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Brazil's President Makes Changes to Oil Royalties Bill

11/30/2012 | 03:32pm US/Eastern
   By Gerald Jeffris and Matthew Cowley 

Brazilian President Dilma Rousseff on Friday modified a bill that would redistribute proceeds from the country's oil wealth, and moved to restore her administration's priorities by channeling a large part of future revenues to an education fund.

The president avoided a showdown with two of Brazil's most powerful states, Rio de Janeiro and Sao Paulo, by restoring their rights to revenues from oil wells that are already in production. The administration, however, will have to work hard to persuade lawmakers from the nonproducing states--which have an overwhelming majority in Congress--to avoid having the president's changes overturned.

Brazil produces around 1.9 million barrels of crude oil a day. The figure is expected to rise significantly in the coming years as a result of enormous oil reservoirs that have been discovered in the so-called subsalt region, which lie beneath deep Atlantic waters, kilometers of rock and a thick layer of salt.

Ms. Rousseff vetoed a clause that would have taken away some 6 billion Brazilian reais ($2.86 billion) a year from Rio de Janeiro, Sao Paulo and Esprito Santo states, related to royalties from oil wells that are already producing. The states have threatened legal action if that revenue stream--already built into the states' budgets--had been taken away.

The president will also sign a new decree, which must now be approved by Congress, creating an education fund that will absorb a "substantial part" of the revenues from new oil wells, Education Minister Aloisio Mercadante told reporters at a press conference.

Meanwhile, officials urged Congress to approve the president's changes as being the fastest way to get the oil industry back on track. The government has had to delay for several years an auction of new exploration areas which it now aims to hold in May 2013.

Write to Gerald Jeffris in Brasilia at gerald.jeffris@dowjones.com and Matthew Cowley at matthew.cowley@dowjones.com

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