Brazil: Tax hike in Rio de Janeiro could reduce oil companies' remaining value by 75%

Rio de Janeiro has approved two new taxes on oil and gas production set to become effective in April 2016 and apply to all fields in the state, which accounts for 70% of Brazil's production. Regulations required for their implementation have not been approved yet, creating uncertainty as to how and when they would come into effect. If these taxes are implemented, upstream companies would lose over US$150 billion of the value remaining in Rio de Janeiro's current fields and future developments. This represents a 77% drop, severely threatening the viability of new investments in the E&P sector. US$110 billion relate to increased government take. This short-sighted initiative would plummet private investment, reducing future tax collection and increasing unemployment levels. We do not expect these taxes to be implemented given their impact, but they signal that Brazil's economic woes might put at risk its excellent record of contract sanctity.