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The Brazilian Energy Sector
 

The Brazilian Energy Sector

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The Brazilian Energy Sector by David Panico, Managing Director, Investment Banking, Citi. Presentation featured at the 2nd International Conference: Brazil: A pathway into the future from the Emerging ...

The Brazilian Energy Sector by David Panico, Managing Director, Investment Banking, Citi. Presentation featured at the 2nd International Conference: Brazil: A pathway into the future from the Emerging Markets Institute at Cornell University's Samuel Curtis Johnson Graduate School of Management and Better Brazil

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    The Brazilian Energy Sector The Brazilian Energy Sector Presentation Transcript

    • September 2012The Brazilian Energy Sector
    • Table of Contents 1. Citi Brazil 1 2. Introduction: The Brazilian Energy Matrix 3 3. Power Sector Overview: Perspectives and Challenges 5 4. Oil & Gas Sector Overview: Perspectives and Challenges 12
    • 1. Citi Brazil
    • : The Largest Global Bank with a Commercial Platform in Brazil Present in Brazil for 97 years, with a unique breath of services and long-lasting commercial relationships. Shareholders’ Equity in Brazil Key Citi Brazil Highlights (US$ bn) $4.0 Enhanced Investment Banking Capabilities $1.8 $1.5 $1.3 $0.8 Strong Financial Products Expertise $0.7 $0.6 $0.4 $0.3 CS JPM BNP MS BAML DB BARC GS Brazil + Global Distribution Network Assets in Brazil (US$ bn) $33.6 Relationship with Corporate Clients $18.1 $15.2 $14.6 Strong brand among Brazilian customers $11.4 $3.8 $3.5 $2.1 $1.3 Seasoned Personnel DB CS JPM BNP BARC BAML MS GS Source: Brazilian Central Bank as of December 31, 2011.1
    • is a Leading Advisor and Underwriter in Brazil Citi continues to be a leading underwriter on several landmark equity transactions throughout Brazil, with a solid position amongst international banks. Brazil Equity Brazil M&A (2010-2012 YTD) (2010-2012 YTD) Rank Bookrunner Volume ($bn) Share (%) Rank Bookrunner Volume ($bn) Share (%) 1 BofA Merril Lynch $6.2 10.7% 1 BofA Merril Lynch $26.9 58.8% 2 $6.0 10.3% 2 Credit Suisse $24.2 52.9% 3 Morgan Stanley $4.7 8.2% 3 Barclays $17.2 37.7% 4 Credit Suisse $4.7 8.2% 4 $6.9 15.1% 5 JP Morgan $2.5 4.2% 5 JP Morgan $5.6 12.2% 6 Goldman Sachs $1.7 3.0% 6 UBS $5.0 11.0% 7 Deutsche Bank $0.2 0.5% 7 Societe Generale $4.8 10.5% Advisor on the Advisor on the sale Tender Offer for Advisor on the Advisor to HRT of the remaining Follow-On Follow-On IPO IPO ETF ETF IPO IPO the remaining acquisition of a Block Trade Advisor to Vale in Participações in 49.9% stake to Joint Joint Joint Joint Joint Joint Joint Joint Block Trade 67% stake in 60% stake in Joint Bookrunner the sale of its oil & the sale of E&P Bookrunner Bookrunner Bookrunner Bookrunner Bookrunner Bookrunner Bookrunner Bookrunner Joint Bookrunner gas E&P assets in assets in US$1.7 bn US$530 mm Brazil Namibia US$1.7 bn US$530 mm US$5.4 bn US$6.8 bn US$1.8 bn Ongoing Ongoing Ongoing Ongoing Ongoing Ongoing 2012 2012 2011 Ongoing Ongoing 2011 Ongoing Ongoing April 2012 Advisor on the Advisor to the Advisor on the Advisor on the Advisor on the sale Follow-On Follow-On acquisition of a acquisition of Follow-On Follow-On IPO Consortium on primary sale of a of Shopping Jardim Follow-On Follow-On Joint Joint IPO Follow-On 5.6% stake in Joint Joint Joint Follow-On the privatization 30% stake in Galp Sul and landbanks Joint Joint Bookrunner Bookrunner Joint Bookrunner Bookrunner Bookrunner Joint Bookrunner Joint Bookrunner of Brasília Airport to Bookrunner Bookrunner Bookrunner US$70 bn US$70 bn US$4.9 bn US$4.9 bn US$686 mm US$686 mm US$1.5 bn US$1.5 bn US$232 mm US$2.0 bn US$2.6 bn US$2.3 bn US$272 mm