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Local Content Policy in the Brazilian Oil

and Gas Sectoral System of Innovation
a a
Roberto Wagner Mendonça & Luiz Guilherme de Oliveira
a
Center of Advanced Studies in Government and Public
Administration and Post-Graduation Program in Administration ,
University of Brasilia , Brasília , Brazil
Published online: 21 Nov 2013.

To cite this article: Roberto Wagner Mendonça & Luiz Guilherme de Oliveira (2013) Local Content
Policy in the Brazilian Oil and Gas Sectoral System of Innovation, Latin American Business Review,
14:3-4, 271-287, DOI: 10.1080/10978526.2013.833477

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 Latin American Business Review, 14:271–287, 2013
Copyright © Taylor & Francis Group, LLC
ISSN: 1097-8526 print/1528-6932 online
DOI: 10.1080/10978526.2013.833477

Local Content Policy in the Brazilian Oil and

Gas Sectoral System of Innovation

ROBERTO WAGNER MENDONÇA and LUIZ GUILHERME

DE OLIVEIRA
Center of Advanced Studies in Government and Public Administration and Post-Graduation
Program in Administration, University of Brasilia, Brasília, Brazil
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ABSTRACT. The purpose of this article is to discuss the develop-

ment, goals, and format of local content public policy within the
context of the Brazilian oil and gas sectoral system of innovation.
The theoretical frame of reference for this article revolves around
the concept of innovation systems, more specifically their sectoral
focus as in Malerba (2002 and 2004). Norwegian local content
policy was considered as a reference. This article concludes that
this policy has not yet come to a consensus, presents regulatory
weaknesses, does not have well-defined roles, and has little poten-
tial to generate innovations.
RESUMEN. Este artículo se propone discutir la evolución, objeti-
vos y formato de la política pública de contenido local, desde la
perspectiva del sistema sectorial de innovación que impera en el
sector de petróleo y gas brasileño. El referencial teórico del artículo
abarca el concepto de los sistemas de innovación, especialmente su
recorte sectorial a partir de Malerba (2002 y 2004). El estudio ha
tomado como referencial la política de contenido local noruega.
Las conclusiones indican que no existe consenso respecto a esta
política, ella presenta fragilidades regulatorias, no cuenta con una
separación bien definida de las funciones y su actual potencial de
general innovaciones es muy pequeño.
RESUMO. A proposta deste artigo é discutir a evolução, os objetivos
e o formato da política pública de conteúdo local contextualizando-a
no sistema setorial de inovação do setor de óleo & gás brasileiro. O

Received October 8, 2012; revised April 4, 2013; accepted June 6, 2013.

Address correspondence to Roberto Wagner Mendonça, Universidade de Brasília, Campus
Universitário Darcy Ribeiro - Biblioteca Central, Sala 312, Brasília, DF, CEP 70910-900, Brazil.
E-mail: rwmendonca@unb.br

271
 272 R. W. Mendonça and L. G. de Oliveira

referencial teórico do artigo gira em torno do conceito de sistemas

de inovação especialmente o seu recorte setorial a partir de Malerba
(2002 e 2004). Considera-se como referência a política de con-
teúdo local norueguesa. Conclui-se que esta política ainda não
chegou a ser um consenso, apresenta fragilidades regulatórias,
não tem uma separação de funções bem definida e tem hoje um
potencial pequeno de gerar inovações.

KEYWORDS. innovation, local content, oil sector, sectoral inno-

vation system

INTRODUCTION
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In the 2000s, a debate arose regarding a new development in Brazil and in

Latin America, which today stands as a third stance between the Washington
Consensus and populism. This stance sets out to rescue the State’s role as the
driver of development, confront the tendency of wages to grow at a slower
rate than productivity, and, finally, address the exchange rate management
and “Dutch disease” concerns (Bresser Pereira, 2011).
One of the exponents of this stance is the current President of the
National Bank for Economic and Social Development, Luciano Coutinho who,
in a paper from 2005, presented his diagnosis of the Brazilian economy. He
argued that under the import substitution regime the manufacturing industry
grew in Brazil at an annual rate of 9.5% p.a. from the postwar period until late
1970. This allowed the creation of an industrial structure similar to those of
developed countries. The external debt crisis interrupted this trajectory. The
government took over private sector dollar obligations, thus jeopardizing its
fiscal health and its ability to promote development. The resultant inflation
made Brazilian corporations change their strategy, aiming to be less leveraged
and innovative (Coutinho, 2005). The external debt crisis put Brazil under the
tutelage of the International Monetary Fund. The International Monetary
Fund, in its eagerness to clean up public finances, acted to hinder State
investment so as to generate fiscal surplus, in addition to recommending the
implementation of the Washington Consensus, which included the liberaliza-
tion of markets and the privatization of state-owned companies.
In the oil and gas sector, this was reflected by delays in the 1990s in the
development of various fields discovered in the Campos Basin in the 1980s
(Albacora, Marlin, and Roncador oil fields). These delays were due to restric-
tions placed on Petrobras’ investment budget. Had these fields entered pro-
duction they would have contributed to the highly sought after self-suffi-
ciency in oil production. The government then decided to open up the oil
sector to International Oil Companies, and partially privatize Petrobras thus
attracting private investment to the sector.
 Local Content in the Brazilian Oil Sector 273

