In an attempt to give a positive sign to the Brazilian oil and gas industry, the government recently published two new rules aimed at relaxing regulations for compliance on local content obligations of oil and gas exploration and production contracts, as detailed below.

Local Content Bonus

On January 18, 2016, Decree 8,637/2016 was published to create the “Program to Stimulate Supply Chain Competitiveness and for the Development and Improvement of Oil and Gas Sector Suppliers” (Pedefor). According to the Ministry of Mines and Energy (MME), the program seeks to incentivize suppliers to invest in productive capacity, technology and innovation in the country.

In practice, the decree creates a mechanism to give bonuses to exploration and production consortiums or companies that contribute to the establishment or expansion of suppliers in the country, invest in technological innovation, perform exportation of national equipments or engage in the acquisition of explorative lots of national products. These investments will be converted into Local Content Units – UCL, which will be used to reduce local content obligations for current oil and gas exploration and production contracts executed with the ANP, Brazil’s national oil and gas agency.

The new model was well received by the sector, as it allows companies to establish a more comprehensive local content policy which is not only focused on compliance for specific local content items of contracts with the ANP. The new model is expected to alleviate the significant fines for non compliance of local content imposed by the ANP.

The distribution of the UCLs will be managed by a directive committee comprised of representatives of the federal government, the ANP, the national development bank (BNDES) and the public innovation agency, Finep. The specific criteria for application of the decree are yet to be regulated.

Local Content Neutralization

In parallel, recently ANP submitted a draft, for public consultation, of a new resolution that will allow for the recalculation of the global local content percentages established in oil and gas exploration and production concession contracts. The recalculation will use a formula proposed by ANP, which considers the weight of investments effectively made in each local content item, and ignores the percentages of items for which no investment was made.

The resolution is an answer to an old market demand. Due to a formal request by the Brazilian Petroleum Institute, the resolution will be applied retroactively to all concession contracts currently in effect.

For more information on Pedefor, the new rules for neutralization of local content or other matters related to this legal update, please contact Alexandre R. Chequer, Leonardo P. Costa, Victor Galante, or Bruno Belchior.

Observations in this update about Brazilian law are by Tauil & Chequer Advogados. They are not intended to provide legal advice to any entity; any entity considering the possibility of a transaction must seek advice tailored to its particular circumstances.