This Thursday, the STF resumes its judgment on the rule that divides revenue between producing and non-producing states
The judgment on the constitutionality of provisions that changes the criteria for dividing the royalties of oil between producing and non-producing states and municipalities.
The rule has been suspended since 2013 due to an injunction by Minister Cármen Lúcia. The trial was (May 6), but the session ended without the votes of the ministers, who must present them in this Thursday (May 7). The collegial decision defines whether there will be redistribution of funds and under what conditions. The impact of the decision is billions of reais on the revenues of federative units.
What are oil royalties?
These are financial compensations paid by oil exploration companies to the Union, States and municipalities for the extraction of non-renewable natural resources, such as oil and natural gas.
The compensation mechanism is determined by the Constitution. Brazilian legislation establishes that the exploitation of these resources, due to their socio-environmental impact, implies participation in the result or financial compensation to the affected States and municipalities.
In practice, the values correspond to a percentage of production and function as one of the main sources of revenue for producing states and municipalities.
This type of compensation has existed in Brazil since the 1950s, but gained relevance with the expansion of the oil industry —especially after the opening of the sector in the 1990s— with the creation of the ANP (National Agency for Petroleum, Natural Gas and Biofuels), and the regulation of the concession regime.
How does the current division work?
The distribution of royalties follows rules defined by law and varies depending on the exploitation regime (concession or sharing) and the location of production (on land or at sea).
In general, revenue is shared between the Union, States and municipalities, with a greater concentration in producing or confronting territories (those bordering offshore exploration areas), in addition to municipalities directly affected by the activity.
In the model currently in force, the money from royalties is concentrated in the Union and in Producing states and municipalities.
There are also redistribution mechanisms for non-producing entities, but to a lesser extent. This design results in a concentration of revenues in a few states, especially in Rio de Janeiro, Espírito Santo and São Paulo, which are home to the largest oil extraction operations in Brazil.
What is the STF judging?
The impasse under analysis at the Supreme Court involves precisely the attempt to change this logic. Law No. 12,734 of 2012 expands the participation of non-producing states and municipalities in the division of royalties and reduces producers’ share.
The law was sanctioned by former president Dilma Roussef. But, in 2013, minister Cármen Lúcia suspended central redistribution provisions.
The minister’s understanding at the time was that the royalties they must be considered compensation for the structural pressure that the oil industry imposes on producing territories.
However, the decision was precautionary and did not resolve the merits of the issue. The Court now resumes this judgment and can understand that:
- os royalties are local compensation in nature. In other words, they must compensate for the impacts of exploration and, therefore, remain concentrated in producing and confronting states; or
- os royalties represent participation in national wealth and can be between all federative entities, as determined by the suspended law.
RJ, ES and SP are against redistribution
The 3 states with the highest oil production do not accept the change in the transfer of values. The judgment in the STF precisely brings together actions presented by these federative entities.
In addition to ADI (Direct Unconstitutionality Action) no., filed by the State of Rio de Janeiro, the Supreme Court jointly analyzes:
- ADI, proposed by the Rio de Janeiro Legislative Assembly;
- ADI, from Espírito Santo;
- a , from São Paulo;
- and , presented by (Brazilian Association of Municipalities with Maritime, River and Land Terminals for Embarking and Unloading Oil and Natural Gas).
They all state that Law No. 12,734 is unconstitutional and that the change in distribution criteria could cause billions of dollars in losses to producing states and municipalities, with a direct impact on public finances.
The (Federation of Industries of the State of Rio de Janeiro) estimates that the State would lose up to R$8 billion with the change, and the cities in Rio de Janeiro benefiting from the payments, R$13 billion.
Em published in partnership with ACRJ (Rio de Janeiro Commercial Association) and Fecomércio RJ, the federation said that removing the portion of royalties of the State would be “exceeding the limit of what is reasonable”, “breaking the federative pact” e “punish those who produce”. Rio de Janeiro produces 88% of the country’s oil and 77% of its gas.
The other producing states, São Paulo and Espírito Santo, may have losses estimated at R$2.3 billion and R$500 million annually, respectively.