Law 9.478/97 regulated the opening of the sector and was concerned
with establishing as state policy both supply chain development and the
definition of local content objectives that should be fulfilled by new entrants
and by Petrobras. According to Pacheco (2007), these measures, which
included the creation of the Oil Sectorial Fund (CT-Petro), aimed to over-
come the historic disarticulation between industrial and innovation policy
that marked the import substitution era.
As such, we underwent an institutionalization of local content in the
Brazilian oil and gas sector. This policy has undergone several changes
throughout the first decade of the twenty-first century; several regulatory
modifications, it has faced many resistors, suffered much criticism, and is far
from a consensus. (Guimarães, 2012). Despite this, the local content policy,
under the aegis of new developments, has begun to overflow to other sec-
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tors as was evidenced by Executive Order 580 in 2012 that was converted
into Law 12.745 establishing the possibility of the Federal Government to
require local content targets in bids to the Growth Acceleration Program.
In terms of oil sector local content policy, Norway’s successful case
provides a reference point. Starting in the 1970s, this country managed to
assemble what is considered the largest example of catching-up in this sector.
The local content index went from 28% in 1975 to 62% in 1978, a level which
is still held today (Thurber & Tangen Istad, 2010).
Like Brazil, Norway has a state-controlled oil company (Statoil) that
dominates the industry in their country. It was founded in 1971 and under-
went a partial privatization in 1999, more recently reserve depletion led to
several years of declining production in the range of 2 million barrels per day.
Norway also possesses a cluster of high-technology industries in
Stavanger responsible for $4.9 billion in exports in 2003, generating 37,000
jobs in about 900–1000 firms (Hatakenaka et al., 2006). Why has Brazil not
developed a cluster of innovative companies in the oil and gas sector like
Norway did? There may have been a lack of insight as to the potential supply
chain building in this sector because, as Oliveira (2012) highlighted, the
creation of Petrobras had as its principal objective the safe and inexpensive
production of petroleum to fuel Brazilian industrialization. In addition, there
were problems that required short-term solutions such as the strong trade
deficit caused by the Brazilian dependency on oil imports that aggravated
the 1970s crisis, which ultimately ended the import substitution policy. In
Norway’s case, there were comfortable macroeconomic conditions and a
tradition of natural resource management for the collective benefit.
With the development of the reserves discovered in the 1980s by
Petrobras, the country produced and refined almost as much oil as it con-
sumed in the 2000s, and the discovery of the Pre-Salt layer, whose reserves
promise to multiply the Brazilian proven reserves, currently around 15 bil-
lion barrels, several times over, the sector has begun to be thought of as a
trigger for national development rather than an obstacle to be overcome.
 274 R. W. Mendonça and L. G. de Oliveira

So, in the context of new developments, once the self-sufficiency policy

has achieved its objectives through Petrobras, the local content policy will
take on a renewed relevance. The purpose of the article is to discuss whether
the design of local content public policy can have a positive impact on the
sectoral system of innovation in Brazil’s oil and gas sector.

