Opportunities in shipbuilding and offshore oil and gas industries

By Georgia Barroso Souza, Vieira Rezende Barbosa e Guerreiro Advogados
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The opening of the Brazilian oil and gas market to foreign investors has been a key catalyst for the rapid development of the local petroleum industry, which has seen a remarkable 75% growth rate over the past few years. Recent offshore discoveries have enabled the industry to explore and develop, and also start production on a new frontier – the so-called pre-salt cluster. As a result, Brazil is today firmly positioned as a centre for major international oil and gas reserve development.

Georgia Barroso Souza, Associate, Vieira Rezende Barbosa e Guerreiro Advogados
Georgia Barroso Souza
Associate
Vieira Rezende Barbosa e Guerreiro Advogados

The rising industry

The growth of the Brazilian offshore sector has had a major impact on the nation’s shipping and offshore supply chain, which has absorbed considerable investment as it develops new opportunities. Across all related segments, the goods and services supply chain has created around 420,000 full-time jobs in Brazil, either directly or indirectly.

Marine and offshore industries have a particular importance in the global economy due to their strategic value and their ability to create large numbers of jobs. In addition, they have great influence on domestic economies as a result of their impact on the wider supply chain. In countries where they are particularly strong, therefore, these sectors often enjoy significant government incentives.

In Brazil, high demand for ultra deep-sea exploration equipment and vessels has led to widespread government support for local shipyards and for Brazilian companies that are suppliers of offshore units. Boosted by increasing global demand for resources, the ongoing development of Brazilian oil and gas fields will drive a new level of exploration and production, which should in turn attract record levels of investment to the Brazilian economy. In the context of recent major discoveries, huge increases in production, and the government’s goal for Brazil to become a major producer of oil and gas, the need to develop and modernize the industry’s supply chain now offers a range of investment opportunities.

Petrobras, Brazil’s most important player in the offshore oil and gas sector, recently announced its 2011–2015 Business Plan, presenting new strategies for the supply of essential goods and services needed for the development of the pre-salt area. According to the plan, 87% of foreseen investment will be allocated to exploration and production. In addition, Petrobras plans to invest US$224.7 billion on 688 projects through 2015, by which time production levels sourced from the pre-salt cluster are projected to reach 543 million barrels of oil equivalent per day).

The federal government is expected to continue to protect local-content requirements for oil and gas projects. However, global companies will probably also be needed to add to the output of local manufacturers.

Investment opportunities

While Brazil’s maritime and offshore industries have attracted much interest from foreign investors, the rise in oil production is also creating demand for investment in refining capacity. Developing the strategic bridge between production and distribution will be an important part of making of Brazil self-sufficient in oil derivates. Petrobras has already announced it will meet its new refinery delivery schedules, which will significantly boost the country’s refining capacity. The company’s business plan predicts investment of about US$73.6 billion in refining, transportation, and marketing operations, making it Petrobras’s second-largest investment sector after exploration and production (US$104.6 billion).

The liquid bulk sector is also attracting interest, driven by wider economic growth and the exploitation of the pre-salt cluster. However, this area is still suffering from a relative lack of investment in infrastructure, specifically through improvements to facilities and related rail and road networks. In addition, the growing demand for offshore-related vessels and rigs has created increasing demand for shipyard capacity. The Petrobras business plan foresees the installation of 35 new production systems from 2016 to 2020, and also a significant increase in orders for support vessels and 21 new drilling rigs, which will be built in Brazil.

Based on these figures, the delivery of five production platforms per year will be required — meaning not only major improvements in efficiency from existing yards, but also the rapid expansion of the nationwide shipbuilding industry. With some 278 units under construction in Brazil – including boats, oil tankers and oil rigs – the sector is potentially a major employer. However, manpower remains a bottleneck, with a lack of skilled labour hampering development. Among the most urgent needs is expertise in information technology and design, together with skilled blue-collar workers such as welders.

The projected growth of the offshore support sector over the next few years has encouraged commercial operators, investors and financiers — but lack of manpower and increasing labour costs continue to cause concern for Brazilian shipowners. With so much happening in the Brazilian shipbuilding industry and offshore sectors, foreign investors are now looking for long-term stability to maximize returns on their investments.

Financing structure

Financing for Brazilian shipyards is granted through the Merchant Marine Fund’s agent BNDES (the National Bank for Economic and Social Development) at very attractive rates. Funding is designed for the implementation, expansion and modernization of facilities and for ship/unit construction, conversion and repairs. Funding is also available for Brazilian shipping companies to cover orders of new vessels and equipment, together with the cost of repairs and upgrading work placed with Brazilian shipbuilders. Some financing options cover up to 90% of project values at very attractive rates.

After many years of crisis, Brazil’s shipbuilders are today recovering, thanks largely to investments in the local oil and gas sectors. However, if the segment is to avoid a downturn, the maritime industry needs to implement new measures to plan for a long-term and sustainable future.

Georgia Barroso Souza is an associate at Vieira Rezende Barbosa e Guerreiro Advogados, an associated law firm of Wikborg Rein, in Rio de Janeiro

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