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Brazil tax on oil exports would
undermine economy
-Petrobras CEO

Crude oil exports from Brazil from 2010 to 2020.
(in million metric tons) © Statista 2021

Lawmakers seek solutions to price hikes

Proposal to offset high product prices
- Refinery sales to increase competition

By Jeff Fick / Platts

Petroleumworld 11 24 2021

Brazil's economy and oil industry would suffer a significant setback should Latin America's biggest oil and natural gas producer impose a tax on oil exports to offset rising refined product prices, the CEO of state-led producer Petrobras said Nov. 23.

"The eventual tax on oil exports could cause losses in the market," Petrobras CEO Joaquim Silva e Luna said during testimony before a Senate panel. The tax proposal would also likely have a chilling effect on potential investments in the country, especially in the refining and downstream segment, the executive added.

The proposed tax on oil exports was among a plethora of old, complicated and controversial solutions raised in Brazil's battle against rising international oil and refined product prices. Brazil, much like the rest of the world, has been battered by high prices as the global economy restarts despite the ongoing coronavirus pandemic.

The soaring inflation caused by skyrocketing commodities prices also coincided with the country's worst water crisis in 20 years, which left hydroelectric dam reservoirs at record lows. Brazil's currency, the real, has also lost significant value against the US dollar in 2020-2021, further exacerbating price pressures.

In Brazil, Petrobras has taken the brunt of the criticism. The company has been pilloried for its policy of keeping domestic fuel prices at parity with international imports, which was first implemented to market fanfare in 2016. The policy is also supported by a November 2019 antitrust agreement with the Justice Ministry's Antitrust Division, or CADE, that requires Petrobras maintain the policy.

Petrobras has maintained the policy despite pressure from lawmakers and other groups such as independent truckers, who have made ending the policy a key pillar of several strike movements in 2021. The pandemic, however, has undermined support for three strikes carried out by independent truckers, including lackluster turnout for the last 15-day walkout on Nov. 1.

President Jair Bolsonaro and his administration have also pointed to the ICMS manufacturing tax imposed by Brazil's 26 states and federal district. The tax is currently calculated on a percentage basis that rises along with oil prices. Bolsonaro would like states to implement a fixed rate, but state governors have rejected the proposal.

Brazil has also dusted off a proposed fuel price stabilization fund, which would help smooth out price adjustments during periods of volatility. The proposal has failed to garner much support in the past.

The fund, however, could be funded by the federal government's share of Petrobras' dividends, Silva e Luna said.

Increased competition

While Petrobras takes much of the blame for price volatility, the company's market share and increased competition from other players indicate a diminished ability to control the domestic market, Silva e Luna said. Petrobras also competes with large competitors such as Vibra, Ipiranga, Cosan and Shell joint venture Raizen and Atem, the executive noted.

"Petrobras accompanies prices in the market, which is the balance between supply and demand," Silva e Luna said. "Petrobras adjusts fuel prices observing external and internal markets, competition between producers and importers and price variations in the global market."

The clearest path toward lower prices is increased market competition, where Petrobras has also faced resistance to its $25 billion-$35 billion divestment program for 2021-2025. The antitrust agreement with CADE requires Petrobras to sell eight of its 13 operated refineries by end-2022. So far, the company has signed deals to sell three refineries.

Brazil sees the refinery sales as a way to end Petrobras' monopoly in the downstream segment and create competition that would lead to lower prices for end consumers.

"We will have more investors, more investments, more competition, more fuel supplies and lower prices," Silva e Luna said.

For now, however, Petrobras will continue to supply the market to the best of its ability, Silva e Luna said. That includes running the company's 13 refineries at 90% of installed production capacity as of Nov. 21, Silva e Luna said.




By Jeff Fick from S&P Global Platts. 11 23 2021



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