* Main producing states to contest bill in courts
* Former vetoed articles of bill to affect current contracts
* Veto overturn a defeat for President Rousseff
BRASILIA, March 7 Brazil's Congress has
overturned a presidential veto of a controversial oil and
natural gas royalty bill, stripping billions of dollars in
revenue from producing states, which have threatened to contest
the bill in the courts.
While originally aimed at giving non oil-producing states a
fair share of Brazil's future oil wealth, the new law cuts the
share of oil royalties also received from existing production
contracts by states and cities bordering maritime fields and
redistributes the income among all 27 states and 5,500
By altering existing oil contracts, the new law risks
poisoning future debates with states over tax reform and mining.
The law could create fresh uncertainty for oil companies
operating in Brazil as well, and delay the South American
nation's plans to tap huge subsalt fields and become a major
world oil producer.
The result of the vote announced on Thursday was a defeat
for President Dilma Rousseff, who had committed herself to
limiting the immediate impact of her government's oil industry
reform on producing states led by Rio de Janeiro. One of the
most divisive issues of her 2-year-old presidency, the issue has
soured relations among Brazil's states.
"The royalty issue has become a zero-sum game, there are
clear winners and clear losers and the losers are not happy,"
João Augusto de Castro Neves, a senior analyst with the Eurasia
Group in Washington in an interview.
"The producing states' defeat may contaminate other issues
such as Rousseff's push for a new mining code or lead them to
block efforts for tax reform," Castro Neves, an economics and
energy specialist, said.
The governments of Rio de Janeiro and Espirito Santo along
with Sao Paulo state, where offshore oil production is starting
to grow rapidly, say they plan to go to the Supreme Court to
challenge the law.
Approved by Congress in November, the bill was vetoed in
part by Rousseff under rules that give Brazil's president the
right to a line-item veto, removing sections of a bill while
passing other parts.
Congress left intact Rousseff's contribution to the new law
that 10 percent of all future oil royalties be used to fund
improvements in education in Brazil without which, she said, the
country's development will be hobbled.
RIO OLYMPICS AT RISK
Rio de Janeiro has said it could lose as much as 3.1 billion
reais in 2013 alone under the new law, undermining plans to host
the World Cup soccer tournament games in 2014 and the Olympics
Games in 2016.
Rio de Janeiro and neighboring Espirito Santo received 86
percent of all oil and gas royalties and windfall profits taxes
given directly to states and municipalities in 2012, according
to Brazil's oil regulator, the ANP. Most controversially, the
new law cuts the states' and municipalities' share of royalties
on existing oil-production concessions.
Total royalties and windfall profits taxes in 2012 were 31.6
billion reais ($16.1 billion), with about half going to the
federal government and the rest directly to states and
Rio de Janeiro's Governor Sergio Cabral and his supporters
said last year that they hope the Constitution's restrictions on
the extinction of existing rights will protect their previous
share of royalties on existing production contracts, limiting
the changes to future oil production.
Under the law, producing states' royalties will shrink to 20
percent of the total royalty take by 2019 from 40 percent today.
Producing municipalities share will drop to 4 percent in 2019
from 10 percent of the total take today.