By Sibel Tinar, Senior Contributing Reporter
RIO DE JANEIRO, BRAZIL – Upon the approval of the amendment of Brazil’s existing oil laws that aims to redistribute oil royalties among all states and municipalities by the lower house of the Brazilian Congress, Câmara dos Deputados (Chamber of Deputies), the tension between the state of Rio de Janeiro, and the nation’s capital Brasília has been escalating.
If approved by President Lula, this decision taken by the Congress on December 1st will change the country’s oil laws, and implement production-sharing deals, replacing the current concession-based system for the pre-salt oil that is discovered off the coast of Brazil’s Southeastern states.
According to the new oil royalty distribution system, 52.5 percent of royalties will be distributed among all of Brazil’s 26 states and the Federal District, 40 percent will go to the federal government, and the oil producing states and cities that currently receive 30 percent will get the other 7.5 percent.
Being the top oil-producing state in Brazil, Rio de Janeiro is among the states that has reacted strongly, questioning the constitutionality of the approved measures, especially of the amendment regarding royalty distribution, as the officials expressed their hopes that President Lula would veto the bill.
The governor of the state, Sérgio Cabral, has said that the amendment “is a complete disregard for legality”, adding that: “President Lula has already guaranteed to veto it, and I trust the president. ”
The deputy Chico Alencar from Rio de Janeiro emphasized that according to the constitution, “the royalty is a compensation for environmental damage, and not a paycheck.”
The controversial amendment, drafted by Congressman Ibsen Pinheiro, which in Rio sent 150,000 people to the streets in protest earlier this year, also requires the federal government to make up for any losses incurred by the oil-producing states, aside from royalty redistribution.
It also runs the risk of undercutting the funding for the Fundo Social (Social Fund) established with the objective of directing the states’ oil revenues into health care and education.
The overhaul of Brazil’s oil laws was part of Lula’s plan for the federal government to assert more control over the revenue that will be coming from the nation’s pre-salt oil fields, and to be able to invest in nation-wide problems such as poverty, health care, and education.
The president, however, is widely expected to veto this bill, and force the Congress to re-initiate the debate of the issue, due to the controversy surrounding the amendment on royalties.
José Sérgio Gabrielli, the CEO of the state-run energy giant Petrobras, has expressed his belief that it would be up to the incoming president Dilma Rousseff to resolve the issue, saying: “It is probable that it could return to the Congress in 2011 as a new bill that discusses the question of royalties in a more equitable way, allowing a larger share to be distributed to the producing states, while at the same time allowing other states to receive the benefits of production.”
Petrobras is reported to have plans to invest $224 billion within the next four years to the development of pre-salt oil fields offshore, which are believed to hold over 50 billion barrels of high-quality crude oil.