Aluisio de Lima-Campos

Chairman, ABCI Institute;

Adjunct Professor, American University Washington
College of Law
Vienna, September 30, 2013

General aspects of LCRs

The Norwegian and Brazilian Models

Relevant WTO disputes and provisions

Lessons learned and final remarks


Country Legislation/Policy Year
enacted
Focus
Brazil Local Content Legislation 2003 Oil concession
Trinidad &
Tobago
Local Content & Local
Participation
Framework
2004 In-country fabrication
Kazakhstan Law of the Republic of
Kazakhstan; 223-IV
2009 Procurement & services
Indonesia Local Content Rules 2009 Procurement of domestic
inputs
Nigeria Local Content Act 2010 Indigenous participation
and domiciliation of oil
and gas activities
Source: ADO, Rabiu. Local content policy and the wto rules of traderelated investment measures (trims): the pros and Cons. International Journal of
Business and Management Studies. Aberdeen: Vol.2(1), 2013, p.137-146.
macroeconomic and short-term: strengthening
demand directed to the domestic market and
employment expansion;
more specific focus and long-term perspective:
(i) diversification of the industrial sector; (ii)
development of technology-intensive sectors and high
growth potential; (iii) build relevant segments to
enhance national security
The policy inhibits benefited sectors from becoming
more competitive vis a vis foreign suppliers;
The consequent trend is then reduction of investment
in R&D and innovation;
Costs associated with the acquisition of inputs
increase; and
Resulting disincentive to further investments by foreign
investors in the country.

Norwegian Model (oil & gas)
Focused in the production chain not in the
sector;
The Norwegian government could add local
companies in the operators list of suppliers;
The more the operators contracted with
Norwegian suppliers the greater their chances in
subsequent biddings.



Focused in the O&G sector;
LCR set by Government (ANP) in
concession bidding notice;
LCR based on percentage of local inputs;
Requirement of certification of LC and
audit of reports;
No sunset provisions



Law/Regulation What does it establish?
Law No. 9.478 of 6
August 1997
Minimum local content requirements are established in licensing round for the award of oil
and gas exploration and production rights, and change over time and for different type of
acreage (based on relative maturity and location) Specific commitments are set out in
petroleum contracts.
Law No. 12.276 of 30
June 2010
Authorizes the federal government to cede at a cost to Petrleo Brasileiro SA -
PETROBRAS the exercise of research and production of oil, natural gas and other fluid
hydrocarbons in the areas of Pre-Salt
Law No. 12.304 of 2
August 2010
Authorizes the Executive to create the company Empresa Brasileira de Administrao de
Petrleo e Gs Natural S.A. - Pr-Sal Petrleo S.A. (PPSA)
Law No. 12.351 of 23
December 2010
The text provides for the exploration and production of oil, natural gas and other fluid
hydrocarbons, under the regime of production sharing in areas of pre-salt and strategic
areas
ANP Regulation No.
6/2007 Resolution
No.36/2007
Specify the criteria and procedures for the calculation and certification of local content
ANP Regulation No.
8/2007 and
Resolution No. 38/2007
Specify the procedure for audit of local content certification
ANP Regulation No.
9/2007 and
Resolution No. 39/2007
Specify the reporting procedure and format
Bidding 1 2 3 4 5 6 7 8 9 10
Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Nature
(requirements)
No requirements of LC in bidding
notice. LC commitments are offered
by interested parties in their
respective bids.
Global LC minimum
percentages are set
in bidding notice.
Commitment with
additional % for
certain activities may
be offered by bidding
parties.
Global LC minimum and maximum
percentages are set in the bidding
notice for the phases of exploration
and development, as well as minimum
percentages for items defined by the
bidding party.
Definition Supplier
location
Domestically manufactured goods (LC of more
than 60% in 2000; more than 40% thereafter)
and, by 2001, for Services Provided in the
Country (more than 80%)
Calculation methodology to quantify
LC by Supplier of Goods and Services
Evidence No proof of LC
required
Requirement
to report
quarterly
spending on
national and
foreign goods
and services
Required Declaration
of Origin by supplier
Requirement of certificates of
domestic content by accredited bodies
Source: GUIMARES, Eduardo Augusto. Confederao Nacional da Indstria. Poltica de contedo local na cadeia do petrleo e gs: uma viso sobre a evoluo do instrumento e a percepo
das empresas investidoras e produtoras de bens / Confederao Nacional da Indstria Braslia : CNI, 2012.

Libra Oilfield Santos Basin (11 companies bidding)
May compete consortia composed of up to five companies
with a R$ 610 million minimum investment;
The winner will be established based on the best return for the
Brazilian government, with a price established at between
US$100-120 p/barrel;
Petrobras is the operator, with a minimum share of 30%, and
can also participate in a bidding consortium;
A signing bonus of R$15 billion must be paid to the Brazilian
government.

For the exploration phase, the minimum LC
is 37%.
For the development phase, the
corresponding figure is 55% for the first oil
produced until 2021 and 59% thereafter.



Lack of incentives to and lack of firm commitment
by local industry to become competitive
Open-ended protection of local industry;
No planned gradual reduction of LCRs overtime;
No clear goals;
High administrative costs.
DS412 - Canada Certain Measures Affecting
the Renewable Energy Generation Sector
Japan alleged that Canadas use of LCR was not
in accordance with GATT and TRIMS agreements.
Canada argued that its program was consistent
with Art III:8(a) of GATT because the LCRs have
environmental objectives and were not for profit.
The WTO AB agreed with Japan (May 6, 2013).




