March 18, 2013 / 11:51 PM / in 5 years

Brazil Supreme Court justice postpones implementing royalty law

* Payments will be made under terms of prior framework

* Lawmakers overrode presidential veto

By Ana Flor and Guillermo Parra-Bernal

BRASILIA/SAO PAULO, March 18 (Reuters) - A justice at Brazil’s supreme court postponed late on Monday the implementation of a new law for the distribution of oil royalties to regional governments after three states claimed the rule breached the country’s Constitution.

Justice Cármen Lúcia ordered that the new royalty payments system be suspended until the Supreme Federal Court decides the issue. Rio de Janeiro, São Paulo and Espírito Santo - Brazil’s three largest oil producing states - filed lawsuits last week to prevent the law from being implemented until a ruling is made by the entire court.

Thus, this week’s payments will be made under terms of a prior regulatory framework for royalties, which lawmakers revoked late in 2010. The new law will be suspended “until the final ruling of the current lawsuits,” Lúcia said in a stateme nt.

Lúcia’s decision means that a legal battle could be prolongued for a few more months, generating regulatory noise in Latin America’s largest economy. The distribution of royalties does not directly affect oil companies in Brazil but the government may not resume auctions of oil concessions until the issue is resolved.

The new royalty law, which was the subject of a presidential veto that lawmakers overrode on March 7, strips the three states of billions of dollars in proceeds levied on the output of rich offshore oil fields.

Rio, São Paulo and Espírito Santo maintain that only royalties from future oil contracts should be shared, while non-producing states - which have a majority in congress - want to grant themselves a bigger share of royalties from existing production.

The legislation was originally meant to more widely distribute the nation’s future oil wealth as it developed giant crude resources off its Atlantic coast.

If the Supreme Court upholds the new royalty rules, states and municipalities are expected to start receiving their royalty checks in May.

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