End of local content is harmful, says Fiesp study


A study by the Competitiveness Department of the Federation of Industries of the State of São Paulo (Fiesp) argues that the change from the current rules of local content for exploration and production of oil and gas to a single global index would reduce production, number of jobs and tax revenues generated by the national industry of goods and services.


In discussion since September last year, the new policy for local content should be defined tomorrow, during a meeting that will be coordinated by the Chief Minister of the Civil House, Eliseu Padilha.


Oil and gas exploration and production companies are calling for the simplification of the current rules  and the application of a global index capable of attracting investment and fostering the creation of a more competitive chain of suppliers .


The industry supplying goods and services to the sector, however, rejects the idea of a global index. According to the Fiesp study, with a single global index of 40%, local content can be achieved with zero machines and equipment produced internally, the industrial segment that adds more value and generates more jobs. In the supply chain of goods and services for oil and gas, services account for 50% of demand, and goods for the remaining 50%, 20% in machinery and equipment and 30% in inputs.


According to the study, today with an investment of R $ 1 billion in the exploration and production of oil and gas, the domestic production of goods and services in the sector generates R $ 551 million in contribution to the GDP and 1,532 jobs. If local content rules are withdrawn, the same amount of investment would result in R $ 43 million for GDP and 144 jobs. The revenue generated in taxes would fall from the current R $ 521.5 million to R $ 31 million and the total salaries paid, from R $ 293.9 million to R $ 27.8 million. Impacts were measured for the medium and long term, considering that the demand for goods would be 100% met by imports.


Current local content requirements have been in force since 2005, when the rules became more specific, with oversight by the National Petroleum Agency (ANP) of the percentages established for about 90 items. Failure to comply with these rules has resulted in fines that are the object of criticism by operators.


One of the ideas the industry has come up with in discussing the new rules for the industry has been to simplify the current model by replacing the 90 items with local content indexes for five segments: services, infrastructure, machinery and equipment, systems, and project engineering. The fines would be replaced by compensatory measures. More recently, however, operators in the industry have come to advocate a single global index of local content.


It was because of the local content policy, that many multinational oil-producing companies invested in Brazil and national companies positioned themselves as suppliers.


After a period of high growth, the sector was affected by Operation Lava-Jato, Petrobras management problems and falling oil prices. Petrobras has reduced investments and its orders for goods and services. Between 2014 and 2015, according to Fiesp, the number of workers in the sector fell by 14%, while in the entire manufacturing industry the decline was 7.3%. The sector’s output fell 14.5% versus a fall of 10.8% across the manufacturing industry.


“Today, Petrobras is investing again, although at better levels than previously planned and everyone is interested in producing again,” says Roriz. The director of Fiesp points out that local content was adopted by countries such as the United States, Norway and the United Kingdom, which contributed to the increase of oil production in the long term because the concept of chain densification was maintained. “It’s important that the government’s decision is not to buy where it’s cheapest,” he says. What weighs against the national industry, he argues, is the cost of producing in Brazil, which causes an average price differential of 30% between the domestic and imported products.

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