Brazil's oil industry seeks reductions in local content rules


Brazil's oil industry seeks reductions in local content rules


RIO DE JANEIRO -- Petrobras has formally asked regulators to ease strict requirements on the use of local goods and services ahead of a crucial bidding round for new oil and natural gas exploration concessions.

Petrobras asked Brazil's National Petroleum Agency (ANP), to reduce the amount of local goods and services for 34 separate items related to offshore and onshore exploration and development. "The minimum percentages of local content for the cited items and sub items cannot be met by the national supply chain," Petrobras said in its request.

Brazil's 11th auction of oil and natural gas concessions, the first since 2008, is scheduled for May.

Petrobras, already struggling with flagging production and anxious to avoid further delays because of supply bottlenecks at home, filed the request as part of public input into the tender contract to be issued ahead of the auction.

The request is "evidence of how tight the local supply chain is" Credit Suisse said in a research report. While supply troubles add to the strains Petrobras faces as it invests heavily to boost crude oil production, the request to reduce local content requirements shows the company is actively trying to solve the problem, Credit Suisse added.

Changes to the amount of local goods and services used by oil companies could mean billions of dollars in revenue for Brazilian firms as well as oilfield services companies around the world. Easing the requirements could help speed development of massive oil fields discovered off Brazil's coast by avoiding bottlenecks in the country's nascent oilfield services industry, which is struggling to meet demand for everything from drilling rigs to pumps and valves.

Petrobras plans to invest $237 billion through 2016, and the concession auctions should lead to more investments by Petrobras and other oil companies as they start to develop the new acreage.

Brazil's government wants to channel that cash to local companies or at the very least local units of multinationals. The government wants to develop the country's oilfield services sector in lockstep with recently discovered offshore fields, creating a sustainable industry that could eventually export goods and services around the world. One of the primary ways to do that is by requiring, via concession contracts, that oil companies in Brazil use a certain percentage of local goods and services.

But the requirements are weighing on the industry. Petrobras confirmed that it will start work on four oil platforms in China instead of Brazil, as originally planned, because of delays at local shipyards. The company denied that the change meant local content rules wouldn't be met, saying that "the index of contracted local content is immutable, and Petrobras is not trying to alter it."

Jose Antonio de Figueiredo, Petrobras's Engineering Director, said the move was made "to guarantee that the production curve will not be compromised." Petrobras is working furiously to boost output amid production declines at mature fields. Petrobras said it was unlikely to boost crude oil production this year because of maintenance shutdowns at aging offshore platforms.

Some suppliers also recognize that Brazil's services industry is having trouble meeting demand. Associaçao Brasileira da Industria de Tubos e Acessorios de Metal (ABITAM), a local trade group, also asked the ANP to reduce the amount of local content in onshore drill casings to 95% from 100%. "None of ABITAM's suppliers can meet demand for 100% minimum local content for this subitem" the trade group said.

Last week, at a public hearing on the 11th round, ANP officials ignored the requests, saying local content rules for May's auction will be kept at the same levels as the country's last concession auction in December 2008. Contracts will demand between 37% and 80% local content for the exploration phase and between 55% and 85% for the development phase, with lower requirements for deep-water offshore blocks and higher requirements for onshore blocks. The concession contract will be published in March 2013.

Dow Jones Newswires

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