the importation of equipment for
This paper was prepared for presentation at the SPE Latin American and Caribbean Petroleum E&P activities.
Engineering Conference held in Buenos Aires, Argentina, 2528 March 2001.
In addition, this paper also aims to evaluate, under two
This paper was selected for presentation by an SPE Program Committee following review of
information contained in an abstract submitted by the author(s). Contents of the paper, as
different cost structure and three price scenarios, the
presented, have not been reviewed by the Society of Petroleum Engineers and are subject to government revenue share as well as the economic potential of
correction by the author(s). The material, as presented, does not necessarily reflect any
position of the Society of Petroleum Engineers, its officers, or members. Papers presented at oil fields located in the deep-water Campos basin the
SPE meetings are subject to publication review by Editorial Committees of the Society of
Petroleum Engineers. Electronic reproduction, distribution, or storage of any part of this paper
biggest Brazilian sedimentary basin holding some 8 (eight)
for commercial purposes without the written consent of the Society of Petroleum Engineers is billion barrels of proved reserves.
prohibited. Permission to reproduce in print is restricted to an abstract of not more than 300
words; illustrations may not be copied. The abstract must contain conspicuous The authors developed an economic model, shown later
acknowledgment of where and by whom the paper was presented. Write Librarian, SPE, P.O.
Box 833836, Richardson, TX 75083-3836, U.S.A., fax 01-972-952-9435.
in this paper, comprising the hypothesis assumed in the
examples herein and a full description of the Brazilian fiscal
system. Sensitivity analyses of the economic potential and
Abstract government share have been carried out for deep-water oil
The purpose of this paper is to evaluate the economic
fields. The field sizes modeled were 250, 500, 750 and 1,000
potential of oil fields located in the deep-water Campos basin,
million barrels of oil, and the analysis was carried out at three
under different cost structure and price scenarios, via--vis the different oil prices ($15/bbl, $20/bbl and $25/bbl) and two cost
government revenue share resulting from the current fiscal
structures (Table 7).
terms introduced by the new Petroleum Law. The outcomes
Following this, a government share comparison was
show that the Brazilian fiscal regime is competitive on a world made between the Brazilian case (deep-water Campos basin
basis and the analyzed oil fields are economically attractive
oil fields), where the outcome was generated using the ANP
under the scenarios most likely to happen.
economic model, and some selected peer countries, whose
outcome came from international literature.
The Brazilian Constitution establishes that the nations
Brazilian Fiscal System
deposits of oil, natural gas and other hydrocarbon fluids are The main components of the Brazilian fiscal regime are (1) the
property of the State. The State also holds the monopoly over
petroleum levies, (2) the direct taxes, and (3) the indirect
the exploration and production of such mineral resources, but
it may grant to public and private companies the rights to
develop and produce them. This is bound by a concession
1 Petroleum Levies
agreement, executed after an auction, and subject to the
Articles 45 to 51 of the Petroleum Law outline the petroleum
payment of a set of petroleum levies. According to Law no levies, also called the government take under the Petroleum
9,478, of 1997, known as the Petroleum Law, the Agncia
Law. These are the signature bonus, royalties, special
Nacional do Petrleo - ANP is the sole entity responsible for
participation fee and acreage rental fee. They represent the
granting the concessions, collecting the petroleum levies, remuneration paid by the concessionaire to government for the
distributing the proceeds, as well as conducting regulation
right over the hydrocarbons, in accordance with the E&P
concession agreement. Only royalties existed prior to 1997.
Apart from the petroleum levies, oil and gas companies The Petroleum Law introduced the other three forms of
operating in Brazil must also pay other non-specific taxes
government take.
levied on companies in general, irrespective of the nature of
their business. 1.1 - Royalties
This paper shall present the main changes in the
The Petroleum Law increased the previous royalty rate from a
Brazilian fiscal terms for oil and gas companies introduced by
fixed 5% to a basic 10% value and introduced the Ministry of
the new Petroleum Law. It highlights, among others, some key Science and Technology as a new beneficiary of the proceeds.
issues such as the set up of new petroleum levies, the twofold
As an immediate consequence of such an increase in the
increase of royalties and the new version of the temporary
royalty rate, the collected amount doubled. On the other hand,

