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Local content rules send costs higher in Brazil

Requirements are contributing to cost inflation in the country's oil and gas sector

Local content requirements in Brazil are compounding a manpower shortage and contributing to cost inflation in the country’s booming oil and gas sector as state-run Petrobras starts to bring a series of deep-water projects into production, the head Brazil’s largest oilfield services provider Odebrecht has said.

“Local content and its impact on manpower has led to cost inflation. We’ve had experience, for instance, with the cost of operating rigs, where manpower costs have gone up by 100% in the past few years, which is very, very high,” Roberto Ramos, the chief executive of Odebrecht Oil and Gas told reporters in London last week.

Petrobras, which dominates Brazil’s oil and gas sector, reported its first quarterly loss in 13 years in early August. The company blamed the $1.35 billion second-quarter loss primarily on the depreciation in the value of the Real pushing costs higher and an unusually high number of dry wells the company had to write off. Petrobras is continuing to see losses from buying refined products at international prices from the global market but having to sell them at subsidised prices in the local market.

But the comments from Odebrecht, one of Petrobras’ largest service providers, is further evidence that the government’s local content policies, which are aimed at fostering the long-term development of a world-class domestic oil and gas industry, are coming at a heavy short-term cost for Petrobras.

Local content rules mean that Petrobras and other companies in Brazil are relying on domestic industries to provide between 60% and 80% of goods, services and personnel for a raft of new deep-water pre-salt projects. But that domestic industry so far lacks the scale and skills needed to satisfy that demand.

Consultancy Booz & Co concluded in a report compiled for Brazil’s National Organisation of the Petroleum Industry (ONIP) that “despite Petrobras being a world benchmark in technology for exploration and production, the local chain has a lesser capacity for innovation than desired”. The report added that “gaps in local productivity imply higher costs and lower capacity”.

The report, though, also highlighted the UK and Norway as two countries that built world-leading oil and gas industries after major discoveries. Those countries were successful because they successfully managed to attract global companies, establish industry clusters like those seen in Stavanger and Aberdeen, create an export-focused sector and used incentives to build local skills and capacity through local content regulations.

Whether Brazil will be able to replicate this model remains to be seen. “Demand has gone up... this has led to cost inflation and the only solution to that is to train and to develop people, but that is not done easily overnight. This is a problem that only time will cure,” Ramos said.

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