Fault lines exposed in Brazil’s local content row

Industry groups and oil players clash as debate enters key month for country’s stalled sector

Brazil’s oil sector has entered a decisive month in terms of local content as policy makers try to kick-start the country’s stalled industry and lay foundations for more sustainable growth.

The debate has exposed a fault line between industry asssociations, pro-industry officials and trade unions on the one side and oil companies and Finance Ministry officials on the other.

A special committee, involving top officials from several Brazilian ministries, was due to meet as Upstream went to press and was said to be edging closer to a decision on local content rules governing licensing rounds planned for later this year.

The committee, known by its acronym Pedefor, was split between one side advocating a broadly stated local content requirement of up to 40% and another in favour of keeping several different categories, each with its own minimum percentage requirement.

The first camp believe that the way forward is through a much more flexible policy that places efficiency and higher oil output among its prime objectives.

The second group leans toward maintaining a segmented approach to give Brazilian industry closer support on the road to become globally competitive.

Some industry groups have been lobbying hard to keep at least five different categories of local content — covering goods, services, engineering, auxiliary systems and infrastructure.

One area of apparent concensus is that Brazil will move away from a system where bidders can score points by offering local content percentages, which critics say has led to some ill thought out commitments and a backlog of penalties.

This emotionally-charged debate over local content has run so long that it has begun to put aspects of Brazil’s ambitious licensing round plans in doubt.

Four such events are planned in 2017, and for two of them — a planned offering of exploration concessions and one of two promised offerings of pre-salt acreage — the rules on local content are not yet in place.

Petrobras has tried to go on the offensive, telling members of the Pedefor committee that 36 billion reais ($11.6 billion) would be lost to public purse between 2014 and 2021 because of late deliveries of pre-salt production platforms with very high local content and the subsequent impact on investment plans.

The culprits include six “replicant” floating production, storage and offloading vessels for the Lula field and four units that will eventually be deployed on Buzios.

In its report, submitted to a government committee on local content, Petrobras highlighted the case of the P-70 and P-71 FPSOs that are now due on stream in 2019, three years late.

Studies on Brazilian costs and competitiveness by IHS Energy were quoted by Petrobras in its waiver claim for local content on the Libra project, but also found their way into the Brazilian press.

One report claimed that streamlining the rules could help boost Brazil’s production by 1 million barrels per day by 2025 and increase investment by 40 billion reais.

In this scenario, the report suggested, 7 billion reais would still be spent locally.

Brazilian machine industry association Abimaq responded with its own document, claiming that pulling the rug on local content policies would throw another 1 million Brazilians out of work.

Abimaq also complained that Brazil’s complex and onerous tax regime was the main reason local companies struggled to compete.

This particular gripe is likely to surface again next month if Brazil fulfils its promise to extend a long-running tax loophole that shields imported oil sector equipment from taxes that would otherwise cause the industry to grind to a halt.

Appeals for simplification and harmonisation of the tax system have so far fallen on deaf ears.

“The Brazilian capacity to get stuck in a rut on certain themes is breathtaking. The local content debate has been stuck in the same mould since the pre-salt discoveries. It’s as if we face a choice between two extremes,” said David Kupfer, director of the energy institute at the federal university of Rio de Janeiro, who also heads a thinktank on competitiveness.

Kupfer suggested dropping the highly prescriptive local content tables used by Brazil over the past decade and basing a new policy that allows investors to enjoy considerable freedom over what they spend locally.

“We can see the errors of past strategies, based on the carrot of huge demand and the stick of penalties,” he said.

Nevertheless, Kupfer spoke optimistically about Brazil’s capacity to develop internationally competitive segments.

“Brazil has the scale to allow local industry to close the gap to attain international standards of efficiency,” he said.