UPDATE 1-Brazil oil states ratchet up protests over royalty cuts
* Protesters block oil-region airports in Rio de Janeiro
* Politicians urge suspension of oil-field eco licenses
* Royalty dispute could hurt oil-rights auctions -assn
RIO DE JANEIRO, March 8 (Reuters) - Brazilian oil-producing states retaliated on Friday against multibillion-dollar cuts made by Congress to their oil royalties with a wave of protests and threats to cut off most of the country's oil output.
The actions threaten to poison relationships between Brazil's states, saddle oil companies with losses and complicate efforts by President Dilma Rousseff to forge political alliances needed to pass legislation in the last 17 months of her term.
Airports in Campos and Cabo Frio, Brazil, key bases in Rio de Janeiro state for helicopter service to offshore oil platforms in the Campos Basin, were blockaded for up to six hours on Thursday, preventing oil workers from boarding flights to drilling rigs and production platforms.
The airports are now working normally, airport officials said. Flights to Petrobras' installations will be fully back to normal on Saturday after the protest, state led oil company Petroleo Brasileiro SA said in an e-mail response to Reuters.
Rio de Janeiro Governor Sergio Cabral ordered the suspension of all the state's payments - except for legally mandated public employee salaries and transfers to municipalities - after Brazil's Congress ruled on Thursday that new royalty sharing legislation should apply to existing oil agreements, which could mean a loss of 3.1 billion reais ($1.59 billion) in his state's income this year alone.
Thirty-four congressmen from Rio de Janeiro have signed a letter calling on Cabral to suspend all state environmental licenses related to oil production, Rodrigo Bethlehem, one of the congressmen said in an interview on the CBN Radio network.
"Royalties are compensation for the impact of resource extraction," he said. "Those licenses were based on a certain level of royalties that no longer exist and we would have to look at new guarantees for environmental impacts."
If the licenses were suspended, related oil production could be forced to stop. In January, Rio de Janeiro accounted for 1.7 million barrels day or 67 percent of Brazil's oil and natural gas equivalent output of 2.53 million barrels a day. In 2012 the state received 71 percent of all royalty payments to state and municipal governments.
ROUSSEFF VETO OVERTURNED
The airport protests, payment cut-offs and proposed reprisals come after Congress overrode a presidential veto of parts of the new Brazilian oil royalty bill.
The bill, part of a 2010 oil reform aimed at using giant new offshore oil reserves to improve social conditions in the country, redistributed oil and gas royalties more equally among the country's 27 states and 5,560 municipalities.
Producing state royalties will be cut in half to 20 percent of total payments by 2019 while producing cities will see their share shrink to 4 percent from 10 percent.
While conceding that the congress could redistribute future oil royalties any way it wanted, Rio de Janeiro and neighboring Espirito Santo states, which produce 83 percent of Brazil's oil and gas, objected to the reduction of royalty payments from existing oil field concessions.
Rio de Janeiro legislators have also said they may seek to reduce royalties to states such as Minas Gerais and Pará where much of the country's iron ore and other minerals are produced.
President Rousseff is trying to draft changes to the country's mining code considered essential to channel soaring mining income to economic development and boost output of metals and fertilizers needed by Brazil's growing agriculture industry.
Many states promised a percentage of oil royalties in debt renegotiations with the federal government a decade ago and taking away the existing royalty stream breaks a contract with federal authorities, producing states say.
Taking those existing revenue streams away will cripple state finances and make it hard for Rio de Janeiro to pay for infrastructure needed for its role in the 2014 soccer World Cup and 2016 Olympics, Cabral has said. State legislators are threatening to raise taxes on oil companies.
That alleged breach is unconstitutional because it alters existing agreements and commitments, Cabral and other governors say, a legal theory Rio de Janeiro, Espirito Santo and Sao Paulo state plan to present to Brazil's Supreme Court.
It will also reduce interest in three oil-rights auctions planned for this year, said João Carlos de Luca, president of Brazil's IBP, the national oil producers association, and Adriano Pires, head of the Brazilian infrastructure institute, a Rio de Janeiro energy think-tank.
The first auction, scheduled for May 14 and 15 will be the first in the country in five years and is considered essential to help oil companies renew exploration leases and secure long-term access to Brazilian production.
"Rio is going about this all the wrong way, punishing the oil industry instead of taking it to the courts," Pires said. "If this happens Rio will lose jobs and investment."
It was not clear on Friday if Rio de Janeiro's order on Thursday to suspend all unessential payments would include debt payments to the federal treasury or just suppliers and contractors. Economists and federal officials contacted by Reuters said the state has little leeway to apply pressure by halting payments because many of its expenses are considered obligatory by law.