UPDATE 2-Brazil Sao Francisco Basin shows natgas in all wells -regulator

* Petrobras, Shell, BG, Vale seek gas in Sao Francisco

* Natgas could slash energy costs in key Brazil state

* Petrobras preferred shares jump, first gain in 3 days

* Oil royalty vote unlikely before election, Chambriard says

By Leonardo Goy

BRASILIA, July 11 (Reuters) - Oil companies are finding signs of natural gas in all the wells drilled in Brazil's Sao Francisco Basin, a landlocked petroleum frontier in the country's Minas Gerais state, Magda Chambriard, director-general of Brazil's petroleum regulator, ANP, said Wednesday.

There are "no dry holes" in the Sao Francisco Basin, Chambriard said during a Senate hearing in Brasilia. "They all show signs of gas."

Brazilian electricity costs are among the world's highest. Cia. Energetica de Minas Gerais, or Cemig , the utility that controls natural gas distribution Minas Gerais, said in June that development of gas there could cut energy costs for the state, Brazil's most important mining region and a key manufacturing and agricultural state.

Companies with leases to explore for and produce gas in the Sao Francisco basin include Brazil's state-led oil company Petrobras, Britain's BG Group Plc., Royal Dutch Shell Plc. and Brazil's Vale SA, the world's second-largest mining company.

Petrobras preferred shares, the company's most-traded class of stock, rose 1.58 percent to 18.67 reais, its first gain in three days.

Vale, which is in the process of selling most of its oil exploration lease stakes, has said it is likely to keep its natural gas assets.

Mining requires large amounts of energy in the form of heat and electricity and Vale is one of Brazil's top energy customers.

Minas Gerais produces nearly 15 percent of the world's sea-borne iron ore exports and is home to some of Brazil's largest steelmakers, such as Usiminas and carmakers such as Fiat SpA.

It also grows 50 percent of the coffee in Brazil, the world's largest coffee producer.

OIL ROYALTY, AUCTIONS

Brazil's Congress is unlikely to vote on a new oil and gas royalty system until after municipal elections in October, Chambriard said.

Many in Congress want to spread the royalty payments around to all the country's 27 states and more than 5,500 municipal governments rather than concentrate them in states where the oil is produced.

Producing states such as Rio de Janeiro and Espirito Santo are home to more than 80 percent of Brazil's output of oil and natural gas. In 2011, Rio de Janeiro earned 10.7 billion reais ($5.26 billion) in royalty and windfall profits taxes, according to the ANP.

Without this money, Rio de Janeiro will have difficulty paying for police, social programs and urban improvements scheduled for Brazil's 2014 Soccer World Cup and Rio de Janeiro's 2016 Olympic Games, according to Governor Sergio Cabral.

Chambriard also said the next, or Brazil's 11th, round of oil lease auctions would only be announced after the royalty issue is settled.

If an 11th round is successful, the ANP hopes to hold a 12th round soon after, offering areas in the states of Acre, Piaui, Mato Grosso and Parana, states where the ANP has increasing expectation oil will be found thanks to new oil surveys.