Brazil States Plan Lawsuits to Reverse Changes to Oil Royalties

RIO DE JANEIRO - Brazil's Rio de Janeiro and Espirito Santo states said Thursday that they plan to file lawsuits with the country's Supreme Court to fight changes to oil royalties payments that could cost the states billions of dollars in revenue.

The moves follow a vote late Wednesday in Brazil's Congress, when both houses overwhelmingly voted to overturn a presidential veto of key portions of the oil-royalties bill. President Dilma Rousseff had removed the redistribution of royalties from existing oil production equally among Brazil's 27 states, which would cost Espirito Santo, Rio de Janeiro and Sao Paulo states an estimated 6 billion Brazilian reais ($2.9 billion) per year in lost revenue.

The lost revenue will hurt Rio de Janeiro's ability to host the 2014 World Soccer Cup and 2016 Summer Olympics, state officials said. Speaking to reporters Thursday, Gov. Sergio Cabral said that "because there is an immediate danger of making the state insolvent, we're going to seek an injunction" to halt implementation of the law.

The state will file the lawsuit with the Supreme Court as soon as the new law is published in the Federal Register, Mr. Cabral added. "We are talking about oil fields that have already been auctioned off, with signed contracts," Mr. Cabral said. According to Mr. Cabral, the changes are unconstitutional because they would break the existing contracts.

Rio de Janeiro also suspended all state payments until the Supreme Court rules on the lawsuit, according to a statement. Public workers, however, will continue to receive paychecks, the state government said.

The original oil-royalties bill was passed in 2012, with distribution of oil royalties granted to all 27 of Brazil's states from existing oil wells and new wells. Ms. Rousseff, using her line-item veto power over legislation, vetoed the portion of the bill that distributes oil royalties from existing wells.

The congressional override of the veto means oil royalties will be distributed broadly to all the states immediately. Maintenance of the veto would have postponed broad oil royalties distribution to future wells only.

Espirito Santo Gov. Renato Casagrande also said that Espirito Santo state had prepared a lawsuit that will be filed with the Supreme Court, calling the vote to override the veto "political demagoguery."

"The decision taken by the majority of representatives from non-oil-producing states, besides seriously compromising federal balance and the country's business environment, represents a hard blow to the finances of Espirito Santo and Rio de Janeiro, states that account for nearly all of Brazilian oil production," Mr. Casagrande said in a statement.

Sao Paulo state didn't respond to requests for comment on the royalties vote, but Gov. Geraldo Alckmin said earlier this week that the state would also file a lawsuit to block the changes.

While the states prepare legal challenges to the new royalties distribution regime, the latest act in the long-running political saga is unlikely to interrupt the crucial 11th-round auction of oil and natural gas concessions planned for May, oil-industry consultants said. That's because states had already agreed to equally distribute royalties from future production.

Brazil's National Petroleum Agency will auction off 289 blocks of exploration concessions, including deep-water blocks in the country's equatorial margin, in the country's first oil and natural gas lease sale since 2008. The ANP also plans to hold the country's first sale of acreage in the subsalt region as well as shale oil and natural gas concessions later this year.


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