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Brazil inches ahead with plan to tax crude oil exports, create fuel price fund

Highlights

Aims to stabilize product prices

industry resists move

Includes incentives for refining

Brazil inched toward potentially imposing a tax on crude oil exports as part of a broader move aimed at insulating Latin America's largest economy from international oil and refined product price volatility, including a price-stabilization fund for domestic diesel, gasoline and LPG.

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The Senate Economic Affairs committee passed the measure implementing the tax and fuel price stabilization fund in a symbolic vote Dec. 7. The bill now heads to both houses of Brazil's Congress for further debate, which will likely not take place until 2022.

The move was the latest attempt to counter a surge in international oil and refined product prices that has undermined Brazil's economic recovery from the world's second-deadliest coronavirus outbreak. State-led oil producer and refiner Petrobras has raised domestic diesel, gasoline and LPG prices at the refinery gate to keep prices at parity with international imports, much to the chagrin of the government and general public.

Petrobras is required to maintain import-parity pricing as part of a November 2019 antitrust agreement, which also forced the company to sell eight of its 13 operated refineries. The controversial policy, however, has been in place since 2016.

The policy played a key part in Petrobras' financial recovery from a massive corruption scandal uncovered in 2014, which nearly tipped the company into bankruptcy after it was cut off from international financial markets.

It was also seen as a way to end long-running government meddling in Petrobras' prices. Petrobras lost as much as $40 billion in profits in 2011-2014 because it was forced to sell expensive diesel and gasoline imports at a loss in the domestic market. The government, which controls Petrobras' board of directors, prohibited the company from passing along high international oil prices along to consumers at the pump.

The market lauded Petrobras' move to market-based pricing, and the company's repeated affirmation of the policy has been well received by investors. But in a country that founded its state-led producer on the war cry "The Oil is Ours" in the 1950s, many aren't interested in paying market prices.

Export tax of 2.5%-20%

The latest bill, which is backed by the former ruling Workers' Party, or PT, would impose a variable tax of 2.5%-20% on oil exports, depending on oil prices. The tax would be in effect on a sliding scale for oil prices at $45-$100/b.

Brazil's Tupi crude was assessed at a 45 cent/b premium to the Latin America Dated Brent Strip Dec. 6.

The oil export tax would be used as one of the sources of funding for a price-stabilization fund, according to lawmakers. Additional funding could come from signing bonuses at subsalt production-sharing auctions or the government's share of Petrobras dividends.

The price-stabilization fund would then be used to help smooth out price adjustments during periods of peak volatility. The idea is an old one in Brazil, and has failed to garner much support in the past.

The bill also includes incentives for domestic refining, as well as lawmaker-ordered changes to Petrobras' pricing policy. It's unclear how the changes would be imposed on the company, which is publicly traded.

The measure faces ample resistance both within in the government and from the industry itself.

"The creation of a tax on crude-oil exports to finance an eventual fund begets an even more serious problem for the Brazilian economy," the Brazilian Petroleum Institute, or IBP, said Dec. 2.

"The mere signaling of more taxes on the industry generate a reduction in investments in Brazil, as well as makes projects in other locations a priority for oil companies in detriment to Brazil," the IBP added.