according to this Law, the new beneficiary should use the profits, which were later abolished. Nowadays, apart from
proceeds from royalties to foster the development of new oil Brazil, other countries such as Australia (Petroleum Resource
and gas products and processes. Rent Tax PRRT) and Norway (Special Petroleum Tax) for
Another important change introduced by the new example, also adopt this kind of additional income tax. Other
Petroleum Law has to do with royalty assessment, since a new examples can be found in Ref. 4.
production valuation criterion has been envisaged. Fiscal While royalty is levied on gross revenues, the SPF is
Decree no 2,705, released on August 3, 1998, known as the levied on profits before corporate income tax. The assessment
Government Take Decree, established fiscal arrangements in methodology for the SPF is outlined in Portarias ANP no 10
the petroleum sector. Among its provisions the Decree states and n o 102, both issued in 1999. Allowable deductions include
that royalty on oil shall be paid on its market value. This is operating costs, depreciation, royalty payments, exploration
defined as the greater of the sales price or the Minimum and appraisal expenditures, any losses brought forward from
Value. Consequently, Portaria 1 ANP no 206, of 2000 (former previous periods, a provision for abandonment expenditure,
n o 155, of 1998), set forth the assessment methodology for the leasing costs and any signature bonus paid on the block. Costs
Minimum Value applicable to each oil field. Fig. 1 shows the from outside the licence area cannot be offset against the
relationship between the domestic and international oil prices special participation profits of the field but dry hole costs and
for the purpose of royalties before and after the issuance of the seismic costs from within the original licence can be offset.
Government Take Decree. Prior to the release of the Decree, The Special Participation Fee is chargeable on a sliding
domestic oil prices used for royalties had practically no scale, which varies according to the location of the field
relationship with international oil prices, which was causing a onshore, shallow water (400m) or deep water (>400m) , its
substantial distortion in the internal valuation of the proceeds. level of production and for the first four years of the field life.
References 1 and 2 contain more detail on the changes in The relevant rates applicable to offshore deep-water are given
royalties since enactment of the Petroleum Law, concerning in Table 1.
the collection and distribution issues, the amounts involved, The SPF is a progressive levy since the rates gradually
pricing methodology, forecasting, etc. increase as production (and consequently profitability) grows.
On the other hand, royalties are regressive because they are
1.2 - Signature Bonus levied on gross revenues, regardless whether the field is
The Petroleum Law introduced signature bonuses for the first making a profit or not.
time in the Brazilian legal framework. A signature bonus is As the SPF is levied on profits for giant fields, it captures
paid as a lump sum by the winning company of the concession part of the petroleum economic rent generated in high oil price
auction, on signature of the concession contract. The ANP sets scenarios. Government is supposed to use the proceeds of such
a minimum value for the bonus in the invitation to bid for a economic resources in order to obtain sustainable growth,
particular block, however the amount paid forms part of the either by applying them in developing arrangements to lure
bid. domestic and international investments or by making
Note that, in August 1998, at the time of the monopoly provisions to meet harsh times when they are expected.
flexibilization, when the ANP recognized Petrobras' rights Each country treats the issue in a particular way,
over 397 concession areas, a bonus was not charged for the depending on its energetic and industrial orientation, but some
areas granted to Petrobras since they were not the object of an overall points related to oil and gas industries should reflect a
auction. better infrastructure, the wealth of public information on the
Thus, the signature bonuses were paid for the first time in hydrocarbon resources and institutional security.
September 1999, upon signature of the Licensing Round 1 According to items II and III of article 8 of the Petroleum
agreements, tallying circa R$ 321.7 millions (US$ 169.6 Law, the ANP is responsible for promoting studies aimed at
millions), corresponding to 12 exploratory blocks, with the the delimitation of blocks, for the purpose of the concession of
majority falling in the range of US$4 18 million. exploration activities, development and production. It is also
Of the 23 blocks offered, 21 were granted to 16 different the ANPs responsibility to regulate the execution of
companies in License Round 2 (June 2000). At that time the geological and geophysical surveys, applied to oil exploration,
signature bonuses amounted to R$ 468.3 million (US$ 254.7 and aimed at the collection of technical data for
million). commercialization, on a nonexclusive basis (spec survey).
As a consequence of the above, 40% (forty percent) of
1.3 - Special Participation Fee (SPF) the SPFs proceeds are conveyed to the Ministry of Mines and
The Petroleum Law set up the Special Participation Fee (SPF), Energy, for the payment of geological and geophysical studies
which is an additional income tax paid on the profits of the and services applied to oil and natural gas exploration,
field and applicable only to giant oil and gas fields. In the mid- promoted by the ANP. 10% (ten percent) of the SPFs
1970's, both the US (Windfall Profits Tax) and the UK proceeds are conveyed to the Ministry of Environment,
(Petroleum Revenue Tax - PRT) set up similar levies on destined for the development of studies and projects related to
the protection of the environment and to the correction of
Portaria (Portuguese name) is an Administrative Ruling issued by
the ANP's board.

