Brazil was forced to ease local content rules after oil output dropped significantly

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Under stringent local content requirements in the South American country of Brazil, oil production and the growth and development of the petroleum industry were significantly affected. The government was forced to take steps to loosen local content rules that dictated what percent of certain equipment and services must be provided locally.

At auctions held in September and October 2017, local content requirement for offshore was set at 18%, well construction 25% and 40% for sub-sea works. Between 2005 and 2015 the average local content percentage was 65 %, described as over-ambitious and seen as contributing to increased bureaucracy, higher pricing and delays. This led to an environment where corruption flourished.

Reuters reported in June 2018 that the tough local content requirements were aimed at bolstering Brazilian industry, but local firms often lagged global rivals in technical expertise.

That, together with strong unions and tough regulations, forced many oil firms to choose between incurring high penalties for violating the rules or waiting years more to get oil production online, Wood Mackenzie said in a June 20 report.

Petroleo Brasileiro SA also banned top offshore construction companies – most of which were domestic – from working with it after a graft investigation revealed company officials received bribes by contractors inflating costs for the state-controlled oil company.

Prior local content rules “amounted to an additional [exploration and production] tax, creating bottlenecks that delayed the development of a strong domestic industry,” Wood Mack said, as most companies opted to pay high fines to speed production.

Oil regulator ANP received 230 requests for waivers from companies seeking exemptions from the oil rules arguing they could not meet the requirements based on Brazilian market conditions.

But in 2017 and 2018, under President Michel Temer, fines were reduced by 40 percent, depending on the category. Local content requirements also have been lowered to match levels that operators were able to achieve.

The world’s biggest oil companies have bid aggressively in recent auctions to lock in access to the country’s coveted offshore pre-salt play, where billions of barrels of oil are trapped beneath a thick layer of salt under the ocean floor.

Related: Brazil’s Temer relaxes stringent local content requirements

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