João Ferraz, CEO, Sete Brasil
João Ferraz, CEO of Sete Brazil discusses the company’s future and how the growth of Sete Brazil will power forward not only Brazil‘s pre-salt developments, but also the country’s wider industrial capabilities. He further discusses how the business will cooperate with other enterprises to expedite access to subsea resources.
On December 23rd, BNDES approved a USD 10 billion package for Sete Brasil. What were the conditions attached to the receipt of these funds?
BNDES (National Bank for Economic and Social Development) is a finance agency in Brazil created, as its name suggests, to support the development of the country. For this reason, it is quite natural for BNDES to advance such an amount of credit to Sete Brasil, because our company will create many jobs and stimulate a great many new industrial capabilities in Brazil. Sete Brasil’s order book will boost Brazilian shipyards and consists of 29 ultra-deep water automated design type rigs, capable of operating in the most difficult of conditions. These rigs will also utilize 55 – 65 percent locally provided products and services, and BNDES will advance 80 percent of the finance due to this local content.
Sete Brasil was created with a business model that sees significant credit risk mitigation, and for this reason, given that our company will fuel whole sections of the economy, it was always entirely likely that BNDES would support our efforts in this manner.
Sete Brasil was also trying to obtain finance from export credit agencies and commercial banks. What are the features of your company that make it attractive for such institutions to invest with Sete Brasil?
So far, Sete Brasil has acquired finance for 75 percent of the company’s total expected CAPEX through BNDES, FMM (Merchant Marine Fund) and from further equity. Sete Brasil has also accessed finance from commercial banks, and the United Kingdom’s export credit agency. Our company is still looking for finance for around 19 percent of the company’s final CAPEX. This is predicted to come from further export credit agencies. Whilst Sete Brasil generates a huge deal of local content, around 40 percent of goods and services will come from international suppliers. This makes Sete Brasil eligible to raise finance from the UK, Norway, Germany, and the US, for example. As large-scale suppliers in these countries will be eager to satisfy Brazilian demand, Sete Brasil looks like it is able to raise export credit that will ease the company’s fiscal burden in this way.
What is the reason that Sete Brasil still constructs part of its facilities abroad, when so much of its business model seems to support local content?
This is part of our company’s strategy to minimize delays. The type of rig designs being built, as mentioned, are ultra-deep water drilling rigs. Constructing these designs for the first time in Brazil has some risk associated with it. To assume that the local yards have the capabilities to build these rigs straight off would be quite naïve. The first rigs, with the lower levels of local content associated with them will split construction between local yards and international construction sites. Initially, Brazilian yards will focus on the simpler elements of the construction process, and over time assume more responsibility for ever more technical parts of the rigs. This strategy will reduce risks of delays, as international construction companies can use their experience to deliver technical elements of the rigs on time whilst simultaneously expediting the learning process here in Brazil as shipyards and their staff gain hands on experience.
The first rigs will include 55 percent local content, and the later builds closer to 65 percent.
What technical advantages do these international yards offer to Sete Brasil?
Keppel FELS, for example, is constructing a semi-submersible rig type, commonly fabricated in Singapore, which will be built for the first time here in Brazil. Keppel FELS knows how to perform, and will construct the lower hull outside Brazil for the rigs first delivered. In the second batch supplied, the legs for the lower hulls will be constructed abroad. The last rigs will have their lower hull fully constructed in Brazil.
The owner of BrasFELS is transferring technology and knowledge from Singapore to their subsidiary in Brazil. Currently, Sete Brasil has five yards constructing vessels in Brazil. These shipyards all have foreign owners with vast experience, and these owners are bringing knowledge and skills to their subsidiaries here in Brazil.
The most important aspect to reducing costs and for gaining productivity is improving control of the process of construction. It is not only the case of knowing what to do theoretically that allows workers to produce rigs. Understanding the ‘how’ and ‘why’ is also vital. As technology percolates from the parent shipyards in the east to their Brazilian subsidiaries, Brazilian production chains will become more efficient.
Whilst Sete Brasil will own rigs, the units will be operated independently by the likes of Queiroz Galvao, for example. With Sete Brasil investing so much, why not take the final step and bring operations in-house?
We are not drillers—Sete Brasil is an equity investment company, and does not desire in any way to become a drilling company. Sete Brasil and its shareholders know that the pre-salt domain is a huge resource, and Petrobras, for one, will require a huge amount of everything in a very short period of time. Service providers operating in Brazil, such as drillers, will have to initiate a very fast track increase in capacity, and without assistance or stimulation to grow, then indeed all of Petrobras’ service providers would be likely to fall behind the behemoth’s demands for equipment and services.
Sete Brasil comes not to replace existing players, but to support them. It comes to offer its strong balance sheet and assets to help service companies who otherwise could not keep pace with the requirements of Petrobras. In this way, a joint venture business model is clearly advantageous to both parties and offers a route to rapidly providing the capacity to extract Brazil’s oil and gas resources.
The majority of Sete Brasil’s rigs will work for Petrobras. What are the implications for your company in working so exclusively with one client?
For a company to have only one client is typically not a good thing. However, knowing the capabilities of Petrobras and the strength of that company means it is less risky to work for Brazil’s giant. Anyone who wants to operate in Brazil must work for Petrobras. Other companies extracting oil in Brazil, whilst they are very strong and reliable companies, are still minute compared to Petrobras, and cover a limited proportion of the market share. Any service providers who wish to operate in Brazil must bear in mind Petrobras’ enormous share of the market.
The best way for Sete Brasil to grow is to work for Petrobras.
Another opportunity that Sete Brasil is conscious of is the SPOT market. How developed would you consider the SPOT market to be in Brazil?
The SPOT market here is still in its infancy. However, I still consider there to be a strong prospect for excellent growth in this sector in the near future. Our SPOT rigs will be ready by 2020, and by that time, the market may well have seen the rise of a more developed SPOT sector. Companies arriving in Brazil, such as IOCs, do not have the same asset portfolio as Petrobras. However, as foreign companies arrive in Brazil, SPOT market opportunities will become more pronounced.
Petrobras contracts for long-term periods because it can. It has the capacity to do so, and this is perhaps why the SPOT market is as yet underdeveloped in Brazil.
With Sete Brasil being the provider of the tools to extract the countries oil and gas resources, do you think Sete Brasil is a more reliable indicator than Petrobras of the future of the Brazilian market?
The pre-salt resources will demand all kinds of equipment, from rigs to Platform Support Vessels (PSVS) and Floating Production, to Storage and Offloading vessels (FPSOs). Indeed, all sorts of ships and supplies will be required. These will either be built or moved to Brazil to service the needs of Petrobras. The consistency of that demand is the ultimate indication that Brazil is moving forwards.
How central is the scale of Sete Brasil’s order book to developing Brazilian industries to the level where they can adequately supply the offshore sector in this country?
Our company does not have a problem in engaging with local content and producing here in Brazil; it is the reason Sete Brasil was created. Without local content rules, there would be no need for Sete Brasil to exist. The business is not afraid of any serious risk to the ultimate success of its operations. Whilst the company was only founded three years ago, its progress so far is admirable. Take for instance the fact that the average ship construction project for Sete Brasil is slightly ahead of schedule—this says a great deal about the company’s progress.
The company is not investing in one rig; it is investing in 29. Neither is the company procuring these rigs from only one yard, it is producing from five. Our company has six different partners as operators across its fleet. Our risk, this way, is minimized. The breadth of our orders are significant, and the way we will slowly increase the proportion of local content from our Brazilian suppliers is a key reasons why Sete Brasil’s progress will be transformative for this country.
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