with Terje Staalstrøm, President, Brazilian-Norwegian Chamber of Commerce
Last year the financial trade between Brazil and Norway reached $1.7 billion, growing 20% from 2010. What is the significance of the last twelve months in the economic relations between the two countries?
The significance is that trade is picking up again after a slowdown in 2010. We are now trying to get an understanding of foreign direct investment in Brazil and the trade balance between the two countries.. It is actually not that easy because, if you look at the commercial relations between Norway and Brazil there are e.g. for tax reasons investments going through Holland. And there are a lot of engineering and oil& gas supply services which do not appear in the trade balance. However we know that Norway was the seventh largest investor in Brazil in 2010, which is impressive for a relatively small country like Norway.
If you look at what Norway is importing from Brazil, it is mostly agricultural products like soya and minerals, whereas we are traditionally exporting a lot of bacalao (stock fish), where for 150 years Brazil has been one of our largest customers. However, over the last five to six years the large share of our exports has been marine and offshore equipment and services.
Just how dominant is oil and gas within the economic relationship between Norway and Brazil?
If I look at private business, there are around 130-140 Norwegian companies operating in Brazil, and more than 100 of these are in the oil and gas business, either providing services or manufacturing equipment.. I would estimate that the oil and gas segment accounts for roughly two thirds of the real trade balance.
Last year, the official Norwegian Brazilian strategy was developed; why was this strategy created specifically last year, and what was the rationale behind it?
The government saw that Norwegian business, political and environmental interests were rapidly growing in relation to Brazil. The initiative taken has spurred an increase in commercial activities. Since the strategy was issued in March 2011 we have been working on the actual implementation.. In the Chamber of Commerce we have had various meetings to obtain input from the industry as to what the priority planning and execution should be.. At the end of September this year we had another conference in Rio with all the Norwegian interests, the Chambers of Commerce from Rio, So Paulo and Oslo meeting to discuss the tasks on which we believe the government should concentrate.
I think we have to accept that Norway is a small country and therefore a small player in Brazil. Brazil is being courted by a number of larger and more important countries than Norway like France, Germany, Italy, the US and the UK, who are all regularly visiting Brazil, wishing to establish trade agreements and memorandums of understanding etc. and to invest in Brazil. We therefore have a challenge in convincing the Brazilian authorities that it is important for them to have business relations, including bi-lateral agreements with Norway.
Since the strategy was launched, Norway has e.g. proposed a maritime agreement which is still sitting in the Ministry of Transport in Brazil. However, we have concluded on a renegotiated bilateral customs agreement between Brazil and Norway. We have had ministerial and political visits between the two countries, including an energy dialogue this September and there have been talks on a bilateral economic commission. There have also been discussions about updating the double taxation agreement from 1980.
Considering the interests of Brazil, I do not think a full trade agreement is very realistic, especially when you consider agriculture where Norway may be too protectionist for Brazil’s interests.. That being said, a bilateral maritime agreement, which cover the offshore area and services, would be an interesting development.
You are in negotiations with the industry as to what they would like to see in Brazil in order to open relations between the two countries. What are some of the things that they are most adamant about?
I think the biggest challenge is for companies to meet the requirements for local content. However, looking at the history of Norwegian oil and gas exploration we had similar prerequisites for local content in the late 1970s and early 1980s. This was used to build up the Norwegian supply equipment and manufacturing industry and our engineering capabilities. So we understand fully that Brazil is looking to what we did and is now having similar conditions to local content.
Are they learning as fast as the Norwegians did?
They probably are, but it still takes time. In Norway, it took a number of years before we had an internationally competitive supply and equipment industry. The development in Brazil and in particular the plans of Petrobras with their investments in equipments and fields are so immense that at the moment they do not really have the capacity to meet the requirements for local content. On the other hand, to meet the overall goals Brazilians are fortunately quite pragmatic when it comes to practicing local content requirement. For example, as there are still certain types of equipment which cannot be produced in Brazil these are exempted from the local content requirements.
However, if you want to build an FPSO, a supply boat or a drill ship in Brazil you will have local content requirement in the range of 50-70%.That can be achieved, but because of present lack of production capacity and skilled labour in Brazil the cost of production is high.. To build an FPSO in Brazil today may be double the price of Korea, and even 20-30% more expensive than building in Norway. It therefore makes the project less commercially attractive and leads to Brazil having to pay more for leasing and operating the equipment.. The local content requirement is therefore a challenge.
Do the Brazilian authorities recognize that this could put a freeze on their extensive drilling program if they simply do not have the equipment necessary to carry on with their program; are they starting to ease up the idea of reducing local content requirements?
You have to remember that the Brazilian government is a coalition with the Workers Party (PT) dominating, so it is first and foremost a political decision. You should talk to some of the officials in the Brazilian Embassy about this, but I do not think it is easy politically for the Brazilian government to relax on something which is providing employment, improving national competiveness and increasing confidence in Brazil. All this is in line with the political program of PT. If you start reducing the requirements, you have to have political acceptance. But, as I said, they are pragmatic; even Petrobras has reduced the target by 2020 of 4.9 million bpd, to 4.2 million, given the delays as a result of lacking production capacity and consequences of local content requirements.
