BRASILIA/RIO DE JANEIRO, (Reuters) – Brazil’s main oil-producing states asked their country’s Supreme Court on Friday to overturn a new law that strips them of billions of dollars in royalties levied on the output of rich offshore oil fields.
The three main oil-producing states, Rio de Janeiro, Espirito Santo and Sao Paulo, filed challenges with the court in Brasilia arguing that the legislation is unconstitutional because it changes existing contracts and violates Brazil’s fiscal discipline law.
Brazil’s constitution has clauses limiting the government’s ability to deprive people of established rights. A decade ago, Rio de Janeiro and other states pledged a percentage of oil royalties to make payments on debt to the federal government.
The bill signed into law by president Dilma Rousseff on Thursday night forces the government to share offshore oil royalties more equally among the country’s 26 states, federal district, and 5,500 municipalities.
The dispute has poisoned relations between Brazil’s states and clouded the once-bright future of Brazil’s oil industry, where plans to auction production sharing concessions to tap huge subsalt fields have been delayed by regulatory quarrels.
The royalty bill was originally meant to more widely distribute Brazil’s future oil wealth as it developed giant new “subsalt” resources off its Atlantic coast near Rio de Janeiro.
But non-oil-producing states and those with small on-shore production wanted to get access to resources for education right away and pushed through legislation that divided up royalties on existing offshore oil agreements as well.
With 80 percent of output and the bulk of royalty payments, the three oil-rich states challenging that law were receiving too much from the offshore crude that was seen more as a federal resource than a state one, supporters of the change said.
“Congress ignored our situation and we have had to resort to the Supreme Court. We hope the court appreciates our arguments,” said Espirito Santo Governor Renato Casagrande in a telephone interview.
Otherwise, he said, “we will have to adjust our budget, cut programs, reduce jobs and investments.”
Espirito Santo stands to lose 800 million reais ($405 million) this year, and 10 billion reais by 2020 in reduced royalty revenues if the law stands, Casagrande said.
Rio de Janeiro, Brazil’s top oil state, has estimated it could lose 3.1 billion reais ($1.59 billion) in income this year alone from the new royalty sharing law.
In response, Rio de Janeiro Governor Sergio Cabral last week ordered the suspension of all the state’s payments – except for legally mandated public employee salaries and transfers to municipalities. Cabral warned that the new law will threaten Rio’s plans to host the soccer World Cup next year and the 2016 Olympic Games.