As we look into the oil and gas industry in Brazil, local content regulations are of strategic importance to the country. It enhances domestic industry and promotes jobs as well as increase in incomes.
The promotion of import substitution industries in the fifties and sixties was no doubt an indiscriminate. There were not attempts to concentrate on industrial sectors which might have had a potential comparative advantage. All industries irrespective of their sizes had protection policies implemented to safe guard the growth in Brazil.
It is thus important to focus on only issues that border on oil and gas industry of which a number of illustrations can be referenced from.
In 1944, for example, the Venezuela government passed a hydrocarbon law that forced oil companies to refine oil in the Republica Bolivariana de Venezuela.
Brazil Local Content Regulations – History
Brazil as country has a long history of import substitution policies. Infact, the government was anxious to promote maximum vertical integration, to promote both final consumer goods industries and intermediate and capital goods sector.
This would thereby give the government national control over most sectors and even more precisely the energy sector.
From 1934, Presidents Vargas regime was eager to pass the mantle of exhaustible natural resources to the nationals. Therefore, the promulgation of the Mine Code declared that mineral resources from the ground belonged to the Federal Union.
In addition, the code declared that foreign and domestic firms alike interested in exploring, production and even refining needed permission from the federal government.
Birth of Petrobras in Brazil
In addition, an announcement that saw an inclusion of local participation came in 1953 by President Vargas when he declared that Petrobras (NOC) should use only Brazilian capital, workers, and know how.
It was a landmark for the people of Brazil and a clear sign of independence from foreign dominance and the beginning of industrialization of the country in the oil and gas industry.
Even though Brazil didn’t have a sophisticated outlook to industrialization in the fifties and sixties, ISPs helped to increase local participation in joint ventures with foreign companies. Brazil was finally able to operate modern technology and developed a capacity and capability to supply the countries needs in the oil and gas industry.
But an even more pressing goal came about in the seventies when Brazil commenced its offshore drilling which resulted to a more national orient model in the eighties.
As a result the transfer of responsibility to the national oil company Petrobras to find and develop a new and national supply industry.
In turn many laws were passed and regulations bodies were set up to foster the growth of the industry. Today it is said that Brazil is one of the countries that focus on new, innovative and complex technologies.
In addition, and more importantly Petrobras is referred to as one of the most experienced operators in deep waters exploration and production in the world.
But could this be as a result of the higher coefficient by multinational companies in Brazil? Research conducted by Clare Rodriguez shows there is a positive externally from MNCs to supplier which creates a positive knowledge spill over’s which would intern lead to higher total factor productivity.
New Brazil Local Content Regulations
Brazil’s local content regulations have been the subject of much debate. Introduced in the fifth licensing round in 2003, the requirements, along with fines for non-compliance, increased exponentially over subsequent rounds.
This resulted in not only stifling offshore development, but also restraining the domestic industry that the regulations were meant to cultivate in the first place.
In 2017, the Brazilian National Petroleum, Natural Gas and Biofuels Agency(ANP) rewrote the terms for the Libra (now Mero) FPSOs.
On April 11, 2018, after two years of discussions, the Brazilian National Council for Energy Policy (CNPE) and the ANP published a resolution allowing companies to swap the local content commitments of their existing exploration and production contracts for lower and simpler requirements with reduced fines.
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