Made-in-Brazil rules severely cut nation’s production, analyst says

Brazil’s national oil company Petrobras could increase its productivity by as much as 1.5 million barrels a day by loosening up on its made-in-Brazil rules, an IHS  analyst said at an industry conference in Houston Thursday.

Brazil, one of the world’s most bountiful regions for new oil discoveries, also has some of the most ambitious local-content requirements for new projects, as it seeks to develop its economy and industry on the back of its emerging energy industry. International bids for Brazil’s largest oil reservoir, Libra, will be evaluated partially on how much Brazil-based labor and equipment each company expects to use. Libra will be up for auction in late October.

But the challenges of meeting ambitious local content requirements can make Brazilian projects less financially viable for foreign investors, said Enrique Sira, managing director for IHS, during the final day of the three-day forum at the Westin Memorial City hotel in West Houston.

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One of the paradoxes is that the requirements may be higher than the local materials available, Sira said.

“The high local content requirement continues to be above what Brazilian industry can supply today,” Sira said. “It is a bottleneck that will make things cost more.”

The current rules require at least 37 percent of project materials be locally sourced the exploration phase and 51 percent to 55 percent be locally sourced for the development phase.

However, Brazilian regulators also have set local requirements for specific inputs or activities, which further limits operators’ flexibility.

For example, for subsea systems, 90 percent of the basic engineering must be supplied locally, but only 20 percent of the subsea control systems equipment needs to be Brazilian sourced.

Despite the challenges, international operators are winning contracts by bidding higher than the local content requirement, further raising the bar. But getting up to 70 percent local content is a significant challenge.

This is especially true for ship building: The Brazilian shipyards lag about 20 years behind their counterparts in Asia in shipbuilding capacity and technology, Sira said. Brazilian shipyards still lack the needed capacity to build key items, such as hulls. As a result, they are contracting with Korean shipyards to have certain portions of the vessels built in Korea and then shipped to Brazil for assembly, in order to meet the requirements.

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These types of requirements, however, delay production, which can be costly for operators, Sira said.

“You have heavy investment and a difficult learning curve ahead,” Sira said.

While it also can lead to cost overruns or project fines, the delays are by far the most financially devastating for operators, given the high overhead costs of projects, even when idle.

“The most costly thing is being late on production,” Sira said. “The larger evil is the opportunity cost of not producing when you are scheduled to.”