Brazil above water

What opportunities are currently available in the Brazilian oil and gas industry?
As consultants and brokers, we cannot afford to be optimistic or pessimistic. We have to be realists. The newspapers are selling the idea that the market is coming up again, that there is a lot of activity and IOCs are coming back in a big way. In my opinion, there is too much noise.
It is true that the new rules for the bidding rounds and the new movements the government has made – in terms of reviewing legislation such as Repetro and local content rules – are definitely way more market-friendly than they were a few years back. That has brought a lot of interest back into the country.
If you look at the oil rounds in detail, it is important to see not only which companies have acquired concessions, but also which ones are committing to doing exactly what work programmes and how much they will invest. You cannot directly translate the awarding of a concession to drilling, development and more production.
Some places have been awarded for multiple millions of dollars because of their proven reserves and pre-salt resources, and it is a no-brainer that people would like to develop those areas as fast as they can. The other areas are exploration acreage where there is no data or clear idea of reserves, and companies are trying to strike oil.
My realistic expectation for chartering activity in Brazil in the next two years is that it is still going to remain very focused on Petrobras. There is new legislation in place in terms of how Petrobras is allowed to procure in the market. IOCs make up a large share of the demand for support vessels, and they announce their needs publicly so companies can bid.

How is Brazil’s vessel chartering sector faring following the global oil price slump?
You cannot just say that the market is down, because it depends on what you are talking about. Consistency-wise, Brazil is probably the least worst-off of the markets for offshore shipping worldwide. Other areas are struggling a lot more. Brazil is a market that has suffered less with low international oil prices.
The overall number of Brazilian-flagged vessels that have been employed is growing. If we look at fleet evolution here since 2000, at the very peak of oil prices there were 500 ships, and now we are down to 375 ships. This is not too bad, compared with the Gulf of Mexico or the North Sea. The number of ships that have remained employed because activity in Brazil is so robust is tremendous. You do not find those numbers anywhere else globally. Brazil has approximately the same number of FPSOs as the whole of Southeast Asia.
Out of the 500 vessels that used to be in Brazil, more than half were foreign-flagged. Of the 375 in Brazil today, only 65 are foreign-flagged. There is no single anchor handler with a Brazilian flag that remains without a job these days. There are not enough Brazilian-flagged ships to give Petrobras and the other charterers the volume they need in terms of Brazilian-flagged ships in the anchor handling segment.
In PSVs, there are a few remaining foreign-flagged vessels and they will soon be gone because Brazilian ships are idle. Of these few foreign-flagged vessels, only about two are employed, while the rest are just floating around because the owners that have Brazilian tonnage can take these foreign-flagged vessels and transform them into local fleets.
It is a special regime of our flag requirement, a version of the Jones Act of Brazil, whereby if you have Brazilian tonnage, you have the right to take your foreign-flagged or foreign-built vessel and use your tonnage to bring it under the Brazilian flag temporarily by suspending your foreign flag. There are also still some foreign-flagged oil spill vessels, but when you go into shallow diving support, there are no foreign-flagged vessels. Most diving support vessels and pipe layers are foreign-flagged.

How likely is it that investor-friendly regulations will undergo severe changes following the October 2018 general elections?
In terms of changing taxation, Brazil is extremely conservative. It took the whole strike in May 2018 just to discuss a potential change in one simple tax on fuels.
Brazil is a democratic country with extremely stable institutions. Our legal, legislative and executive systems have the same power, so the president will not be able to change things by decree. There is a certain level of things that can change, but something such as the Repetro law has to go through Congress. By itself, it is subject to the veto of the president.
Things in Brazil do not change so quickly, which is both good and bad. The taxation system is very complex, so you need an expert to walk you through the process and explain what is happening, but the chances of that changing are very low. There would also be all sorts of signals that a change is coming. Usually, our legal system establishes that you cannot change anything affecting decisions that were made in the past. When changes happen, they are valid from that point on.
A good example of that is the local content rules. The ANP [National Agency of Petroleum, Natural Gas and Biofuels] is governmental, but independent of the system. Its tendency during the former left-wing governments was to set artificially and very high local content demands to stimulate people to build locally.
The current government, which is more centrist, thinks that we should make it flexible because prices have been historically high in Brazil. The government thought we should open up a little bit for imported goods and play with the world, so it started changing the flavour. That decision was subject to discussion in Congress, and the industry and everybody co-operated and a new result came out.
Conversely, what happened with Repetro is fantastic. It is an incentive for foreign goods. The government says no taxation should be applied to these foreign goods, because we need them and it is going to take a long time to make them locally. We should keep the incentive and the industry coming because the activity is more important than the taxes. They have extended Repetro, responding to worries that it was going to end in 2020.
You can still plan for 20 years, and if it is a good plan, it will survive. Several companies have done it and they are here in spite of all the changes that have happened politically. How much local content you have depends on the conditions. Brazil is stable overall. It is pragmatic and the country is responding well, better than three or four years ago. This is why all the interest is coming back.

For more information on Brazil’s shipping industry, see our business intelligence platform, TOGYiN.
TOGYiN features profiles on companies and institutions active in Brazil’s oil and gas industry, and provides access to all our coverage and content, including our interviews with key players and industry leaders.
TOGY’s teams enjoy unparalleled boardroom access in 35 markets worldwide. TOGYiN members benefit from full access to that network, where they can directly connect with thousands of their peers.

Business intelligence and networking for executives: TOGYiN