There is a highly developed goods and services supplier chain for the energy industry in Brazil, particularly as regards large suppliers of equipment for oil exploration, production and refining. As regards natural gas and renewable energy, however, much remains to be done. There are also numerous bottlenecks in the secondary supply chain (medium and small suppliers) and, although local content policy requirements have been relaxed since the 14th Round of ANP Auctions, they continue to pose a challenge.
In reality the old Local Content Policy caused a delay in the development of the supply chain. In general in these times of Corona Virus Pandemic, the orders are scarce, and the health crisis will delay in high degree the competitiveness leap. The increase in competitiveness is a must to many goods and service providers in order for them to achieve the scale of Global Suppliers.
Strong points and points for improvement in Brazil’s oil and gas goods and service industries are as follows:
Strong points
There is a well-established, diversified heavy equipment industry to serve exploration, production and refining projects. Examples in this segment are subsea equipment, general-use valves (except subsea valves), heavy boiler work pieces of equipment (furnaces, boilers and heat exchangers), all purpose and special piping of up to medium diameter, rotating equipment (such as pumps, reciprocating compressors and ventilators), metal structures, cranes, the whole manufacturing chain of electrical equipment to all scales (motors, generators and substation and transmission equipment) and steam turbines. The automation and control electronics industry is also well served in Brazil, although imported content is high.
Points for improvement and bottlenecks
Noteworthy equipment families include subsea valves, special-use refinery valves, large diameter piping for gas pipelines, boiler work with special metallurgy (chrome, molybdenum, vanadium, but the scale of demand is small at present), high-volume centrifugal gas, CO2 and air compressors and gas turbines.
It is a challenge for Brazilian Industry as a whole to introduce the 4.0 Industry concepts addressing Smart Manufacturing, Smart Products and Services, Cloud Data Processing and Smart Supply Chain Integration. The most advanced brazilian enterprises in that sense are large companies and the majority of them are in the beginning of the Smart Manufacturing phase. The main objectives recognized by the directors of such enterprises are production costs reduction and product quality increase. Many initiatives exist as to introduce factory floor sensors, Programmable Logic Controllers (PLCs), Digital Control Systems (DCS), Scada Systems, Manufacturing Execution Systems (MES) and Enterprise Resource Planning (ERP).
The modernization plans of some industries were severely impacted by Pandemic in the years 2020 and 2021. There is no capital availability for the upgrade of plants and no easy access to financing. According to an appraisal study conducted by the Brazilian Industry Confederation (www.CNI.org) the modernization process in Brazil has been impaired by these factors.
Small and medium supplier chain – Secondary Chain
This supply chain offers considerable opportunities for foreign suppliers wanting to come to Brazil. Some examples are:
Forging (this operation is critical to the valves industry in Brazil), manufacturers of “fittings” for special steel piping of any size, processes for the manufacturing of polyethylene fittings and accessories for the natural gas industry, clamps/fasteners, small equipment, controllers, security and alarm systems and others. Forged pieces and parts for subsea pieces of equipment.
Foundries – the situation is similar to that of forging. There are few foundries in Brazil producing customized parts for the oil and gas industry.
In Brazil, small and micro businesses account for around 70% of employment and 27% of GDP. Many of these firms endeavour to enter the oil and gas supply chain, but few manage to meet the stringent technical and product quality requirements.
Instrumentation and Automation – small local control systems for continuous processes, safety systems and sensors.
Shipbuilding and Offshore Industry – Shipyards
In the 1960s and 70s, Brazil’s shipbuilding industry ranked fourth in the world. In the 1980s and 90s, the industry was pulverised for lack of commissions and then in 2003 made a comeback as a result of contracts from Petrobras.
Partly due to substantial national content requirements, however, shipbuilding projects in Brazil became expensive and from 2010 onwards operators were opting to build their vessels in Asia or to charter them, even paying the fine for failing to meet national content specifications. Today a number of shipyards in Brazil await international partners in order to be able to resume production and re-enter the global market.
