The eyes of the world are on Brazil now for sporting reasons, currently with the Football World Cup and then, two years later, the 2016 Olympics in Rio de Janeiro.
For several years, the world has also been looking towards Brazil as an economic growth engine, and whereas this huge country’s growth in recent years has tapered off, what has not changed is the magnitude of the opportunity in the Brazilian oil and gas industry.
In fact, the auction last year of the first of the ultra-deepwater, pre-salt licences marks only the start of the exploitation of that particular resource; forecasts are that over $550billion will be spent exploring and developing the Santos Basin alone.
The sheer scale of the pre-salt market opportunity has required the state operator Petrobras to raise tens of billions of dollars from capital markets in order to fund its pre-salt exploration and development programme.
Regardless of the funding requirement, the lack of skilled labour in the local market and logistical and technical challenges of operating offshore at depth has finally driven Petrobras to admit that it cannot explore and develop all of the resource itself; several of the majors and other E&P companies have invested in both pre and post-salt fields accordingly.
This is not something to do lightly. Intrinsically, establishing a business in Brazil is difficult enough, without the added complication of the increasing local content requirements that much of the oil and gas industry is subject to.
Equally critically, businesses with ambition to service the oil and gas upstream industry will need to become accredited suppliers to Petrobras – very achievable given the large number of small businesses with whom Petrobras does business.
Nevertheless, whether by acquisition or through establishing a local subsidiary, many foreign businesses are positioning themselves in the Brazilian oil and gas market to take advantage of the huge commercial opportunity there.
Most choose to acquire an existing business as it is generally quicker to market and can bring experienced local management. The depreciation of the Brazilian real since the start of 2012 has only increased the attractiveness of the opportunity in a market where revenue is driven by the US Dollar.
Probably the most daunting prospect for a foreign entrant is complying with the Brazilian tax system, a behemoth of staggering complexity that operates at three different levels (federal, state and municipality), in some circumstances has multiple methods of calculation available and which places emphasis on extensive indirect taxation.
Logically, as you would expect, many companies do face material tax contingencies from the various authorities. Close behind are the labour laws, which are very much favourable to the employee, and again result in significant contingencies.
This complexity makes it critical both to structure any investment in Brazil in a tax efficient manner, and to do thorough due diligence into the tax and labour exposures at a minimum, even if the target vehicle is a relatively small business that you would not think it worth performing financial due on.
The mood in Brazil is therefore likely to remain upbeat whether they win the football World Cup or not. Like many of the fans visiting at the moment, businesses will find Brazil a difficult place to operate but intoxicating and replete in opportunity.
As in any endeavour, the chances of success will be enhanced if businesses do their homework in advance and enter the market properly. With the abundance of opportunity Brazil must be on everyone’s to do list!
Colin Pearson is a tax partner at EY
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