RIO DE JANEIRO, (Reuters) – A volatile mix of vast new oil wealth and election-year politics is straining relations between Brazil’s states and complicating President Luiz Inacio Lula da Silva’s efforts to pass a landmark oil reform before the October polls.
An amendment passed by Congress’ lower house this month that would take special income from Brazil’s handful of oil-producing states and distribute it among all 26 states has sparked protests and outrage in the losing regions.
Rio de Janeiro state governor Sergio Cabral, who cried publicly when the measure was approved, rallied a reported 50,000 or more people last week to protest the step, which would cost the state at least 4 billion reais ($2.2 billion) a year and, he said, harm its ability to host the 2016 Olympics.
Huge posters condemning the “cowardice” of the amendment have sprung up around Rio, including on the iconic Christ the Redeemer statue overlooking the beach-side city.
While the controversial amendment will struggle to survive Brazil’s Senate and Lula’s veto power, it has opened a Pandora’s Box as non-producer state politicians see a chance to bring home an oil bounty for voters in an election year.
“The field is fertile for demagogues,” wrote columnist Miriam Leitao in the O Globo newspaper, adding: “The field was plowed by the government.”
The new offshore oil fields were found in 2007 and could hold more than 50 billion barrels.
Lula, a popular former union leader who cannot run for a third straight term at the election in October, says the oil wealth can put Brazil on a fast track to wealth and social equality,
He wants Congress to quickly pass four bills that would overhaul the previous model of oil extraction to give the government more control over the reserves and create a fund to invest in education and health.
Congress’ approval of the bills would help ruling party presidential candidate Dilma Rousseff, Lula’s chief of staff and choice to succeed him.
But the prospect of oil wealth for all has emboldened national legislators to question why Rio, Sao Paulo and Espirito Santo states should get the lion’s share of tributes from oil companies.
“There aren’t any producer states. At most, they have a sea view, which is very privileged,” said Ibsen Pinheiro, a deputy from Rio Grande do Sul state who co-authored the amendment, which would apply to existing and future oil production.
The government had proposed discussing the distribution of royalties after Congress passed the oil reform bills, but was unable to vote down the amendment.
Rio is by far the biggest beneficiary under the current system, receiving 70 percent of the royalties and more than 90 percent of a special participation tax, which oil companies pay based on the volume produced. The government of the state, which produces 85 percent of the country’s oil, raked in 4.9 billion reais in oil revenues in 2009, which would collapse to less than a quarter of a billion reais under the new law.
STRUGGLE FOR CONTROL
Lula now faces a struggle to control the forces let loose by the bills, which were passed by the lower house and now need approval by the Senate before he can sign them into law.
By upholding a change in distribution, Lula could risk alienating his Rio ally Cabral and losing votes for Rousseff in the country’s third most populous state. Rejecting the changes could also have a cost by antagonizing many legislators and possibly losing Rousseff support in non-producer states such as Minas Gerais and Rio Grande do Sul where she has roots.
The dispute has carved divisions within the PMDB party, the main coalition partner of Lula’s leftist Workers’ Party.
“This bill was obviously something you could not send to Congress in an electoral year, even less with the urgency requirement that it be voted within three months,” said Bolivar Lamounier, an independent political consultant in Sao Paulo.
“Unless Lula finds a way out, this may deepen.”
The opposition, which is expected to struggle against Lula’s huge popularity and a rebounding economy in the election campaign, has majorities in key Senate committees and is likely to try to use the royalty conflict to block the bills.
But Lula still has scope to push a compromise in the Senate and get the bills passed by June or July, when legislators’ attention turns to the soccer World Cup and the election campaign, said Christopher Garman, chief Latin America analyst at the Eurasia Group consultancy in Washington.
Lula’s approval ratings of over 80 percent give him “kingmaker” status and he is likely to use that to nudge senators into supporting the government, he said. Still, the government may have to agree to pay from central coffers to appease non-producing states, perhaps by decentralizing revenue from the planned Social Development Fund.
“Lula’s not going to pay a political cost for this,” said Garman, who gives the reforms around a 60 percent chance of winning approval.
“The overarching message here is that you have a new oil reform, you have greater rents extracted from new production and you channel that to (an election message of) ‘the oil is ours’… it’s a political home-run.”