Debate about local content rules divides industry and oil operators

Valor Econômico 2 Jan, 2017. Renato Rostás and Rodrigo Polito

RICH PRESS / BLOOMBERG

Debate about local content rules divides industry and oil operators

On the one hand, oil companies want changes; on the other hand, companies ask for more time.

Equipment manufacturers claim to have invested $ 60 billion since the discovery of the pre-salt to serve the sector.

The discussion about changes in the rules of local content has divided the Brazilian productive sectors: the manufacturing industry and oil and gas exploration and production companies.

The industry is concerned about the proposed changes in the obligatory index. After the discovery of the pre-salt layer, the companies claim to have invested nearly $ 60 billion and suffer with about 60% idle capacity at the moment. But if the policy has not really worked so far, vendors believe they can lose the little that still benefits them.

The operators, who are showing interest in the upcoming auctions of exploratory areas, argue that changes in current policy are crucial for the will to translate into investments during 2017. There will be about 25 auctions carried out and the availability of resources is scarce, with expectation of a fiercer competition.

In December, 14 state industry associations and federations launched the “Movimento Produz Brasil” (Made in Brazil Movement), whose objective is to value the sustainable insertion of national suppliers, defend local content as an industrial policy mechanism and highlight the contribution of national production to employment generation , income and tax collection for the country. Entities ask for time to discuss possible changes.

On the other side of the chain, the Brazilian Institute of Petroleum, Natural Gas and Biofuels (IBP), which has a frequent communication channel with the government of Michel Temer, defends the revision of the local content policy. “We are in favor of a strong local chain to make the country more attractive. But we are against protectionism, “says the entity’s executive secretary, Antonio Guimarães. “If you create a rule that makes protection overblown, it will not create a healthy industry and we see it today. Some companies created on the basis of protectionism can not survive abroad. ”

Alexandre Lyra, chairman of the Steel Institute Brazil – an association that brings together the country’s steel mills and is part of the “Made in Brasil” – believes that a wrong image was created in that local content is “the source of all the ills of the oil sector.” He says he believes in the national industry to meet demand, but criticizes that, with the economy weakened and without a government policy to ensure isonomy, the situation is worsening. “We understand that when it comes to public concession, and the oil auction rounds are that, it is necessary to have a counterpart to generate employment and income in the country,” says José Velloso Cardoso, chief executive of the Brazilian Association of Machinery and Equipment Abimaq), also part of the coalition. “But in the case of oil, job generation once the equipment is installed, is one of the lowest in the economy.”

The Abimaq president fears that if the Repetro – a special customs regime for imports and exports in oil and gas – is extended, as the operators ask, and the obligation of national content is relaxed, “an import bias will be imposed”. Analysts are betting that the instrument will be extended at the beginning of the year, coming to an end by 2040.

The coalition’s proposal is to divide all activity into subsections and apply a minimum of national content in each, instead of adopting what the operators seem to prefer,  a global index of nationalization. If the overall criterion is adopted, suppliers argue that only employing national labor, for example, would be sufficient. The segments would be services, infrastructure, machinery and equipment, project engineering and systems, with 30% to 40% of each requirement.

The National Energy Research Council (CNPE) will decide what it does with the degree of nationalization for oil exploration this month. At its last meeting, on December 14, it was agreed that the 4th Round of Areas with Marginal Accumulations is free to meet the current idex. The biggest concern now is for the 14th Round of Bids of the National Agency of Petroleum, Natural Gas and Biofuels (ANP), scheduled for the beginning of the second half. The event will attract the largest number of participants and will offer the largest number of exploratory blocks. Rules must be released by the end of the month.

The Audit Court of the Union (TCU), after conducting an extensive audit on the subject for a year, has already concluded that the policy was set up, in a sense, “on the spur of the moment” and that, a broader failure to deliver rules for industrial development, ends up being harmful. The practice would also create a kind of market reserve for suppliers, the report said, even if they do not have the capacity to meet demand.

“Policies as they are today are restricted to the first and second links in the chain [of exploration and production and direct suppliers, such as shipyards] because they receive all the benefits. The third link [of machines and equipment, for example] is outside the Repetro, “argues Velloso. “Even if the vessel is assembled here, and this already counts as local content, it can buy the imported parts and often pay fines, if it exists. So it’s no use. ”

Even Petrobras, which during the last few governments was the spearhead of the program that prioritizes Brazilian products in these operations, started to position itself against the index of nationalization as it is today and other big oil companies are pushing for changes. The TCU report also cites how much the policy has injured the state company – the main reason the company wants to revise the current rules.

Pal Eitrheim, president of Statoil in Brazil, has said that tinkering with this variable would increase the attractiveness of production. The executive also calls for a simpler tax regime and regulatory stability. For Lincoln Guardado, president of Queiroz Galvão Exploration and Production (QGEP), the country has to attract large operators and create capillarity for industry, but the priority is also to make national content more flexible.

What Petrobras stands for is a regressive policy that lays the groundwork for the industry and in the future open the market to open competition. “Petrobras is in favor of a local content policy and a model that will reward innovation, quality production, adequate costs and deadlines, and partnerships,” the company said in a statement. “There is room to develop an intelligent and effective local content policy. Petrobras has very important scale power to help. ”

For Márcio Félix, Secretary of Oil, Natural Gas and Renewable Fuels of the Ministry of Mines and Energy (MME), there is almost a declaration of war against the revision of the local content policy. “We have a new challenge with regard to local content. We are experiencing a real battle over local content. ” he said at an event held in December.

Lyra from Brazil Steel also says that it would be necessary to discuss the local content policy for all sectors, including within the scope of the Investment Partnerships Program (PPI) – in which Steel Brazil wants to try to prevent external influence. China, for example, has an interest in financing infrastructure projects here, and the institute fears that it will also be able to secure the supply of its products, such as metal structures.

If the incentive is really to buy material from abroad, Velloso traces a catastrophic scenario. The opening of the market to foreigners, with a reduction of Petrobras’ participation in the upcoming auctions, will certainly attract more interested parties. This can, he says, transform Brazil into an “Opec [Organization of Petroleum Exporting Countries] country”.

“Let’s just stay with royalty and not generate [benefit] directly for the population. We will be like Nigeria or Venezuela. Without creating a value-added chain, we do not promote wealth. This industry suggests division into five sub segments, with a local demand index for each one or we prefer for the oil to stay at the bottom of the sea, “he says.

Producers see policy easing as a chance of attracting more investments in oil auctions while industry suggests dividing into five sub segments, with a local demand index for each.