Petrobras Wants Local Content Changes

By Leo Byrne, Contributing Reporter

RIO DE JANEIRO, BRAZIL – Brazil’s majority state owned oil giant Petrobras last week officially requested that regulators relax strict requirements on “local content” laws. The term refers to the use of domestic goods and services, and Petrobras has requested changes before the next bidding rounds for new oil and gas exploration concessions in May.

As it currently stands, Brazil has some of the most demanding local content laws in the world. Awarded contracts will require that activities in the exploration phase use between 37 and 85 percent local goods and services, while those in the development phase will have to use between 55 and 80 percent.

Onshore exploration will be subject to yet more stringent content laws, while activities in deep water have more relaxed constraints, due to their more technically demanding nature.

“The minimum percentages of local content for the cited items and sub-items cannot be met by the national supply chain,” the company said in its request to the ANP, Brazil’s oil and gas regulator.

Specifically the oil giant was asking for a reduction for local goods and services on 34 items pertaining to both offshore and onshore exploration and development. Both the ANP and the ministry of mines and energy reacted negatively to the request according to reports.

Such rules are an attempt to keep revenue and cash flow generated by the commercialization of the pre-salt reserves within Brazil. However, critics and analysts have long been concerned that the high percentage of local goods and services required in concession contracts have the potential to stifle supply, and create bottlenecks and inefficiencies.

“Logically it would be cheaper to build and do things locally, so it’s a good idea for governments to focus on local content. However, Brazil is struggling at the moment with too many projects at one time,” Bob Fryklund, VP of energy research at IHS told The Rio Times.

“You have to look at it from a cost, capacity, and time standpoint, it’s what I call mega project disease and it’s not unique to Brazil. If you magnify it to the scale of what Petrobras is trying to do, it’s a daunting task,” Fryklund explained.

Petrobras’ request is indicative that the besieged company is concerned about further supply hold ups. The oil giant is currently attempting to weather a storm caused by stalling production from mature fields while at the same time battling artificially low prices at the pump.

Amid the tumult the company also announced that it was moving the production of four new rigs outside of Brazil. Although it was originally planned to take place locally, worries over domestic shipyards being unable to meet deadlines meant that the four tankers will now be converted to FPSOs (floating production, storage and offloading unit) in China.

Petrobras denied however that it was attempting to circumvent local content laws as the work constituted only a small percentage of the value of the contract.

The tight supply on everything from rigs and pumps to skilled labor will certainly make things more difficult for Petrobas as the first concession auctions since 2008 approach. The company recently saw its stock fall to a seven year low after the Grupo BTG Pactual cut its rating on the oil giant from buy to the equivalent of hold.