Corruption probe puts pressure on buy-Brazil rules

OREANDA-NEWS. September 23, 2016. The fallout of a prolonged corruption investigation centered on state-controlled Petrobras has increased pressure on the Brazilian government to permanently relax local content rules.

Petrobras is already seeking waivers in an effort to keep its upstream projects on track, and other oil producers, such as Shell, have been pushing for more lasting changes.

The strict rules, which require upstream developers to use a percentage of locally sourced goods and services, have long been criticized as a drag on the industry.

The local content requirements were adopted in 2003 during the 13-year rule of the Workers Party (PT), which is now in the political opposition after last month's impeachment of President Dilma Rousseff.

Critics say the rules created the conditions for a far-reaching pay-to-play scheme targeted by the Lava Jato corruption investigation, by giving a privileged set of local contractors exclusive access to lucrative contracts. These contracts were then used to fund campaigns and pay bribes.

Many of these contractors, such as Odebrecht and OAS, are in legal and financial trouble because of the scandal. Around 30 mainly Brazilian firms are still on a December 2014 moratorium on contracting with Petrobras and many others are in financial straits.

Even before the corruption case erupted in 2014, compliance had been a challenge because local contractors lacked a competitive cost structure and technological capacity.

Earlier this week, Petrobras made a formal request to oil regulator ANP to waive local content obligations for the construction of the first permanent floating production, storage and offloading (FPSO) vessel planned for the 8bn-12bn bl Libra sub-salt field.

Petrobras production and technology director Roberto Moro said late yesterday that nine of the 19 production systems the company plans to bring on stream through 2021 could be re-contracted with other firms in order to keep the company's production plans on track.

Petrobras has already cancelled contracts with corruption-linked firms and shipped FPSO projects to shipyards in Asia. Among them, the P-67 and P-70 platforms earmarked for sub-salt fields in the Santos basin.

Earlier today, former finance minister and Petrobras chairman Guido Mantega was taken into police custody on accusations of corruption in the tenders for the two platforms.

Mantega is alleged to have requested in 2012 that the platforms' local contractors Mendes Junior and OSX deliver around R5mn (around \\$2.5mn at the time) to hidden offshore accounts used to finance PT campaigns. Through his attorney, Mantega denies any wrongdoing.

The ANP has already adopted a more transparent policy for granting waivers, and earlier this year handed down a landmark decision exempting firms from fines for non-compliance. But critics say the piecemeal approach is not enough to foment oil development.

Mines and Energy Ministry officials have said more substantial changes may be adopted by year-end as part of a multi-faceted plan, Pedefor, aimed at increasing the competitiveness of the sector.

In its 2017-21 business plan released this week, Petrobras acknowledges that local content rules remain a major risk for the costs and timeline of its projects.