METHODOLOGICAL AND THEORETICAL

CONSIDERATIONS

A methodological limitation of this article is that it does not set out to effec-
tively measure the innovation generated by the local content policy. Instead,
it presents an analysis of local content public policy design with a focus on
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the issue of innovation within the context of the sectoral system of innova-
tion in Brazil’s oil and gas sector.
The literature review on the topic began within the context of the
discussion of the changes in the regulatory framework that followed the Pre-
Salt layer discovery in 2006. In this context, the Norwegian model was
introduced to the debate as an inspirational case and as justification for these
changes. In institutional terms, the Norwegian regulatory approach of
separating policy, regulatory, and commercial functions in the oil and gas
sector is regarded as the canonical model of a good bureaucratic design for
the oil and gas sector (Thurber & Tangen Istad, 2010). As an example, the
ideas of the Social Fund and of a nonoperational state-owned company
adopted in the regulation of the Pre-Salt reserves were inspired by the
Norwegian model.
In addition, within the universe of oil state companies, Petrobras and
Statoil are considered relatively well managed firms and possess some degree
of separation from the State. On the other hand, the Norwegian institutions are
quite different from those in Brazil, which makes any comparison a challenge.
A central concept of this article is the sectoral system of innovation
system developed by Malerba (2002 and 2004). According to this author, the
three factors affecting innovation in a sector are: knowledge, learning pro-
cesses and technologies; the actors and networks; and the institutions. We
will quickly review these concepts.
An innovation system is a concept developed within the framework of
the neo-Schumpeterian school of thought to explain the catching-up of
countries and to serve as a focusing device (Freeman, 2002; Lundvall, 2007).
Innovation can be defined as the introduction of a new good, a new produc-
tion method, the opening of a new market, the discovery and appropriation
of a new source of raw materials or a change in the organizational structure
of an industry’s sector—trustification or fragmentation (Schumpeter, 1997).
Sector can be defined as a specific set of knowledge, technologies, and
inputs required for the development of a product (Malerba, 2002).
 Local Content in the Brazilian Oil Sector 275

According to Malerba (2002 and 2004), firms are the main agents of a
sector. Other agents, such as universities and government agencies, have a
variable role depending on the sector. Lundvall (2007) believed that the role
of universities is generally overrated due to a tradition of linear innovation
models and the underestimation of the importance of tacit knowledge.

SECTORAL SYSTEMS OF INNOVATION IN THE

BRAZILIAN OIL AND GAS INDUSTRY

The following schema contains an outline of the sectoral system of innova-

tion. Based on Malerba’s categories, Petrobras would be the hegemonic
agent that through its purchasing power and positioning within the network
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could coordinate the other agents in the system. The key institution is Law
9.478/1997, which earmarked resources from royalties and special participa-
tion for the financing of Thematic Networks research. The production of
knowledge and technologies is coordinated by the Petrobras Research Center
(CENPES), which coordinates these networks. Both the purchasing policies,
as well as the lines of research to be pursued, are products of the implemen-
tation of the company’s 2020 Strategic Plan. Figure 1 shows a schematic
organization of the sector putting Petrobras as the central agent and the Law
9478 as the main institution.

FIGURE 1 Brazilian Oil & Gas Sectoral System of Innovation. (color figure available online).
 276 R. W. Mendonça and L. G. de Oliveira

Petrobras
Furtado (2003) argued that despite the changes in the 1990s that introduced
new agents and dynamism, Petrobras continues to be central to the network.
This conformation of the innovation network has the advantage of the pres-
ence of a hegemonic actor that increases the predictability and reduces the
transaction costs involved, making the network convergent, although less
diverse, and thus, less innovative.
According to Furtado and Freitas (2004), this can be explained in part
by a series of technological investments made by CENPES at the end of the
1980s in hopes of developing the newly discovered deep-water reserves.
These investments, which amounted to 1% of the company’s revenue during
a few years, were not successful but they did lead to the acquisition of tech-
nological skills. In the views of Dantas and Bell (2011), the acquisition of
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these skills allowed the company, in a process of co-evolution, to move from

a passive management of their learning networks to an active, innovative,
and, finally, strategic management.
In terms of investment in R&D, the company has invested an average of
$160 million per year during the 1990s. Between 2004 and 2008, this average
increased to six times its past value and reached a level of $900 million.
Between 2009 and 2011 the average amount of investment in R&D was at
$ 1.041 billion. A total of $3.1 billion was invested between 2009 and 2011,
47% destined for exploration. Of these investments, 52% were made inter-
nally, 25% in partnerships with national teaching and research institutions,
and 19% in partnerships with national companies.

