Rio says redistributed oil royalties put World Cup, Olympics in doubt

Rio de Janeiro state said it may not be ready to host the 2014 World Cup and 2016 Olympic Games after Brazil’s Congress voted to strip 6 percent of the state’s annual budget.

Legislators passed a bill yesterday that would cost Rio 4 billion reais ($2 billion) next year by redistributing oil royalties, according to Governor Sergio Cabral. The lower house of Congress voted 286-124 to give non-producing states and towns a bigger share of offshore oil revenue, which amounted to 24.2 billion reais in 2011.

Facing $13.5 billion in stadium and transportation projects planned for the events, with many behind schedule, Cabral said the new law threatens to derail the games and send the state into financial collapse. The state’s budget is 62 billion reais this year, according to its website.

“It’s absolutely not viable,” Cabral told reporters in Brasilia today. “We are going to close our doors. We won’t do the Olympics, we won’t do the Cup.”
The bill, which passed the Senate last year, now needs President Dilma Rousseff’s signature. Oil-producing states say that redistributing royalties from fields currently in production amounts to breaking contracts, and have said they will challenge the law in the courts. Rousseff won’t sign an unconstitutional law, Cabral said.

New Blocks

The distribution of royalties in the world’s 13th-largest crude oil producer must be established by the end of January in order to hold the so-called Round 11 auction for new exploration in May, according to Brazil’s oil regulator. Oil companies including Royal Dutch Shell Plc (RDSA), Total SA (FP) and Statoil ASA (STL) have been waiting since 2008 for the country to offer new exploration areas. No offshore blocks have been auctioned since 2007, when it announced at least 50 billion barrels of crude reserves off the southern coast.

Brazil plans to auction more pre-salt blocks, so named because the oil lies under 2 kilometers (1.2 miles) of the mineral, in November of next year, Energy Minister Edison Lobao said in September.

The royalties bill has been stalled since 2009 because oil- producing states, especially Rio de Janeiro and Espirito Santo, have resisted demands from other states for a bigger share of the bonanza, arguing that the producing regions must be compensated for environmental risks and infrastructure costs.

Rising Output

As Brazil’s crude output has risen, total royalty income jumped to 13 billion reais in 2011 from 9.9 billion reais in 2010, according to the country’s oil regulator.

Drawn-out conflict over the royalties bill could affect plans for next year’s oil auctions, according to Joao Augusto de Castro Neves, a Latin America analyst at Eurasia Group.

“Resuming oil auctions next year is at stake,” Neves said in a telephone interview from Washington D.C. “If you don’t have a clear definition of what the legal framework is going to be like, you could delay those auctions. I think it’s unlikely that she will decide to veto, but there will be some noise.”
Rousseff is still studying the outcome of yesterday’s vote, her press office said in an e-mailed statement.

The president will face pressure from all sides, according to Andre Pereira, political analyst with consulting firm Perspectiva.

Prolonged Battle

“She’s between a rock and a hard place, having to choose between upsetting a few close allies and a lot of non-producing states,” Pereira said in a telephone interview from Brasilia. “This battle won’t be over soon.”

Brazil will definitely hold oil auctions next year, Institutional Affairs Minister Ideli Salvatti said to reporters in Brasilia today.

As the pre-salt fields go into production, offshore royalty income is projected by Brazil’s Energy Ministry to gush to 54.5 billion reais by 2020. Including onshore output, the government forecasts 60 billion reais in annual royalties in eight years.

The new rules don’t alter royalties paid by companies such as state-controlled Petroleo Brasileiro SA (PETR4), the world’s biggest producer in waters
deeper than 1,000 feet (305 meters).

Producers including Shell, Total and Statoil have expressed interest in competing in Round 11, which includes 174 exploration licenses on land and off Brazil’s northeastern coast.

Billionaire Eike Batista has granted OGX Petroleo & Gas Participacoes SA (OGXP3) a $1 billion put option to help the oil company he controls participate in the bidding.

Companies including Petrobras and OGX have found oil and gas near the auction areas. One third of the oil found in the world over the past five years is located below Brazilian waters, Fitch Ratings said in a report on Sept. 12.

Oil companies will probably spend about $1 billion for the rights to explore the 174 blocks, Joao Carlos de Luca, the head of the Brazilian Institute of Petroleum, an industry group, said Sept. 20.