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Brazil Looks To Finance Fuel Subsidies With Oil Auctions

Brazil is studying the possibility to finance a future fund to subsidize domestic fuel prices with part of the proceeds it expects to receive from an offshore oil auction later this year, a source with direct knowledge of the government’s plans told Reuters this week.

Fuel prices and the hikes in those prices early this year became the bone of contention between Brazilian President Jair Bolsonaro and state oil firm Petrobras—a spat that ended with Bolsonaro ousting the chief executive of the Brazilian national oil company, Roberto Castello Branco.

Fears of further government intervention in Brazil’s oil sector sparked a significant sell-off in Petrobras shares.

While Petrobras insisted that it would determine the price of gasoline and diesel in Brazil based on international oil prices and import prices, Bolsonaro wasn’t happy with the price hikes as he is trying to save Brazil’s economy amid one of the world’s worst COVID outbreaks.

Therefore, according to the Reuters source, the government is now considering whether some proceeds from the November oil auction of the Sépia and Atapu oilfields in the pre-salt Santos basin can be used to create a fund that would subsidize fuels and protect consumers from fluctuations in prices.

The oil auction, which will follow one that didn’t attract bidders in 2019, is expected to bring the government between US$3.5 billion (20 billion Brazilian reals) and US$5.3 billion (30 billion reals), according to Reuters’ source.

Last week, Petrobras and the government agreed to the terms under which the state oil firm would receive compensation for the excess reserves in the Sépia and Atapu oilfields if bidders bid in the production-sharing round of the so-called Transfer of Rights (TOR). Under the Transfer of Rights agreement, the state oil firm would carry exploration and production activities in Sépia and Atapu, with production volumes limited to 500 million barrels of oil equivalent (boe) in Sépia and 550 million boe in Atapu. The company that would potentially win the excess reserves at Atapu will have to pay Petrobras US$3.25 billion for past development costs, while the winner of the Sépia excess reserves should pay the state oil firm US$3.2 billion for Sepia.

By Tsvetana Paraskova for Oilprice.com

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