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An offshore oil platform sits over Tupi field in Santos Bay off the coast of Rio de Janeiro, Brazil, Thursday Oct. 28, 2010.

Felipe Dana/AP

Brazil's government presented a plan Wednesday for divvying up oil royalties among states, a crucial step in advancing its effort to tap deepwater reserves it hopes will turn the country into a major crude exporter.

President Dilma Rousseff hopes to resolve a dispute among states scrapping for control of oil revenue, an impasse that could deteriorate into an ugly legal battle that would further stall the development of oilfields.

Government leaders hope to hold new auctions for deepwater fields by the second half of 2012. It would be the first such offer since 2007. But that will depend on the government's ability to broker an agreement on royalties between a handful of oil-producing states and non-producer states who say they deserve a share of the proceeds.

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The administration's proposal would cut the amount of royalty revenue received by the federal government to 20 per cent of the total by 2020 from 30 per cent now, while the non-producer states' cut would jump more than ten-fold to 23 per cent in the same period.

In a sign of tough negotiations ahead, Henrique Eduardo Alves, leader of the government-allied PMDB party in the lower house Chamber of Deputies, immediately said the proposal would not meet the demands of non-producer states.

Producer states, which under the plan would see their share of royalties slip to 25 per cent from 26.25 per cent as of 2012, were also displeased.

"They didn't like it, but we're moving forward," said Senator Delcidio Amaral of the ruling Workers' Party.

Oil producer states such as Rio de Janeiro, where most of Brazil's oil is produced, say they should continue receiving the lion's share of royalties and taxes from the sector.

Since the discovery of the massive deepwater reserves, non-producer states -- which include the poorest in the country -- have insisted they be given a greater share of the proceeds from the booming oil industry.

Brazil hopes to become one of the world's largest suppliers of crude oil outside the Organization of the Petroleum Exporting Countries by developing the so-called subsalt region, which is believed to hold more than 50 billion barrels of oil.

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Former president Luiz Inacio Lula da Silva called the reserves a "gift from God", and many Brazilians believe oil will be crucial to helping ease poverty and spur economic development.

Brazil held an auction in 2006 for blocks including some in deepwater areas, but a legal challenge interrupted the process. The government launched another auction in 2007 but withdrew the blocks in the subsalt region after huge oil reserves were discovered there.

Brazil approved regulations in 2010 to increase state control over the reserves and boost its income.

Mr. Lula vetoed a provision of that law that would have distributed royalties equally among all states. Congress is slated next month to vote on overriding that veto, possibly unleashing a protracted legal battle.

Some proposed solutions have included increasing taxes on existing fields so more income can be distributed. State oil giant Petrobras, by far Brazil's largest oil producer, has vowed a legal challenge to any such measure.

The new framework approved last year created a production-sharing system for future subsalt projects in which companies share part of the oil they produce with the government. Oilfields currently being developed operate under a concession system.

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