Local content in Brazilian oil and gas auctions

Advisor: Leonardo Rezende

In this paper, we study the case of Brazilian oil and gas auctions to assess the impact of local content requirements in bidding behavior, allowing us to estimate its impact on government revenue. The Brazilian case is particularly appealing, as there were significant changes in these requirements throughout the years. In the sales with increased local content requirements there was a dramatic change in the bidders behavior: the average signing bonus for offshore tracts dropped from an average of R$ 57 million in the first sales to only R$ 10.6 million and the average number of bids per tract plunged from 0.92 to 0.12. We aim to answer how much the increased local content requirements affected participation and revenue in the auctions. We develop and estimate a structural auction model within the mineral rights framework that includes an entry decision and bids in multiple dimensions, including a bonus and a local content percentage. Our results show that local content requirements increase costs in deep water areas in 14%. Government revenue in auctions in these areas could be much larger in a counterfactual with no local content requirements, amounting to an extra R$ 17 billion in signing bonus only for deep-water tracts. For onshore areas, we did not find any significant difference between local and foreign costs.