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BRAZIL: Oil Production Threatened by New Royalties Law

Bottom Line: Massive plans to tap into Brazil’s subsalt fields and an upcoming auction of new oil and gas blocks in May could be delayed as we expect a high-profile legal battle pitting key oil-producing states against the federal government over a controversial new law aimed at adjusting oil and gas royalty distribution. In the meantime, protests against the measure in the two top oil-producing states have the power to severely disrupt production.

Analysis: Brazilian President Dilma Rousseff attempted to veto a controversial oil and gas royalty redistribution bill, but on 7 March, Congress overturned the veto, paving the way for the law’s enactment. Essentially, the law seeks to redistribute the oil wealth more equally among the country’s 27 states.

Rio de Janeiro and Espirito Santo—two of the biggest oil-producing states—will fight the enactment of this new law through legal means that could delay existing and new projects. More than 80% of oil and gas extraction takes place in these two states and both would see royalties dwindle from 40% to 20% by 2019 under the new law. Rio de Janeiro stands to lose around $1.58 billion in royalties in 2013 alone. This loss of state revenue would have a significant impact on the state’s ability to host the World Cup in 2014 and the Olympics in 2016. Espirito Santo state could lose around $5.1 billion over the next 7 years. Both states, along with Sao Paulo, plan to file a petition with…

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