This document discusses the effectiveness of local content policy in Brazil's petroleum sector. It provides an overview of local content policies internationally and in Brazil, outlining the evolution and key aspects of Brazil's policy. The policy aims to increase local industry participation, technological development, and job opportunities. However, the complex certification process and high fines for non-compliance impact investment decisions. Potential best practices to enhance the policy include developing commitments in phases, negotiated development plans, incentives over penalties, and simplifying certification. The overall goal is balancing local content promotion with investment promotion in oil production.

1. Grupo Economia da Energia Diana Martinez-Prieto
The effectiveness of Local Content Policy in
the Brazilian Petroleum Sector
Diana Martinez-Prieto
IAEE - AB3E - GEEIE
MSc. Industrial Economics, UFRJ, Brazil
BSc. Economics, Universidad Nacional de Colombia
E-mail: d_martinezp@yahoo.com

2. Grupo Economia da Energia Diana Martinez-Prieto
Index
 Objectives of LCP and the international experience
 Current Brazilian Local Content Policy in the petroleum sector
 The effectiveness of the Brazilian Local Content Policy
 Best practices to enhance the LCP in the Brazilian Petroleum Sector

3. Grupo Economia da Energia Diana Martinez-Prieto
Introduction
 Without Local Content Policy (LCP),
operators tend to buy on global
market.
 The more often used definition for
“Local Content” is the oil operators
value-added generation; starting
from equipment acquisition
produced by suppliers companies in
any location within the country
Source: NPD.

4. Grupo Economia da Energia Diana Martinez-Prieto
Canada
USA
Mexico
Bolivia
Brazil
Venezuela
T&T
United Kingdom
Norway Russia
Algeria
Libya
Ghana
Nigeria
Angola
South Africa
Tanzania
Saudi Arabia
China
Australia
Indonesia
Malaysia
East Timor
New GuineaUganda
Ecuador
Colombia
IndiaOman
Kazakhstan
Iraq
Irão
Azerbaijan
Mozambique
The Local Content Policy has become a global drive of
petroleum countries
Source: own elaboration.

5. Grupo Economia da Energia Diana Martinez-Prieto
Norway:
Strengthten value-added
activities (backward and
forward linkages)
Nigeria:
National recruitment
and training
Malaysia:
Transform into a
international hub for a
petroleum services and
equipments
Kazakhstan:
Reduce economic dependence of
petroleum industry
(diversification)
However, the objectives of this policy are different
Source: own elaboration.
Brazil:
 Increase the participation of the
domestic industry on competitive bases
 Enhance national technological
development
 Enhance the level of national capabilities
and job opportunities

6. Grupo Economia da Energia Diana Martinez-Prieto
Local Content Policy evolution in Brazil
Procap 1000
(1986-1992)
Procap 2000
Procap Future
vision
Local Content Requirements9.478 Law: The LC is
defined in a concession
contract clause
Creation of ANP
0 1 2 3 4 5 6 7 8 9
10
12
X% LC free
defined
X% Min LC (by block’s localization).
Creation of PRONIMP
2013
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
X% LC maximum
Certification system- booklet
2009
2010
2011
2012
Bidding Rounds
1939? - 1960 1970 - 1980 1990 - 2000
Most of materials
and equipments
were purchased
abroad
Import
substitution of
materials and
equipments Economic Open
Law 12.351: LC in
the production
sharing system
Pre-Sal
ANP Res. No. 36,
37, 38, 39
1953: Petrobras
1957: IBP
INOVAPETRO
2014
2015
2016
2017
* Procap 2000 (1993-1999).
Source: own elaboration.
Procap
2000*
The auction notice and the agreement present differences
between production sharing system and concession system
(Pre-Salt area VS. other offshore and onshore areas)

7. Grupo Economia da Energia Diana Martinez-Prieto
How is the Local Content Policy in the Brazilian oil industry?
The regulation of the oil industry
in Brazil has been characterized
by a strong emphasis on
promoting Local Content, but it
introduce different issues that
could represent risks for the
investments.
Source: Oxford Analytica.

