The effectiveness of Local Content Policy in the Brazilian Petroleum Sector | 5th ELAEE Conference

Grupo Economia da Energia Diana Martinez-Prieto

The effectiveness of Local Content Policy in the Brazilian Petroleum Sector

Diana Martinez-PrietoIAEE - AB3E - GEEIE

MSc. Industrial Economics, UFRJ, Brazil

BSc. Economics, Universidad Nacional de Colombia

E-mail: [email protected]

mailto:[email protected]


Index

Objectives of LCP and the international experience

Current Brazilian Local Content Policy in the petroleum sector

The effectiveness of the Brazilian Local Content Policy

Best practices to enhance the LCP in the Brazilian Petroleum Sector


Introduction

Without Local Content Policy (LCP),

operators tend to buy on global

market.

The more often used definition for

“Local Content” is the oil operators

value-added generation; starting

from equipment acquisition

produced by suppliers companies in

any location within the country

Source: NPD.


Canada

USA

Mexico

BoliviaBrazil

Venezuela

T&T

United Kingdom

Norway Russia

Algeria

Libya

Ghana

Nigeria

Angola

South Africa

Tanzania

Saudi Arabia

China

Australia

Indonesia

Malaysia

East Timor

New GuineaUganda

Ecuador

Colombia

IndiaOman

Kazakhstan

Iraq

Irão

Azerbaijan

Mozambique

The Local Content Policy has become a global drive of petroleum countries

Source: own elaboration.


Norway:Strengthten value-addedactivities (backward andforward linkages)

Nigeria:National recruitmentand training

Malaysia:Transform into a international hub for a petroleum services andequipments

Kazakhstan:Reduce economic dependence ofpetroleum industry(diversification)

However, the objectives of this policy are different


Brazil: Increase the participation of the

domestic industry on competitive bases Enhance national technological

development Enhance the level of national capabilities

and job opportunities


Local Content Policy evolution in Brazil

Procap 1000 (1986-1992)

Procap 2000 Procap Future

vision

Local Content Requirements9.478 Law: The LC is defined in a concession contract clause Creation of ANP

0 1 2 3 4 5 6 7 8 9 10

12

X% LC free defined

X% Min LC (by block’s localization). Creation of PRONIMP

20

13

20

08

20

07

20

06

20

05

20

04

20

03

20

02

20

01

20

00

19

99

19

98

19

97

X% LC maximum

Certification system- booklet

20

09

20

10

20

11

20

12

Bidding Rounds

1939? - 1960 1970 - 1980 1990 - 2000

Most of materials and equipments were purchased

abroad

Import substitution of materials and

equipments Economic Open

Law 12.351: LC in the production sharing system

Pre-Sal

ANP Res. No. 36, 37, 38, 39

1953: Petrobras1957: IBP

INOVAPETRO

20

14

20

15

20

16

20

17

* Procap 2000 (1993-1999).


Procap2000*

The auction notice and the agreement present differences between production sharing system and concession system (Pre-Salt area VS. other offshore and onshore areas)


How is the Local Content Policy in the Brazilian oil industry?

The regulation of the oil industry

in Brazil has been characterized

by a strong emphasis on

promoting Local Content, but it

introduce different issues that

could represent risks for the

investments.

Source: Oxford Analytica.


The Brazilian Local Content process in the petroleum sector

Offers and assessment

criteria

Submission of offers in the tender protocol of auction Signing of the concession agreement

Certification

Exploration Phase LC Certification Development Phase LC Certification

Fiscalization

Fiscalization Fines Enforcement


Commitments of Local Content in Brazil (concession system)

Average Local Content in Brazil(2000-2013)

LC offers and assessment criteria

Submission of offers in the tender protocol of auction

Signing of the concession agreement


The LC is part of the offers assessment criteria (20%, with PEM and Signing Bonus)

Offers are submitted with percentual LC compromises for equipments, for each phases.

Production Exploration


Certification

Exploration Phase LC Certification

Development Phase LC Certification

Example: Retention valves of axial displacement

Spring (purchasing in local market): US$5 Body (cast in the factory): US$50 Obturator (import): US$18,5 Guia (cast in the factory): US$35 Sell price (supported by the Certification

Company): US$655,8

Certification and compliance process


Areas of activity Basic unit of measurement: goods,

temporary goods, services Complementary units of

measurement: systems, sub-systems, sets of systems

Source: ANP.

Certification and compliance process


Fiscalization

Fiscalization Fines Enforcement

If 0 < NR(%) < 65% ⇒ M(%) = 60%

If NR(%) > 65% ⇒ M(%) = 1,143 NR(%) - 14,285%

Fines for non-compliance (concession system)


Impacts of the Brazilian LCP in the E&P projects

With information from the Energy Economics Group of the Federal University of Rio de Janeiro (GEE/UFRJ) and economists and tax experts of the principal companies linked to Brazilian Petroleum, Gas and Biofuels Institute (IBP), a Technical and Economic Feasibility Assessment was performed for one of the operators with petroleum reserves of 500 MMBbl in deep water.

For the assessment, the oil operators realize a Technical and Economic Feasibility Assessment, which include:

→ An analysis of Discounted Cash-Flow.→ An analysis of risks with the Monte Carlo’s model.

See more in: https://www.researchgate.net/publication/269335922_The_Local_Content_Policy_and_the_investment_decisions_in_Brazil (Master´s Thesis, 2014)

https://www.researchgate.net/publication/269335922_The_Local_Content_Policy_and_the_investment_decisions_in_Brazil


The Brazilian Local Content Policy: how effective has it been?

Offers and assessment

criteria

Companies commit to buying those Brazilian goods and services that they will need during a period that could last 10 years. In most cases their needs are not well known, since they depend on the results of the exploratory campaign.

Certification

The companies must undergo a rigorous and complex system of certification of their purchases of goods and services.

Fiscalization

The companies pay high fines if they do not comply with contractual commitments


1. The LC compromises should be developed for each E&P phases, so thatthe operators have a best control of the contractual compromises.

2. The development plan of the fields should be to result of the negotiationprocess between the operators and the government.

3. The development of operators local content should be a factor in biddingreward or tax character.

4. Fiscal flexibility by Local Content incentives

Potential best practices of LCP in the Brazilian petroleum sector

Looking for a highest equilibrium between Local Content promotion and investments promotion in oil production. Based in other experiences, other possibilities are:


5. To simplify the Local Content certification process and discuss the rulesof contracts.

6. Encourage local suppliers to develop k - intensive equipment and thosewith the greatest impact in the chain, allowing access to relevantmarkets on the world stage.

7. Incentives to export local suppliers and their technologies, as well as toincrease the local suppliers participation in the oil operator’s activitiesabroad.

Potential best practices of LCP in the Brazilian petroleum sector

See more in: Oxford Energy Forum 98, p. 28 – 30, 2014 https://www.researchgate.net/publication/271192256_The_impact_and_effectiveness_of_local_content_policy_on_oil_exploration_and_production_in_Brazil

https://www.researchgate.net/publication/271192256_The_impact_and_effectiveness_of_local_content_policy_on_oil_exploration_and_production_in_Brazil


Thank you for your attention

Diana Martinez-PrietoIAEE - AB3E - GEEIE

MSc. Industrial Economics, UFRJ, Brazil

BSc. Economics, Universidad Nacional de ColombiaE-mail: [email protected]

mailto:[email protected]

The effectiveness of Local Content Policy in the Brazilian Petroleum Sector | 5th ELAEE Conference

Presentations & Public Speaking

local content policy

grupo economia

brazil procap

brazilian oil industry

petroleum services

brazil bsc

lc free defined x

production sharing system