Moreover, the market international competition in this Pandemic era regarding hull construction will be very tough for Brazilian shipyards because of the obsolescence and lack of introduction of modern construction techniques in the last 7 years. May be, marine repair could be an area where Brazilian shipyards would perform well.
Shipbuilding and Offshore Industry – Platform Modules
Brazil has done better in this segment by virtue of a legacy from the time of large refining projects. In terms of their construction, these modules resemble refinery subsystems. Brazil has shown itself capable of integrating an FPSO at international prices and to acceptable timeframes. Nonetheless, this is another area ripe for foreign suppliers wishing to operate in Brazil with a good engineering background and stimulating manufacturing of equipment and construction contractors. This segment can benefit significantly from the 4.0 Industry concepts because this is an area where Brazilian firms have demonstrated good competitiveness.
Main Contractors or Project Integrators
This is one area where Brazil really is lacking. Almost all the major Brazilian “contractors” have been damaged by “Operation Carwash” and today are barred from contracts with the government and, consequently, with Petrobras. Some await “Leniency Agreements”, so as to be able to return to the company listing, but these are lengthy processes. Some foreign “contractors” have set up in Brazil and won some sizeable contracts, and we are following these projects in order to assess these firms’ performance more thoroughly. Today, in Brazil, the integration of a production platform or FPSO is better performed by shipyards in place of a major contractor.
Engineering Project Firms
This is another key bottleneck in Brazil, whether for conceptual, basic or detail projects. This used to be a substantial industry in Brazil, but suffered greatly from the very high inflation of the 1980s and early 90s. It rallied later, although weakened, on the strength of Petrobras projects, but has now practically disappeared under the impacts of Operation Carwash, which have eroded demand from Petrobras. This is another important niche for foreign firms wishing to move into Brazil or even to partner with the few remaining Brazilian firms.
General features of bottlenecks facing goods and service suppliers for the oil and gas industry in Brazil
Planning and Management – There is room for improvement in large project planning and management. Local delivery timeframes still fall short of international expectations;
Innovation Management – The industry needs to sharpen its focus on innovation to leverage competitiveness; it has no tradition of collaboration with technology institutes or universities;
Human Capital Management – There are excellent technical schools (the Senai system) and universities, but a lack of experienced personnel to work in the industry; the human capital crisis in Brazil in the oil and gas industry, especially in the Construction and Assembly segment is much more critical in relation to foremen and supervision skilled technicians than in relation to medium experienced engineers (5 to 10 year experience) or junior engineers.
Lack of Industrial Engineering – The problem here is similar to that described above in relation to Design Engineering. Shop floor engineering, to provide alternative manufacturing solutions and enable other designs to be envisaged, is lacking in Brazilian manufacturing.
Access to Funding – There is still much to be done to improve entrepreneurs’ access to sources of financing in Brazil to invest in their businesses. Interest rates have already reached an international level and (the interest rate have been coming down in the last seven years), but the credit approval processes whether at government or private investment banks are drawn out and burdened by guarantee requirements.
Tax and Labour Law – Both frameworks are highly complex and costly in Brazil. As factors that impact suppliers’ competitiveness, labour and tax requirements have to be properly studied and understood. A Labour Reform Law Act passed in the Congress in 2017 and this law made easier for firms the process of hiring people and attenuated the effects of tributes for the employer. Now an comprehensive Tax Reform is the target but may be the object of much discussion in the House of Representatives, the Senate and state governors.
Logistics Chain for raw material and exports – Costs are very high in this chain in Brazil, raising production costs and impairing competitiveness. The preferred mode of transport is road and no rail infrastructure has been developed. Recent airport privatisations have breathed new life into logistics.
