On July 18 2017 the Brazilian National Agency of Petroleum, Natural Gas and Biofuels (ANP) published Notice of Public Consultation and Public Hearing 20 in order to collect input regarding the new rule which will increase the flexibility of the local content rules provided for in concession contracts entered into between the seventh and 13th bidding round for onerous assignment, as well as the first production sharing bidding round of the exploration of oil and natural gas blocks.

Overview

The alteration of the local content rules is partially motivated by the large number of exemption requests regarding the local content obligation. According to the ANP, there have been 225 such requests since 2011, which has caused controversy between companies and oil and gas industry suppliers.

Further, the ANP intends to standardise the provision contained in the relevant concession contracts (ie, contracts entered into between the seventh and 13th bidding rounds for onerous assignment and the first production sharing bidding round for exploration of oil and natural gas blocks) which gives the ANP the power to authorise:

  • exemptions from compliance with the local content rules;
  • adjustments to the percentage of the pledged local content; and
  • transfers of local content surpluses.

The purpose of the proposed rule is to guarantee more legal certainty to operators, detailing the criteria and necessary procedures that they must follow in order to receive ANP approval.

The proposed rule does not contemplate contracts entered into before the seveth bidding round, as these contracts have no specific rules for the above exemptions, adjustments and transfers in order to meet local content requirements.

Under the proposed rule, an exemption from the local content commitments in relation to contracts of determined goods or services will be granted where:

  • no Brazilian supplier is available;
  • the Brazilian supplier charges excessive prices compared with international suppliers;
  • the Brazilian supplier's shipment timelines are excessive compared with international suppliers; and
  • use of technology which does not exist in Brazil is required.

As detailed in the proposed rule, excessive pricing will be considered as any price that exceeds between 10% and 25% of the price of non-Brazilian suppliers, depending on the date on which the contract was signed. The ANP will analyse excessive timelines on a case-by-case basis, according to the characteristics of each contract.

The exemption request must be filed with the ANP by the delivery of the last local content report for each local content benchmark.

The proposed rule also sets out that once the administrative process of analysing the exemption begins, the ANP will conduct a public consultation with a view to obtaining subsidies for its decision-making process (which can be waived where other public consultations address this topic).

As regards requests for adjustments to or transfers of surplus local content, the proposed rule is more conceptual in nature, since the ANP is waiting for further definitions from the National Council of Energy Policy on this subject.

Comment

Consultation on the proposed rule closed on September 18 2017 and a public hearing was held on October 3 2017 in order to discuss this matter with the industry.

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For further information on this topic please contact Godofredo Mendes Vianna at Kincaid | Mendes Vianna Advogados by telephone (+55 21 2276 6200) or email (godofredo@kincaid.com.br). The Kincaid | Mendes Vianna Advogados website can be accessed at www.kincaid.com.br.