8. Grupo Economia da Energia Diana Martinez-Prieto
The Brazilian Local Content process in the petroleum sector
Offers and
assessment
criteria
 Submission of offers in the tender protocol of auction
 Signing of the concession agreement
Certification
 Exploration Phase
 LC Certification
 Development Phase
 LC Certification
Fiscalization
 Fiscalization
 Fines Enforcement

9. Grupo Economia da Energia Diana Martinez-Prieto
Commitments of Local Content in Brazil (concession system)
Average Local Content in Brazil
(2000-2013)
LC offers and
assessment criteria
 Submission of offers in the
tender protocol of auction
 Signing of the concession
agreement
Source: own elaboration.
 The LC is part of the offers
assessment criteria (20%, with
PEM and Signing Bonus)
 Offers are submitted with
percentual LC compromises for
equipments, for each phases.
Production Exploration

10. Grupo Economia da Energia Diana Martinez-Prieto
Certification
 Exploration Phase LC
Certification
 Development Phase LC
Certification
Example: Retention valves of axial displacement
 Spring (purchasing in local market): US$5
 Body (cast in the factory): US$50
 Obturator (import): US$18,5
 Guia (cast in the factory): US$35
 Sell price (supported by the Certification
Company): US$655,8
Certification and compliance process

11. Grupo Economia da Energia Diana Martinez-Prieto
 Areas of activity
 Basic unit of measurement: goods,
temporary goods, services
 Complementary units of
measurement: systems, sub-
systems, sets of systems
Source: ANP.
Certification and compliance process

12. Grupo Economia da Energia Diana Martinez-Prieto
Fiscalization
 Fiscalization
 Fines Enforcement
If 0 < NR(%) < 65% ⇒ M(%) = 60%
If NR(%) > 65% ⇒ M(%) = 1,143 NR(%) - 14,285%
Fines for non-compliance (concession system)

13. Grupo Economia da Energia Diana Martinez-Prieto
Impacts of the Brazilian LCP in the E&P projects
With information from the Energy Economics Group of the Federal University of
Rio de Janeiro (GEE/UFRJ) and economists and tax experts of the principal
companies linked to Brazilian Petroleum, Gas and Biofuels Institute (IBP), a
Technical and Economic Feasibility Assessment was performed for one of the
operators with petroleum reserves of 500 MMBbl in deep water.
For the assessment, the oil operators realize a Technical and Economic
Feasibility Assessment, which include:
→ An analysis of Discounted Cash-Flow.
→ An analysis of risks with the Monte Carlo’s model.
See more in:
https://www.researchgate.net/publication/269335922_The_Local_Content
_Policy_and_the_investment_decisions_in_Brazil (Master´s Thesis, 2014)

14. Grupo Economia da Energia Diana Martinez-Prieto
The Brazilian Local Content Policy: how effective has it been?
Offers and
assessment
criteria
Companies commit to buying those Brazilian goods and services
that they will need during a period that could last 10 years. In
most cases their needs are not well known, since they depend on
the results of the exploratory campaign.
Certification
The companies must undergo a rigorous and complex system of
certification of their purchases of goods and services.
Fiscalization
The companies pay high fines if they do not comply with
contractual commitments

15. Grupo Economia da Energia Diana Martinez-Prieto
1. The LC compromises should be developed for each E&P phases, so that
the operators have a best control of the contractual compromises.
2. The development plan of the fields should be to result of the negotiation
process between the operators and the government.
3. The development of operators local content should be a factor in bidding
reward or tax character.
4. Fiscal flexibility by Local Content incentives
Potential best practices of LCP in the Brazilian petroleum sector
Looking for a highest equilibrium between Local Content promotion and investments
promotion in oil production. Based in other experiences, other possibilities are:

16. Grupo Economia da Energia Diana Martinez-Prieto
5. To simplify the Local Content certification process and discuss the rules
of contracts.
6. Encourage local suppliers to develop k - intensive equipment and those
with the greatest impact in the chain, allowing access to relevant
markets on the world stage.
7. Incentives to export local suppliers and their technologies, as well as to
increase the local suppliers participation in the oil operator’s activities
abroad.
Potential best practices of LCP in the Brazilian petroleum sector
See more in: Oxford Energy Forum 98, p. 28 – 30, 2014
https://www.researchgate.net/publication/271192256_The_impact_and_effective
ness_of_local_content_policy_on_oil_exploration_and_production_in_Brazil

17. Grupo Economia da Energia Diana Martinez-Prieto
Thank you for your attention
Diana Martinez-Prieto
IAEE - AB3E - GEEIE
MSc. Industrial Economics, UFRJ, Brazil
BSc. Economics, Universidad Nacional de Colombia
E-mail: d_martinezp@yahoo.com