US$232 mm US$4.8 bn 2010 2010 2010 2010 2010 2010 2010 2010 2009 March 2012 February 2012 January 2012 November 2011 2009 November 2011 Advisor on the Advisor Advisor on the acquisition of a Advisor on the Advisor on the on its sale to acquisition of 50.5% stake in sale of PU unit acquisition of Follow-On Follow-On Follow-On Follow-On Follow-On Follow-On Follow-On Follow-On Follow-On Follow-On assets in LatAm to Joint Bookrunner Joint Bookrunner Joint Bookrunner Joint Bookrunner Joint Bookrunner Joint Bookrunner Joint Bookrunner Joint Bookrunner Joint Bookrunner Joint Bookrunner from US$356 mm US$224 mm US$350 mm US$376 mm US$890 mm US$2.6 bn US$327 mm US$340 mm US$330 mm US$4.5bn US$356 mm US$224 mm US$350 mm US$376 mm US$890 mm 2009 2009 2009 2009 2009 August 2011 August 2011 July 2011 April 2011 January 2011 2009 2009 2009 2009 2009 Source: Bloomberg as of June 1st 2012. Note: League tables include only international banks.2
    • 2. Introduction: The Brazilian Energy Matrix
    • Brazil: Solid Macroeconomics Russia Largest Economies by GDP, 2011 Brazilian GDP (Nominal GDP in US$ tn) (US$ bn, % p.a.) USA 15.1 6.1% 5.2% 7.6% 3.9% 4.5% 4.3% 4.2% 2.7% 3.0% China 7.3 $3,203 (0.3%) $2,815 $3,009 $2,474 $2,567 $2,142 $1,653 $1,622 $1,366 $1,089 Japan 5.9 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015EGermany 3.6 Nominal GDP (US$bn) GDP (Real Change p.a., in %) France 2.8 Interest Rates & Inflation Brazil 2.5 (Avg, %) 15.3% United China Japan Germany France Brazil United Italy UK 2.4 States Kingdom 12.0% 12.4% 11.7% 10.1% 9.8% 7.5% Italy 2.2 6.6% 5.7% 5.0% 4.2% 4.9% 4.9% 3.6% Russia 1.9 2006 2007 2008 2009 2010 2011 2012E Canada 1.7 Inflation (IPCA) Interest rate (Selic, year average) Source: Brazilian Central Bank and IMF.3
    • The Brazilian Energy Matrix: Renewable as Nowhere Else 2010 Nuclear Mineral Coal 1% Hydro 5% 14% Natural Gas 10% Vegetable Coal & Wood Over 45% of all energy 10% consumed in Brazil comes from Renewables: 45% renewable sources, versus an average of 13% in developed Sugar Cane countries 18% Petroleum Based 39% Other Renew ables 3% 2020 Nuclear Mineral Coal 6% 1% Hydro Renewable sources account for 13% Natural Gas over 80% of electricity Vegetable Coal & 14% Wood generation, while global average 8% Renewables: is under 20% 47% Sugar Cane 22% Petroleum Based 32% Other Renew ables 4% Source: Brazilian Ministry of Mines and Energy.4
    • 3. Power Sector Overview: Perspectives and Challenges
    • Significant Potential for Electricity Demand… Electrical Consumption p/ Capita vs. GDP p/ Capita (KWh, US) 18,000 Effect of electrically intensive Canada 16,000 (Aluminum) Canada 14,000 USA USA 12,000 KWh/hab/year 10,000 Brazil’s per capita electricity consumption is expected to Japan 8,000 reach 3.5MWh by 2020 from France 2.4MWh today Germany Russia Spain 6,000 UK Portugal Greece Italy Chile 4,000 Brazil 2020 China Argentina 2,000 India Brazil 2010 0 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 US$/hab/year Source: IEA 2009: Key World Energy Statistics. (1) GDP per Capita in US$ covnerted through Purchase Power Parity as of 2000. Data pertains to the year 2007 for all countries except for Brazil.5
    • …Fueled by Brazil’s Regional Development Forecasted Energy Demand by Region (Avg. GW) CAGR: 4.6% CAGR 74.3 Power demand is expected to 71.3 68.4 +9.7% grow 4.6% p.a. between 2011 6.5 65.0 6.2 and 2016 61.5 5.9 59.2 5.1 10.7 +5.0% 4.3 10.2 4.1 9.7 9.2 8.8 8.4 11.8 +3.8% 11.3 10.9 10.5 10.1 9.8 While the Southeast and Midwest account for over 60% of consumption, it is the developing regions (N and NE) 40.2 41.9 43.6 45.3 +4.2% that grow at a faster pace 36.9 38.3 2011 2012 2013 2014 2015 2016 Yearly capacity expansions of Southeast / Mid West South Northeast North 6,2 GW will be required to supply to this additional demand Source: EPE.6