environmental damage caused by the petroleum industry Participation Fee is taken as a deduction when calculating
activities. corporate income tax. The abandonment allowance is not
The ANP/SPG2 team estimates that, among the current qualified as an income tax deduction.
concession agreements whose production profiles are known The legal entities can be taxed on both actual or
(approximately 350), only 13 fields will pay the SPF, 12 of presumed profit regimes alternatively. They compute their
them being located in the Campos basin and 1 in the Santos income on a quarterly basis with quarters ending on March 31,
basin (Ref.2). June 30, September 30 and December 31 of every calendar
Table 2 splits the Brazilian offshore fields into shallow year.
water ( 400m) and deep water (>400m) and depicts, for a The legal entity, taxed on the actual profit regime 4 , can
given field size, the estimated point in time at which a SPF also opt to make tax payment and assessment on a monthly
levy is paid and the number of years it shall continue being estimate basis, by applying, on the monthly gross revenue, the
paid 3 . same percentile (8% for the oil industry) of presumed income.
Table 3 illustrates, for the cases listed in Table 2 when At the year-end a full tax computation and reconciliation is
the SPF payments are due, the rates (%) applicable to gross done.
revenue that produces an outcome equivalent to the SPF levy. Non-equity joint ventures under the Brazilian legal
This is an attempt to find, for the field sizes under analysis, an framework are called consortia. Consortium is not taxed as
equivalent royalty rate that would have the same SPF an entity; it is treated as a partnership. Consequently each
economic impact. This chart illustrates the SPF's consortium member retains its separate legal identity for
progressiveness as a result of the link of special participation everything, including tax purposes, being taxed on a pro rata
to production rates. A typical 10% fixed royalty was assumed. share of its respective incomes and expenses.
There is no consolidation of corporate groups for
1.4 - Rental Fees Brazilian income tax purposes.
The Petroleum Law introduced a third component in the Tax law does not permit loss carry-backwards and
Brazilian legal framework, the annual rental fees. They may provides less than full loss offset for tax-loss firms. Although
vary depending on geological characteristics, the location of losses may be carried forward with no time limitation, there is
the sedimentary basin and other relevant factors. The proceeds a cap for offsetting them against taxable income. Carried-
derived from the rentals, as well as from the bonuses, are forward losses (net operating losses) cannot be offset, in any
destined to support the ANPs expenses needed for the period, by more than 30% of the period's taxable income. Such
execution of its activities. losses are carried forward without interest or any form of
Table 4 sets out the range of rental payments, in R$/km2 , indexation to compensate for inflation.
that may be specified during various contractual stages. The gains or losses in exchange transactions can be taxed
or deducted on a cash or accrual regime, at the discretion of
2 Direct Taxes the tax payer. Again, there is no cost indexation in order to
For the purpose of this paper, the direct taxes compensate for inflation.
comprise not only income taxes but also social contributions Table 5 compares the current legislation's treatment
(PIS and COFINS) levied on oil and natural gas turnover. given to both CIT and SPF, with regard to the E&P costs,
which are eligible for deduction.
2.1- Income Taxes (IT)
The taxes levied on income comprise both the 2.2- Social Contributions Levied On Gross Revenue
Corporate Income Tax (IRPJ) and the Social Contribution on There are two social contribution taxes levied on gross
Net Profit tax (CSLL), currently calculated at a combined rate revenues in the same way as royalty is charged, which are due
of 34%. This comprises a basic 15% corporate income tax plus when production is sold to the domestic market. The
a surtax of 10% plus a Social Contribution Tax of 9%. The Contribution for the Worker's Social Integration Programme
government intends to reset the combined tax to 33% (its pre- (PIS) is levied at the rate of 0.65%, and the Contribution for
May 1999 level) on January, 1 2003, by reducing the Social the Social Security Funding (COFINS) is charged at 3%.
Contribution Tax to 8%. Since February 1999, the chargeable basis for both of
Corporate income tax (CIT) is chargeable on the total these social contributions is operating revenue, which
up and downstream profit of a company. No ring fencing includes, besides turnover, financial gains (interest and
applies. The normal deductions apply in calculating profits, exchange gains).
including operating costs, depreciation, royalty, signature
bonuses, rentals, any losses brought forward from previous 3 Indirect Taxes
periods and financing costs. In addition, the Special In this paper the term "indirect taxes" refers to taxes and
social contributions that are levied by federal, state and
Superintendence of Government Take Control (SPG) of the municipal authorities on investment (equipment, facilities,
National Petroleum Agency (Agncia Nacional do Petrleo - ANP)
3 4
Assumptions: US$18.00/bbl Brent Dated, CAPEX and OPEX costs Companies with an annual turnover of R$ 240 million (US$ 120
from literature. million) or above shall be taxed on an actual profit basis.