The CENPES
Almeida and MELO (2010), in their analysis of the CENPES management,
considered that during the 2003 to 2008 cycle, the formation of the Thematic
Networks and regional clusters sought to integrate the academic and govern-
mental entities in search of a technological trajectory that was less incremen-
tal and, therefore, more innovative.
CENPES, using resources from Law 9.478/1997, underwent a recent
expansion to occupy an area of 300,000 square meters, making it one of the
biggest research complexes in the world (Petrobas, 2012a). In December
2011, it employed 831 researchers, 24% of whom have their doctorates and
43% of whom have their masters. Since 2010, several research centers belong-
ing to large service providers such as Schlumberger, Baker Hughes, and FMC
Technologies, Inc., have been erected on Fundão Island near to the CENPES
research center seeking closer partnerships with CENPES.
According to Petrobras’ 2011 Technology Results Report (Petrobas,
2012c) the R&D projects are organized by three main directional axes: expan-
sion of current business limits, value-adding and product diversification, and
 Local Content in the Brazilian Oil Sector 277

sustainability. We highlight some 2011 results of the first axis: the integration
of a stratigraphic modeling software with the Hydrocarbon Accumulation
Simulator; implementation of Reverse Time Migration technology, developed
by Petrobras to improve seismic images; the first sampling of gas hydrates on
the Brazilian coast; completion of the basic designs and upgrade front end
engineering design (FEED) for the drilling semisubmersible platforms P-14
and P-17; drilling of the first well in the world with Liner Conveyed Gravel
Pack technology, which reduces the drilling time of horizontal wells in
mature sandstone-sided fields, among others.

Law 9.478/1997
Article 177 of the 1988 Constitution constitutionalized the Petrobras monopoly
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that was guaranteed by Law 2.004/1953. The Constitutional Amendment No. 9

of 1995 ended Petrobras’ monopoly and gave the Union the possibility of hiring
state- or private-owned enterprises to carry out these activities. The so-called
Petroleum Law (Law 9.478/1997) came to regulate this Constitutional Amendment
and the manner in which the Union would execute these contracts and to be the
most important institution in the sector. When it was created it intended to
remove (i) from Petrobras the regulatory function, and (ii) from Petrobras’ pro-
curement policy the industrial policy orientation. It created institutions such as
the National Petroleum Agency and the National Energy Policy Council.
It was up to the National Energy Policy Council, among other things, to
induce increases in the minimum rates of local content in goods and services
to be observed in bids, concession contracts, and production sharing, with
the authority to define the sector’s strategy of technological development.
The preparation of edicts, promotion of bids, application of contracts, and
their taxation were left to another entity created by this law, the National
Petroleum Agency (ANP). The ANP’s Resolution No. 36/2007 created
Regulation No. 6/2007, which sets the criteria and procedures for the imple-
mentation of Local Content Certification activities. Local content standards
published by the ANP were the product of the work of the Program of
Mobilization of the Petroleum Industry (PROMIMP), whose executive coor-
dination is run by Petrobras itself.
A provision was created to ensure that the financing of R&D activity
occurred through royalties and special participation. It was stipulated that
25% of that which exceeded the 5% rate of royalties up to the maximum rate
of 10% would be designated for the Ministry of Science and Technology for
research programs in oil & gas sector R&D. It is up to the ANP to establish the
rate for each oil field. The law also stipulates that 40% of these resources are
earmarked for the Department of Science and Technology (MCT) for techno-
logical and scientific development of the North and Northeast regions, which
led to the creation of the North-Northeast Networks in 2001 by the Study and
Projects Financing Institution (FINEP), a decentralized body of the MCT.
 278 R. W. Mendonça and L. G. de Oliveira

Regarding special participation, the law also provides that 40% of the
resources relating to special participation are intended for the MCT. Clause
No. 24 of the concession contracts, established in 1998, creates the conces-
sionaire’s obligation to invest a minimum amount of 1% of the gross revenue
derived from the exploration and production of an oil field, which is assessed
by special participation, toward R&D costs, and at least 50% of these resources
should be applied in the hiring of national R&D institutions. This contractual
clause was regulated by the ANP Resolution No. 33/2005 and its annex, the
ANP Technical Regulation No. 5/2005.

Thematic Networks
In 2006, Petrobras launched a new model of technological partnerships with
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universities and research centers, called Thematic Networks, coordinated by

CENPES and funded by the newly enacted Law 9.478/1997.
This is a system of partnerships with academic institutions for the devel-
opment of R&D projects in the areas of interest outlined in the company’s
strategic plan. Networks have been established in the following areas:
Exploration; Production; Supply; Natural Gas, Energy, and Sustainable
Development; and Technology Management. Two relationship models were
created: competence centers and technological issues.
The competence centers have been established in the oil, gas, and energy
segments, in regions with intense Petrobras operational activity. Petrobras
selected some universities and research centers.
The second model deals with technological issues that relate to
Petrobras’ strategic interests through the creation of 42 thematic networks. In
this model, the projects will be developed through networks, in a format that
will seek to induce the collaboration of institutions of recognized compe-
tence in the selected themes. The thematic networks have an orienting role
for investments that do not prevent Petrobras’ Technological Committees
from deciding on investments that they consider most appropriate for institu-
tions that are not part of the networks.

