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Local content changes welcome but cabotage still an issue

Tue 07 Mar 2017 by David Foxwell

Local content changes welcome but cabotage still an issue

News that local content requirements enforced by ANP, the Brazilian Petroleum Regulator, are to be relaxed from September 2017 will be welcomed by many in the offshore oil and gas supply chain. In future, in the exploration phase of a project, the local content requirement will only be 18 per cent, a move that is likely to improve certainty around investment offshore Brazil.

Overall, as CMS Law noted, it seems the rules will be simplified and lower levels of required local content should at least alleviate one of the oil companies’ main problems with the Brazilian oil and gas regime, and pave the way for a return to attractive and competitive licensing rounds in 2017 and 2018.    

As highlighted in OSJ on a number of occasions, the local content requirements have been widely criticised for their complexity and the additional costs they have imposed on the industry. The mechanism was politically motivated to protect sectors of Brazilian industry from competition, which resulted in local content being associated with a hefty premium over international prices in many cases. Moreover, operators were forced to try to anticipate the levels of local content they will be able to secure in the development of a field at the bidding stage.

“These difficulties have become increasingly clear in the wake of the Lava Jato corruption scandal and resulting financial crisis for much of the oil and gas supply chain. These factors have led to delays and cost overruns in many Brazilian projects, particularly in offshore construction and many operators have accepted they will not be able to achieve their local content commitments,” said CMS Law.

For the 14th bid round for oil and gas concessions, local content will no longer be a bid criterion. For this and the 3rd round for production sharing agreements, both planned for this year, the minimum local content levels will be fixed at levels around 50 per cent lower than the minimum required in recent rounds.

So much for the good news about local content; unfortunately owners of offshore support vessels will still need to deal with Brazilian regulations for OSVs enforced by another agency, ANTAQ (the National Agency for Waterway Transportation), that continues to give priority to Brazilian-flagged vessels.

Relaxing local content requirements will help Brazil’s moribund offshore industry return to life and will help generate greater levels of activity, but as long as Brazilian-flagged vessels get priority status and owners of international vessels with contracts can be ‘blocked’, non-Brazilian owners will be cautious about recommitting vessels to that market, even as it picks up. In fact, 2017 is likely to see the number of international vessels dwindle further. As broker Westshore reported recently, in 2016 the foreign fleet of platform supply vessels practically disappeared, falling from around 80 units to below 20, most of which are doomed to disappear as they are blocked by local ships.

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