etc.) and services used by the oil and gas companies in E&P exemptions provided by the special regime REPETRO,
projects. Note that the turnover/revenue based social corresponds to 38%. In other words, indirect taxation would
contributions PIS and COFINS are considered both direct or increase CAPEX costs by 38%. On the other hand,
indirect taxes, depending on whether they are levied on oil and considering the application of the REPETRO regime, such
gas revenues (direct taxes) or on investment or service used by impact goes down to only 6% 5 . Therefore, the REPETRO
the industry (indirect taxes). These taxes may have a heavy regime cuts CAPEX costs by 23%, substantially reducing the
economic impact on both CAPEX (Capital Expenditure) and burdensome indirect taxation and the production costs.
OPEX (Operating Expenditure) costs. Again, according to ANP/SPG team studies, the impact
In practical terms, the concept of indirect taxation in of indirect taxes on OPEX costs is about 20% on average. As
Brazil is not very simple, and the applicable taxes depend on the REPETRO regime applies only to tangible goods, it has
the circumstances (tangible or intangible) and origins little effect on OPEX costs, where intangibles (services)
(domestic or imported) of the goods and services. However, prevail.
the following taxes are to be considered when computing an Expectations are that the indirect taxation structure will
indirect taxation average level: Municipal Service Tax (ISS), be simplified as part of a wider fiscal reform package currently
State Value Added Tax (ICMS), Withholding Tax (in lieu of before the Brazilian Congress.
corporate income tax - IRRF), Import Duty (I.I.), Federal Tax Treatment given to the State Value Added Tax (ICMS) in
on Manufactured Products (IPI), Provisional Contribution on the model under discussion is worth mentioning. A second key
Financial Transactions (CPMF), and the Social Contributions form of indirect taxation with which the industry has taken
PIS and COFINS. issue is the level of state value added taxes paid on goods and
In the development phase of an oil and gas venture, services. If a company starts a standalone project, in the pre-
expenditures are substantially high. To mitigate the tax burden production phase, during which there is no revenue, it
in this initial period, there is a worldwide trend to postpone the accumulates a reasonable amount of ICMS credits to be offset
taxation to the production phase, hence reducing the at the time production starts and is sold. For upstream
regressiveness of the fiscal system (Ref. 4). companies with no Brazilian downstream presence, this is a
In this particular, a key form of indirect taxation with particular issue, since their way of recovering this tax is when
which the industry has taken issue has been import duties. crude is sold to refineries.
Brazilian law requires that import duties must be paid on all On the other hand, whether a company has revenues from
equipment used for exploration and production (including for other ongoing projects, this is no longer an issue, since it can
example drilling rigs, floating production platforms and immediately recover these tax credits by offsetting them
equipment, which would normally have been exported from against tax debits generated by sales.
Brazil following use). In other words, consolidation on a country basis is
To cope with this the Government passed Law n 9,826 allowed for ICMS taxes. For this reason, the economic model
(August 23 1999), followed by the Presidential Decree n doesnt consider the levyance of the ICMS tax.
3,161 (September 2 1999), which introduced the Special Table 6 shows the direct and indirect taxes levied on an
Temporary Admission Regime (REPETRO), a temporary E&P Project.
exemption specifically for the upstream sector of the oil
industry. This special customs regime allows for certain Methodology and Assumptions
specific oil industry equipment to be temporarily admitted into
Brazil and remain for the duration of a specific concession As mentioned in the introduction, the main goal of this
contract (which could be for the lifetime of the field) without analysis is to evaluate the economic potential
the payment of import duties. (concessionaires profitability) resulting from the exploration,
Qualifying items include geophysical survey equipment, discovery and development of a range of the deep-water field
drilling rigs and associated equipment, fixed and floating sizes and cost structures that might be expected in the Campos
production or storage facilities, risers and remote operated basin. For the purpose of this study the term "deep-water"
vehicles (ROVs). refers to offshore production beyond the 400 metres
The suspension of indirect taxation (I.I., IPI and ICMS) bathymetric curve.
is valid for goods and equipment imported prior to January 1, Much of the focus of fiscal system analysis in the
2006. This regime also rendered Brazilian-made equipment upstream sector of the petroleum industry is on the division of
exempt from certain indirect taxes (PIS, COFINS, IPI and profits such as government or state "take". Government take is
ICMS). It is thought likely that there may be a further the percentage share of the economic profits obtained by the
extension to the regime's timeframe. In order to qualify for the government through bonuses, royalties, taxes, etc.
special regime, the private company must lodge a financial The timing of the taxation over the life of the
guarantee equivalent to the suspended taxes with the development has a significant impact on investor's
REPETRO doesn't apply to intangibles, which causes a 6% increase
According to ANP/SPG team studies, the average impact in costs. The economic model considered CAPEX comprising 70% of
of indirect taxes on CAPEX costs, not considering the tangibles (tax free) and 30% of intangibles (chargeable).

