State management and regulation of extractive industries in the Pan Amazon

The extractive industries are strategic components of the economy of all Amazonian countries, but their importance varies greatly. Mineral extraction creates tangible economic benefits for a sovereign state. Converting a non-renewable natural resource into money can provide an emerging economy or middle-income country with much-needed financial capital for infrastructure development and poverty reduction. The resource exploitation generates foreign earnings essential for providing citizens with the goods and services that are not produced by the domestic economy. Unfortunately, many, or perhaps, even most, resource-rich countries of the Global South suffer from corruption, poor governance and adverse social conditions that impede sustainable investment of extractive wealth.

Macroeconomic realities

The Pan Amazon is a massive reservoir of mineral resources, and extractive industries represent a large component of the regional GDP (see Chapter 1). The combined importance of the mineral sector varies among countries, ranging from a high of almost 25 per cent in Venezuela, to just a bit more than two per cent for Brazil.

Mining has long dominated the natural resource sector in Peru, Guyana and Suriname, while hydrocarbon extraction predominates in Venezuela, Ecuador and Colombia. Only a fraction of Colombia’s oil and gas fields are located within the Amazon, which like those of Venezuela are located in the Orinoco basin just north of the Amazon Ecoregion. The Bolivian economy is highly dependent upon natural resources, although most of its mineral wealth has been exploited on landscapes outside the Amazon Basin. All the countries have gold-bearing rocks located within their Amazonian jurisdictions and all have vibrant, if problematic, wildcat gold-mining communities.

Of all the Amazonian countries, Brazil has the most diversified economy and is the least reliant on mineral exploitation; nonetheless, it has the largest mining sector and slightly more than 27 % of its total national production of industrial minerals originates in the seven states of the Legal Amazon. Wildcat goldminers, known as garimpeiros, constitute an important economic constituency with significant influence on local and regional political systems. Brazil is also one of the world’s largest producers of oil and gas, but only 1 % of its oil production and about 14 % of its natural gas production comes from fields located within the Legal Amazon.

Statistics that estimate ‘mineral rents’ actually underreport the economic impact of the extractive sector, because exploration and operations represent a significant part of the total cash flow, which varies with the commodity cycle. When prices are high, the cost of production might be as low as 5 %, but when prices crash, companies can lose money and go bankrupt. Similarly, mineral revenues are not an accurate measure of the impact of the extractive sector on national and regional economies. The expenditures related to exploration and operations are more likely to be spent in the region and benefit local communities via job creation and the consumption of goods and services. In contrast, the so-called ‘rents’, which are net revenues, benefit national economies via taxes and foreign exchange earnings, but the primary beneficiaries are the multinational corporations that export their earnings to the nations where they are distributed to the investors that provided the capital for project development.

The total revenues generated by the extractive industries is highly cyclical. In 2019, total revenues were estimated at ~US$29 billion, considerably less than the US$100 billion worth of minerals exploited in 2014 but still double what they were prior to 2007.

Legal frameworks and tax regimes

Essentially, there are three approaches for managing the relationship between companies and sovereign states:

1) Concessions provide companies with the exclusive rights to explore and exploit the minerals of a specific geographic area. This is the predominant model for mining ventures (except in Venezuela) and is the system used in Brazil, Peru and Colombia for oil and gas contracts.

2) Production sharing agreements are joint ventures between a national oil company and corporations that agree to finance and manage operations in exchange for a proportional share of production within a concession. This model predominates in Bolivia, Ecuador, Venezuela, Suriname and Guyana; it is also the model used to manage two of Suriname’s corporate gold mines.

3) Service contracts are arrangements between national oil companies and a contracting company that is paid a fee to manage oil and gas assets; Ecuador uses this model for operations on older fields controlled by the state-owned oil company.

There are three principal mechanisms that states use to capture revenues: royalties, corporate income taxes and profits from state-owned companies. These are complimented by licensing fees, property taxes and signing bonuses as well as windfall-profit taxes created to claw back revenues when commodity prices spike and corporate revenues increase far beyond the cost of production

Royalties are calculated on the gross value of the raw commodity regardless of the cost of extraction. This is a straightforward calculation based on the market price and the unit of the mineral commodity: barrels of oil, cubic metres of gas or tonnes of mineral ore [concentrate]. Several states have a stratified regime that lowers levies on smaller mines and oil fields, which rise as the scale of operations and production increases. Mining royalties tend to be smaller than for hydrocarbons. Presumably, this reflects the greater cost of mining operations compared to drilling for oil and gas, but the disparity also reflects the history of the industry and a legacy of exploitation commonly attributed to – largely foreign – oil companies.

Corporate income taxes are calculated on the profits of the operating business unit after subtracting the full cost of exploration, production and processing as well as payments for royalties and taxes. This approach allows companies to manage the price risk of commodity markets while motivating them to invest in future production capacity. It is less transparent, however, and susceptible to corporate malfeasance.

State-owned oil companies and joint ventures are an important source of revenue for the national government. Investment decisions are subject to political considerations, however, and operations are not usually as operationally efficient as a private company. They may or may not pay corporate income tax depending upon the state – but all pay royalties.

The lion’s share of revenues captured by income taxes is retained by central governments, but a significant portion is returned to the regional and local government via revenue sharing policies unique to each country. In general, payments to subnational jurisdictions are managed via the royalty regime, which might explain why rates tend to be low while the proportion returned is relatively high.

Some royalty regimes contemplate a solidarity provision that allocates resources to regions and communities that lack revenue-generating mineral resources. Moreover, all governments also transfer funds from the general treasury to subnational jurisdictions via the regular budgetary process.

Ecuador has adopted a system based on the volume of oil extracted from the Amazon. The value of one dollar per barrel of oil is deposited in a fund that invests in the economic and social development of communities in the region. In 2019, that amounted to about 5 % per year of the rents derived from production, which would be the lowest level of revenue sharing in the Amazonian region.

Peru has the most generous system and includes not only 100 % of the revenues generated by the royalty system, but also 50 % of the revenues captured via the corporate income tax. The Peruvian system, known as the canon, also specifies the proportional share allocated to the regional government and the local communities that host to, or are impacted by, the extractive activities.

“A Perfect Storm in the Amazon” is a book by Timothy Killeen and contains the author’s viewpoints and analysis. The second edition was published by The White Horse in 2021, under the terms of a Creative Commons license (CC BY 4.0 license).

To read earlier chapters of the book, find Chapter One here, Chapter Two here, Chapter Three here and Chapter Four here.