DW: Will demand for local content undermine cost cuts drive?

Brazil and Tanzania are two countries at very different stages of oil and gas development, Douglas-Westwood said in its DW Monday report. 

Brazil is a well-established powerhouse, reeling from a recent corruption scandal, while Tanzania is at the early stage of development after a series of promising discoveries by majors including Shell and Statoil, DW explained.

Both, however, are currently struggling with the same thing – local content. The degree and depth with which a local government is involved in developing and steering a project varies globally but getting the balance right is vital. Too low and the country may not be able to maximize the impact of oil and gas; too high or restrictive, and companies will be deterred from investing.

According to DW, Brazilian NOC Petrobras has struggled with local content for many years, with the Replicant project a clear example of this. In 2010, Engevix signed a contract with Petrobras to supply eight FPSOs with identical designs. However, long-term delays and a chronic lack of financing has meant that only three of the hulls have been completed – three years behind schedule. Much of the additional work has been transferred to China, undermining the intentions of local content.

This is likely to have influenced Petrobras’ decision to apply for special dispensation for its Libra and Sepia FPSOs. Re-issued tenders for the units indicate 27% local content levels for some of the topside equipment and no local content for the hull – far lower than the 70% usually required. However, tendering activities were brought to a halt due to an injunction by Sinaval who have claimed that no consultation has taken place between Petrobras and local players. This dispute has played out on the wider political stage as well, with rumored delays to the large upcoming bid round, due to no agreement being put in place over the extent of reforms to local content regulation.

DW further noted that Tanzania is also struggling with local content regulations, with leading operators voicing concerns at a recent stakeholders’ consultation meeting over the impact the 2015 Petroleum Act will have on developments ahead of a draft 2017 Regulation. Currently, a local content program has to be submitted before any development plans, detailing local employment and training operators will have to provide quarterly updates on the implementation of local content.

Douglas-Westwood concluded that the issues being experienced in these two countries are not unique, and local content will remain a contentious and difficult issue for governments around the world for the foreseeable future – especially for operators beginning to move into new frontier areas.

However, DW added, the question remains whether ensuring that local content requirements are met will compromise the drive for cost reductions and efficient project completions.

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