CT-Petro
Petrobras, through the CENPES, participates in the CT-Petro as an intervener
in its edicts and on its management committee, through the orientation of
guidelines and annual investment plans. CT-Petro was created in 1999 to
stimulate the productive chain of the oil and natural gas sectors under the
auspices of Law 9.478/97. The target audience was not-for-profit research
institutions. In fact, the fund’s rules establish that institutions that form part-
nerships with companies for the development of projects will have prefer-
ence over others in the approval of their projects.
In 2001, FINEP launched the Cooperative Networks for Research,
Innovation, and Technology Transfer of the Oil and Natural Gas Sector,
 Local Content in the Brazilian Oil Sector 279

focused on the North and Northeast regions, in compliance with the legal
device that determines the allocation of at least 40% of the CT-Petro Fund
resources in these regions. Thirteen networks were created. In 2002, FINEP
approved Petrobras’ participation in this program. Since then, Petrobras has
concluded a cooperation agreement with the anchoring institution of each of
these networks. The implementation of each project has taken place through
the conclusion of specific agreements.
According to Silva (2009), in their study of P-51 subcontractors, they
found that none of these companies participated in R&D projects involving
CT-Petro. This reveals dissociation between Petrobras’ suppliers and the
development of exploration and production technologies. An inhibitor of
this process is that CT-Petro projects must always involve universities and
research centers and there is difficulty in defining a common agenda. The
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hegemonic role of Petrobras in the sector has helped in achieving the goal
of establishing relationships with companies; in this case Petrobras itself
operates in more than 70% of the Fund’s projects as intervener (Centro de
Gestão e Estudos Estragégicos, 2005).

PROMIMP
The definition of the local content rates occurred within the context of the
Program of Mobilization of the Petroleum Industry (PROMIMP), created in
2003 by the Federal Government, through Decree 4.925, with the goal of
supporting the national industry in local content targets. This organization
includes several industry organizations and ministries under the coordina-
tion of Petrobras. Their engineers, in practice and through experience, estab-
lished local content limits for equipment that must be complied with by the
industry and by the operator. Later, following the Pre-Salt discovery, opin-
ions surfaced that these goals were set too high.
The main actions developed by the PROMIMP were the preparation of
a professional qualification plan, the Technological PROMIMP program and
a Competitiveness Study of the petroleum supply chain. A study conducted
in partnership with the Federal University of Rio de Janeiro on the current
industry scenario concluded that the majority of companies do not use uni-
versities or research centers as sources of technological financing, making
them dependent on Petrobras for the development of new technologies
through the establishment of terms of cooperation.

STRATEGIC PLAN 2020

The Pre-Salt discovery and the assignment of the Union Pre-Salt areas placed
huge projects in the Petrobras portfolio and revenue prospects that promise
to multiply the $145.9 billion obtained in 2011 (Petrobas, 2012b). For the
development of their Post-Salt and Pre-Salt reserves, the company provides
in its 2012–2016 Strategic Plan for the investment of $ 236.5 billion,
 280 R. W. Mendonça and L. G. de Oliveira

representing such huge purchasing power that it will impact the entire pro-
duction chain (Petrobras, 2012).

SMALL- AND MEDIUM-SIZED COMPANIES

According to Hatakenaka and colleagues (2006), innovation in the oil and
gas sector is only possible if three types of company are present (the opera-
tor, large service companies, and small highly qualified engineering firms).
In the Brazilian innovation system, there is Petrobras, which is an operator
of recognized technical and financial capacity. There is the incipient pres-
ence of some service companies and a set of engineering firms that for the
most part are not on the technological frontier of their areas.
According to Silva and Britto (2009), Petrobras’ subcontracting policy is an
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obstacle for the learning of Brazilian engineering firms, who are subordinated to
networks coordinated by Engineering Procurement Companies and thus have
no direct contact with the company that has great technological competencies.

