Brazil Oil M&A to Pick Up as Service Suppliers Seek Partners

Mergers and acquisitions will likely accelerate in Brazil’s oil services industry as suppliers such as Halliburton Co. (HAL) and Schlumberger Ltd. (SLB) struggle to meet local content requirements, Ernst & Young LLP said.

Foreign service suppliers looking to benefit from state- controlled Petroleo Brasileiro SA (PETR4)’s $224.7 billion in investments over the next five years will need to form joint ventures or buy out local competitors, Carlos Assis, head of oil, natural gas and mining for South America at Ernst & Young, said today in an interview. International oil companies operating in Brazil also need to use local content at production projects, he said.

“The big suppliers like Halliburton, Schlumberger and Baker Hughes need a Brazilian company providing them with technology for them to be able to declare that the technology has the presence of local content,” Assis said in Rio de Janeiro.

Brazil plans to create domestic shipbuilding and oil service industries to boost employment as Rio-based Petrobras and other producers including Royal Dutch Shell Plc and Chevron Corp. expand production. Petrobras plans to more than double output to 6.4 million barrels a day by 2020, with a large part of the output coming from deep-water fields that require advanced technology to extract the oil.

Petrobras needs to purchase as much as 70 percent of its equipment from local suppliers to meet Brazilian guidelines, according to a presentation on its website.

Petrobras Auditing

Foreign service suppliers have set up departments to develop local content in Brazil as they look to maintain their share of the market, Assis said. Houston-based Baker Hughes plans to continue hiring Brazilians to help meet local content requirements, spokeswoman Teresa Wong said in an e-mailed response to questions. Houston-based Halliburton and Schlumberger, based in Paris and Houston, didn’t respond to phone calls seeking comment.

Petrobras is stepping up its auditing of foreign suppliers to guarantee they use enough locally made components and materials to meet requirements, Exploration and Production Director Guilherme Estrella said at a Sept. 1 conference in Rio.

$400 Billion

Brazil’s oil industry is expected to need $400 billion in goods and services through 2020, Carlos Camerini, the superintendent of local industry group ONIP, said at the same conference. Petrobras produces about 90 percent of Brazil’s oil and natural gas and will be the lead operator of new projects in the so-called pre-salt region that holds the country’s largest oil fields.

Petrobras is letting suppliers use their contracts with the company as guarantees to encourage banks to cut borrowing costs by as much as 40 percent, stimulating investments in the supply chain, Chief Financial Officer Almir Barbassa said in an Aug. 25 interview.

The policy requiring Petrobras to buy goods and services from local companies will stunt production growth, Banco Safra said in a research report to clients in June. The company’s production rose 2 percent in the first half of 2011, its slowest growth since 2007.

To contact the reporter on this story: Peter Millard in Rio de Janeiro at

To contact the editor responsible for this story: Dale Crofts at

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