UPDATE 1-Rio marchers protest Brazil's oil royalty plan

* Rio wants to keep bigger share of oil royalties
* Row threatens to delay exploitation of new fields

By Jeb Blount and Sabrina Lorenzi
RIO DE JANEIRO, Nov 10 (Reuters) - Thousands of
demonstrators rallied in Rio de Janeiro on Thursday against an
oil law that could cost the beachside city and surrounding
state billions of dollars in revenues.
The protest comes as lawmakers in Congress continue to
wrangle over a proposal to distribute the proceeds of Brazil's
booming energy industry more widely among states, a dispute
that has slowed the development of massive offshore reserves
and created a political headache for President Dilma Rousseff.
The government of Rio state, which organized the protest,
has said the proposal would strip it of funds for basic social
services and hurt its ability to prepare for the 2014 World Cup
soccer tournament and 2016 Olympic games.
An oil leak near Chevron's offshore Frade field
north of Rio de Janeiro gave Rio de Janeiro state Governor
Sergio Cabral more ammo in his campaign to fight the new
royalty bill, saying a decline in revenues could also leave
producing states vulnerable to environmental calamities.
"The situation illustrates the issue of compensation,
because the problems won't touch the shores of other states --
any event of this kind will hurt Rio de Janeiro," Cabral told
reporters.
His government has put up hundreds of large posters around
the city calling on people to fight the "injustice" of the law
and has threatened to take the issue to the country's Supreme
Court to make sure it does not go forward.
"There are a lot of places in Brazil with natural wealth,
it's not just Rio and oil," said Marco Antonio Pereira de
Souza, a 39-year-old municipal employee from the city of Macae
in Rio state who was taking part in the march.
"The place where the oil is produced should get the most.
We're the ones with the problems, the possible environmental
problems."Brazilians heralded the discovery in 2007 of huge oil
reserves in the offshore region known as the subsalt as a
ticket to developed nation status, but it has unleashed a
furious debate among states over who should benefit.
Brazil's Senate approved a bill in October that would boost
royalty revenue to nonproducing states while reducing the cut
that goes to municipalities and producer states such as Rio de
Janeiro and neighboring Espirito Santo.
HEAVY COST FEARED
Rio authorities have said the proposal would cost the
state's municipalities 50 billion reais ($28 billion) by 2020,
while producer states would lose 38 billion reais over the same
period.
Cabral said he is hopeful that President Dilma Rousseff
will veto the law, if passed by lawmakers, "because this could
open a precedent to an outright violation of constitutional
rights, a very serious one."
"I'm really afraid a lot will be lost, that money that is
an important part of our budgets in Rio will just disappear,
that important investments won't happen," said Savio Lucio de
Souza Rangel, a 37-year-old information-technology manager
attending the protest.
The proposal now faces a contentious vote in the lower
house of Congress and a slew of law suits.
At stake is the development of some of the world's largest
crude reserves held in an area known as the subsalt, a region
the size of New York state believed to hold more than 50
billion barrels that could turn Brazil into a major oil
exporter.
The approval of the legislation is required to resume
auctions for deepwater fields by the second half of 2012. Those
auctions would be the first of their kind since 2007.
Analysts say the proposal could leave oil companies uneasy
about expanding in Brazil on worries that political wrangling
could alter the terms of investment deals after they have been
signed.
Brazil last year created a production-sharing system for
future projects in the subsalt region as part of former
President Luiz Inacio Lula da Silva's effort to increase
government revenues from those oil discoveries, which he dubbed
a "gift from God."