Facts Decision Comment

A recent decision rendered by the Brasilia Federal Court of Appeals suspended one of the most anticipated Petrobras international tenders for the charter and operation of a floating production, storage and offloading (FPSO) unit in the Libra field, the largest oil field in the pre-salt region. The suspension will remain in effect until the Brazilian National Agency of Petroleum, Natural Gas and Biofuels (ANP) rules on Petrobras's local content waiver request.

Facts

The injunction was filed by the Brazilian Association of Shipbuilding, Ship Repair and Offshore Industries (Sinaval) on behalf of its associate members, mainly Brazilian shipyards. The suit claimed that Petrobras had failed to comply with local content requirements, in violation of the production sharing agreement signed with the federal government. According to the plaintiff, none of the local suppliers and shipyards had been invited to participate in the international bids launched by Petrobras.

Decision

The Brasilia Federal Court initially denied Sinaval's preliminary injunction request to suspend Petrobras's bidding process. Sinaval then filed a bill of review before the court of appeals, which overturned the initial ruling.

The decision highlights that, in relation to the exploration and production of petroleum under a product sharing agreement in pre-salt areas, Article 15(VIII) of Law 12,351/2010 prescribes that the bid notices must indicate "the minimum local content level required and other criteria related to the development of the domestic industry".

In addition, the court found that, according to the product sharing agreement signed by Petrobras, the federal government, ANP and Pre-Sal Petroleo SA (which was created to represent the federal government in pre-salt activities), a waiver may be granted only if:

  • there is no local service provider for the goods purchased or services contracted;
  • all proposals received from domestic service providers have an excessive delivery period or price in relation to their foreign counterparts; or
  • no local equivalent is available for a given technology.

Further, considering that ANP is still considering Petrobras's waiver request, the court held that it was necessary to wait for the referred administrative decision.

Therefore, considering the possible damages to the shipyards associated with Sinaval, the judge stated that it would be unwise to proceed with the bidding processes without ANP's decision on the waiver regarding whether the local content rule has been observed, emphasising that such analysis is typically complex.

Thus, the injunction to suspend Petrobras's bidding processes was partially granted in advance of ANP's decision on the waiver request.

Comment

Petrobras has previously cancelled two similar tenders for this FPSO, alleging excessive pricing in the proposals. Local content rules and policies which were "not negotiable" according to the former administrations of Presidents Lula and Dilma now face challenging times due to the oil industry's recent downturn.

Petrobras's request for a local content waiver for this important contract is not only a major shift after more than 15 years, but also – according to local suppliers and shipyards – an unfair modification of the status quo, as local industry has invested large sums of money in 'green-field' facilities in Brazil fomented by Petrobras in order to remain competitive under the existing local content rules.

This discussion will undoubtedly evolve once ANP issues its decision regarding Petrobras's local content waiver request.

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

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