Brazil’s oil sector hopes for the best

New local content rules and an attempt to reduce the country’s huge glut of lawsuits are encouraging steps in the right direction

Brazil's oil sector may have lost some of its brio in recent years, but there are signs of progress and a rise in interest among operators and investors.

Recent expectations about a rapid shift toward more business-friendly policies were probably running too high.

Brazil’s 1988 constitution is a feeding ground for interest groups and their lawyers, demanding willingness to negotiate, and a generous dose of patience.

Interest groups have been resorting to the courts in their efforts to oppose some of the changes now taking place.

Trade unions have argued that administrative law requires state-controlled Petrobras to use inclusive and transparent procedures in order to sell off assets, while associations representing shipyards and machine industries apply similar arguments to challenge tender processes for big offshore projects, such as the floating production units for the Libra field.

Rio’s greatest musical genius Tom Jobim once warned that “Brazil is not for beginners” and investors sometimes balk at the leap of faith that it seems to demand, with its legal and institutional complexities. Red tape and legal delays can take on a life of their own in Brazil.

Brazilians have become much less convinced by arguments in favour of monopolies or domestic champions and, disgusted by corruption, are unimpressed by calls for protectionism.

Officials and regulators believe that they now have a mandate for creating a more dynamic and diverse oil sector. The tide may now be turning away from protectionism and obstructionism, hopefully with important lessons learned.

The new local content rules announced last week — although still to be debated and approved — seem eminently sensible and were a step forward, reducing overall requirements and leaving ample space for working effectively and competitively with local capacity.

For its part, Petrobras management seems to have absorbed the message that its procurement and asset sale procedures need to include mechanisms that guarantee acceptable levels of transparency, competitiveness and good governance.

By seeking to co-operate with the federal audit tribunal in improving its procedures, Petrobras is likely to bolster its own legal arguments in the courts. This was seen last week when a federal court lifted an injunction that was blocking Petrobras’ sale of the Suape petrochemicals complex and the Citepe textiles complex to Mexico’s Alpek.

What investors would really like to see, of course, are deeper structural reforms that would tackle such uncertainty. A new Civil Procedure Code (NCPC) which came into force in March 2015, offers hope for tackling Brazil’s excessive volume of ongoing lawsuits, numbering nearly 50,000 for every 100,000 inhabitants, compared with 5700 lawsuits per 100,000 citizens in the US, according to the Columbia Journal of Transnational Law.

The NCPC provides a new model for binding precedents and introducing mechanisms to suspend lawsuits turning on an established point of law.

Such changes will require much effort and adaptation by legal professionals, but they are encouraging.

In the shorter term, as Brazil attempts to push forward with ambitious licensing plans, the next priority is clear.

The Rio de Janeiro government seems hell-bent on turning to oil rents to help solve its financial crisis, but this could reduce interest in the licensing rounds.

The federal government would do well to tackle this issue head on and make it a key component of any debt-restructuring deal with the troubled state.