UPDATE 1-Injunction blocks Brazil congress vote over oil royalty law

Mon Dec 17, 2012 5:48pm EST

BRASILIA Dec 17 (Reuters) - A Supreme Court injunction blocking an attempt by Congress to overturn a presidential veto added flames on Monday to a political battle raging over Brazil's new oil royalty law that redistributes the country's future oil wealth.

The feud between oil producing states reluctant to share their income from oil royalties and the rest of the country threatens to prolong regulatory uncertainty that has delayed development of Brazil's massive pre-salt oil deposits offshore.

President Dilma Rousseff last month signed a new law that increases the distribution of oil royalties from future contracts to all Brazilian states, but she vetoed provisions that affected existing concessions.

States that do not produce oil have a majority in Congress, and they scheduled a fast-track vote for Tuesday evening to overturn Rousseff's veto in a joint session of both chambers. But an injunction sought by producing states, led by Rio de Janeiro, was issued by Supreme Court Justice Luiz Fux, in effect blocking Tuesday's vote.

Senate president Jose Sarney said he would appeal against Fux's decision, arguing that the high court judge was interfering with internal procedures of Congress.

The law is crucial for Brazil's oil industry because auctions for new oil concessions 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.

Rio's government said the original law vetoed by Rousseff would have cut $39 billion of its royalties by 2020, including crucial revenue needed to host the World Cup soccer tournament in 2014 and the Summer Olympics two years later.

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