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Sembcorp Marine Ltd. (SMM), the Singapore-based oil services company, is building its first shipyard in Brazil to protect market share as state-controlled Petroleo Brasileiro SA (PETR4) awards more contracts to local suppliers.
Sembcorp is competing with billionaire Eike Batista’s OSX Brasil SA (OSXB3) and Keppel Corp. Ltd (KEP) for more than $30 billion of drilling vessels that Petrobras will deploy in the Atlantic Ocean within the next eight years. Half the 65 deepwater drillships the company needs by then must be made in Brazil, according to regulations intended to boost local manufacturers.
Petrobras is battling the twin challenge of extracting billions of barrels of oil trapped under the seabed while starting from scratch a shipbuilding industry intended to create jobs and reduce the company’s dependence on foreign suppliers. Delays receiving rigs last year caused Petrobras to miss oil output targets, and the risks are mounting as the world’s biggest offshore oil development gathers momentum.
“As a country it’s a huge challenge because it isn’t a simple industry,” Jorge Roberto Goncalves, head of shipbuilder Estaleiro Ilha SA, said in a March 6 interview. “Brazil has naval experience, but very centered around Rio de Janeiro. We have to extend it to the whole country.”
Petrobras, which operates the largest fleet of production platforms at a single company, plans to triple its drilling vessels by 2020. Those built in Brazil will have as much as 65 percent of so-called local content. The company expects 2020 output of 6.4 million barrels a day, about equal to OPEC members Angola, Nigeria and Venezuela combined. The Rio de Janeiro-based company currently produces about 2.7 million barrels a day.
Petrobras needs to purchase as much as 70 percent of its equipment from domestic suppliers to meet local content rules set out by former President Luiz Inacio Lula da Silva. The goal is to help drag 28 million people out of poverty, or about 15 percent of the country’s 190 million-strong population.
Brazilian manufacturers will struggle to deliver the equipment as fast and as cheaply as established shipbuilders in South Korea because of a lack of experience, said Kjeld Aabo, a Rio de Janeiro-based manager for offshore equipment at MAN Diesel & Turbo, a division of MAN SE (MAN) that is competing to provide the engines and power generators to propel the 33 drillships Petrobras is ordering from domestic yards.
“Nobody can compare with the Korean yards,” Aabo said in a telephone interview, adding that construction costs in Brazil are likely to be about 20 percent higher than at foreign yards. “In Brazil they’re basically starting from scratch,” he said.
ABS Consulting, which certifies the amount of local content in Brazilian oil equipment, expanded its staff fivefold to 25 auditors since opening the department in 2008 and plans to continue hiring, Thereza Moreira, the company’s head of local content, said in a March 6 interview in Rio de Janeiro.
“They need to invest here in Brazil,” Moreira said.
Brazil has had mixed success restricting imports to bolster domestic industries. High tariffs on imported aircraft helped turn Embraer SA (EMBR3) into the world’s fourth-biggest airplane maker. The country banned imported computers in the 1980s to foster local technology, only to ditch the policy after slow and expensive local processors handicapped industry.
The U.S. and China, the world’s two largest oil consumers, are counting on Brazil to increase exports and ease dependence on producers in more volatile areas such as the Middle East and Venezuela. U.S. President Barack Obama, in a visit to Brazil in March 2011, said he wanted his country to become one of Brazil’s “best customers” as the country ramps up oil production.
Brazil expects oil revenue to curb poverty in Latin America’s most populous nation as growing exports finance federal and state budgets. The new shipyards and ports get subsidized government financing to help create new jobs.
Employment at Brazilian shipyards has surged threefold over the past five years to 59,167 at the end of 2011, according to Sinaval, Brazil’s shipbuilders association. Employment is up from 1,900 in 2000 after the government required local construction and offered subsidized loans. The construction and expansion of new yards will add at least 15,000 jobs by 2014, according to a presentation on Sinaval’s website.
Petrobras set up a new company, Sete Brasil, to finance the construction of the rigs and then lease them back to Petrobras. Sete plans to earn nearly $80 billion from renting 30 units over the next two decades.
“Unfortunately for Petrobras there’s a bit of disconnect in what their goals are,” Shannon Moran, a Latin America oil analyst at Wood Mackenzie, said in a telephone interview. “The Brazilian government is very focused on the local content side, and at some point would be willing to let production targets slide in favor of meeting their local content requirements.”
Output rose 1.5 percent in 2011 to 2.6 million barrels a day of oil and natural gas on average, the slowest pace of growth since 2007 and below its 7.7 percent target. Petrobras only received half of the 12 rigs it had ordered that are capable of operating in waters at least 2,000 meters (6,562 feet) deep. Former Chief Executive Officer Jose Sergio Gabrielli blamed the delivery delays on bottlenecks at foreign suppliers.
Petrobras is also already struggling to meet requirements to buy rigs, platforms and vessels from local suppliers. The Rio Grande shipyard plans to deliver P-55, a $1.7 billion platform capable of producing 180,000 barrels a day in deep waters, about two years behind the original delivery date in early 2013. The Atlantico Sul shipyard is more than a year behind schedule building the first Suezmax tanker for Petrobras’ transport unit.
“All the shipyards from north to south are completely booked, they have no availability,” said Adriano Bravo, chief executive officer of Petra Executive Search, a headhunter for Brazil’s oil industry. “It’s very difficult for the government to meet production targets under existing local content rules.”
Companies are setting up in Brazil to fill the capacity void. STX OSV Holdings Ltd, the biggest maker of oil-rig support vessels, and Batista’s OSX started building new yards last year. MAN’s Aabo says the company will also set up an assembly plant in Brazil to meet the regulations if it wins enough work.
Petrobras Chief Executive Officer Maria das Gracas Foster is having her office directly monitor progress at the shipyards to try and keep projects on track, she told reporters March 5.
Delays “are perhaps the biggest risk in these types of enterprises,” Sete Brasil President Joao Carlos Ferraz said in an e-mailed response to questions. The company has set up partnerships to have more experienced companies operate its vessels to help improve efficiency, he said.
Brazil is offering cut-rate loans to accelerate the oil services industry. Batista’s OSX has obtained subsidized loans from the Merchant Marine Fund to complete construction of the yard. Brazil’s BNDES development bank has set up several lending programs to accelerate growth in oil equipment suppliers.
“Foreign companies would much rather supply from abroad, but this isn’t what the BNDES is interested in,” Ricardo Cunha da Costa, the head of the BNDES’s oil and gas supply chain department, said in an interview last month at the bank’s headquarters in Rio de Janeiro. “They have to build infrastructure.”
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