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 Brazilian Senate voting on October 19th, 2011, Rio de Janeiro, Brazil, News

The Brazilian Senate voting on October 19th, 2011, photo by Jose Cruz/ABr.

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.

An agreement is required to allow for the proposed 2012 bidding for exploration of Brazil’s massive deepwater pre-salt oil fields, Rio de Janeiro, Brazil, News

An agreement is required to allow for the proposed 2012 bidding for exploration of Brazil’s massive deepwater pre-salt oil fields, photo by Divulgação Petrobras/ABr.

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.

11 Responses to "New Oil Royalties Plan Threatens Rio Revenue"

  1. Ken Rothey  October 26, 2011 at 7:28 AM

    I quietly enjoyed a quiet toast to the recent announcment by Brazils government that they would give more to the poor class. It is with consumption in mind that I knew that that policy was precisely what the whole world needs to get out of the economic doldrums. An editorial in the New Your Times today made the case very clear, “It is consumption, stupid”, of cours paraphrasing the words of President in 1991.

    With all of the talk by all of the upper class politicians around the world, it is the manifest lack of a plan to boost consumption which shows the universal ignorance of those who ‘represent’ us.

    In the USA, congress spent $700,000 to hlep the banks, just in time for Wall Street to make its annual bonuses. In China, the rubber stamp guys spent $700,000 to BUILD infrastructure. China is growing!

  2. John Case Adams  October 26, 2011 at 5:39 PM

    My understanding is that in Brazil all mineral rights belong to the federal government. So it seems reasonable that the Federal Govt. share the oil revenues across the entire spectrum of Brazilian society and its geographic regions. I does seem to me that it should be a formula which takes account of population densities of the different regions. It should also be considered that the oil producing states themselves will be additional beneficiaries of the wealth generated by the activities of mining commerce, which over time may grow to eclipse the actual revenue sharing subsidies they receive. It’s definitely a more complex formula than 20, 20, 20….that’s required.

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  5. Tony Martin  October 30, 2011 at 10:38 AM

    Given the location and depth of the oil wells, the commodity is clearly one of Federal ownership and hence incumbent on them to distribute it where it has the best benefit, assuming it can exclude corrupt influences. The oil wells will also generate a significant amount of one-off and on-going expenses. These expenses will bring a revenue-benefit to those states closest to the fields, especially Rio. Also the amount of taxes relating to airport movements, port usage/access; accommodation for oil workers & their families etc etc will bring a long-term boost to the Rio economy. Perhaps government officials need to focus on how efficiently they distribute/ use the revenue funds so as to maximize the greatest benefit to the State. Would it be asking too much for politicians to publicise their strategic plan for the use of the projected oil funds?

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