THE NORWEGIAN CASE

According to Wicken (2007), the Norwegian innovation system is made up
of three layers, the result of three distinct historical processes that have gen-
erated institutional trajectories that affected the other layers. In the first phase,
there was a decentralized industrialization, with strong community ties (fish-
ing and farming) and institutions such as odelslov, which aimed to avoid the
concentration of land. In the second phase, there was a centralization and
increase in scale resulting from the electricity generation industry and, later,
the petroleum industry. Finally, at the end of the twentieth century, R&D-
intensive small businesses were largely integrated into the oil production
chain. This trajectory from a community base helps explain why Norway was
not limited to developing a national champion in the oil sector, but also took
care of developing small engineering businesses, something Brazil did not.
In the oil and gas sector, Engen (2007) proposed five periods:
entrepreneurial (1970–1976), first consolidation (1977–1980), maturation,
restructuring, and second consolidation. During the first phase, the 10
commandments of the Norwegian Oil Sector were prepared by the Norwegian
Parliament and the regulatory framework was established. From the
beginning, there was an effort to include domestic suppliers in the oil and
gas chain, which led to adoption of anchored concrete platforms, for
example, on the basis of the Norwegian expertise in dam-building. During
the consolidation phase (1977–1980), there were great advances in project
management and in the integration of EPecistas (Engineering procurement
companies) with the system’s other agents, especially the State-owned Statoil.
During the maturation phase (1981–1988), good will agreements became
compulsory. These agreements mandated the hiring of Norwegian firms and
 Local Content in the Brazilian Oil Sector 281

institutions for tax deductible R&D. During the restructuring phase (1989–
1996), with the fall of oil prices from $40 to $9, there was a relaxation of the
policy to reduce costs by 50% and a convergence to the British model, a
much more liberal one. Companies were allowed to choose technological
conceptions, subsuppliers, and the location of their operational bases, among
other things. During the second consolidation phase (1997–?), given the
reality of declining production, Norwegian operators merged (Statoil-Hydro-
Saga), as did the two major suppliers (Aker-Kvaerner), aiming to reach a
scale that make them competitive in their new strategy of searching for
reserves outside of Norway. Today, the State-owned, semiprivatized
Norwegian firm Statoil has large investments in Angola.
As we can see, in the Norwegian case, there were great precautions
taken to involve the national industry in this new industry. In fact, Norway,
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a small country of 5-million people had no domestic market for its oil and
focused on developing its economy by integrating its production chains with
the oil production, unlike the Brazilian case, with a large population that was
undergoing industrialization and had a large trade deficit due to its oil
imports. So, in retrospect, the Norwegian emphasis on development and the
Brazilian focus on the pursuit of self-sufficiency seem natural.

THE LOCAL CONTENT POLICY

The oil extraction can generate economic income at a greater rate than simi-
lar activities, depending on the difference between the market price and the
price of extraction. The value that exceeds the required return for remunera-
tion of the capital invested is called oil income, whose division should be the
object of public policy. This economic income can be captured by society
through a suitable tax structure or invested in a local content policy that will
tend to raise the cost of extraction, but on the other hand, may generate
economic activities that can last longer than the economic cycle of the finite
natural resource (Heum, Kasande, Ekern, & Nyombi, 2011).
In the view of the Brazilian Agency for Industrial Development (ABDI,
2011), the development of the supply chain of goods and services has as one
of its instruments local content policy, which figures alongside countless
other instruments that should be coordinated by the Federal Government,
but is far from being a focal point of policy. Its efforts are directed toward
structuring the management of the supplier network.
As part of a supply chain diagnostics project and seeking international
references, ABDI organized a Mission to Norway in order to learn about their
practices. They found that the Norwegian model, where administration agen-
cies directly participate in the development of suppliers, would be unen-
forceable, because it would “always be subject to suspicion of corruption.”
However, Petrobras and other carriers could play such a role. Curiously, the
 282 R. W. Mendonça and L. G. de Oliveira

Report begins by suggesting greater coordination by the Federal Government

and ends by strengthening Petrobras’ role.
Brazil currently coordinates the local content policy within Petrobras.
Alonso (2004) considered that since its founding in 1953 up until 1996,
Petrobras adopted a policy of promoting the development of a capital goods
industry in the country. Petrobras operated through three lines of action:
joint projects with Brazilian and foreign companies to augment the transfer
of ‘know-how’; the creation of an Association of Equipment Manufacturers
in order to disseminate quality standards; and the creation of a prequalifica-
tion system for suppliers.
During the 1970s, Petrobras began to use its accreditation system as a
barrier to entry for foreign suppliers. This policy was in line with the import-
substitution policy of the Federal Government. During the 1980s, the com-
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pany developed the “pioneer products” program, which basically consisted

