Month: June 2018

Published at TN Petroleum Magazine in 05/28/2018

Decree 2.745/1998 simplified Petrobras’ procurement processes, bringing the required agility to compete in a market that became competitive after the opening of the oil and gas sector to the private sector, with the advent of Law 9.478/1997 (The Petroleum Law). After almost 20 years of the simplified regime, Petrobras is forced to comply with a public bidding regime, with the enactment of the State Law (13.303/2016). This law will govern all procurement by all Brazilian state-owned companies – around 150 of the federal government alone, not counting the state and municipal state-owned companies, which operate in several areas such as agriculture, tourism, ports, nuclear, war, banks, among others.

The process of adaptation to the State Law by Petrobras has been very difficult. This is because it treats the purchase of simple items, such as a common engine, for example, in the same way as sophisticated equipment such as christmas trees, which is not in line with industry best practices. The upstream sector presents peculiar characteristics, and the major oil companies in the world follow a specific pattern of procurement, due to the reduced number of suppliers in certain segments and the high technology involved. Oil companies need to develop strategic partnerships with their main suppliers, a business model not contemplated by the State Law, precisely because the law is generic.

A critical point is the 5th paragraph of Article 1 of the law, which provides that the state-owned company participating to a consortium, as operator, is subject to the law. This generated a problem because Petrobras, as operator of consortia formed for joint operation of oil and gas exploration, is in charge of the procurement of the consortia, which have always ran under a private legal regime. Compliance with public procurement rules came against Petrobras’ business plans and projects economics in the partnerships with other oil companies.

The recent Decree 9.355/2018, published on April 26, determines in its Article 1, paragraph 7 that goods and services procurement performed by the consortia operated by Petrobras are subject to the private regime of private companies, in which case the public tendering procedure is not applicable. The inclusion of this provision in this Decree was surprising, as its purpose is to determine rules for the assignment of Petrobras’ rights to the exploration, development and production of oil and gas. Timely or not, the new rule exempts Petrobras from the obligation set forth in above mentioned paragraph 5 of Article 1 of Law 13.303.

Petrobras plans to invest US$ 60.6 billion in exploration and production of oil and natural gas by 2021. The largest projects, especially in the pre-salt, will be explored by Petrobras in partnership with other companies. In this context, suppliers are confused and do not know how to act and participate in the projects developed by the consortia. A question arises: how to reconcile two different procurement regimes in the same company?

Petrobras has made a huge and commendable effort to inform and train suppliers in the new procedures of Law 13.303, including providing an application where suppliers can track all bids in progress. However, there is no information available on the procurement of the consortia. Without going into the merits of the (debatable) legality of Decree 9.355, the situation is Kafkian because Petrobras is currently exercising unfair competition with itself: when it operates alone, it does not have the same tools as when it acts in a consortium. In order to avoid bureaucracy, objections, delays and, as a consequence, cost increases, Petrobras tends to change its business model and to explore all its fields in partnership with other companies, in order to simplify procurement procedures.

To be efficient and fulfill its purpose, a company, state or non-state, must obey management principles and rules, not just legal principles and rules. The São Paulo Stock Exchange B3 recently authorized Petrobras to join the special Corporate Governance Level 2 listing segment: “These achievements reinforce the progress made in Petrobras’ corporate governance and ratify its commitment to continuous process improvement and alignment with best practices in the market” as stated by the oil company itself. In fact, there has been a significant improvement in its disclosure, transparency for stakeholders and compliance (code of ethics and organizational integrity). Advances are evident, and the risk of illegalities has been significantly reduced. This may be enough to prevent criminal actions, and the company could count on a uniform, simpler and more agile procurement procedure, in line with international standards, similar to other oil companies.

We are living a new context in Brazil: intolerance to corruption, bargaining and other crimes is notorious, reflecting a deep and historic cultural change. State companies needed a management, governance, and compliance clash. But when it comes to procurement procedures, although Law 13.303 is less bureaucratic than Law 8.666/93 (public procurement law), should Petrobras not have its own rules, adapted to the reality of the oil sector? In an extremely competitive market, this may be necessary.

An analysis of the best practices of procurement and hiring in this sector is inevitable, tracking the worldwide recognized and standardized practices. This would help determining in a logical and objective way, the best procedures for Petrobras, taking into account the legal nature of the company – a semi-public – since this continues to be the Brazilian option, that is, to maintain a state-owned company as a leading actor in this sector.