Industry Observatory

The Brazilian Institute for Oil, Gas and Biofuels (IBP) presented proposals to improve Brazil’s local content policy for the oil and gas industry.

One proposal is to simplify local content commitments by prioritizing supply chain segments with greater development potential in terms of job creation and technology content.

To inform its proposal, IBP commissioned a study from consultants Bain&CO which mapped seven priority segments based on an analysis of social and economic value for Brazil and the global relevance of Brazil’s demand. The seven segments are: module and topsides design, fabrication and installation; subsea equipment; subsea installation services; high-tech well drilling and completion; high-tech machinery and equipment; medium-technology machinery and equipment; and construction of offshore support vessels.

Strategic segments will also be prioritized on the basis of their ability to compete in the global market, as there is a risk that local businesses reliant on the oil industry will disappear as domestic offshore demand declines.

In practical terms, the proposed policy is not to create a market reserve, but to support Brazilian-based companies in establishing the capabilities to offer goods and services on the West Coast of Africa and the Gulf of Mexico, for example, which are currently dominated by Korean, Chinese, American and European companies, so they are able to grow and establish themselves as relevant players on the global market.

IBP believes that developing a competitive and sustainable industry will require the following conditions to be met: local suppliers meshed into the global value chain; the potential for job creation, especially for high value-added jobs; expansion of production capabilities; and high-level investment in research, development and innovation.

Other proposed approaches to stimulating investment include the introduction of incentive and compensation mechanisms to recognize companies’ efforts and investments in production and innovation, and regulating the exemption clauses in concession, assignment-of-rights and production-sharing agreements to recognize situations where local content is unavailable or impracticable.

IBP recommends implementing mechanisms that encourage and reward investment. For example, rather than applying penalties directly, companies could be allowed to implement compensation initiatives such as developing suppliers in strategic segments within the government’s interest, with the positive effect of stimulating the development of local industrial capabilities. These compensation instruments would recognize initiatives such as investing in new production capabilities and exports, and would be more effective in promoting the development of the supply chain than just penalties, which often have the undesirable effect of delaying or inhibiting investment, with negative impacts on oil production and the benefits provided to society in the form of royalties and taxes – two important sources of funding for education, health and other public services.