OREANDA-NEWS. The Brazilian government has eased controversial rules that require oil and gas companies to source part of their goods and services in the local market, a move that was welcomed by the industry.

Critics have long said the rigid local content rules raise costs and generate inefficiency.

An 18 January decree issued by Brazilian president Dilma Rousseff expands the list of activities qualifying for the calculation of local content percentages.

The list now includes signing of purchase contracts for goods, services and systems that enable the installation of new suppliers in the country; direct investment in the expansion of production capacity of suppliers; direct investment in technological innovation for suppliers; the purchase of Brazilian goods and systems to service a foreign party; and the acquisition of pioneer lots of goods and systems developed in Brazil.

The decree establishes a framework of incentives and credits for companies that can swap between compliant and non-compliant projects. The incentives and credits will be awarded to firms "that promote local content beyond the mandatory rules through hiring local engineering firms and promoting technological innovation, thereby generating local jobs."

The credits could be applied to existing projects.

The decree also establishes a committee comprised of representatives from the federal executive branch; the ministries of finance, development, mines and energy, and science; oil regulator ANP; state-backed development bank BNDES; and research firm FINEP.

The committee will be responsible for adopting regulations to govern the new credit system, and for drafting and submitting to the ANP recommendations to improve existing local content rules.

Brazil's oil industry chamber IBP says the new rules are a good first step. "The decree introduces an important change in the industry's logic of development to establish a model that encourages investments to expand local content, as opposed to the current logic which only provides penalties," the group said.

The changes are a cornerstone of Pedefor, a new government program to stimulate competitiveness in Brazil's oil and gas supply chain.

Brazil's local content rules have come under intense scrutiny as traditional oil sector suppliers fall on hard times, partially the result of their involvement in a systemic kickback scheme at state-controlled Petrobras. Around two dozen mainly Brazilian firms are still banned from bidding on Petrobras contracts for their role in the scheme.

Embattled Rousseff has been reluctant to change the rules for fear of alienating her labor union base, which benefits from the rules that force local and foreign companies to use a high percentage of Brazilian goods and services in projects.