Is the tide about to turn for Brazil’s local content rules?

For more than 10 years, international oil and gas companies looking to do business in Brazil have been hamstrung by the challenges thrown up by the country’s local content policy.

But is that about to change?

Brazilian Senator Jose Serra recently stated that he expects a vote to reduce the local content rules to occur in September, alongside a proposed easing of pressures on national oil company Petrobras from having to take a 30 per cent stake in all new projects on the sub-salt polygon region, including the giant Santos and Campos basins.

A vote this month would precede both the country’s 13th licensing round on October 7th and the presidential elections in October, so it is unlikely that any changes would be seen in the immediate future.

But Senator Serra’s comments reflect a growing desire within the Brazilian business community for a change to the way the country runs its oil and gas industry, against the desire from some senior political figures, including President Dilma Rousseff, to keep the local content rules.

Even the hint of a removal of these rules should provide a significant alert to oil service companies throughout the world to the potential for new business in this oil-rich country.

To recap, Brazil’s local content policy was first introduced with the fifth licensing round in 2003 at a time when the economy was experiencing a healthy three per cent growth.

Under the rules, in contractual commitments, embedded in concession contracts such as oil licences, oil companies must obtain a minimum percentage of equipment and services from local suppliers.  The extent of that commitment can vary; for example, it has reached 95 per cent and still runs at in excess of 60 per cent on Petrobras projects.

The aims of these rules were to help the development of a strong local supply chain, and there is no doubt that this sector has benefitted considerably from Brazil’s oil industry growth over the past 12 years.

But in many cases, the need to use local suppliers has led to bottlenecks and project delays and in an industry where time equates directly to money, this has often held back project development.

When oil was at $100 per barrel plus, international operators were prepared to bend and twist over and through such local content hoops and hurdles as the Brazilian government placed in front of them. But the double whammy of the global downturn in the oil price, coupled with Brazil’s operation car wash corruption scandal, make acceptance of the local content rules even more difficult to tolerate for the international community.

Earlier this summer, Petrobras announced a significant downward revision to its oil output by 1.4 million barrels per day to 2.8 million bpd by 2020. The 39 companies registered so far for the 13th licensing round has been described as a ‘pretty satisfactory figure’ by the ANP but is well short of the 72 that went through qualification in 2013.

The Brazilian industry is in need of an uplift. The abolition of local content rules would seem to satisfy the demands of the industry in Brazil and would provide greatly enhanced opportunities for international oil service companies to exploit. But will business common sense win out over political dogma? Only the people of Brazil can decide.

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