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Grupo Economia da Energia Diana Martinez-Prieto
The effectiveness of Local Content Policy in the Brazilian Petroleum Sector
Diana Martinez-PrietoIAEE - AB3E - GEEIE
MSc. Industrial Economics, UFRJ, Brazil
BSc. Economics, Universidad Nacional de Colombia
E-mail: [email protected]
Grupo Economia da Energia Diana Martinez-Prieto
Index
Objectives of LCP and the international experience
Current Brazilian Local Content Policy in the petroleum sector
The effectiveness of the Brazilian Local Content Policy
Best practices to enhance the LCP in the Brazilian Petroleum Sector
Grupo Economia da Energia Diana Martinez-Prieto
Introduction
Without Local Content Policy (LCP),
operators tend to buy on global
market.
The more often used definition for
“Local Content” is the oil operators
value-added generation; starting
from equipment acquisition
produced by suppliers companies in
any location within the country
Source: NPD.
Grupo Economia da Energia Diana Martinez-Prieto
Canada
USA
Mexico
BoliviaBrazil
Venezuela
T&T
United Kingdom
Norway Russia
Algeria
Libya
Ghana
Nigeria
Angola
South Africa
Tanzania
Saudi Arabia
China
Australia
Indonesia
Malaysia
East Timor
New GuineaUganda
Ecuador
Colombia
IndiaOman
Kazakhstan
Iraq
Irão
Azerbaijan
Mozambique
The Local Content Policy has become a global drive of petroleum countries
Source: own elaboration.
Grupo Economia da Energia Diana Martinez-Prieto
Norway:Strengthten value-addedactivities (backward andforward linkages)
Nigeria:National recruitmentand training
Malaysia:Transform into a international hub for a petroleum services andequipments
Kazakhstan:Reduce economic dependence ofpetroleum industry(diversification)
However, the objectives of this policy are different
Source: own elaboration.
Brazil: Increase the participation of the
domestic industry on competitive bases Enhance national technological
development Enhance the level of national capabilities
and job opportunities
Grupo Economia da Energia Diana Martinez-Prieto
Local Content Policy evolution in Brazil
Procap 1000 (1986-1992)
Procap 2000 Procap Future
vision
Local Content Requirements9.478 Law: The LC is defined in a concession contract clause Creation of ANP
0 1 2 3 4 5 6 7 8 9 10
12
X% LC free defined
X% Min LC (by block’s localization). Creation of PRONIMP
20
13
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
X% LC maximum
Certification system- booklet
20
09
20
10
20
11
20
12
Bidding Rounds
1939? - 1960 1970 - 1980 1990 - 2000
Most of materials and equipments were purchased
abroad
Import substitution of materials and
equipments Economic Open
Law 12.351: LC in the production sharing system
Pre-Sal
ANP Res. No. 36, 37, 38, 39
1953: Petrobras1957: IBP
INOVAPETRO
20
14
20
15
20
16
20
17
* Procap 2000 (1993-1999).
Source: own elaboration.
Procap2000*
The auction notice and the agreement present differences between production sharing system and concession system (Pre-Salt area VS. other offshore and onshore areas)
Grupo Economia da Energia Diana Martinez-Prieto
How is the Local Content Policy in the Brazilian oil industry?
The regulation of the oil industry
in Brazil has been characterized
by a strong emphasis on
promoting Local Content, but it
introduce different issues that
could represent risks for the
investments.
Source: Oxford Analytica.
Grupo Economia da Energia Diana Martinez-Prieto
The Brazilian Local Content process in the petroleum sector
Offers and assessment
criteria
Submission of offers in the tender protocol of auction Signing of the concession agreement
Certification
Exploration Phase LC Certification Development Phase LC Certification
Fiscalization
Fiscalization Fines Enforcement
Grupo Economia da Energia Diana Martinez-Prieto
Commitments of Local Content in Brazil (concession system)
Average Local Content in Brazil(2000-2013)
LC offers and assessment criteria
Submission of offers in the tender protocol of auction
Signing of the concession agreement
Source: own elaboration.
