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Editorial comment

In Brazil, a debate of epic proportions is raging over royalties. What else do we expect in a country that finds itself suddenly, and extraordinarily, wealthy by the discovery of vast oil and gas reserves? Brazil’s Congress is looking to pass a new law that modifies the distribution of royalties from oil production. The bill seeks to redistribute revenues from oil production from the three ‘producing’ states: Rio de Janeiro, São Paolo and Espirito Santo, to include the other 24 states in Brazil. While the changes are largely about dividing up future production at the massive oilfields that have been discovered offshore underneath sub-salt layers, the new law would also apply to oil wells that are already in operation (comprising revenues of some Rs 6 billion/yr or US$ 2.9 billion/yr). 

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At the time of writing, Brazil’s President Dilma Rousseff has a few days to endorse or veto the measure, which has already been approved by both chambers of Brazil’s Congress. It would cut the royalties collected by the federal government, reduce revenue for producing states from 26% to 20%, and boost revenue for the other 24 states from 7% to 21% (and up to 27% by 2020).

In protest against the legislation, hundreds of thousands of people took to the streets of Rio de Janeiro this week, under the banner of “Veto Dilma! Against injustice. In defence of Rio”. Rio Governor Sergio Cabral led the protest and urged his friend President Rousseff to veto the part of the bill that reallocates funds from existing oil production. He said that the bill “would devastate the state budget and compromise the future of Rio. The state would be inviable”. Rio is spending billions of dollars building infrastructure for the upcoming 2014 World Cup it is hosting, and the 2016 Summer Olympic Games.

This is a sensitive decision for Rousseff who, while unapologetic about her longstanding plans to divert oil revenues to fund social amelioration and to improve the standard of education, faces re-election next year. Her predecessor Luiz Inacio Lula da Silva vetoed a similar law back in 2011, days before he left office, in an attempt to safeguard existing oil revenues. Something must be agreed however, before Brazil can hold a much-delayed 11th bidding round for new concessions next May, setting the ball in motion for license auctions later in 2013. Analysts predict Rousseff will go for a partial veto, but ultimately won’t make any decision that would stand in the way of next year’s important bidding process, because there is a lot of money to be made, regardless of how it is divided up between states.

There are parallels to be drawn between President Rousseff’s difficult decision as she faces re-election and US President Barack Obama’s decision to delay approval of the controversial Keystone XL pipeline until after the Presidential election. Now safely elected for a second term, Obama is expected to announce his decision on the project, and do it quickly.

Protests at the White House have stepped up since the election, with a renewed vigour amongst opponents nationally. Without an electorate to court, without the pressure of the campaign, Obama is free to make his decision without bi-partisan pressure.

In an article in the Financial Post, John Kemp (Reuters) explains: “Wall Street as well as the oil and gas industry will return to work [after the election] knowing that they heavily backed the losing side and now have very little political capital with the re-elected Obama administration and the Democratic majority in the US Senate. Some urgent bridge-building will be required in the coming days if they are to influence financial regulation and energy policy over the next four years.”1

By approving the Keystone extension line, Obama could do some bridge-building of his own, could reach out to the oil and gas industry, put his faith and backing behind the cutting edge future of the fossil fuel industry and promote a new era of responsible, safe production and pipeline transportation. But he doesn’t have to.

1. John Kemp, ‘Election gamble backfires for banks, energy firms’, (7th November, 2012).

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