profitability. To take the time value of money into account, The results for Brazil are presented in Table 8 and in
economic indicators are used such as the internal rate of return Figures 2, 3 and 4. They consider three price scenarios
(IRR) and the discounted net present value (NPV), which (US$15/bbl, US$20/bbl and US$25/bbl) and two cost
provide a better measure of the profitability of an opportunity. structures (low and high development costs (Table 7)).
The simulations of the Brazilian cases used an Fig. 2 displays the internal rate of return (IRR) as a
independent economic model designed by the ANP/SPG team, function of three variables: field size, cost structure and oil
encompassing the fiscal system described so far (petroleum price. It shows that: (i) the IRR increases significantly with the
levies, direct and indirect taxes). increase of both oil price (1% per US$/bbl) and field size
Four different deep-water field sizes at two cost (1% per 100 MMbbl); (ii) the IRR goes up by approximately
structures were modeled under three oil price scenarios. Only 5% as we move from a high cost to a low cost structure; and
oil fields were considered in the analysis. Production profiles, (iii) except for the high cost/low oil price case, all other cases
development and operating costs and crude prices utilized in have the IRR above 10%.
this study reflect expected Brazilian conditions. Table 7 Fig. 3 displays the undiscounted government take
depicts the production costs used in this study. (GT@0%) for different field sizes, cost structures and oil price
For all cases reported, the exploration and appraisal scenarios. It shows that: (i) the range of undiscounted
(E&A) investments were not considered, since, with a few government take is 52%-61% for all cases, but one (the high
exceptions, these are usually not material6 in the take context. cost / low oil price case); (ii) the undiscounted government
The CAPEX costs were distributed along the first 8 years of take is moderately sensitive to oil price for large fields and
the project's cash flow (5,3%; 10,7%; 18,7%; 20,0%; 16,0%; highly sensitive for small ones; and (iii) interesting to note is
13,3%; 10,7% e 5,3%), comprising 30% of intangibles the possible existence of regressive (high cost/low oil price),
(services) and 70% of tangibles (facilities, equipment, etc.). neutral (low cost/low oil price) and progressive (the
A nonescalated 2% year inflation was assumed for the remainders) regimes, as a result of the combination of cost
US dollar (Ref. 5). structure, price scenario and fiscal terms.
In a subsequent approach, eight countries, which to a Fig. 4 is similar to Fig. 3 except for the fact that the
certain extent compete with Brazil for E&P investments, were government take is discounted at 12.5% (GT@12.5%). It
selected for comparison. These are Angola (deep- illustrates that: (i) except for the low cost/high oil price case
water/frontier terms), Congo (deep-water/frontier terms), (which is neutral), the "take" regressiveness springs up as the
Egypt (deep-water/frontier terms), Equatorial Guinea, Nigeria cash flows are discounted; (ii) because royalty is linked
(deep-water/frontier terms), Norway, the United Kingdom and directly to production levels, the levies are larger early in the
the United States (Outer Continental Shelf, deep-water/frontier development when production is highest and become lower as
terms)7 . The economic data for these countries were obtained the resource depletes (the impact of these levies early in the
from the international literature (Ref. 5). project is demonstrated by the increased percentage of
government take when calculated on a discounted basis); and
Study Case: Campos Basin, Brazil (iii) under a low price environment, small and moderate size
fields have a discounted government take above 100%. It just
The input values for the fiscal system using the means that the project's rate of return is less than the discount
ANP/SPG independent economic model are outlined in the factor being applied.
next paragraphs.
Petroleum levies: US$ 15 millions signature bonus8 , 10% Comparison with Other Countries
royalty rate applied to full production volume, US$ 1,850/km2
rental fee 9 and SPF according to Portarias ANP no 10/99 and Figures 5 and 6 display total government take levels for
ANP n o 102/99 for deep-water offshore. a 750 million-barrel offshore field with a low development
Direct taxes: 34% (combined) CIT and 3.65% Social cost of US$ 2.50/bbl. The comparison is made at US$ 18 per
Contributions (PIS + COFINS). It has been assumed that the barrel.
produced oil would be sold in Brazil. The top chart shows that the combination of direct taxes
Indirect taxes multipliers: (1 + 6%) for CAPEX and (1 + (combined corporate tax plus PIS and COFINS on sales of oil
20%) for OPEX. and gas), indirect taxes on investment, royalty, rentals and
A 25 o API gravity oil has been used, reflecting the special participation is about 58% undiscounted for Brazil,
average oil gravity expected for deep-water Brazil projects about average with the countries in the comparison.
(approximately Brent Dated minus 15%). The lower chart shows all government take levels when
cash flows are discounted at 12.5% nominal discount rate. The
Usually CAPEX costs outweigh E&A costs by 40-50 times. government take in Brazil increases from 58% undiscounted to
For countries with several fiscal terms, the deep-water/frontier about 79% discounted. The structure of Brazils taxes results
terms have been used in these comparisons. in a larger increase in discounted government take than other
Average bonus offered for deep-water Campos blocks in the two countries shown in the comparison, positioning Brazil slightly
Licence Rounds over the last 2 years. above Egypt and Congo and below Norway. Royalty and
Assumed 400-km2 average oil field acreage for Campos basin.

