Brazil Passes Royalties Bill to Allow New Oil Bidding

Brazil Approves Royalties Bill to Allow New Oil Bidding

BRASILIA - Brazil's congress late Tuesday passed long-awaited legislation for the oil industry allowing billions of dollars in fresh investments into some of the biggest oil-field discoveries in decades.

The legislation, which President Dilma Rousseff is expected to sign quickly into law, was the remaining element needed from a broad oil-sector reform package designed to boost exploration of the country's recently discovered offshore oil finds known as the presalt, as they are located under a thick layer of shifting salt in deep waters off the coast of Rio de Janeiro, Sao Paulo and Espirito Santo states.

Lawmakers said the legislation was expected to direct more than 20 billion Brazilian reais ($9.9 billion) in royalty revenue toward needed public-sector spending and investment within the next decade.

By a vote of 286 to 124, the Brazilian Chamber of Deputies approved revised rules for distribution of multibillion-dollar royalties paid by oil companies to the government. In the effort, the house rejected a version of the bill directing more resources to the oil-producing states in favor of text crafted in the country's senate offering more revenue to nonproducing states.

"With this bill, we were able to maintain the gains that the states had made in a more balanced way among producers and nonproducers," said bill sponsor Onyx Lorenzoni after the vote.

Under the approved version, royalties will be distributed to states and municipalities according to criteria of the country's FPE and FPM tax-revenue distribution funds. Another portion of the royalty revenue will be directed to a social fund administered by the federal government.

With the approval of the senate version, the legislation will be sent directly to President Rousseff for signature into law and allow the government to plan for sale of some important offshore oil-concession contracts as early as April. Brazil last held a bidding round for oil concessions in December 2008.

The legislation would also pave the way for Brazil's first auction of subsalt acreage controlled by the government under new production-sharing agreements.

The subsalt is estimated to hold tens of billions of barrels of crude and could potentially make Brazil one of the world's top five oil producers by the end of the decade. State-run energy giant Petroleo Brasileiro plans to spend $237 billion through 2016 to develop the first wave of subsalt oil fields, with the goal of more than doubling current output to 4.2 million barrels a day by 2020.

Following the approval, however, representatives from large-scale oil-producing states such as Rio de Janeiro and Espirito Santo repeated their threats to contest the bill in court, claiming it would reduce their revenue by diverting royalties from existing oil-exploration contracts to nonproducing states.

"This bill represents the confiscation of resources guaranteed under the constitution," said Rio de Janeiro lawmaker Jandira Feghali, adding that if the question isn't resolved "it will be taken to the supreme court."

Under Brazilian rules, President Rousseff can exercise a line-item veto; however, congressional allies said after the vote she doesn't plan to use it.

Political analysts, meanwhile, said possible court challengers were unlikely to hold up the new bidding rounds, as they probably would apply to royalties from existing concession contracts and not to new oil areas.

Copyright (c) 2012 Dow Jones & Company, Inc.


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