    • Expected Growth in Installed Capacity… Supply & Demand Balance (Avg. GW) Government sponsored 81 oversupply to maintain competitive prices 77.6 3.4 75.4 2.2 3.3 Contracting energy in reserve 2.2 4.2 74.3 auctions to provide further 71.4 system stability 4.8 1.7 71.3 4.6 68.5 63.7 65.0 Oversupply assumes contracted 1.2 0.9 projects coming online within 59.5 expected timeframe 0.2 61.6 0.1 59.2 2011 2012 2013 2014 2015 2016 Complexity of large projects Spare Capacity Reserve Energy Supply Demand being developed could result in delays Source: Company Presentations and Wall Street Research.7
    • …Focused on Alternative Renewables Breakdown of Capacity By Source Installed (% of total MW) Capacity / Potential Key Themes 2010 (GW) ▲Competitive implementation and operating Nuclear costs 2% 79.1 / ▲Clean energy Hydro Thermal 260(1) ▼Environmental / social licensing 76% 14% Hydro ▼Uncontrollable source (climate dependent) ▼Difficulties to develop unexplored potential Renew ables 8% ▲ Not dependent on climate ▼ Environmental issues 22.7 ▼ Natural gas supply restrictions Thermal ▼ Higher cost of certain sources (diesel, heavy fuel oil) 2020 ▲ Clean energy ▲ Large unexplored potential Nuclear SHP: 4.1 / 2% 18 ▲ Increased competitiveness due to local supply of equipment (particularly in wind) Hydro Thermal Wind: 1.7 / 67% 15% 143 ▲ Government Subsidies Renewables ▼ Dependent on climate (SHPs – Rainfall / Biomass: 9.8 / Wind – Seasonality of generation) 13.5(2) Renew ables ▼ Current energy price levels are not 16% competitive for some sources Sources: ANEEL, CRESESB/CEPEL, CENBIO, CPFL. (1) Estimated totality of hydropower potential, including small hydropower plants (SHPs)8 (2) Estimated potential of generation from sugarcane biomass
    • Alternative Energy Has Competitive Prices… Auctions have been adding significant capacity to the Brazil’s generation supply base, most notably in the thermal and renewable sectors. Auctions(1) Price Evolution (R$/ MWh) Assured Energy per Source (avg. GW) 1.3% 0.1% $150 R$145.66 (11%) 2009 0.8 GW 98.6% $120 2% (22%) 12% R$101.34 $90 2010 2.6 GW 51% 51% 35% $60 11% 9% 9% $30 2011 2.3 GW 40% 40% 40% $0 2009 2010 2011 Hydro Small Hydro Biomass Wind Gas-Fired Source: CCE, Citi estimates and Wall Street Research. (1) Considers new energy (LEN), reserve energy (LER) and alternative energy (LFA) auctions (2) Excluding Belo Monte Plant9
    • …Which Have Been a Governmental Concern Increasing Government intervention is changing he structure of the power sector, and will demand strong efforts towards efficiency gains to maintain attractive levels of return. Changes Impacts A Tariff Reviews • Regulatory WACC reduction from ▼ Pressure for efficiency gains Distribution 9.95% to 7.15% ▲ M&A potential - Synergies • X-Factor B Concession Renewal • No capital remuneration in tariffs (cost- ▼ Reduction of ~20% in regulated based model) power prices(1) Generation • Segment becomes regulated upon ▼ Increase in consumption could renewal (optional) surpass projected demand • Reduction of regulatory charges ▼ Reduced competitiveness of free market ▼ Pressure for efficiency gains • No reimbursements for assets built ▼ Lower margins / dividends Transmission before 1999 ▼ Single digit returns on new projects • Cost-based model ▼ Lower cash flow for companies which choose to renew, hindering their ability to invest in new projects (1) Estimated joint impact of regulatory changes and generation / transmission costs10
    • Competitive Landscape Generation Distribution Transmission 119.989 MW 68 mm customers R$12.7 bn Annual RAP (1) 33% 13% (1) 46% 6% 12% 9% 18% 6% 9% 5% 7% 17% 4% 6% 4% 6% 5% 2% 5% 2% 4% 5% 2% 5% 1% (1) 2% 4% 1% 4% 2% 1% 3% 1% 3% 2% 1% 2% Others 30% Others 6% Others 4% International Players 78% State Owned 33% State Owned 68% State Owned 22% Private 67% Private 32% Private Source: Aneel, EPE, Wall Street Research. (1) Includes Chesf, Furnas, Eletronorte, Eletronuclear, Itaipu & Amazonas Energia11