Special Participation rates based on production level tend to The relationship between government take and
front-end load taxes. exploration attractiveness is very complex, influenced by the
Figures 7 and 8 display government take levels for a size and quality of discoveries, crude quality and price, and the
smaller 250 million-barrel offshore field with a development structure of the government take. In spite of that, this analysis
cost of US$ 4.50 per barrel. The comparison is also made at demonstrates that the current level of government take is
US$ 18 per barrel. generally competitive and appropriate for international deep-
The total level of direct and indirect taxes, royalty, water exploration and development.
rentals and special participation is about 56% on an
undiscounted basis, as shown in the upper chart, slightly above Nomenclature
the average 50% level corresponding to Nigeria, Equatorial
Guinea, the United States and Egypt. Bbl = barrel of oil
The lowest chart shows the impact of the structure of the MM bbl = millions of barrel of oil
various fiscal systems by viewing government take with MM boe = millions of barrel of oil-equivalent
discounted cash flows. Three fiscal regimes present R$/km2 = Real (Brazilian currency) per square kilometer
government take above 100%. The government take in Brazil US$/bbl = United States' dollars per barrel
increases from 56% undiscounted to about 90% discounted at
12.5%, practically levelling with the US regime. References
1. Barbosa, D. H. in Impacto da Tributao nas Atividades
Conclusions de E&P em guas Profundas no Brasil. MBA Thesis,
Unicamp, Brazil. November 2000.
Significant potential for new hydrocarbon discovery 2. Schechtman, R.; Barbosa, D. H.; Gutman, J. and Gallier,
exists in Brazil, most of it in deep-water offshore, where E&P C. A. J. in Participaes Governamentais na Nova Lei
efforts are costly and technically challenging. do Petrleo. Rio Oil&Gas Expo and Conference, Brazil.
International investments are necessary to achieve a October 2000.
desired activity level in deep water underexplored or 3. Johnston, D. in "International Petroleum Fiscal Systems
unexplored basins. and Production Sharing Contracts". PennWell Books.
In this particular, the study highlights some important 1994.
aspects of the Brazilian tax system and its potential impact on 4. Van Meurs, P. in "World Fiscal Systems for Oil & Gas."
international energy investment and the development of London. May 2000.
petroleum resources in Brazil. 5. Petroconsultants in "Review of Petroleum Fiscal
The new Petroleum Law set up a new framework: the Regimes". 1998.
State acting as a regulator, granting concession areas in
exchange for the payment of levies by the concessionaires.
A set of three new petroleum levies was introduced
(signature bonus, special participation and rental fees), and
royalty was raised from 5% (fixed rate) to 10% (default rate).
Important changes in oil pricing methodology where also
introduced with the reference oil price used for royalties and
SPF calculations being indexed to international arms length
Significant changes also occurred with the introduction
of new beneficiaries of the petroleum levies: the Ministry of
Science and Technology, the Ministry of Mines and Energy
and the Ministry of Environment.
Brazilian customs authorities have recognized that the
imposition of indirect taxes on investment in high cost
development areas would not result in the desired level of
exploration. The introduction of the REPETRO regime was a
key factor to mitigate this, since it had the desired effect of
reducing both the discounted and undiscounted government
take as well as improving the return (IRR). CAPEX costs were
significantly reduced (around 23% as shown in the example)
under such a regime.
The economic study of the Campos basin showed that,
under the current Brazilian fiscal system, the fields are
economically attractive for the scenarios most likely to

