Since the discovery of the huge pre-salt reserves in 2006, Brazil
has been experiencing an energy boom which, in the words of one
analyst, will make Brazil an oil power by the end of the decade
with production in line with that of Iran. In what is fast becoming
one of the largest offshore markets in the world, international
companies are queuing-up to get a slice of the action. Overseas
service companies and suppliers, particularly in the offshore and
subsea sectors, are looking to capitalise on growth in demand for
their products. Additionally, as a sign that things are continuing
to heat-up in the sector, Petrobras, which in 2010 was ranked as
the second most profitable company in the Americas, recently bucked
the international trend for slashing budgets by announcing the
largest investment plan in its history, US$224.7 billion planned
for the period between 2011 and 2015.
However, an essential factor for operators and suppliers to
consider when entering this promising market is “local
content”. This refers to the requirement for operators to
procure a minimum proportion of goods and services for exploration
and production from local sources. These rules affect operating
companies when bidding for licences and suppliers selling into the
Brazilian market.
The Brazilian Petroleum Agency (ANP), which regulates the oil and
gas industry and runs the licensing rounds for oil and gas
concessions states that its objective is “to maximize the
content from the national goods and services industry, on a
competitive and sustainable basis, in the implementation of oil and
gas projects in Brazil and abroad.”
1. LEGAL FRAMEWORK
Since the first competitive licensing round for oil
and gas in Brazil in 1999, the concession agreements have included
a clause requiring concessionaires to ensure preference to
Brazilian suppliers if their proposed price, delivery schedule and
quality conditions are at least as good as competing
suppliers. This requirement is found in many concessions and
production sharing agreements around the world, and particularly in
developing countries. The concessionaire is also required to
keep track of appropriate Brazilian suppliers and ensure they are
invited to tender on equivalent terms to their non-Brazilian
competitors.
In addition, concessionaires undertake in their
concession agreements to procure a specified minimum percentage, by
value, of goods and services from local sources. Competing
bids for oil and gas concessions are evaluated on a points system,
with points awarded according to the level of bidders’
proposed signing bonus, minimum exploration programme and local
content undertaking. The bidder for a particular block that
receives the most points will be awarded the concession agreement
for that area. Since the seventh licensing round, 40 points
have been awarded for the signing bonus, 40 points for the minimum
exploration programme and 20 points for local content.
In the first five licensing rounds, the bidding
rules did not specify a minimum level for local content.
Bidders could propose any local content percentage they wished, but
higher bids would accrue more points and a consequent
advantage.
The 6th licensing round introduced a prescribed
minimum local content percentage, which varied depending on whether
the block was on land, in shallow water or deep water. The
7th licensing round also introduced a maximum percentage, so that
bids will not accrue more points for specifying a local content
percentage above the maximum level.
Bidders are required to specify a separate local
content percentage for the exploration phase and the development
stage. The range of acceptable bids is higher during the
development stage and this element attracts more points for the
purpose of evaluating bids (Exploration - 5 points / Development
– 15 points).
In addition to specifying an aggregate local
content percentage, the current licensing regime requires each
operator to specify a separate local content percentage for
particular categories of goods and services (items and
sub-items). The tender protocol for each bidding round sets
out separate minimum local content percentages for each of these
items and sub-items. By way of example, some of the minimum
local content percentages in the most recent (10th) licensing round
were 40% for seismic interpretation and processing, 90% for
drilling rig chartering, 95% for engineering of process plant and
100% for well lining.
Concessionaires may request a waiver or amendment
of their local content undertakings in relation to the procurement
of specific items or sub-items in certain limited circumstances
(e.g. where bids for the supply of local goods and services are
excessively high or could result in delay to the development
schedule, or where new technology that was not available at the
time of the licensing round is only available from non-local
suppliers). However, no such waiver or amendment will affect
the aggregate local content percentage. The concessionaire
will have to make up the shortfall of local content in a particular
item or sub-item by exceeding its local content obligation in
relation to other items or sub-items.
If, at the conclusion of the exploration phase or
any development stage, a concessionaire has not satisfied its local
content obligations, it will be liable to pay a fine of between 60%
and 100% of the non-realized local content percentage.
3. CERTIFICATION REGIME
The detailed rules for calculating local content
are set out in a rulebook published by the ANP (Cartilha de
Conteúdo Local – ANP Resolution No.36 dated 11.13.2007,
Annex III
To qualify as local content, products must not only be acquired
locally, they must be manufactured locally. The value of
imported and domestic inputs for each product or service are
calculated to arrive at a percentage. The rules also deal
with applicable exchange rates and how taxes and freight charges
are taken into account.
In order to prove compliance with the local content
rules, the concessionaire must obtain local content certificates
from each of its suppliers at the time of purchase.
Certificates are awarded by ANP-accredited certification
agencies and follow a prescribed format and state the
local content percentage of the product or service being
supplied.
Concessionaires must request their suppliers to
provide the required certification, but suppliers may obtain prior
certification of their goods on their own initiative. For
products that are standardized and produced in series, suppliers
may reuse a certificate on subsequent sales of the same
product. In order to do so, there must be no change of
specification, composition or means of production and the certified
local content value must not have changed by more than 10%.
Upon the supply of such goods, the supplier must attach to the
local content certificate a statement of integrity confirming that
the goods conform to the original certification.
To allow the ANP to monitor this process,
concessionaires must submit quarterly investment reports to the ANP
setting out, in a spreadsheet, the local content percentages of
items and sub-items procured (and certified) in that quarter, as
well as the cumulative local content percentages.
Certification agencies, likewise, are subject to periodic
audits.
4. IMPLICATIONS FOR OPERATORS AND SERVICE
COMPANIES
For the purpose of bidding in Brazilian licensing
rounds, oil companies should have a clear idea of what their
exploration and potential development requirements might be and
their ability to procure the necessary goods and services from
Brazilian sources. This is increasingly important in the
current environment, where Petrobras’ huge requirements for
its sub-salt developments are widely expected to lead to a supply
crunch in various sectors of the offshore supply market.
Failure to meet local content undertakings may
result in serious fines being imposed, whereas failure to specify a
high enough local content percentage may be prejudicial to a bid
for a concession. On the other hand, if operators are able to
line up local suppliers in advance for the high value components of
their exploration and development budgets, they may feel confident
to bid a higher local content percentage and gain a consequent
advantage in the bidding process.
From a potential supplier’s perspective, it
is important to consider the advantages, in terms of
competitiveness, that may result from supplying products with a
high local content. In particular, every supplier to the
Brazilian market should be aware of the minimum local content
percentages for their particular products under the various
licensing rounds.
In some cases, these local content requirements may
make continued importation of raw materials, components or products
into Brazil unsustainable. On the other hand, Brazil’s
rapidly growing offshore oil and gas industry may justify some
suppliers moving production to Brazil or reconsidering their own
supply options.
Updated October 2011