On April 12, 2018, Brazil’s National Agency of Petroleum, Natural Gas and Biofuels ("ANP") published in the Official Gazette Resolution No. 726/2018 (“Resolution”), which regulates amendments to the local content clauses of contracts for exploration and production of oil and natural gas, as well as establish rules regarding exemptions (waivers), adjustments of percentage and transfers of local content excess.
Resulting from discussions between the Brazilian government and market players, the Resolution allows the ANP to apply local content commitments different from those in force under the Concession Contracts executed until and including the 13th Bid Round.
In this regard, given the voluntary nature of this measure, each oil company that qualifies under the Resolution can express its agreement to the new provisions, within a term of 120 days counted from the publication of the Resolution, and then execute an amendment to the relevant exploration and production contract.
According to Exhibit I of the Resolution, the amendment can establish the following local content percentages:
- Onshore blocks – A global percentage of 50% for both the exploration phase and the development stage or for each development section.
- Offshore blocks – A global percentage of 18% in the exploration phase and in the development stage or in each development section, a percentage of 25% for well construction and 40% for the collection and offloading system. As to the commitments regarding the stationary production units, percentages were provided for three areas—40% for engineering; 40% for machinery and equipment; and 40% for construction, integration and assembly.
The Resolution states that, by agreement of all signatories, the local content clauses under the Production Sharing Agreements and the Transfer of Rights Agreement may also be amended.
It is important to note that, after the execution of the relevant amendment, the contracting parties will no longer be allowed to submit waiver and adjustment requests towards local content commitments, and proceedings that were previously submitted will be automatically dismissed. Furthermore, the Resolution establishes that the contracting party that opts to amend the contract must waive any claim against the ANP relating to fines imposed for noncompliance with local content commitments.
The Resolution also sets forth the criteria, requirements and procedures applicable to the exemption of local content commitments regarding the Concession Contracts from the 7th to the 13th Bid Round, the Transfer of Rights Agreement and the Production Sharing Agreements concerning the 1st Pre-salt Bid Round (including the Concession Contract concerning the unitized area adjacent to Gato do Mato - 2nd Pre-salt Bid Round). The exemption may be authorized in the event of (i) the absence of a Brazilian supplier, (ii) offers from Brazilian suppliers with expensive prices compared to the prices of foreign suppliers of similar goods/services, (iii) offers from Brazilian suppliers with excessively long delivery time compared to the delivery times of foreign suppliers of similar goods/services and (iv) the absence of a new technology in Brazil.
The exemption request must be signed by the operator, accompanied with evidence and filed at the ANP until the deadline for the submission of the last Local Content Report of each Local Content Assessment pursuant to the respective Phase, Stage or Section. The Resolution also provides that the ANP may conduct a public consultation, with the objective of gathering information, giving transparency to the decisions of the Public Administration and assuring the participation of any interested party.
Adjustment of percentage and transfer of excess
For the contracts mentioned in the item above (waiver), the ANP may exceptionally authorize the adjustment of a local content percentage, based on the public interest, with regards to a certain item or sub-item of the commitment table. In this case, the operator must request the adjustment, on special conditions, by the deadline for the submission of the last Local Content Report of each Local Content Assessment.
The Resolution also allows the operator to request the transfer of local content excess (if the concessionaries not only complied with the requirements but also exceeded them) from the Exploration Phase to the Development Stage or from a Section of the Development Stage to the subsequent section, depending on the result of the inspection regarding the Phase or Section.
It is our understanding that the initiatives towards local content provide legal certainty to the market and potentially unlock future investments.