Oil wealth strains Brazil politics in election year

RIO DE JANEIRO, (Reuters) – A volatile mix of vast  new oil wealth and election-year politics is straining  relations between Brazil’s states and complicating President  Luiz Inacio Lula da Silva’s efforts to pass a landmark oil  reform before the October polls.

An amendment passed by Congress’ lower house this month  that would take special income from Brazil’s handful of  oil-producing states and distribute it among all 26 states has  sparked protests and outrage in the losing regions.

Rio de Janeiro state governor Sergio Cabral, who cried  publicly when the measure was approved, rallied a reported  50,000 or more people last week to protest the step, which  would cost the state at least 4 billion reais ($2.2 billion) a  year and, he said, harm its ability to host the 2016 Olympics.

Huge posters condemning the “cowardice” of the amendment  have sprung up around Rio, including on the iconic Christ the  Redeemer statue overlooking the beach-side city.

While the controversial amendment will struggle to survive  Brazil’s Senate and Lula’s veto power, it has opened a  Pandora’s Box as non-producer state politicians see a chance to  bring home an oil bounty for voters in an election year.

“The field is fertile for demagogues,” wrote columnist  Miriam Leitao in the O Globo newspaper, adding: “The field was  plowed by the government.”

The new offshore oil fields were found in 2007 and could  hold more than 50 billion barrels.

Lula, a popular former union leader who cannot run for a  third straight term at the election in October, says the oil  wealth can put Brazil on a  fast track to wealth and social  equality,

He wants Congress to quickly pass four bills that would  overhaul the previous model of oil extraction to give the  government more control over the reserves and create a fund to  invest in education and health.

Congress’ approval of the bills would help ruling party  presidential candidate Dilma Rousseff, Lula’s chief of staff  and choice to succeed him.

But the prospect of oil wealth for all has emboldened  national legislators to question why Rio, Sao Paulo and  Espirito Santo states should get the lion’s share of tributes  from oil companies.
“There aren’t any producer states. At most, they have a sea  view, which is very privileged,” said Ibsen Pinheiro, a deputy  from Rio Grande do Sul state who co-authored the amendment,  which would apply to existing and future oil production.

The government had proposed discussing the distribution of  royalties after Congress passed the oil reform bills, but was  unable to vote down the amendment.

Rio is by far the biggest beneficiary under the current  system, receiving 70 percent of the royalties and more than 90  percent of a special participation tax, which oil companies pay  based on the volume produced. The government of the state,  which produces 85 percent of the country’s oil, raked in 4.9  billion reais in oil revenues in 2009, which would collapse to  less than a quarter of a billion reais under the new law.

STRUGGLE FOR CONTROL

Lula now faces a struggle to control the forces let loose  by the bills, which were passed by the lower house and now need  approval by the Senate before he can sign them into law.

By upholding a change in distribution, Lula could risk  alienating his Rio ally Cabral and losing votes for Rousseff in  the country’s third most populous state. Rejecting the changes  could also have a cost by antagonizing many legislators and  possibly losing Rousseff support in non-producer states such as  Minas Gerais and Rio Grande do Sul where she has roots.

The dispute has carved divisions within the PMDB party, the  main coalition partner of Lula’s leftist Workers’ Party.

“This bill was obviously something you could not send to  Congress in an electoral year, even less with the urgency  requirement that it be voted within three months,” said Bolivar  Lamounier, an independent political consultant in Sao Paulo.

“Unless Lula finds a way out, this may deepen.”

The opposition, which is expected to struggle against  Lula’s huge popularity and a rebounding economy in the election  campaign, has majorities in key Senate committees and is likely  to try to use the royalty conflict to block the bills.

But Lula still has scope to push a compromise in the Senate  and get the bills passed by June or July, when legislators’  attention turns to the soccer World Cup and the election  campaign, said Christopher Garman, chief Latin America analyst  at the Eurasia Group consultancy in Washington.

Lula’s approval ratings of over 80 percent give him  “kingmaker” status and he is likely to use that to nudge  senators into supporting the government, he said. Still, the  government may have to agree to pay from central coffers to  appease non-producing states, perhaps by decentralizing revenue  from the planned Social Development Fund.

“Lula’s not going to pay a political cost for this,” said  Garman, who gives the reforms around a 60 percent chance of  winning approval.

“The overarching message here is that you have a new oil  reform, you have greater rents extracted from new production  and you channel that to (an election message of) ‘the oil is  ours’… it’s a political home-run.”