RIO DE JANEIRO - Brazil's government is betting that laws requiring oil companies to purchase goods and services domestically will stimulate the country's struggling industrial sector, but the bet may pay off only half way if it stymies development of massive oil reserves.
Brazil's government has been imposing local content requirements on oil companies since 1999, but the pre-salt offshore oil discoveries of 2007 increased pressure on the local oil services industry.
Production in the newly-found reserves will depend on sophisticated technologies, but Brazilian oil services companies have struggled to meet exploding demand.
Maria das Gracas Foster, president of state-run oil giant Petrobras, has argued that local content requirements aren't responsible for production delays, citing examples of international suppliers who have delivered services only after lengthy delays.
But a study by Booz & Co., prepared for Brazil's National Petroleum Industry Organization, or ONIP, found that Brazilian producers in the oil services industry charge 55% more than their international competitors.
The study found that a heavy tax burden, high borrowing costs and infrastructure bottlenecks explain the gap between Brazilian companies and their foreign competitors.
"In summary," stated the report, "Brazil is in a challenging position--higher costs than emerging countries and lower productivity than developed countries."
Limited to domestic suppliers, Petrobras forecasts no production growth in the next three years despite its 16.4 billion barrels oil-equivalent in proven reserves, causing speculation that the government may relax local content requirements.
Analysts, however, expect local content laws to remain.
"Our sense is that these requirements are fixed and the government is not going to budge," said Ruaraidh Montgomery, an analyst at the Wood Mackenzie consulting group.
The government's challenge is to ensure that inefficient local suppliers don't permanently handicap the country's oil industry.
To economist Adilson Oliveira of the Federal University of Rio de Janeiro, the policy will fail unless the industry can become internationally competitive.
"The worst case scenario is that local content requirements create a privileged, inefficient industry at the expense of Petrobras and Brazil, but that doesn't have to be the case," said Mr. Oliveira. "The government has to stimulate the industry and demand improvements, not protect it. It has to say, 'We want to help you compete with international companies, not protect you from them.'"
In fact, many foreign companies are setting up Brazilian subsidiaries, but by entering Brazil they take on the costs associated with the country.
Wages are rising as skilled labor has proven scarce, adding to problems with infrastructure, taxes, and bureaucracy.
The Brazilian government has taken steps to lower these costs, funding worker training programs and providing 75,000 scholarships over the next ten years for Brazilians to study abroad through the Science Without Borders program.
Meanwhile, historic cuts by the central bank to the country's Selic base interest rate will lower the cost of capital in Brazil.
In addition, a new ONIP program aims to identify bottlenecks in the oil industry supply chain, with the National Development Bank, or BNDES, funding projects to remove them.
But despite efforts to support the industry, it's unlikely Brazilian companies will be able to compete internationally in the near term.
"Established international players already have the technological expertise, so it's hard to see what Brazilian companies can offer in the short term, although over time they may play a role in deepwater operations" said Mr. Montgomery.
Despite the challenges, local content has many supporters in Brazil.
"Local content requirements are necessary to give the industry a start," said Roberto Magalhaes, superintendent of ONIP. "Every country in the world protects its companies in its own way."
For now, the Brazilian government will protect the oil services industry with local content laws, and oil production will most likely continue to suffer.
"They still don't have the capacity needed to supply the production Brazil envisions," said Jamie Webster, a manager at PFC Energy consultants. "They will be set up for some years of disappointments."
Copyright (c) 2012 Dow Jones & Company, Inc.
WHAT DO YOU THINK?
Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.
More from this Author
Most Popular Articles