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Petrobras faces fresh think on contract strategy after ANP ruling

Hydrocarbons regulator grants only a partial waiver from onerous local content requirements

Petrobras may be forced to rethink its contracting strategy for a floating production, storage and offloading (FPSO) unit for the Libra pre-salt field development after Brazil’s hydrocarbon’s regulator (ANP) granted only a partial waiver from tough local content requirements.

The Petrobras-led Libra consortium submitted its waiver application in August 2016, one year after tendering for a chartered FPSO, complaining that prices were "excessive" due to highly prescriptive local content requirements averaging around 65%.

Brazilian oil industry associations rejected this charge, claiming that the supposed 40% overprice was anomalous due, in part, to the soaring country risk attaching to Brazil during the infamous Car Wash corruption scandal.

Petrobras launched another tender, with local content averaging less than 15%, and the Libra consortium has been waiting for the ANP to evaluate the claim for waiver since then.

Japanese floater specialist Modec International submitted the lowest bid in the new tender - understood to be almost $700,000 per day - but a Brazilian court ruled that the parties could not sign the contract until the waiver claim is concluded.

The decision, announced on Wednesday this week, granted full waiver on a small list of items relating to the hull and a few elements of topside plant, namely tanks, flares, turbines and gas compression.

On a much longer list of topside items, the ANP issued recommendations for lower minimum rates of local content than those included in the production-sharing contract governing Libra.

The rates fell significantly in some cases including, for example, allowing valves to be supplied at a new local content rate of 35%, electrical systems at 23% and module fabrication at 48%.

In the category of basic engineering and detailed engineering, the waiver request was rejected outright. Other categories where rates were left unchanged included management of topside integration (80%) and moooring systems (85%).

The local content requirements in the waiver decision are significantly higher than contained in the Petrobras tender apparently won by Modec

"Petrobras will now have to decide whether to tender again in line with the new local content rates,” said one source.

Luis Guilheme de Sa, commercial manager with Techint’s offshore arm in Brazil commented: "This result was very positive, it shows that the waiver was grounded upon proper technical analysis. This is a major step forward and a victory for local industry,” he said.

Another option for Petrobras, however, is waiting for the ANP to issue its new resolution which can allow access to systematically lower rates, applied retroactively.

Earlier this year, the agency took an expansive approach to the task of fleshing out the rules on waiver, proposing a solution for the whole period since 2005, when mandatory local content requirements soared to between 55% and 65%.

The regulation would leave operators with the choice of either sticking to the original contractual terms and — if necessary — applying for a local content waiver, or signing a contractual addendum that commits the parties to new lower local content requirements. The latter path would leave no future option for seeking a waiver.

The draft resolution suggests following the new mimimum local content requirements used in Brazil’s recent 14th licensing round.

Local content requirements range from 18% during exploration and, in the production phase, 25% for both wells and the offshore production unit, with a higher rate of 40% for the subsea gathering system, where Brazilian industry is more competitive.

The agency held a public hearing on Tuesday to debate this proposed resolution, but the proposal is due to enter into law on 13 November.