Rio's Governor Sanctions Law for Tax on Pipelines

The governor of Brazil's Rio de Janeiro state has sanctioned a law that allows it to charge a 100% services tax on pipeline operation in the state, a government spokesman said Tuesday.

Governor Rosinha Matheus had already announced plans for the higher tax to be levied on pipelines, but federally-owned oil giant Petrobras, was trying until recently to negotiate a reduction.

According to the law, pipelines with a diameter of over 30 inches and all equipment to build such pipelines are to be taxed the extra ICMS tax on top of the tax which is already levied on oil exploration and production activities in the state. Petrobras plans a pipeline with a diameter of between 35 and 40 inches.

Matheus has publicly acknowledged that she is waging war against Petrobras because she believes the oil group's plans for a pipeline threaten her dream to build a refinery in Rio. Petrobras wants to build the pipeline to transport crude it pumps out of the prolific Campos Basin on the coast of the state of Rio de Janeiro to refineries in Sao Paulo and Minas Gerais states.

The pipeline project is expected to consume investments of 4.65 billion reals ($1=BRL2.8) and create 34,000 direct and indirect jobs. It will also boost tax revenues and oil royalties in Rio de Janeiro state, Petrobras said, without citing a specific amount.

The company has also said its plans for a pipeline don't conflict with plans for a refinery, as most of Brazil's crude comes from Rio de Janeiro.

"There is enough production in Rio de Janeiro to justify a refinery," said Rio de Janeiro's Energy secretary Wagner Victer last week.

Petrobras says the pipeline is necessary to make oil transport more efficient. The 725-kilometer pipeline would take crude to a refinery in the city of Rio, as well as to two other refineries in Sao Paulo state and another one in the state of Minas Gerais. The plan calls for the transport of about 500,000 barrels of oil per day to be refined just in the Sao Paulo refineries.

But the company has said it will scrap the project if Matheus insists on creating obstacles for its completion. Company officials have also said recently that Petrobras may miss its 2006 production target because the row with Matheus.