Supreme Court suspends Brazil's oil royalty share-out law

A Federal Supreme Court judge has temporarily suspended a controversial law that gives a greater share of the country's oil royalties to non-oil producing states.

In a preliminary injunction, Judge Carmen Lucia on Monday accepted an appeal filed by Rio de Janeiro state, one of three oil-producing states which stand to lose from the new oil royalty share-out plan.

The new scheme, approved by Congress and which went into force last Friday, provides for a more equitable sharing of royalties among the country's 26 states and the federal district of Brasilia.

The measure cuts the federal government's share of oil royalty revenues from 30 to 20 percent, and that of producing states from 26 to 20 percent.

And non-producing states in turn see their royalty revenues rise from seven to 21 percent by 2013, and up to 27 percent by 2020.

But judge Lucia said her injunction allows to "safeguard in a preventive manner the rights of states and municipalities which feel they have been penalized" by the law.

The Federal Supreme Court will now have to make a final ruling on the case at an unspecified date.

In a statement, Renan Calheiros, the Senate speaker, said he would provide the judges with all the necessary information "to defend the democratic decision" by Congress.

The states of Rio de Janeiro, Sao Paulo and Espirito Santo, which produce most of the country's oil, had appealed to the Federal Supreme Court as soon as the new law was enacted.

They argued that the new share-out plan modified existing oil contracts, violate the Constitution and reduce their revenues.

Rio Governor Sergio Cabral even warned the new scheme would cripple the state's finances and jeopardize the financing of the 2016 Rio summer Olympics.

Last November, Rousseff, under intense pressure from oil-producing states, vetoed parts of the law, questioning the fact that contracts signed before the bill was approved would be affected retroactively.

Her veto was meant to maintain the previous share-out plan favoring oil-producing states for existing contracts, while establishing the new royalties distribution rules for future contracts.

Brazil will have to resolve the dispute before it opens a new bidding round for offshore oil and gas mining, beginning in May.

Oil-producing states anticipate higher revenues from so-called "pre-salt," deep-water reserves discovered in 2007 off Rio de Janeiro state.

The huge pre-salt reserves could hold more than 100 billion barrels of high-quality recoverable crude and turn Brazil into one of the world's top exporters, according to the National Petroleum Agency.

State-run energy giant Petrobras extracts most of the two million barrels produced daily in Brazil, where other national and foreign firms such as Anglo-Dutch Shell, Norwegian Statoil and US Chevron also operate.