State Ready to Defend Oil Revenues

By Jewellord T. Nem Singh, Contributing Reporter

RIO DE JANEIRO – State Attorney Luis Roberto Barroso delivered the opinion of Rio’s State Prosecutor’s office on Tuesday July 6th, arguing that the changes to the royalty distribution recently passed in Congress are unconstitutional. The new document questions the constitutionality of the new law, and forms the latest attempt of the largest oil producing state of Brazil to mobilize against Congress’ move to centralize revenue resources towards the federal government.

While still some way from reaching the Supreme Federal Tribunal (STF) – the sole body able to decide its constitutionality – due to the complex procedures involving many government agencies and branches to challenge the law, it is quite clear that the newly passed legislation will undergo further changes. However, the move also indicates that this is the only legal avenue for the state to prevent radical changes for the fiscal prospects of oil-producing states and municipalities.

Rio de Janeiro, one of the most politically and economically important states of Brazil, would experience a R$7 Billion per year fall in its annual budget should the current law be implemented.

For the proponents, the law aims for equitable distribution of oil revenues because oil is considered a national wealth and as such other states deserve a share of the region’s windfall. For its opponents, the law disregards the vulnerability of oil-producing states, whereby the environmental and social consequences of oil extraction are solely shouldered by these states.

With elections nearing, whether Lula will act to veto on the law or not, is uncertain. The alternative is to let the issue lie whilst a transition of presidency is occurring, allowing the incoming President to make the final decision on a law that will have serious economic and political implications in the governance of petroleum.

The royalty law is just one of the main policy changes being made public today, as Congress also approved an annual investment in Petrobrás of around R$20 million. The company has moved swiftly to expand its activities and has already acquired the license to build a pipeline that is set to begin operation in the second semester of 2011. The investment costs around USD$1.1 billion and the new 542-kilometer pipeline will produce roughly 12.9 billion liters of ethanol per year.

The main problem with the current oil debate remains the overriding uncertainty in the industry. No study has even clearly indicated how big the reserves are, with rough estimates between 20-120 billion barrels of oil, but exact amounts are unknown.

In addition, the proposed law changing the concessions system to access the reserves is more restrictive to foreign firms and how this will affect Petrobrás, which is attempting to act both as a public company and a private firm competing against foreign capital, remains equally unclear. Worse still, the upcoming election is holding off these pressing decisions which need to be undertaken by an out-going president.