* Rio wants to keep bigger share of oil royalties
* Row threatens to delay exploitation of new fields
By Jeb Blount
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.
It 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.
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.
“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.”
Writing by Brian Ellsworth; editing by Stuart Grudgings and Vicki Allen