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Brazil cuts local content mandate for oil projects

23 Feb 2017 15:09 GMT
Brazil cuts local content mandate for oil projects

Rio de Janeiro, 23 February (Argus) — Brazil's government slashed the minimum percentage of locally sourced goods and services required for future upstream projects, a widely anticipated move that is expected to spark more interest in upcoming licensing rounds.

New simplified equations effectively reduce the local content mandate to around half of the level required in recent licensing rounds.

For onshore projects, the new minimum percentage is 50pc for exploration and production. For offshore projects, the mandate is 18pc for the exploration phase, 25pc for well construction, 40pc for collection and drainage systems, and 25pc for production units.

The new rules also lower fines for non-compliance, to 40pc of what was not achieved from 60pc under the old rules.

The rules will take effect starting in the 14th round scheduled for September, but will not apply to a second production-sharing round covering unitization areas in November. The minimum percentages for a separate second round for sub-salt acreage will match existing commitments for interconnected fields.

"This will bring opportunities to a number of foreign and domestic upstream companies in Brazil, having a minimum mandatory percentage that is completely feasible at competitive prices by Brazilian industries," energy minister Fernando Coelho Filho said today.

The industry has long complained that rigid local content rules thwart upstream development because Brazilian contractors and suppliers can be more costly and inefficient than their foreign rivals.

The rules are also seen as having helped to create the conditions that led to systemic corruption among contractors that are the focus of investigations in Brazil, and more recently across Latin America and parts of Africa.

"The new local content rules represent an important simplification and adaptation of the rules for the national industry supply capacity and will help to unlock investment, create jobs and foster greater competition in the 14th upstream licensing round," Brazil oil chamber IBP said.

State-controlled Petrobras, Brazil's largest oil producer, was not immediately available to comment on the changes.

Shell, Brazil's largest private-sector producer and one of the companies that has spoken out in favor of the changes, said it is still assessing their impact.

Local industry opposes the reduced local content mandate. "The changes are another example of the government succumbing to pressure from Petrobras and other oil companies. It moves more risk from the oil companies to local suppliers," a representative of Brazil's manufacturing association Abimaq tells Argus.

The new rules do not apply to existing projects, and still require the approval of Brazil's national energy policy council CNPE, which is expected to approve them as early as next month.