Page 5 - LatAmOil Week 39

LatAmOil COMMENTARY LatAmOil

From 1999 to 2002, Brazil’s National Agency of by other regulations affecting domestic pro-
Petroleum, Natural Gas and Biofuels (ANP) was curement and by the exclusion of domestic con-
not obligated to list minimum LC requirements struction companies such as Odebrecht from
in its bidding notices. Instead, potential inves- consideration because of their involvement in a
tors had to offer specific levels of LC commit- far-ranging corruption scandal. They also sub-
ment in the offers they submitted to ANP. mitted many requests for exemption from LC
Then in 2003-2004, ANP began stating requirements to ANP. Moreover, these expres-
minimum LC requirements – specifically, the sions of grievance kept rolling in even after the
minimum percentages defined by the National Brazilian government launched Pedefor, a spe-
Energy Policy Council (CNPE) – in its bidding cial programme designed to eliminate local sup-
notices. All potential investors had to agree to ply chain problems and encourage competition
this minimum and could offer additional com- between domestic vendors.
mitments beyond this floor for certain activities. Investors’ pleas appear to have found an audi-
After 2005, ANP had to include both min- ence at the agency. In 2017, the year of the 14th
imum and maximum LC requirements in its licensing round, ANP began reducing some of
bidding notices. It also began listing minimum the fines it imposed on companies that did not
requirements for specific items and activities comply with LC minimums. It also said it would
defined by the bidders. stop weighing LC commitments in its consid-
Likewise, the definition of LC changed over eration of bids, though it expected the winners
time. In 1999, the only factor under consider- of the auctions to abide by existing regulations.
ation was the location of the supplier. In 2000, Then in 2018, it started bringing the base
ANP defined LC as domestically manufac- levels down – and said that the new minimums
would take effect during the 15th exploration
tured goods and set the base level at 60%; it also a measure that applied a 50% floor for LC con- “
said, though, that the floor would drop to 40% bidding round. More specifically, it approved ANP reduced
beginning the following year. Also in 2001, the local content
agency expanded the definition of LC to include sumption to onshore exploration and produc-
services provided within the country and set tion operations. It also reduced LC requirements requirements
the required minimum at 80%. Then in 2005, it for offshore exploration to 18% and introduced
shifted to using a formula to calculate base levels differentiated rates for individual types of devel- for offshore
for LC with respect to goods and services. opment work, setting a minimum of 25% for
The nature of proving compliance also development drilling operations and a floor of exploration
shifted over time. Investors did not have to fur- 40% for subsea production systems and for sta- and production
nish proof of LC consumption in 1999-2000, tionary production units.
but in 2001-2002 they had to begin submitting operations in
quarterly reports breaking down their expendi- More changes ahead?
tures on foreign and domestic goods and ser- These lower LC base levels have remained in 2018
vices. Then in 2003-2004, they were required to place since 2018, and Brazil’s current govern-
start submitting declarations of origin for their ment – led by Jair Bolsonaro, the right-leaning
suppliers. In 2005 and beyond, they also had to president – does not appear to have any immedi-
acquire and submit certificates of domestic con- ate interest in revising them. This could change,
tent from accredited certification bodies. though, if the global oil industry recovers a sig-
nificant amount of the ground it has lost this year
Pre-salt opportunities as a result of the Russian-Saudi crude price war
Questions about LC became more urgent in and the coronavirus (COVID-19) pandemic.
2007, following the first commercial viable pre- ANP has something of an incentive to try
salt discoveries in Brazil’s offshore zone. The new solutions, as Brazil’s most recent bidding
government was eager to attract investors to rounds – the Transfer of Rights Surplus Round
these frontier sections of the Campos and San- and Production-Sharing Contract (PSC) Round
tos basins, and by the time it launched the first 6, both held in early November 2019 – were less
pre-salt bidding round in 2013, it was ready to successful than expected. The auctions drew bids
spell its expectations out clearly. only from Petrobras and two state-owned Chi-
In the first pre-salt auctions, ANP set the base nese companies, even though they had drawn
level for LC at 37% for the exploration phases expressions of interest (EoIs) from a record high
of the contracts on offer. It also boosted the number of potential investors. The agency could,
required minimum to 55% for first-phase devel- therefore, find reasons to take another look at LC
opment and said the base level would rise again requirements, as it has done before.
in 2021, reaching 59%. But it may try to make changes in other areas
These floors applied only to pre-salt fields; first. Industry analysts such as Pablo Medina,
onshore assets had different LC requirements. the vice-president of research at the Welligence
analytics consultancy, believe that the main fac-
Dropping the floor tors driving the underwhelming response to
The requirements outlined above stayed in place last November’s auctions were high signature
through the completion of Brazil’s 13th explora- bonuses, doubts about economic viability and
tion bidding round in 2015. However, they drew a lack of transparency in planned payments to
criticism from Petrobras and other licensees. Petrobras. As such, LC minimums may not be
Investors complained that their projects ANP’s top priority when the time comes to plan
were being delayed by powerful labour unions, the next licensing rounds. ™

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