Table 1 Offshore deep-water Special Participation rates Table 5 Fiscal treatment for eligible deductions:
000 b/d Year 1 Year 2 Year 3 Year 4 + CIT versus SPF
< 31.0 - - - - CIT SPF
< 51.7 - - - 10 Ring Fence Country Field
< 62.0 - - 10 10 Interest Deduction? Yes No
< 72.4 - - 10 20 (Except for leasing)
< 82.7 - 10 10 20 SPF Deduction? Yes No
< 93.1 - 10 20 20 Loss Offsetting Yes, Yes,
< 103.4 10 10 20 30 30% limit no limit
< 113.7 10 20 20 30 E&A costs Amortized Expensed
< 124.1 10 20 30 30 over field life
< 134.4 20 20 30 35 CapEx costs Depreciated, IN-SRF n 162/98
< 144.8 20 30 30 35 Domestic Goods Normal Normal and
< 155.1 20 30 35 35 depreciation accelerated
< 165.4 30 30 35 40 depreciation
< 175.8 30 35 35 40 Exchange Variation Add or deduct No
< 186.1 30 35 40 40 (positive/negative) from revenue
< 196.5 35 35 40 40 Overhead costs Expensed No
< 217.1 35 40 40 40 OpEx costs Expensed
> 217.1 40 40 40 40 Source: Ref. 1