The LC is part of the offers assessment criteria (20%, with PEM and Signing Bonus)
Offers are submitted with percentual LC compromises for equipments, for each phases.
Production Exploration
Grupo Economia da Energia Diana Martinez-Prieto
Certification
Exploration Phase LC Certification
Development Phase LC Certification
Example: Retention valves of axial displacement
Spring (purchasing in local market): US$5 Body (cast in the factory): US$50 Obturator (import): US$18,5 Guia (cast in the factory): US$35 Sell price (supported by the Certification
Company): US$655,8
Certification and compliance process
Grupo Economia da Energia Diana Martinez-Prieto
Areas of activity Basic unit of measurement: goods,
temporary goods, services Complementary units of
measurement: systems, sub-systems, sets of systems
Source: ANP.
Certification and compliance process
Grupo Economia da Energia Diana Martinez-Prieto
Fiscalization
Fiscalization Fines Enforcement
If 0 < NR(%) < 65% ⇒ M(%) = 60%
If NR(%) > 65% ⇒ M(%) = 1,143 NR(%) - 14,285%
Fines for non-compliance (concession system)
Grupo Economia da Energia Diana Martinez-Prieto
Impacts of the Brazilian LCP in the E&P projects
With information from the Energy Economics Group of the Federal University of Rio de Janeiro (GEE/UFRJ) and economists and tax experts of the principal companies linked to Brazilian Petroleum, Gas and Biofuels Institute (IBP), a Technical and Economic Feasibility Assessment was performed for one of the operators with petroleum reserves of 500 MMBbl in deep water.
For the assessment, the oil operators realize a Technical and Economic Feasibility Assessment, which include:
→ An analysis of Discounted Cash-Flow.→ An analysis of risks with the Monte Carlo’s model.
See more in: https://www.researchgate.net/publication/269335922_The_Local_Content_Policy_and_the_investment_decisions_in_Brazil (Master´s Thesis, 2014)
Grupo Economia da Energia Diana Martinez-Prieto
The Brazilian Local Content Policy: how effective has it been?
Offers and assessment
criteria
Companies commit to buying those Brazilian goods and services that they will need during a period that could last 10 years. In most cases their needs are not well known, since they depend on the results of the exploratory campaign.
Certification
The companies must undergo a rigorous and complex system of certification of their purchases of goods and services.
Fiscalization
The companies pay high fines if they do not comply with contractual commitments
Grupo Economia da Energia Diana Martinez-Prieto
1. The LC compromises should be developed for each E&P phases, so thatthe operators have a best control of the contractual compromises.
2. The development plan of the fields should be to result of the negotiationprocess between the operators and the government.
3. The development of operators local content should be a factor in biddingreward or tax character.
4. Fiscal flexibility by Local Content incentives
Potential best practices of LCP in the Brazilian petroleum sector
Looking for a highest equilibrium between Local Content promotion and investments promotion in oil production. Based in other experiences, other possibilities are:
Grupo Economia da Energia Diana Martinez-Prieto
5. To simplify the Local Content certification process and discuss the rulesof contracts.
6. Encourage local suppliers to develop k - intensive equipment and thosewith the greatest impact in the chain, allowing access to relevantmarkets on the world stage.
7. Incentives to export local suppliers and their technologies, as well as toincrease the local suppliers participation in the oil operator’s activitiesabroad.
Potential best practices of LCP in the Brazilian petroleum sector
See more in: Oxford Energy Forum 98, p. 28 – 30, 2014 https://www.researchgate.net/publication/271192256_The_impact_and_effectiveness_of_local_content_policy_on_oil_exploration_and_production_in_Brazil
Grupo Economia da Energia Diana Martinez-Prieto
Thank you for your attention
Diana Martinez-PrietoIAEE - AB3E - GEEIE
MSc. Industrial Economics, UFRJ, Brazil
BSc. Economics, Universidad Nacional de ColombiaE-mail: [email protected]