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Brazil makes big progress but hurdles remain

Temer administration has taken decisive action that has succeeded in drawing investment from oil majors but local content issues and taxation are still key factors to resolve

 by Gareth Chetwynd

Rio de Janeiro

5 Jan 2018 00:00 GMT

 

Brazil’s oil sector was a busy place in 2017, with regulatory reforms playing a key role in attracting oil majors to three licensing rounds, but building on this success will present fresh challenges.

Policies were already beginning to change before the impeachment of ex-president Dilma Rouseff, but her successor, President Michel Temer, has overseen a decisive push for change that only began with the dismantling of the Petrobras monopoly over pre-salt contracts.

A first cycle of oil reforms is nearing completion, with a flurry of year-end activity in the legislative field.

A reformed and extended version of the Repetro tax relief system completed its passage through Congress in December, putting in place a tax framework that many oil companies have described as a necessary condition for investing in high-cost Brazil.

With partners such as Shell applying the brakes, it was no coincidence that a final investment decision on the first full-scale production unit on the Libra field was only announced one day after the Repetro vote.

A softening of local content requirements has also been important in getting projects moving and attracting investors to new licensing rounds, according to Delcio Oddone, director general of Brazil’s hydrocarbons regulator the National Petroleum Agency (ANP).

Legal waivers

Simplified local content rules were introduced for the licensing rounds that took place in 2017, but Petrobras has had to seek legal waivers from much higher local content requirements applying to older contracts.

The first project to move ahead on the basis of a retroactive change in local content was for the floating production, storage and offloading unit that Petrobras plans to install on the pre-salt field Sepia.

The transfer of rights agreement governing Sepia demands local content averaging close to 70%, but Petrobras intends to get the rules altered under a renegotiation of the entire rights transfer agreement.

In a bold statement of intent, the oil company has gone ahead with the contracting process for the Carioca FPSO that will be installed on Sepia.

Japanese floater contractor Modec International’s arrangements for that unit show that it will mostly be built in China, so Petrobras will have to renegotiate the underlying rights transfer contract in order to avoid heavy non-compliance fines.

However, simply renegotiating the terms was not an option for the Libra-1 FPSO as this project was spawned by a more conventional production sharing agreement.

The Petrobras-led consortium was granted only a partial waiver from the heavy local content requirements on Libra and complying with this will be a challenge for Modec, which also won the contract for this unit.

Mindful of the projects that are being held back by such problems, the ANP has come up with a proposed resolution that is intended to deal more systematically with local content requirements on contracts signed between 2005 and 2015, offering a mechanism that would allow lower rates to apply.

The ANP’s thinking is that these rates should be in line with what has been used in recent licensing rounds, but industry associations have been pushing for more, and threatening to challenge the retroactive aspects of the proposed resolution in the courts.

The ANP has bowed to some of this pressure by increasing proposed local content on floating production units to 40%, compared with the 25% floor that was used in recent licensing rounds.

Industry associations are pushing for this rule to also apply to future rounds, and a bloc of politicians with links to the offshore industries made their vote on the Repetro reform conditional upon administration support for a local content bill that would create a 40% requirement for FPUs as well.

Demands

There are also calls from sponsors of the local content bill for an increase in the local content for well construction, creating a discrepancy with the proposed resolution from the ANP.

Despite such differences, there is a growing convergence among officials and interest groups on what policymakers hope will be the bedrock of a more pragmatic local content framework.

Although the ANP proposal on local content for FPUs does not address demands by Brazilian shipyard entity Sinaval for hull construction to be given its own 40% floor, the entity is starting to look isolated on this issue.

“An overall 40% requirement for floating production units will serve our purpose, without needing a specific requirement for hulls,” Jeronimo Goergen, the federal deputy sponsoring the local content bill, tells Upstream.

The ANP is seeking another four months before finalising the terms of the resolution, which will have to be approved by the Mines & Energy Minstry’s policy panel.

“We are close to reaching an understanding on this after a year of discussion, but this is not settled yet,” says Brazilian Oil & Gas Secretary Marcio Felix.

Sinaval vice president Sergio Bacci says: “The most important thing is that we have got another four months to arrive at an agreement.”

There were also some concerns about whether differences in the terms set by the new legislation could result in delays to the licensing rounds planned for 7 March and 29 June, perilously close to October elections.

Felix warns: “If we have to change local content for these rounds, then there would be little chance of holding them in 2018, but I am sure common sense will prevail.”

This threat seemed to fade when backers of the local content bill failed to win a voting slot before the Brazilian Congress went into its recess, meaning the bill will not get a first vote before March.

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