of placing orders at prices above those of the international market as a way
to subsidize the R&D activity of domestic firms.
Given the new foreign trade policy (following Collor’s lowering of
import taxes) and Law 8.666/93, which regulated public bids, Petrobras was
no longer able to exclusively hire its registered suppliers; instead, it was
forced to open bidding to both domestic and foreign suppliers, at least until
the Decree 2.745/98 (Petrobras Bidding Process Regulations) was passed into
law. Given the end of its monopoly in 1997, Petrobras also used turn-key
solutions. They failed to induce the strengthening of their supply chains in a
context in which the company was forced to quickly develop its reserves
unless they could be returned to the newly created regulatory entity, the ANP.
The local content issue is present today in Petrobras’ 2020 Strategic
Plan. Its Product Development Policy calls for the reactivation of the ship-
building industry as well as the consolidation of shipyards, the establishment
of its supply chain, and the consolidation of the production chain as per the
local content policy. As a result of this policy, an increase in international
competitiveness is expected, which would also be a result of its professional
qualification and increased R&D.
The company’s strategy in relation to local content provides for the fol-
lowing actions: consolidate demand and carry out long-term contracts with
growing local content requirements, take steps to increase the role of national
subsuppliers in Petrobras’ acquisitions, induce the development of national
innovative companies, find suppliers outside the traditional supply chain to
increase supply capacity, support learning initiatives to support supply chain
personnel, and expand the use of project PROGREDIR (financing of suppli-
ers through the use of their Petrobras contract as collateral) to induce the
building of foreign firm factories in Brazil.
Guimarães (2012), in a review of local content policy in the oil sector
commissioned by the National Industry Confederation, presented some con-
clusions relative to the current state of this policy in Brazil.
 Local Content in the Brazilian Oil Sector 283

First, that the design of this very widespread policy tends to meet
short-term macroeconomic objectives (the strengthening of demand and
employment) rather than stimulating the growth of technology-intensive
and high growth potential industries. This is not a problem unique to the oil
industry or Brazil: As stated by Almeida (2009), the lack of focus is a char-
acteristic of Latin American industrial policies.
Second, the establishment of local content requirements in bidding for
a field occurs roughly eight years before the possible development of this
same field. At this point, the operators claim they are unaware of the tech-
nology that will be required. Xavier (2012) suggested that the ANP should
have an active role in local content, thus allowing it to guide the technology
updates rather than analyzing them a posteriori.
Third, the Norwegian reference case never had minimum local con-
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tent goals. In their case, the bids with the highest local content rates were
most likely to win. There was also a mechanism whereby companies
reported their bidding “guests” and the government had the prerogative to
include national companies. The organization of a vendor list appears to
be a government assignment that could deserve a second look by the
Brazilian government.
Fourth, Law 12.351/10 (Pre-Salt Law), by introducing the profit-sharing
system, abandons the local content policy in the Pre-Salt and strategic areas.
The fact that Petrobras is the exclusive operator in these areas means that the
participation of local firms depends on Petrobras’ procurement policy. On
the other hand, Lima (2011) believed that since this law does not provide for
a limit on the operator’s cost recovery from the Union, it could also favor the
transfer of local content costs to the Union. Therefore there would be room
to keep a local content policy by socializing the costs associated with their
Pre-Salt reserves.
Fifth, the waiver clause in effect as of the seventh round raises doubts
about the effectiveness of the policy. An aggressive company can propose
higher rates and then claim that the price is “too high,” that the expected
delivery time is “far too great,” or that they wish to use a technology not
available in the country. Xavier (2012) argued that the supervisory activity of
the local content targets pursued by the ANP has weaknesses, such as the
lack of information prior to the development of the fields and the lack of
regulatory transparency in the disclosure of disaggregated information relat-
ing to its enforcement of the goals. This is very serious because it prevents a
fair assessment of the effectiveness of the policy.
Perhaps the closest that anyone has come to examining the effective-
ness of the local content policy for innovation may have been Silva’s (2009)
thesis, which examined the construction of the first semisubmersible plat-
form built entirely in Brazil (P-51), by Rolls-Royce, Nuovo Pignone, and Fels
Setal and Technip (FSTP) consortium with the capacity to produce 180,000
barrels per day and compress 6-million cubic meters of natural gas. This project,
 284 R. W. Mendonça and L. G. de Oliveira

despite having a local content rate of 70%, did not provide advanced-level
learning for the participating firms other than the national operator. In gen-
eral, this occurred because critical equipment was imported and the plan-
ning of activities took place in the foreign offices of companies that already
had the know-how required for the project. The subcontractors were operat-
ing using foreign technology licenses and were isolated from Petrobras;
therefore they did not have a significant learning experience.

