New Oil Royalties Plan Threatens Rio Revenue

By Brennan Stark, Contributing Reporter

RIO DE JANEIRO, BRAZIL – A bill to distribute oil royalties more evenly amongst Brazil’s 27 states passed its first hurdle when it received approval from Brazil’s Senate last Wednesday, October 19th.  The proposal now faces a tough November vote in the lower house of Congress and a torrent of potential lawsuits by those oil-producing states that stand to lose billions.

The plan would see major producer states such as São Paulo, Rio de Janeiro, and Espírito Santo accept a significant cut in oil royalties to allow for a widespread distribution amongst non-producing states.

The federal government’s share would drop from thirty to twenty percent, with oil-producing states down to twenty percent from the current 26.25.  In contrast, non-producing states’ collective shares would soar to twenty percent and would continue to increase until 2020, according to sources.

The negotiations have been tense, with accusations exchanged between oil-producing states and non-producers. Rio de Janeiro and Espírito Santo’s potential losses are estimated at R$4.3 billion in 2012 alone and reaching R$7.5 billion annually within seven years, according to an O Globo report.

Last week Rio governor Sérgio Cabral (PMDB) said he had confidence the new plan would be vetoed “regardless” of the fact President Rousseff received support from the oil-producing state of Rio de Janeiro to help her get elected last year. “I scarcely believe that President Dilma will sanction a legal aberration of nature,” he claimed.

The bill’s final passing is pressured, however, because it is required to allow for the proposed 2012 bidding for exploration of Brazil’s massive deepwater “pre-salt” oil fields, an area as large as New York State whose over fifty billion barrels would turn Brazil into one of the world’s largest exporters of oil.

Rio, presently the largest receiver of royalties and the region where the majority of Brazil’s oil is produced, has vehemently opposed the bill ever since its first manifestation as Ibsen Pinheiro‘s controversial Ibsen amendment in March 2010.

Claimed to be unconstitutional, the amendment was vetoed by former president Luiz Inácio Lula da Silva just days before leaving office and returned to Congress, leaving the issue to Rousseff.

The recently-passed, similar legislation is being threatened with lawsuits as well, igniting a potential legal battle that could halt bidding on the subsalt region indefinitely, thereby losing Brazil tens of billions in annual revenue.

Professor at Fluminense Federal University and expert in regional development José Luiz Vianna claims that although the current model of royalties sharing is narrow and promotes inequality, the bill recently passed by the Senate is not the answer.

“If all municipalities receive part of the royalties, the amount will be very little for each, and therefore not enough to implement public development policies,” he states.

Analysts are claiming the bill violates existing contracts and may leave oil companies cautious about expanding further in Brazil due to worries that investment deals could be altered after signing.

Jim Kappeler, however, an American who has specialized in Brazil’s offshore industry for years, believes that the royalties issue is not of major concern to foreign oil companies.

“I really do not think the foreign oil interests here [in Brazil] care how Brazil divides the royalties.  The royalties are federal taxes that were being shared by the states that were closest to where the oil is being produced and now, if the bill is finally passed, will be divided with all of the states,” he says, claiming the issue is a domestic rather than international concern.

If the royalties issue fails to pass the lower house of Congress or becomes entangled in a web of lawsuits, however, the stall could affect the global community by denying it access to one of the largest oil resources outside of OPEC.