Brazil Plans to Ease Oil Company Fines for Buy-Brazil Breaches

Brazil’s oil regulator plans to ease future fines for producers who fail to meet strict local-content guidelines as the country seeks to accelerate development of offshore oil and gas resources.

The first set of changes since the policy started more than a decade ago probably will be ready for the next oil license auction set for October, said Helder Queiroz, a director at the National Petroleum Agency, or ANP. The proposals need to be approved by the National Energy Council, he said.

“It’s time,” Queiroz, who is coordinating the round, said in an interview at Bloomberg’s Rio de Janeiro office this week. “The local content policy is more than ten years old, needs to be improved.”

While the industry was hoping for lower minimum requirements for Brazil-built oil equipment, the agency decided to start with a more flexible methodology for fines when targets are missed. Instead of using the total rate of domestic purchases to calculate fines, penalties should be applied to separate equipment categories. The current methodology has inflated fines, he said.

A surge in oil investments since the policy was introduced in 2005 has strained the supply chain, making it difficult for explorers to meet minimum requirements and complete projects on time, Queiroz said. Operators including Petroleo Brasileiro SA, Royal Dutch Shell Plc., and Galp Energia SGPS SA have been fined.

‘Cost Structure’

“You would rent a drill ship for $10,000, $70,000 a day, now it costs $600,000, $700,000, even a million dollars. The cost structure changed, we need to adjust,” he said.

The next step would be to focus more on equipment that can be produced in large volumes locally, and less on using the regulation to promote new technologies, he said.

Under the current system, the government sets minimum requirements that fluctuate depending on where each concession is located, and bidders are able to pledge a higher percentage of locally-sourced goods to gain an advantage in auctions. In the hundreds of blocks offered under the policy, local content pledges determined the winning bidder in less than 10 cases, he said.

“This rule that proved inefficient will probably be changed now,” Queiroz said.

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