MercoPress. South Atlantic News Agency

Oil price plunge distorts Brazilian market and leaves Rio cash strapped

“Brent Dated” index, based on a seven-day rolling average price for crude, will be used up to the price level of $50 a barrel, said the decree signed by Rousseff

Brazil's President Dilma Rousseff approved a resolution to maintain the current system for establishing the minimum price of oil on which royalty payments are paid by state-run oil company Petrobras to local governments.

 The so-called “Brent Dated” index, based on a seven-day rolling average price for crude, will be used up to the price level of $50 a barrel, the National Energy Policy Council said in the official government gazette on Friday.

Brent crude has fallen by more than half to $31.29 per barrel, from a 2015 peak of $67 per barrel. The plunge has dried up government revenues in many oil exporting countries.

Although not a major oil exporter, Brazil is struggling to curb growth in federal and state spending in the face of falling revenues. For states such as Rio de Janeiro, oil revenues are vital to funding public services.

Rio de Janeiro state, responsible for two-thirds of Brazil's oil output and 40% of its natural gas. Rio has been pressing the government to update the price methodology. The dispute has raised the perception of risk in Brazil's oil industry, adding to some investors' to opposition to Royal Dutch Shell Plc's $49 billion purchase of BG Group Plc, Brazil's No. 2 oil producer.

In December, unable to win changes from the government and facing a financial crisis, the state of Rio de Janeiro imposed taxes and fees on oil production. Rio hopes to raise 1.84 billion reais ($450 million) this year from the taxes. State officials believe the royalty formula undervalues growing volumes of valuable light crude from giant new “subsalt” fields off the coast.

Instead of higher royalties, producers such as Petrobras, BG, Shell, Portugal's Galp Energia SGPS SA, Norway's Statoil ASA and Spain's Repsol SA now face higher taxes.

Edmar de Almeida, economist at the Federal University of Rio de Janeiro, says the taxes put “subsalt” development at risk by cutting revenue by about a quarter.

With the taxes, the crude price needed for subsalt areas to break even rises to $60-80 per barrel from $40-50 a barrel. Late Friday, Brent crude futures traded at $31.52, down from more than $100 a barrel in late 2014.

While industry officials plan a court challenge, Rio is sticking to its guns. The state's budget crisis has left public servants unpaid, cut spending on Rio's 2016 Olympic Games in August, and turned the sick away from hospitals.