Decree No. 9,042, promulgated by the President of Brazil in early May, modified the rules for determining the reference price of oil and the basis for calculating royalties and special participations by adding provisions to Decree No. 2,705/1998.
According to the new decree, by December 2017, the reference price for oil will continue to correspond to (i) the weighted average selling prices practiced by the concessionaire under normal market conditions or (ii) the Minimum Reference Price (MRP) established by the National Petroleum Agency (ANP), whichever is greater. The MRP is currently calculated based on the formula defined in ANP Ordinance No. 206/2000, which considers the international quotation of Brent oil as a benchmark for the pricing of oil produced in Brazil.
Starting in 2018, the reference price of oil should be exclusively established by the ANP based on a standard basket of up to four types of oil listed on the international market, with similar physicochemical characteristics and competitiveness equivalent to that produced in Brazil. The use of the weighted average of the prices practiced in the sale is discarded.
There is great expectation on the part of oil concessionaires regarding the changes introduced by Decree No. 9,042, especially regarding the regulations on the matter by the ANP scheduled for the coming days.
At first, there was doubt as to whether the rules would be in some measure self-enforcing and would dispense with the regulation by the ANP for application of the standard basket.
However, because the decree does not set objective criteria for using the standard basket and certain guidelines to carry out the controversial analysis of similarity between oil types, there is a consensus that regulations with respect to the new rules is imperative. The ANP has already expressed its opinion in this regard, noting that it should submit a new draft resolution for public review by the end of July and that the new oil reference price will be "introduced in a gradual manner, in four years", starting on January 1, 2018.¹
The regulations must comply with the provisions of the Petroleum Law (Law No. 9,478/1997) regarding the need for the criteria for calculating royalties to be determined based on (i) market prices for oil, (ii) specifications for the product, and (iii) the location of the field.
To that end, proper use of the standard basket in defining the reference price depends on the application of a differential that represents the repercussion of several factors in the pricing process. These are factors related to product specifications and the location of the field, logistics and production and transportation costs, production flow stability, field volume, and the oil’s liquidity in the international market, among others.
It is expected that the new ANP draft resolution will be compatible with the Petroleum Law, thereby ensuring the legal stability and legal certainty necessary for existing investments and concessions and for the next rounds of block bids for exploration and production of oil.
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¹ ANP will apply new guidelines established by the National Energy Policy Council - CNPE for calculating the minimum oil price for the purposes of royalties and special participation starting in 2018. Available at: http://www.anp.gov.br/wwwanp/noticias/anp-e-p/3758-anp-aplicara-novas-diretrizes-estabelecidas-pelo-cnpe-para-o-calculo-do-preco-minimo-do-petroleo-para-fins-de-royalties-e-participacao-especial-a-partir-de-2018. Published on May 12, 2017. Accessed on July 5, 2017.