The Norwegian Case

In the case of Norway, Ryggvik (2010) argued that officially, the local content
policy began with the Royal Decree of 1972, which established the manda-
tory procurement of national goods, when competitive in quality, price, and
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delivery date, in addition to requiring the submission of the shopping list to

the Ministry of Oil and Energy. The effective tax rate on profit amounted to
about 78% and the ability to write off R&D investment spending was quite
attractive. In 1996, with the implementation of Directive 94/22 of the
European Economic Community, much of this framework had to be aban-
doned, but it was still possible to keep parts of the local content policy
through environmental and safety requirements.
According to Ryggvik (2010), to analyze the Norwegian experience in
the oil and gas sector there is the temptation to believe that a society was
able to properly manage its oil resources; however, this was not quite the
case. The discovery of significant reserves coincided with an extremely
favorable geopolitical moment, a well-structured shipbuilding industry, and
a well-established democracy. Even their reputation for operational security
deserves a second look. Between 1965 and 1978, 82 workers died, 45 in
Ekofisk alone; and in 1980, 123 lost their lives when a platform capsized. In
addition, the oil complex quickly exhausted the reserves on the Norwegian
coast and increased the pressure for exploration in environmentally sensi-
tive areas. Today, Norwegian interests are the same as those of the countries
and companies with which it squabbled in the past to catch-up.
Ryggvik (2010) stated that Norway’s success so far is due to the
Norwegian tradition, based on the interpretation of Ricardo’s theory of eco-
nomic income, according to which no natural resource can be considered
individual property, but must belong to the community which legitimized
the institutions created to capture the oil income by society as a whole.
Mjoset and Capelen (2011) also share Ryggvik’s view and claimed that
Norwegian institutions emerged as resistance to the neo-liberal project of
transforming work, capital, and natural resources into commodities. This
project provided for the commodification of labor, which was prevented by
the unions; the liberalization of finances, which was prevented by disasters
like the crisis of 1929; and the rent of natural resources, which was reversed
for the benefit of society.
 Local Content in the Brazilian Oil Sector 285

FINAL REMARKS

The purpose of this article is to discuss whether the design of local content
public policy can have a positive impact on the sectoral system of innovation
in Brazil’s oil and gas sector. It is believed that the outline of the sectoral
innovation system and a discussion of local content policy have contributed
to this end.
In the outline of the Brazilian oil and gas sectoral system of innovation
it became evident that Petrobras occupies the central point. Through its busi-
ness plan, it coordinates its suppliers and guides CENPES in the definition of
technologies of interest to the company. CENPES, in turn, coordinates, using
the resources granted by Law 9.478/97, the country’s universities and research
centers. There is no relationship among Petrobras’ suppliers, universities, and
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research centers, which demonstrates the disarticulation of this innovative

system; such disarticulation is a common characteristic in developing coun-
tries. One hypothesis that could be verified is the extent to which Petrobras’
predominance reduces the capture of the funding of innovation by academic
theoretical and basic research, a problem considered widespread in Brazil.
The local content policy could be the element of integration that drives
suppliers to invest in R&D in partnership with universities and research cen-
ters; however, its design is not conducive to this goal. The local content waiver
allows an aggressive company to propose higher rates and then claim that the
price is “too high,” that the delivery lead time is “far too great,” or that they
wish to use a technology not available in the country. Control of the imple-
mentation of the local content policy by the ANP has several weaknesses, such
as being done retrospectively and a lack of transparency in the disclosing of
disaggregated information relative to the accomplishment of goals.
The Norwegian example of a bureaucratic model where the commer-
cial, regulatory, and ministerial functions are well-defined could contrib-
ute to a more effective policy. In this sense, it could be thought of an
agency under the Ministry of Mines and Energy to manage the vendor list
for the operators in charge of the development of the fields offered by the
ANP. The Ministry of Development, Industry, Commerce, and Innovation
could be left the task of developing technological skills in these suppliers
in conjunction with Petrobras, universities, and research centers using
public resources. Using this improved role separation and a strengthening
of regulatory bodies, the local content policy might be more effective in
promoting learning and innovation in the Brazilian oil and gas sector.

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