Rousseff Vetoes Part of Royalties Law to Avoid Delay in Auctions

Brazilian President Dilma Rousseff vetoed parts of a royalties law, siding with petroleum-producing states whose fight to preserve their take from the nation’s expanding oil wealth could delay the first auctions since 2008.

A law passed this month by Congress granted more revenue from recent offshore oil finds to non-producing states, a move that Rio de Janeiro Governor Sergio Cabral said could bankrupt his state ahead of its hosting of the 2016 Summer Olympics.

Rousseff left in place parts of the bill spreading the oil wealth from un-auctioned blocks to all of Brazil’s 26 states but overturned lawmakers’ application of the new formula to existing concessions, Institutional Affairs Minister Ideli Salvatti told reporters in Brasilia. Cabral has threatened to take his fight to the Supreme Court to preserve existing revenues of 3.4 billion reais ($1.6 billion) next year.

The new formula for distributing royalties must be established by the end of January in order for Brazil to hold in May a scheduled auction of exploration blocks that has been delayed since 2008, according to Brazil’s oil regulator.

Tens of thousands of residents in Rio attended a rally last week urging Rousseff to veto the bill ahead of today’s deadline to do so. Cabral has if the law is allowed to take effect, it will jeopardize $13.5 billion in stadium and transportation projects planned for the 2014 soccer World Cup and Olympics two years later.

As output has risen in the world’s 13th largest crude producer, Brazil’s total royalty income jumped to 13 billion reais in 2011 from 9.9 billion reais in 2010.

Much of that income currently goes to Rio and the neighboring states of Sao Paulo and Espirito Santo, whose coastal beaches would be at risk in the event of a spill from exploration of the so-called pre-salt region. The deepwater deposits, being developed mainly by state-run Petroleo Brasileiro SA (PETR4), contain at least 50 billion barrels of oil.

Education Minister Aloizio Mercadante said today that 100 percent of the revenue from future oil concessions will be used to fund improvements in education. That echoes the wishes of former President Luiz Inacio Lula da Silva, who called the 2007 oil discovery -- the biggest in the Americas in three decades -- “Brazil’s second independence.”

To contact the reporter on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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