Table 2 Years the SPF is due (estimates) Table 6 Taxes levied on E&P project
Field Size Offshore 400m Offshore > 400m Taxes (1) (2) (3) (4) (5)
(MM boe) I.I.
50 No SPF applies No SPF applies IPI
100 No SPF applies No SPF applies ICMS
250 Year 5, 6 or 7 to 1510 Year 5, 6 or 7 to 13 ISS
500 Year 5, 6 or 7 to 16 Year 5, 6 or 7 to 16 CPMF
1000 Not applicable 11 Year 4, 5 or 6 to 18 IOF
2000 Not applicable Year 4, 5 or 6 to 22 PIS
Source: Ref. 2 COFINS
Table 3 SPF rates equivalent to a 10% royalty
Field Size Offshore 400m Offshore > 400m Source: Ref. 1
(MM boe)
Notes: (1) Import, (2) Pre-production, (3) Transactions, (4)
250 1% to 2% 0,5% to 1% Profit, and (5) Profit Remittance
500 4,5% to 6,5% 3,5% to 5%
1000 Not applicable 9% to 12%
2000 Not applicable 14% to 16% Table 7 Costs used in the analysis (US$/bbl)
Source: Ref. 2 250 500 750 1000
MMbbl MMbbl MMbbl MMbbl
OPEX 3,5 3.2 2.5 2.2
Table 4 Acreage rental rates Low CAPEX 3.0 2.6 2.5 2.0
Contract Period Rental (R$/km2 ) High CAPEX 4.5 4.3 3.8 3.5
Exploration 10 500
Extension of Exploration (if any) 20 1,000
Development 20 1,000
Production 100 5,000

The first year the SPF is due could be the 5th , 6th or 7th, depending
on the project's CAPEX cost. The higher the CAPEX cost, the longer
it will take for the project to break even. Once CAPEX declines, lead
time from start up to break-even tends to be smaller.
Giant oil field distribution expected in deep-water.

Table 8 Campos basin outcomes

Brent Price Field Size IRR (%a.a.) Government Take(%) Government Take(%)
US$/bbl MMbbl Undiscounted Discounted@12.5%
250 21.8 14.8 51.8 53.4 66.3 85.3
25.00 500 23.9 15.2 54.2 55.7 66.6 84.6
750 24.6 17.3 56.5 56.9 67.8 79.0
1000 28.8 18.4 57.6 58.4 66.5 77.6
250 16.3 10.2 54.5 57.3 79.9 >100
20.00 500 18.6 10.9 56.2 58.6 75.4 >100
750 19.7 13.2 57.4 58.7 74.5 95.5
1000 23.6 14.3 58.5 59.8 70.8 89.9
250 9.5 4.3 60.9 70.9 >100 >100
15.00 500 12.1 5.7 60.5 65.6 >100 >100
750 13.8 8.3 60.1 62.5 92.6 >100
1000 17.3 9.5 60.5 62.6 81.0 >100

Decree 2.705/98 70
25 100%
Ratio [ BrOP / BD ]

21 90%
Prices ( US$/bbl)

19 80%
15 70%
11 60%
9 50% 55
5 40%









250 500 750 1000
Field Size (MM bbl)

25 low 25 high 20 low

Brent Dated (BD) Brazil Oil Price (BrAP) Ratio
20 high 15 low 15 high

Fig. 1: Data series of Brent Dated vs. average Brazilian Oil Fig. 3: Sensitivity analysis: GT@0% vs. Field Size
Price. Source: Ref. 2
Internal Rate of Return - IRR (%)

250 500 750 1000 65
250 500 750 1000
Field Size (MM bbl) Field Size (MM bbl)
25 low 25 high 20 low
20 high 15 low 15 high 25 low 25 high 20 low
20 high 15 low 15 high

Fig. 2: Sensitivity analysis: IRR vs. Field Size Fig. 4: Sensitivity analysis: GT@12.5% vs. Field Size




Equatorial Guinea

Equatorial Guinea

Brazil - Campos

Brazil - Campos

0 20 40 60 80 100
0 20 40 60 80 100 Government Take - Undiscounted (0%)
Government Take - Undiscounted (0%) Petroleum Tax Direct Tax Indirect Tax Total
Petroleum Tax Direct Tax Indirect Tax Total

Fig. 7: 250 MMbbl, Low Capex, US$ 18.00/bbl

Fig. 5: 750 MMbbl, Low Capex, US$ 18.00/bbl




Equatorial Guinea
Equatorial Guinea

Brazil - Campos


Brazil - Campos

0 20 40 60 80 100
0 20 40 60 80 100 Government Take - Discounted@12.5%
Government Take - Discounted@12.5% Petroleum Tax Direct Tax Indirect Tax Total
Petroleum Tax Direct Tax Indirect Tax Total

Fig. 8: 250 MMbbl, Low Capex, US$ 18.00/bbl

Fig. 6: 750 MMbbl, Low Capex, US$ 18.00/bbl