Congress in Oil Royalties Debate

By Sibel Tinar, Senior Contributing Reporter

RIO DE JANEIRO, BRAZIL – The federal government headed by President Dilma Rousseff is determined to prioritize the resolution of the controversy surrounding the proposed distribution of oil royalties, and is expected to send the amendment back to Congress with a request of constitutional urgency, in order to re-initiate the debate within the first semester.

Sérgio Cabral, the governor of Rio State, expressed his confidence that amendment would not become law, photo by Fabio Rodrigues Pozzebom/ABr.

Brazilian Congress has passed a bill overhauling the existing oil laws last year, aiming to accommodate the country’s needs upon the discovery of pre-salt oil off its Southeastern coast.

The controversial amendment to the bill regarding oil-exploration royalties, drafted by Congressman Ibsen Pinheiro, that proposed the distribution of 52.5 percent of royalties among Brazil’s 26 states and the Federal Distirict, and sending 40 percent to the federal government, was strongly opposed and criticized by the top oil-producing states of Rio de Janeiro, São Paulo, and Espírito Santo.

Faced with unconstitutionality claims, the amendment was vetoed as expected by ex-president Luiz Inácio Lula da Silva during the final days in office, and returned to Congress, leaving the issue for new president Dilma Rousseff to resolve.

Edison Lobão, the Minister of Mines and Energy, pointed out that new bids for pre-salt oil exploration could not be made before the clarification of the new legislation by Congress. “We are insisting on the approval of this project,” he said, “We are convinced that this is the best solution for Brazil.”

The proposal is yet to be discussed with the mayors of municipalities, as well as the governors of states whose oil revenues are at stake. Rio de Janeiro is Brazil’s largest oil-producing state with more than 1.5 million barrels a day, followed by Espírito Santo with 300,000 barrels a day.

Edison Lobão, the Minister of Mines and Energy, has expressed concern that the pre-salt bidding process cannot be initiated before the resolution of the royalties issue, photo by Marcello Casal Jr./ABr.

Both Sérgio Cabral, the governor of Rio, and Renato Casagrande, the governor of Espírito Santo, have been contending that the amendment is unconstitutional, citing that compensation to oil and gas producing states and municipalities is a constitutional right.

“Any measure in line with what Congress approved and Lula vetoed last year disrupts the balance of the Federation,” Casagrande said, adding: “It imposes a political defeat upon Rio de Janeiro and Espírito Santo, and no unit of the Federation should be politically defeated.”

Casagrande also stated that he was committed to achieve a political solution, despite having a direct action of unconstitutionality “prepared” to be forwarded to the Supreme Court, in case of the failure of the negotiations in Congress. “Policy is much stronger than a lawsuit,” he added.

Royalties are major sources of income for energy-producing states and municipalities, as evidenced in the examples Mato Grosso and Mato Grosso do Sul, Brazil’s new hydroelectric-power frontiers, which are expected to generate between R$3-R$4 billion in the form of royalty payments within the next five years.

Brazil raises a total of R$7.9 billion in oil royalties annually, according to Agência Nacional do Petróleo (National Petroleum Agency). If the proposed amendment becomes law without alterations, the State of Rio de Janeiro will lose around R$5 billion per year, as its royalty share will dramatically be reduced to R$200 million, and Espírito Santo will lose around R$1 billion in oil royalties.

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