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Interview

with Antonio Ferreira, President, ABESPetro

27.05.2010 / Energyboardroom

Could you speak to the origins of ABESPetro. What was really behind the initiation of this new group?

ABESPetro, which stands for Brazilian Association of Oil & Gas Service Companies, was founded back in 2004 with 18 members. Today, we have 36 affiliates.

The main purpose was to defend the common interests of service companies. Government agencies and public institutions normally prefer to deal with industry representatives, rather than with a single company’s claim. So as an institution, we thought that we could have a stronger voice.

I think the initiative was quite successful. We grew 100% in number of affiliates, and most of our members are key service providers of the industry. Despite the small amount of firms, we are quite significant in terms of revenue as well as in regards to direct and indirect employment.

Of the interests you’re charged with defending, what are the most pressing issues right now for the companies you represent?

One important recent concern was the problems we faced with REPETRO, a tax relief system for the importation of equipment, on a temporary basis, for exploration and production activities. Since the beginning of 2009, there has been big changes in Receita Federal (Brazilian tax authority), which led to big delays in obtaining the authorization to benefit from REPETRO. These delays may affect tremendously the pace of the projects as well as their costs.

Is it reasonable having an offshore rig, on the Guanabara Bay, waiting for a temporary import license? The alternative for REPETRO, i.e. pay the full importation tax, would not be economically feasible because of the impact it would cause on prices.

FIRJAN, ONIP and IBP, among others, are working with us, together with the Receita Federal staff, to try to resolve this issue.
The other important topic for ABESPetro is the challenge of training and developing the Brazilian workforce for the Oil & Gas sector. Of course we cannot do it by ourselves; we have to get together with the industry and the authorities to actively promote and induce a change, based on our needs over the next 4 to 5 years.

Hiring good technical professionals will become a challenge in the near future. Brazil always had a reputation for producing good engineers, but people looking for engineering careers has dropped quite significantly in the last ten to fifteen years. It’s time to rebound and sell the oil and gas industry to them as a career. In terms of PhDs and Masters, it becomes an even bigger challenge as the country simply does not produce enough.

What do you think needs to be done, then, in order to convince the youth to go back to Oil & Gas sector?

Historically, we had very few universities offering an undergraduate petroleum engineering course. There is not a tradition in the country of forming petroleum engineers. So, firstly we should focus on changing this.

ABESPetro represents many foreign companies. Talking about tax relief or workforce training, how you manage to persuade the local authorities and governments to actually do find solutions?

Regarding the tax exemption regime, we need to be clear: this system only benefits (and the law was written for that) imports of products which Brazil does not produce locally. However, nowadays in Brazil, you cannot manufacture, for example, all the parts of a sixth generation rig, a cementing unit or a seismic vessel. While there is a push to increase local content, it will take time until the industry has the capacity to manufacture such specialized equipment, which makes the tax relief system extremely necessary.

In summary, this is not a mechanism for foreign companies to obtain a tax break, but rather it’s a mechanism to make the industry viable.
In terms of searching for talents, the industry needs to get closer to the universities.

Whose responsibility would that be? Would that be the company’s responsibility to do this or would that be more on the government’s side to realize that we need to further develop this industry?

In my view, you cannot leave this task only in the hands of the government. The industry as a whole needs to make an effort in making itself better known to different players in the society.

Do you think that to some degree that this is just a factor of time? The industry itself did not open up until very recently and therefore the market demand for people to have more universities for the topic hasn’t really grown. Is there something that needs to be done to push the universities to do this?

I think it’s a little bit of both, but the opening of the industry was in 1997. And I think we are still progressing, albeit slowly in some areas. Companies should go to the universities to promote a career in the Oil & Gas industry. There’s probably going to be a lot of people interested.

Changing subject completely, the other hot topic on ABESPetro’s agenda relates to contracts. This is a long lasting issue. We try to work with our clients to better define risks, liabilities, and penalties. Nevertheless, in some cases, the amount of risk that is passed to the service companies is not realistic and disproportional to our business.

Speaking to contracting issues, the government is still trying to define what to do with the pre-salt blocks. As a representative of foreign
service providers, what would you like to see come out of this? What would be the right balance for contractors and for operators?

To be honest, we believe that having international oil companies in Brazil is important. Petrobras became a top-notch oil company also because of the competitors. So in the view of the association, restraining the activities of the international oil companies would be a step back.

The new law, under discussion in Congress, will not prevent the international oil companies to come to Brazil as they will still be able to bid, but the sole operatorship may inhibit them.

The role of Pré-Sal (former Petrosal), which may have veto power over investment decisions, is also controversial.

In the long term, for the service companies, it may imply having a market with one dominant buyer.

It’s still not the same as Pemex?

It’s not the same. For the service providers, probably 20 to 25% of our revenue today comes out of non-Petrobras related activities, like OGX and international oil companies.

Do you think there will be more OGX’s coming up?

It’s difficult to replicate the OGX model, because you need a lot of cash and talent altogether — if I don’t mistake, it was the largest IPO in Brazil at that time.

Coming back to pre-salt; what do you think will be the contributions of your members in bringing technologies to develop this once the regulations and debate is settled?

Despite the turmoil caused by the proposition of a new regulatory framework, we believe that the demand and the financial concerns will sort itself out. Other questions will come into play: wells productivity, production scenarios, etc; and we are not going to have them fully answered probably until 2017.

Regardless of these issues, the demand for our services is going to grow, so our investment decisions will not be affected. In fact, I think that service companies are accelerating the investments in the country. For example, the companies that play in the subsea arena are investing in production capacity in the country as we speak. Traditional service providers such as Baker Hughes, Halliburton, Schlumberger and Weatherford are improving their infrastructure. All of the companies in the association are prepared to invest in new support hubs for the pre-salt cluster, as we will not be able to do it all from Macaé.

In terms of Engineering and R&D, and fueled by the pre-salt discoveries, which have a lot of technological demands involved in its development, service companies are here to invest and to develop technology in the country.

Local content is another issue for some of our associates, as in some areas finding locally sourced services and goods is still a major challenge. For example, recently Petrobras launched a bid for 28 drilling rigs, with one particular clause: they all have to be built in Brazil. It does not mean that all of the parts have to be manufactured here, but they have to be integrated in Brazil. Do we have local installed capacity to deliver them on time?

Do your members have the ability to bring capacity from abroad?

Well, the drilling contractors do not own shipyards. Their specialty is not to build the rigs; it’s to operate them.

But you have partners outside that may be interested?

Yes, but the second question is, at what cost? You may manufacture them, but it may cost much more than if done outside.

In our view, you shouldn’t privilege local content just for the sake of local content. We should privilege local content only if you can be competitive.

So if you could just change one thing in the local market, in the view of ABESPetro, what would that one aspect be?

I think it would be the simplification of the tax regime.

Would you like to add something we haven’t covered?

Brazil needs to give incentives for companies to invest in R&D in the country. The Brazilian law obliges oil companies to invest a percentage of their production-related revenue in Brazilian R&D institutions. All of the R&D centers that service companies are building in Rio de Janeiro do not benefit from this law.

Your career has taken you to a lot of different countries, yet you keep coming back to Brazil. What is it about Brazil that keeps you coming back here?

What attracts me the most is to be able to witness the transformation in my country. There are a lot of things to do yet, but I think there are a lot of opportunities as well. The country’s potential is huge. And this experience is even better for me because, as a Brazilian, I feel part of this transformation.

Therefore, today is the right time for me to be in Brazil.

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