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Brazil's Rio State Seeks New Oil Tax to Offset Royalties Losses

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RIO DE JANEIRO - Brazil's Rio de Janeiro state legislature approved a new tax on oil and natural gas that could generate up to $3.3 billion in new revenue, offsetting possible losses from a controversial, new oil-royalties law.

Rio de Janeiro Gov. Sergio Cabral has 15 days to sign the bill. Mr. Cabral's office declined to comment on the measure, saying the bill was a "legislative initiative."

The measure turns up the heat on the debate over how to distribute Brazil's newfound oil wealth, with the country's Congress set to debate whether to overturn President Dilma Rousseff's veto of part of the new oil-royalties law that grants nonproducing states a share of revenue from existing production. Congress was expected to vote on the veto before the end of the year, but the decision has been postponed until February.

With the veto, Ms. Rousseff determined that the broader distribution of revenue would apply only to future production and not to existing oil fields. Should the veto be overturned, the oil-producing states of Rio de Janeiro, Sao Paulo and Espirito Santo said they would sue to block implementation of the new royalties regime.

The royalties debate pits those three oil-producing states against the 24 other Brazilian states. The dispute also cuts across party lines, with the government unable to bring together members of its congressional alliance, which holds clear majorities in both houses, to broker a deal.

Rather than watch the debate from afar, Rio de Janeiro state congressman Andre Ceciliano proposed a bill that would counter any potential royalties losses should the veto be overturned. "My bill seeks to avoid any irreparable losses to our state's public coffers," Mr. Ceciliano said on his blog.

The measure would impose a tax on the sale or transfer of each barrel of oil produced in Rio de Janeiro state, generating about 6.9 billion reais ($3.3 billion) in 2013, according to estimates. The figure was in line with the BRL6.95 billion in royalties and special-participation taxes on large-producing oil fields the state received in 2011. Rio de Janeiro state officials have said the new royalties regime would cost the state nearly BRL80 billion in royalties through 2020.

The new tax is based on similar taxes on mining in Minas Gerais and Para states, Mr. Ceciliano told the Agencia Brasil news agency.

Rio de Janeiro is home to state-run energy giant Petroleo Brasileiro, or Petrobras, and a majority of Brazil's crude-oil production, including the Campos Basin, where Petrobras produces more than 85% of the country's oil. Petrobras declined to comment on the new tax.

Several massive new discoveries in a region called the subsalt, where oil is trapped miles beneath the seabed under a layer of salt, also sit off the state's coast. Output from the new subsalt fields is expected to dramatically increase revenue from oil royalties in coming years.

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

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