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Sep 16, 2014

Rio Ramps Up Pressure in Debate Over Brazil Oil Royalties Bill

Published: Nov 26, 2012


By Jeff Fick


RIO DE JANEIRO--The city of Rio de Janeiro will grind to a halt Monday afternoon as tens of thousands of protesters are expected to demand President Dilma Rousseff veto legislation that would see them lose out on billions of dollars in revenues from oil production.

Most of Brazil's oil and natural gas is produced in the three states of Rio de Janeiro, Sao Paulo and Espirito Santo, and they face a struggle as they are heavily outnumbered by the other 24 states that stand to gain from the new law.

While the changes are largely about dividing up revenues from future production at massive oil fields lying off the southeast coast, the three states are most outraged that it would also take away revenues from oil wells that are already operating, estimated at some six billion Brazilian reais ($2.9 billion) a year. Rio officials have warned it could hinder their ability to host the 2014 World Cup and the 2016 Summer Olympics.

Brazil's president has until Friday to decide whether to sign the legislation as sent by Congress, make some changes or veto it outright. As well as the politics, hanging in the balance is the threat of lawsuits that could further delay oil industry development.

Protests in Rio tend to be noisy and colorful rather than violent, with live music similar to the famed Carnival street parades. Despite wet and miserable weather Monday, organizers are expecting around 100,000 people to show up. State and city governments in Rio and Espirito Santo have arranged free rail, road and ferry transportation for people to travel to the rally.

At a rally in 2011, some 150,000 people showed up to protest similar legislation. Former President Luiz Inacio Lula da Silva vetoed the law back then, just days before he left office, because it would interfere with the existing oil revenues.

For the president, the desire to drive the oil industry may outweigh the outcry over royalties, said Christopher Garman, a political analyst at Eurasia Group. "Our sense is that the government doesn't want to run the risk of delaying new bid rounds, so [President Rousseff] will probably approve the bill," Mr. Garman said.

Alternatively, the president might try to sidestep the dispute by using a new education plan to channel the funds, according to a person familiar with the president's thinking. The government would seek to include a provision in the legislation that would claim all royalties revenue to finance education.

"We're trying to figure out a way to deal with it and re-establish the president's goals," the person said. "What she has indicated is that the new national plan for education might be a good way to readdress and re-establish the proposal."

With a re-election campaign expected to heat up in the second half of next year. Ms. Rousseff may indeed opt to seek other ways to compensate oil-producing states. The debate cuts across party lines that could disrupt delicate alliances within the ruling coalition formed by Ms. Rousseff's Workers' Party; Congress may even opt to overturn an eventual veto.

"We trust that the president will veto the bill," Espirito Santo Gov. Renato Casagrande told the O Globo newspaper. "If Congress overturns the president's veto, then there could be a debate over compensation."

Mr. Casagrande of the Brazilian Socialist Party and Rio de Janeiro Gov. Sergio Cabral of the Democratic Movement Party both represent large parties in the coalition that could be key to Ms. Rousseff's re-election bid in 2014. Both governors will be joined by officials from opposition-controlled Sao Paulo state government at Monday's event.

The protest was a sign of the "strong unity" among Rio de Janeiro state political leaders, the private sector and citizens against the change, Mr. Cabral said last week. "I believe that President [Rousseff] is going to veto the bill," he added.

-Jeffrey T. Lewis and Gerald Jeffris in Brasilia contributed to this article.

Write to Jeff Fick at jeff.fick@dowjones.com

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