Brazilian Shipbuilding Fail, Transpetro Sets Ultimatum for Struggling Yard

RIO DE JANEIRO (Dow Jones)–The transportation arm of Brazilian state-owned energy giant Petroleo Brasileiro (PBR, PETR4.BR), or Petrobras, has suspended a contract to purchase 16 vessels from the Estaleiro Atlantico Sul shipyard, which last week delivered its first tanker nearly two years late.

EAS, as the shipyard is also known, has until Aug. 30 to fulfill three key conditions or the contract will be rescinded, Transpetro said in a statement emailed to Dow Jones Newswires. Transpetro said that EAS must find a technical partner “with proven experience” to replace South Korea’s Samsung Heavy Industries Co. (010140.SE), which sold its 6% EAS stake in March. In addition, EAS needs to establish a reliable timeline for construction of the ships and beef up engineering to ensure that the vessels meet technical specifications in the contract.

Troubles at EAS underscore the issues Brazil has encountered in restarting its long-dormant shipbuilding industry, once among the world’s largest before falling into decline in the 1990s. The renaissance, however, is encountering growing pains as old shipyards are restored and new ones are carved out of the country’s rugged coastline.

Brazil wants local firms to supply Petrobras with the drilling rigs, production platforms and other ships needed to develop recently discovered offshore oil fields. The country is using requirements for a high percentage of locally produced goods and services, or local content, in development of the newfound oil resources as a way to foment growth in the country’s industrial sector and a fledgling oil and natural gas services industry.

Transpetro said Friday that it would fine EAS for the tardy delivery of the “Joao Candido” oil tanker, the second vessel delivered under Transpetro‘s 10.8 billion Brazilian reais ($5.41 billion) fleet-renovation program. The tanker was built while the shipyard was also under construction.

An EAS contract to build five additional vessels, which will be built using technical assistance from former EAS partner Samsung, has not been suspended, Transpetro said. The company also said that it would create an auditing commission to monitor production at EAS and other shipyards building vessels for the logistics unit, aiming to improve productivity and bring Brazil’s shipping industry in line with overseas competitors.

A spokeswoman for EAS, which is controlled by local construction companies Camargo Correa and Queiroz Galvao, was not available to comment on the suspension when contacted by Dow Jones.

-By Jeff Fick, Dow Jones Newswires