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Middle Eastern countries traditionally have been recognised as having the huge oil and gas reserves. However, with eleven of the 35 biggest discoveries of oil and gas reserves over the last decade made in Brazil, interest is shifting to the South American country where Petrobras is now the world’s third largest energy company.   Although a National Oil Company (NOC) with the financial clout to compete with independent oil companies for access to emerging basins, Petrobras, as a semi-public corporation, is described as a hybrid NOC and managed more as a commercial entity than a state company.

It was the discovery of pre-salt basins in 2007 that signalled Brazil’s potential to become one of the world’s leading producers of oil and natural gas. So far Petroras has discovered 15 billion barrels of proven reserves in the pre-salt seabed layers off the coast and are forecasting production of 6.42 million barrels per day of oil equivalent, including natural gas, by 2020. This is slightly more than peak North Sea production in 1999 of 6 million bpd.

The North Sea oil and gas industry has not been slow to recognise the magnitude of the Brazilian market. UK companies in particular have an outstanding reputation in Brazil for technological innovation and excellence in the global oil and gas market and are well placed to benefit from this booming nation.   According to the Aberdeen City and Shire 2010 Export Survey, Brazil is now the primary overseas target market for Aberdeen based companies. With Petrobras expecting to invest $28 billion in 2011 alone, the opportunities could be significant for northeast-based companies.

The North Sea service industry excels in disciplines such as subsea and deepwater engineering, drilling and well design, seismic acquisition and processing.   Therefore companies with the existing technology and the ability to quickly develop new technology are in a prime position to solve problems associated with complex wells in Brazil.   The rapid growth of investment by Petrobras and their acknowledgement of the benefits of mutual knowledge transfer has the potential to prove many exciting opportunities for northeast-based companies.

However, engaging with the Brazilian market is not always straightforward and for SMEs in particular, acquisition or setting up from scratch often isn’t a viable option due to the requirement of deep cash reserves and lack of transparency over income and earnings.   Partnering with a local company or working alongside a Brazilian agent is worth considering as this can save companies substantial time, with regard to becoming a registered vendor to Petrobras, as well as helping with the onerous bidding process.   But it is not without its challenges as North Sea businesses can often struggle to find their equivalent in Brazil in terms of technical capability and professional standards.   There is the additional concern of losing valuable intellectual property built up and invested in over the course of many years.   Another preferred option is setting up a new company which, in Brazil, is not only relatively easy and inexpensive but counts as local content. For instance there is not a legal requirement for UK companies to include locally-based people on their board.

The key to unlocking Brazilian potential is mutual empathy and an understanding of the cultural differences.   Brazilian companies are often not as sophisticated as UK companies and there is not the same level of engagement with the operator, in this case Petrobras , that companies have been used to in the North Sea.   Competency and uniqueness of product alone is often not enough as Brazil is developing a somewhat different industrial culture. Petrobras attach a high value to technology which has a proven track record of industrial application therefore they prefer to focus on developing relationships with larger service companies rather than SMEs.  

Whatever the method of entry, be prepared to invest a large amount of time and money in the venture. Companies who plan to invest long-term with senior management time will have the competitive advantage as it is important to be in the country as much as possible. Many companies with limited time and money may find the 11 hour flight from the UK to Brazil alone prohibitive.   Local content laws make the industry highly regulated and import tariffs are significant. Seek the best possible specialist professional advice as red tape can be prolific. Whilst foreign investment is welcome and actively encouraged, it must meet Brazilian goals and rules so it is vital that companies understand their own liabilities in the market.

Prior to developing commercial opportunities in Brazil it is also important to consider a number of key issues especially around selecting the model of entry, financial modelling and tax planning. Companies need to ensure they fit into the legal framework of the country as this will affect revenue and also take on board the complex import regulations and the many taxes some products may be subjected to.   Don’t overlook medium to long term goals particularly in relation to the scale and length of time your company is prepared to commit to Brazil and, above all else, make sure you have a viable exit strategy in mind right from the start.

Brazil is not for everyone and certainly not for the half-hearted.  As with any new business venture, taking time to invest in face-to-face relationships is important, particularly in Brazil where business is much more of a social interaction.   Getting expert advice is crucial and it is wise to take advantage of the many networks available. Scottish Development International (SDI) and Scottish Chambers International (SCI) deliver Smart Exporter which offers events, workshops and seminars on key markets and legislative requirements in various global markets. Speak to others that have been there and done it. Learn from their experiences. Making a mistake abroad can be costly. As the only Scottish member of international accounting group UHY International, Campbell Dallas is the first port of call for Scottish companies thinking of working abroad.   We are a one stop shop for pre-entry planning, entry strategy and services in the market.   In particular we can assist with the overseas tax set up and help companies look past the ambitious Petrobras procurement schedules to provide an in-depth understanding of Brazil’s local market. Campbell Dallas also has affiliated partners through the UHY network in all major overseas oil and gas provinces.

Global opportunities for the energy industry are vast and at Campbell Dallas we are happy to assist companies in the oil and gas and other sectors to simplify the issues commonly associated with international trade and maximise profit from overseas operations.  

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