UPDATE 2-Brazil's Rousseff vetoes parts of oil royalties bill
* Producer states to keep royalties from existing contracts
* Royalties from future concessions to be redistributed
* All future royalties must be invested in education
BRASILIA, Nov 30 (Reuters) - President Dilma Rousseff on Friday vetoed parts of a controversial royalties bill that pit Brazil's oil-producing states against the rest of the country in a battle over future oil wealth.
Seeking a compromise on perhaps the most divisive issues to arise during her nearly two-year-old presidency, Rousseff vetoed clauses that would slash income for Brazil's main oil states, including Rio de Janeiro.
Her veto changes the bill so that producer states continue to receive royalties on output from existing oil concessions. She signed most of the rest of the bill as passed earlier this month by Congress, redistributing royalties from all future oil concessions so that non-producing states get a greater share.
Announcing the veto Friday afternoon, Gleisi Hoffmann, Rousseff's chief of staff, said the president's veto sought to "fully protect existing contracts" while ensuring the bill's intent to redistribute Brazil's growing oil wealth.
The legislation, approved with the overwhelming support of states with no oil production, is an effort to spread oil revenues more evenly nationwide as massive new offshore oil discoveries near Rio de Janeiro and other southeastern states begin producing in the coming years. The new discoveries, if developed successfully, could catapult Brazil into the ranks of the world's top petroleum producers.
Rousseff's changes also mandate that all royalties from future production contracts be used to fund educational programs. The shift, which wrests funds away from local politicians and their pet projects in producer states, is important for a left-leaning Rousseff administration focused on continued efforts to eradicate poverty across Latin America's biggest country.
The new law is also crucial for Brazil's oil industry, which has been hobbled in recent years by regulatory uncertainty surrounding the new discoveries.
Auctions for new oil concessions, for instance, have been on hold until a new royalty framework is decided. The concessions are necessary for Brazil to develop new discoveries as quickly as possible, especially at a time when state-run oil company Petrobras, a mandatory partner in the big new fields, is struggling to meet existing production targets.
But a provision in the original bill to change royalties on existing concessions met stiff opposition in Rio, responsible for three-quarters of Brazil's current oil production, and the other producer states of Espirito Santo and Sao Paulo. On Monday, thousands of demonstrators joined a Rio protest staged by the state government to urge Rousseff to veto the bill.
The revised law, then, marks a victory for producer states.
Renato Casagrande, the governor of Espirito Santo, late Friday said Rousseff with her veto "acted coherently and courageously," preserving "judicial security" in Brazil.
"Rio thanks President Dilma," Rio's Governor Sergio Cabral said in a statement.
Rio was especially concerned it would lose crucial revenue as it invests tens of billions of dollars to host the World Cup of soccer in 2014 and the Summer Olympics two years later. The state would have forgone $39 billion in revenue by 2020 under the original bill, Cabral said, warning that Rio "would have to close its doors."
"There would be no Olympics, no World Cup, no payments for retirees and pensioners," he added at the time.
Rousseff herself opposed the original bill, in part because the oil producing states had threatened to go to the country's Supreme Court to contest any altering of existing contracts.
A drawn out legal battle would have created legal risks for the oil industry and hindered plans to hold new auctions next year. That, in turn, would further delay the oil bonanza expected from the big new "sub-salt" reserves, known as such because they lie beneath layers of salt deep under the Atlantic seabed.
The royalties bill was passed a year ago by the Senate but held up in the lower house of Congress by opposition from Rousseff and the oil producing states. The legislation had been in the works since 2007, when Brazil discovered the sub-salt reserves.
The reserves, in a New York state-sized area off the coast of Rio and Sao Paulo, may contain as much as 100 billion barrels of oil and natural gas equivalent, according to the Brazilian Petroleum Institute at Rio de Janeiro's state university. That is enough to supply all U.S. oil needs for more than 14 years.
Along with her veto, Rousseff revised the percentages that the federal, state and municipal governments are to receive from future production.
Under those changes, producer states will receive 20 percent of the royalties collected from new fields, down from a current 26.5 percent. The municipal governments of productive areas will receive 15 percent, while the federal government's share of royalties from future concessions will fall from 30 percent to 20 percent next year.
Non-producing states will see their share of royalties from future oil contracts increase gradually from 1.75 percent at present to 27 percent by 2019.
The government did not disclose how it would administer the new rules that require royalty income to be spent on education. The requirement, however, is an effort to ensure that Brazil uses the windfalls to better a workforce that has long been short on skilled labor.
It is also an effort to avoid the so-called "oil curse" that historically has plagued many big petroleum producers, who have relied on oil income without developing the rest of their economies. The royalties must be used to "prepare Brazil to be a post-petroleum Brazil," said Aloizio Mercadante, the country's oil minister, at a press conference.