National Content Regulations – These used to be extremely rigid and unrealistic, raising the manufacturing and management costs incurred by exploration and production mega projects. They were revised in 2018 by Regulation 726, and this Regulation has been upgraded on January 30 th 2020. The use and application of the Local Content Primer was addressed in this 2020 Revision and the evaluation of Local Content became more straightforward. This is another point for the attention of foreign suppliers interested in setting up in Brazil. Local Content details is part of the Concession or share Agreement Contracts and can be consulted when the Notice of a Round of Blocks is released to the public. For further readings, please proceed to Português (Brasil) (www.gov.br) only in Portuguese.
Competitiveness and Innovation are challenged by the need to move on to the Industry 4.0 phase
This process is crucial to competitiveness but prejudiced by the items set out above. Moreover two additional factors impacted the competitiveness of Brazilian suppliers, namely: the Pandemic years (2020-2021) and the Petrobras decision made in 2016 so as to charter all new rigs and FPSOs to fulfill the needs of production of Pre Salt fields. Only in special cases, Petrobras will decide to construct a platform or FPSO and the model of chartering is being practiced since then. As a consequence the goods and services industry got very few orders and became distant from the level of competitiveness in a global scale.
On the other hand, the introduction of the concepts of the 4.0 Industry asks for some pre-requisites from the part of CEOs and Directors: investment capital, previous knowledge on the concepts and advantages of 4.0 Industry, and the hiring process of a consulting firm which can support the main enterprise in the process of upgrading and its phases. The major benefits identified by Brazilian CEOs and Directors are: improvement of production processes, total quality gains, reduction of labor force and cost reduction. They are aware that the amount of investment in new technologies is huge and important. The major challenge for the introduction of the 4.0 Industry in Brazil is to convince the CEOs and Directors that this theme is important and crucial to operate in a global scale.
A number of institutions and University Foundations are now offering courses in this regard, but Brazilian industry is slow to respond. This is yet another area of opportunities for partnering between Brazilian and foreign suppliers. Partnerships of this kind are the best path to developing and securing market positions, always with a view to win-win relationships.
Petrobras Supplier Register
Inclusion on the Petrobras supplier register confers a kind of seal of excellence on suppliers to this industry. This is because the registration process is very demanding and comprises analysis of financial, technical and legal conditions. Service providers must also meet health, safety and environmental requirements. Today, some 8,500 suppliers are registered with Petrobras.
We recommend that all Brazilian and foreign goods and service suppliers interested in entering the oil and gas market in Brazil apply for registration with Petrobras. The process is completely electronic and operated through the website of PetroNect, a Petrobras subsidiary for electronic procurement and contracting. Although not a simple process, given the scope of the requirements, PetroNect does maintain a call centre offering guidance to interested firms on the necessary documentation and on navigating the system.
Renewable Energy
In this area, the field is open for partnering or entry by new Brazilian or foreign firms, and certainly has a fine future ahead. It really remains to develop a Brazilian industry in this segment, and this constitutes an opportunity, in order for such an industry to grow up, from the outset, in line with the most modern best practices. Early arrivals will always be at an advantage. Demand for projects is small today, but the outlook is for considerable growth in the future.
It is important to point out that in the last version of its Strategic Plan, released in January 2021, PETROBRAS decided that no more investments should be directed to the research and development of Renewable Energies. This makes the company to detach from the Vision presented in the year 2000 when the Board of Directors stated that Petrobras would operate as an integrated Energy Company. Now, considering the intentions of divestments in some important refineries, to leave the natural gas chain and to give up initiatives in Renewable Energies, Petrobras will focus only in the development of Pre Salt fields and thus will become a crude oil company operating in the Southeast of Brazil.
Conclusion
Brazil is plenty of good opportunities for foreign companies interested in entering the Oil and Gas Industry in the country. Nevertheless as any other country Brazil has his own laws framework that should be studied and fairly understood. Tax, Labour System and Local Content legislation are the most important. Our company can provide the support as to guide the foreign company through the right shortcuts. In case you decide to conduct an assessment of the business opportunities in Brazil for the Energy area, keep in mind that you will be in contact to high skilled professionals and we can assure that this will be a really exciting experience.
