New local content regulations to accelerate FPSO deployments in Brazil

Brazil’s new local content regulations could fasttrack the deployment of FPSO units, boosting presalt oil production by more than 21 Bbbl by the mid-2020s, according to Wood Mackenzie.

Offshore staff

HOUSTON/LONDON/SINGAPORE – Brazil’s new local content regulations could fasttrack the deployment of FPSO units, boosting presalt oil production by more than 21 Bbbl by the mid-2020s, according to a new report from Wood Mackenzie.

Brazil’s local content regulations have been the subject of much debate. Introduced in the fifth licensing round in 2003, the requirements, along with fines for non-compliance, increased exponentially over subsequent rounds. This resulted in not only stifling offshore development, but also restraining the domestic industry that the regulations were meant to cultivate in the first place.  

In 2017, the Brazilian National Petroleum, Natural Gas and Biofuels Agency(ANP) rewrote the terms for the Libra (now Mero) FPSOs. On April 11, 2018, after two years of discussions, the Brazilian National Council for Energy Policy (CNPE) and the ANP published a resolution allowing companies to swap the local content commitments of their existing exploration and production contracts for lower and simpler requirements with reduced fines.

Juliana Miguez, research manager with Wood Mackenzie’s Latin America upstream oil and gas team, said: “Brazil’s new local content policy debottlenecks FPSO construction by allowing operators to construct hulls in Asian shipyards and use Brazilian suppliers to build and integrate selected modules.

“This procurement strategy – which is much more aligned with the local industry’s expertise – allows for a more predictable FPSO schedule, benefiting local shipyards through better capacity utilization and productivity gains, and actually increases demand for the local shipbuilding industry despite the hulls being constructed in foreign shipyards.”

By swapping high local content commitments for the new rules, the analyst claims, all 36 FPSOs required to develop discovered resources could be operational by 2027, with the first low local content unit delivered in 2021. In comparison, building the FPSOs under the old local content rules would significantly slow the pace of development, with only 26 FPSOs coming onstream by 2030, with delivery of the first fully domestic unit in 2023.

The analysis estimates, with a faster development pace, Brazil’s discovered resources could sustain a production capacity of 5 MMb/d by the mid-2020s – helping unlock 21 Bbbl of additional reserves – compared to a production plateau of 3.7 MMb/d under the old local content commitments.

Moreover, faster FPSO deployment would have a knock-on effect on the country’s economy, creating more jobs and significantly boosting royalty collection. According to the report, over the coming decade, this could see more than 95,000 additional jobs generated and royalties doubled from $28 billion to $56 billion.

“With up to five FPSOs targeted for award during 2018, the new rules will have an immediate impact on Brazil’s offshore development, debottlenecking the sector and laying the groundwork for faster FPSO deployment,” Miguez said. “Most operators will likely convert their high local content commitments to the new levels to speed up development.”

The deadline for interested companies to submit their requests to ANP is Aug. 10, 2018.

To date, Karoon and Parnaíba Gás Natural have been the first two oil companies to apply to change the terms of their contracts. The ANP has received several comments on the subject. Among the companies interested are Petrobras, Shell, BP, ExxonMobil, Petrogal, and Anadarko.

06/20/2018

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