DS456 - India Certain Measures Relating to Solar Cells and
Solar Modules (Complainant: United States)
The U.S. (Feb. 6, 2013) started a DS case against India
related to LCR under the Jawaharial Nehru National Solar
Mission (NSM) for solar cells and solar modules claiming
that the program is inconsistent with GATT and TRIMS
agreements;
No decisions issued yet.

Art III:4 GATT: National Treatment Principle
The products of the territory of any contracting party imported into the
territory of any other contracting party shall be accorded treatment no
less favorable than that accorded to like products of national origin in
respect of all laws, regulations and requirements affecting their internal
sale, offering for sale, purchase, transportation, distribution or use. The
provisions of this paragraph shall not prevent the application of
differential internal transportation charges which are based exclusively
on the economic operation of the means of transport and not on the
nationality of the product.

Art III:5 GATT:
No contracting party shall establish or maintain any internal
quantitative regulation relating to the mixture, processing or use of
products in specified amounts or proportions which requires, directly
or indirectly, that any specified amount or proportion of any product
which is the subject of the regulation must be supplied from domestic
sources. Moreover, no contracting party shall otherwise apply
internal quantitative regulations in a manner contrary to the
principles set forth in paragraph 1.





Art. III:8 GATT

(a) The provisions of this Article shall not apply to laws,
regulations or requirements governing the procurement by
governmental agencies of products purchased for
governmental purposes and not with a view to commercial
resale or with a view to use in the production of goods for
commercial sale.

(b) The provisions of this Article shall not prevent the
payment of subsidies exclusively to domestic producers,
including payments to domestic producers derived from the
proceeds of internal taxes or charges applied consistently with
the provisions of this Article and subsidies effected through
governmental purchases of domestic products.

SCM Agreement, Art.1.1:
1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if:
(a)(1) there is a financial contribution by a government or any public body within the
territory of a Member (referred to in this Agreement as government), i.e. where:
(i) a government practice involves a direct transfer of funds (e.g. grants, loans, and
equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees);
(ii) government revenue that is otherwise due is foregone or not collected (e.g. fiscal
incentives such as tax credits);
(iii) a government provides goods or services other than general infrastructure, or
purchases goods;
(iv) a government makes payments to a funding mechanism, or entrusts or directs a
private body to carry out one or more of the type of functions illustrated in (i) to (iii) above
which would normally be vested in the government and the practice, in no real sense,
differs from practices normally followed by governments;


SCM Agreement 3.1(b):

3.1 Except as provided in the Agreement on Agriculture,
the following subsidies, within the meaning of Article 1, shall
be prohibited:
(b) subsidies contingent, whether solely or as one of
several other conditions, upon the use of domestic over
imported goods.

Articles 2.1 and 2.2 TRIMs Agreement;

1. Without prejudice to other rights and obligations
under GATT 1994, no Member shall apply any TRIM
that is inconsistent with the provisions of Article III or
Article XI of GATT 1994.

2. An illustrative list of TRIMs that are inconsistent
with the obligation of national treatment provided for in
paragraph 4 of Article III of GATT 1994 and the
obligation of general elimination of quantitative
restrictions provided for in paragraph 1 of Article XI of
GATT 1994 is contained in the Annex to this
Agreement.

The Art.III: 3(b) of Government Procurement Agreement establishes
that:
With respect to all laws, regulations, procedures and practices
regarding government procurement covered by this Agreement, each
Party shall ensure:
that its entities shall not discriminate against locally-established
suppliers on the basis of the country of production of the good or
service being supplied, provided that the country of production is a
Party to the Agreement in accordance with the provisions of
Article IV.
Art. 177 of Brazils Constitution According to this article, the
Union has the monopoly of research, exploration and refinement
of oil, natural gas and other fluid hydrocarbons. Therefore, the
government is directly responsible for purchasing goods and
contracting services for those activities, through government
procurement;
In accordance with the Art. 177 1 of the Brazilian Constitution:
The Union may contract with state or private companies through
tendering for services of research, development and exploration
in accordance with specific law.

The specific Law (Law No. 9.478 of 6 August 1997) in its Art.
5, allows the Brazilian Government to offer through tendering
concessions in the sector of Oil and Gas. This is done by the
Brazilian Governments National Petroleum Agency. In other
words, it is a government transaction involving government
property and acquisition of services to explore and develop
that property.
GPA provisions would not apply, because Brazil is not a
signatory.

LCRs are desirable when the social benefits associated with it are
greater than the resulting losses from cost of production increases
(focus on maximizing competitiveness, welfare, not LC);
Works better in countries that have a stable macroeconomic
environment;
Not a sure cure against Dutch Disease, unless other policies are
applied to deal with persistent distortions (currency overvaluation,
relative interest rates);
It should stimulate the production chain through incentives and not
hinder it through market reserve policies (policy should include clear
goals and a system of rewards and penalties for those goals);
LCRs should be temporary and contain a phase-out mechanism,
with set deadlines.

LCR policies in the O&G sector can
achieve economic and social objectives if
adequately designed and implemented.
Policy design should give due attention to
and avoid international trade law
violations.
In the absence of DSB precedents, more
WTO disputes on LCR policies are
possible. Coverage of all instances of
LCR, however, may require a specific
multilateral understanding for the O&G
sector.