• Oil & Gas: Legal Battle Over Royalties Does Not Affect IOC´s
  • April 30, 2013
  • Law Firm: Siqueira Castro Advogados - São Paulo Office
  • After the new discoveries of oil deposits in pre-salt layer and the expectancy of huge increase in production, the Legislative Branch has approved a bill that changes the rules of the oil royalties destination, rising significantly the participation of non-producers states and cities in the revenue sharing.

    President Dilma Rousseff has partially vetoed the presented bill, but the Congress has overturned the presidential vetoes and has kept the original provisions of the bill approved, by enacting the Federal Law 12,734/2012.

    In view of the significant loss of revenue that the approval of the new rules will lead to the producers, Rio de Janeiro, Espírito Santo and São Paulo States have filed lawsuits before the Brazilian Supreme Court to challenge the constitutionality of said law.

    These States argued that, according to the Constitution, oil royalties must be destined to producers regions to compensate them for the burden and risks of the exploration activity in their territories. Furthermore, they say that the law would not be applied to the existing oil concessions, since the right to receipt oil royalties should be based on the law in force at the time of the signing of the agreement.

    Justice Carmen Lúcia, from Brazilian Supreme Court, the reporting judge of the lawsuits, has suspended the effects of the law, stressing the plausibility of the arguments presented by the producer States and the risk of hard undoing if the suit is considered precedent. However, her decision is temporary, requiring the confirmation en banc.

    Although one of the issue’s focus is the applicability of the new royalties distribution rules to the concessions already firmed, it is important to remember that there is not a breach of the agreements signed between the National Petroleum Agency, the Brazil Regulatory Agency, and the oil exploitation companies (IOC´s), since Federal Law 12,734/2012 has not altered the amount of royalties to be paid by these companies to the Government..

    Therefore, the discussion about the new royalties distribution is not a concern for the private sector at this moment, since the abovementioned law has not modified the amount that concessionaires should pay. Even though this dispute has been generating a legal controversy in the Brazilian oil sector, it is a debate among producers and non-producers political entities that bring no impact to the concession agreements entered into between the Brazilian Government and the IOCs.