To what extent is Brazil catching up in the offshore arena, and would it require the services of Norwegians a few years down the line?
I think you have to look at manufacturing capability and capacity. Brazil will still need to increase their capacity significantly, but even so to import drilling equipment, offshore services etc. over the next five to ten years.
In terms of engineering, I think Norwegian companies will have to establish development and research centers in Brazil in cooperation with both Petrobras and with universities. This is already happening as Statoil and Cenpes (Petrobras’ Research Center) have had a good cooperation for a number of years. Also, Sintef, a Norwegian research institute established themselves in Brazil about two years ago. If we are going to be attractive in the long run we have to do R&D and innovation in Brazil – we cannot do everything in Norway. We therefore see more and more cooperation between Brazilian universities and Norwegian research institutes and universities. The technology you develop in Brazil for deepwater can also be used in Angola or the Gulf of Mexico, so Brazil is a good place for deepwater research.
When it comes to HSE – or health, safety and environment – Norway has a fairly strict regime in the North Sea. Brazil has also a regime on HSE which is quite comprehensive, but it is not easy to grasp the totality because the responsibilities and tasks are split between different public institutions. ANP – the national petroleum agency – an agency of the Ministry of Mines and Energy, has the main responsibility, but then the ministries of environment, marine, the navy, energy, and labour also play a role. So, if you really want to have a good understanding of the total regime of HSE in the Brazilian offshore market, you have to look at a set of regulations issued and controlled by entirely different entities. One of the things Brazil could learn from Norway is to get a more unified legal regime.
On the technological side I can see that there are benefits of cooperation as Statoil can learn from Petrobras when it comes to deep water drilling and how to produce oil deep below the sea floor in difficult geology, like in the pre-salt areas. Statoil is expanding outside Norway and they are now operating in foreign waters like the Gulf of Mexico, Brazil and West Coast of Africa.. They need the technology now being developed to exploit some of these areas.
Norway is not necessarily the best to develop this kind of technology. Brazil is in many ways a better place for this because of the pre-salt fields and the difficult conditions encountered. You will probably find the same geological structure in Angola, an interesting area for Statoil. So it is in Statoil’s interest to cooperate to gain access to the Brazilian-developed technology of Petrobras.
What is Petrobras’s interest in it? Despite some cultural difference, Brazilians and Norwegians work very well together. . Norway has good engineering capabilities and capacity; and we have proven to be quite innovative when it comes to developing new technologies, so Petrobras sees advantages. I find that a weak point in Brazil in general is that there are professionals with good higher education and a skilled manual labour force., but there is a deficiency at the middle management level. Brazilian engineers sometimes lack the ability to take theoretical knowledge learned at universities and use it to instruct the skilled workers.. Norwegian companies may have been successful because they have been bridging that gap, being more hands-on than some of the theoretically educated Brazilian professionals.
What do you see as a couple of the major success stories over the last couple of years where Norwegian companies have really had Brazil as a central focus and where they have been able to make a success of it?
If we limit ourselves to the oil and gas business, Aker Solutions is an example of a successful company in Brazil. They went through a difficult time, but once they learned how to adapt to the Brazilian business culture they became a success.
Aker Yards which now is part of STX Europe has been a success with their shipyard Promar in Rio de Janeiro. And some of the service suppliers have done very well. In general, Norwegian companies that have gone into offshore service on the supply side have enjoyed success. However, some had cold feet last year because of the dramatic increase in cost, particularly for labour in Brazil.. But if you have a good track record, and if you know the Brazilian way of doing business you still can run a profitable business; however there are companies who have not done their homework who get their first contract in Brazil at a low price and are then shocked by the cost of operation. It boils down to overcoming a lack of skilled labour, both onshore and offshore and of delays and cost of locally produced equipment.
Having been involved with the link between the two countries since 1973, what would you like to see develop in the link between Brazil and Norway?
As a Chamber of Commerce we should try to cover the whole spectre of Brazilian-Norwegian business activities, even though the oil and gas business is definitely the most important. The membership today is around 100 companies from various industries, but 60% are in the oil and gas business.
We have had very good relations with the Norwegian ministries, organizations and authorities and I believe we are a bridgehead between private business and the authorities.
Most of our members are Norwegian companies and individuals working with Brazil There are only one major Brazilian investment in Norway, Denofa, a vegetable oil producer. I would like to see more Brazilian companies here. An encouraging development is the number of Brazilian students now coming to Norway for training and studying, not only in oil and gas but also in other specialities, such as maritime law and social affairs..
What would be your advice to a Norwegian company looking to set up in Brazil?
I believe that Brazil has a strong future. The economy is picking up again after running slow in 2010/2011. You have however to remember that Brazil is no longer a low-cost country and that it is a demanding country in which to do business. “Brazil is not for beginners”. You have to understand the differences in business culture and you have to learn their language. Only then can you succeed and the relationship between Brazil and Norway grow stronger.. I am optimistic, but not unrealistically so Brazil is an interesting market and personally I find it much more interesting than India, which I find confusing, and China, which I find restrictive. Among the BRIC countries the Brazilian business mentality fits better with Norwegian mentality.