Government increases requirement for local content in oil and gas

Fulfilling a promise from President Luiz Inácio Lula da Silva (PT), the federal government announced that it will increase the requirement for local content for the next auctions for the concession or sharing of offshore oil fields.

The measure was approved on December 19, at a meeting of the National Energy Policy Council (CNPE), a body chaired by the Minister of Mines and Energy, Alexandre Silveira, and resumes practice adopted in previous PT administrations.

In the oil and gas sector, the local content policy (PCL) is characterized by requiring a minimum participation of Brazilian raw materials and labor in the construction of platforms, ships, probes and refineries.

As part of the strategy, Petrobras recently, through its logistics subsidiary Transpetro, announced that it intends to initiate, from 2024, a new call for contracting national shipyards to build oil tankers.

In the past, however, the procedure was criticized by scholars and sector analysts for having generated negative effects on the development of the industry, at the same time as it increased costs for oil companies, especially Petrobras.

According to the CNPE announcement, the maritime blocks offered in the next auctions, whether under the concession or sharing regime, will require 30% local content in the exploration and production development phases. Since 2017, by decision of the government, then under the management of Michel Temer (MDB), the minimum percentage required was 18% in exploration and 25% in production development.

For flow and stationary production units, the minimum percentages of 40% and 25%, respectively, were maintained. For onshore blocks, local content requirements of 50% in the exploration phase and 50% in the production development stage also remain.

The CNPE also requested the National Petroleum, Natural Gas and Biofuels Agency (ANP) to regulate the contractual clauses giving preference to the hiring of Brazilian suppliers.

OECD says local content policy harms competitiveness

The Organization for Economic Co-operation and Development (OECD) considers that, although local content policies can help governments achieve short-term objectives, competitiveness ends up being harmed over time.

“While most studies have focused on the long-term inefficiencies caused by PCLs, an OECD study also highlights the subsequent costs imposed on the rest of the economy. The inefficiencies that arise in other sectors due to the PCL actually reduce job growth and opportunities to achieve economies of scale, undermining the original objectives”, summarizes the entity.

Also according to the OECD, countries that impose minimum local content requirements lose international competitiveness with a reduction in exports from sectors not directly targeted by the nationalization policy.

“As sectors that benefit from PCL consume more domestic resources, other sectors are forced to reduce production or increase imports, leading to a concentration of domestic economic activity. This process ends up harming the opportunities for growth and innovation that come from a diverse and dynamic economy”, explains the organization.

Demand for local content peaked during PT administrations

The intention to resume the local content policy was already signaled by Lula during the 2022 electoral campaign. In his government guidelines, the then candidate defended that “industrial policy must maintain focus on the country’s priorities and leverage technological capacity national and innovation”.

“Brazil is too big to renounce its productive potential. It makes no sense to import fuels, fertilizers, oil platforms, microprocessors, aircraft and satellites”, said the president at his inauguration ceremony at the National Congress, on January 1st. “We have sufficient technical capacity, capital and market to resume industrialization and the provision of services at a competitive level.”

Encouraging the hiring of local content has already received attention from the ANP since 1999, still during the government of Fernando Henrique Cardoso (PSDB).

That year, when the first round of bidding for oil and gas exploration and production fields took place, the regulatory body already awarded a higher score to companies that committed to using a higher percentage of national products and services.

But it was after Lula’s first government, in 2003, that the requirement for a minimum percentage of local content by concessionaires came into force. The concession contract for the ANP’s fifth bidding round provided for a fine in case of non-compliance with the mandatory indices, which varied from 30% to 70%, depending on the block.

In the sixth bidding round, local content commitments offered reached an average of 86% in the exploration stage and 89% in the production development stage.

During the Dilma Rousseff (PT) government, the required rates varied, for offshore blocks, from 37% to 55% in the exploration phase. In the other stages, they were between 55% and 65%, depending on the notice.

A qualitative analysis of the local content policy for the oil and gas industry in Brazil, authored by William Vitto, concluded that, despite some positive results, the policy adopted during the PT governments ended up being limited only to material production, leaving outside the concept efforts in terms of exports and investments in infrastructure, research and development.

“Likewise, it can be considered that the excessive emphasis on protectionist policy led to serious failures in its draft, as it ended up being a hindrance to the initiative”, says an excerpt from the study, developed within the scope of the Postgraduate Program in Public Policies, Strategies and Development of the Institute of Economics at the Federal University of Rio de Janeiro (UFRJ).

In 2017, the Temer government practically cut in half the minimum levels of local content required in sector auctions. For offshore blocks, the nationalization rate was set at 18% in the exploration phase, considering products and services. The production development stage now has a minimum level of 25% in well construction, 40% in the collection system and 25% in platforms.

The rules were maintained under the government of Jair Bolsonaro (PL) for the main oil auctions in recent years, such as the latest pre-salt rounds under the sharing regime and the offer of surpluses from the onerous transfer.