Brazil has long been seen as one of the prime areas for offshore oil production growth. However, this potential has not yet been fully realised as corruption and strict regulations have stymied progress.
However, as Clarkson Research noted recently, the upcoming licensing round brings with it an alleviation of strict local content rules, although the impact this will have on the OSV sector, however, may not be necessarily be the knockout for which many are hoping.
It is forecast that in full year 2017, Brazil will produce close to 10% of global offshore oil production. Furthermore, only a small proportion of the presalt fields have been developed and there is a vast potential still to be tapped. Nevertheless, as of the start of September, 6% of the global anchor-handling tug/supply (AHTS) vessels and 15% of the platform supply vessel (PSV) fleet were deployed in the region. The offshore support vessel fleet deployed offshore Brazil is dominated by large units with >16,000 bhp AHTSs and >4,000 dwt PSVs making up 34% and 44% of the total, respectively.
Clarksons noted that one of the major headwinds stunting growth in Brazil is ‘Operation Carwash,’ the corruption scandal that has engulfed Petrobras, causing spending by the state-owned oil company to drop off.
This led to charter rate assessments for large AHTSs dropping from US$50,000/day in June 2015 to US$30,000/day a year later; a similar fall was seen for 500-700 m2 deck space PSVs with day rates falling 30% over the same period.
“An additional headwind has been the practice of ‘blocking,’” Clarksons said. This is the Brazilian regulatory principle that a foreign-flagged ship may not be employed if an equivalent domestic unit is available. While vessels can avoid this by registering under the Brazilian Special Registry, the number of foreign-flagged OSVs in layup has rocketed since the offshore downturn in late 2014 from 5 to 43 units, as of September 2017. Moreover, this increase does not capture the many more units which redeployed out of the region in response to blocking.
On 27 September 2017, the 14th Round of Brazilian oil and gas licensing will take place and, with this auction, important regulatory changes also come into effect. The prior strict local content rules, which disincentivised investment, have been eased. There has been a reduction of roughly 50% of required local content across the board. The idea is that more flexible rules will reduce costs and uncertainty for companies and therefore attract more investment and greater levels of production.
“However,” said Clarksons, “there have been no changes to existing blocking regulations. As of September 2017, there are 20 Brazilian-flagged OSVs laid up which could block and dampen any growth in demand. On the other hand, a wholescale ramp-up in production could eventually boost OSV demand to an extent where blocking is utilised to a much lesser degree.
“In conclusion, the potential of Brazilian offshore production has been held back by corruption and strict regulation. Round 14 may signal a new regulatory environment and therefore attract greater investment. This may boost OSV demand. However, blocking rules could still weigh on any possible upswing in day rates.”