    • 4. Oil & Gas Sector Overview: Perspectives and Challenges
    • Brazil to Become a Top O&G Player Pre-Salt: a Structural Change Worldwide Oil and Gas Reserves (bn boe) Russia 335 Iran 312 In the past 5 years, over 50% of oil Saudi Arabia 311 discoveries were in deep waters. Qatar 176 Brazil represents 63% of such discoveries Brazil (Post Tupi) 145 UAE 136 Iraq 134 Kw ait 112 USA 69 Nigeria 68 Forecasts suggest that, with the Libya 53 development of recent finds, Brazil will be Kazakhstan 51 the non-OPEC country with greatest Turmenistan 48 ~9.7x increase in production by 2030 Canada 44 Adding pre-salt discoveries Algeria 39 China 29 Indonesia 23 Australia 22 Malaysia 20 Norw ay 19 At current production rates, proven reserves Egypt 17 would last for around 19 years Brazil 15 Azerbaijan 15 Source: ODS-Petrodata, Riglogix, Wall Street Research, BP Statistical Review of World Energy (2010) and Petrobras’s filings.12
    • O&G Production Should Outpace Global Producers Brazil Oil Production (MBbl/d) With increase in production, Brazil has become self-sufficient and is now a net 6.1 exporter of oil 5.9 5.5 6 % 2. R :1 4.9 C AG 4.4 Additional production will come from deep 3.8 exploration, in which Petrobras has an 3.5 acknowledged expertise, being the leading CAGR: 5.0% offshore operator measured by production 2.8 2.5 and number of offshore facilities 2.1 2.1 2.0 1.8 Brazil is expected to produce 6.1 MBbl/dof by 2020, of which 4.2 MBbl/dof will come from Petrobras 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Source: Wall Street Research.13
    • Brazil: Oil and Natural Gas Reserves are concentrated in RJ AM CE RN AL SE BA Natural Gas Reserves Oil Reserves ES 59.2% SP 82.8% Total: 7.4% RJ Total: 0.4% 852,147 m m m ³ 0.6% PR 28,467 m m boe 0.3% 6.2% 0.7% 11.1% SC 9.5% 8.2% 10.3% AM NE ES RJ SP S Source: ANP.14
    • Brazil: On Track to Become a Major Consumer of Oil 10 Largest Consumers of Oil in 2011 (Bubble sizes represent amount of Oil consumed in 2011) 9% Saudi Arabia The expansion of the middle China China class, increased credit 7% availability, and record auto Annual growth in demand for Oil 2005–2011 sales in recent years drive rapid increases in fuel demand India India 5% Brazil 3% Gasoline and diesel demand Russia have grown at an average pace Canada of 15.9% and 6.3%, respectively, 1% in the last 3 years South Korea (2)% 0% 2% 4% 6% 8% 10% 12% 14% 16% (1)% Annual GDP growth 2005–2011 USA Germany Between 2011-2020, demand for (3)% Bubble sizes represent ammount of Oil consumed in 2011 oil subproducts are expected to grow 4.5% p.a. Japan (5)% Source: BP Statistical Review and World Bank.15
    • Petrobras Dominates the Brazilian O&G Market E&P Market Share (% production, boe/d) 1,736,454 46,960 36,870 92% 8% 14,369 14,131 13,051 7,616 7,954 5,078 4,794 Refinement (% of installed capacity, m³ p/day) 326.4 98% 2.7 2.2 1.1 0.3 2% Biodiesel (% of installed capacity, m³) 556,679 518,400 450,000 434,462 378,000 343,800 296,640 286,920 7% 237,600 216,000 93% Olfar Source: Wall Street Research, IBP and ANP.16
    • Major Investments In The Sector Investment breakdown until 2016 (%) US$236.5 bn Others 7% Bio-Fuels 1% Gas & Energy 6% Between 2012 – 2016 Petrobras will invest US$236.5 bn in all areas of production and refinement of O&G; this presents an outstanding opportunity for all sectors related to the O&G industry. E&PDow nstream & Logistics 56% 30% Source: Petrobras.17
    • E&P: Complex Offshore Exploration Brings Challenges Investment breakdown until 2016 (%) The exploration of offshore reserves so far from the shore poses many challenges, US$131.6 bn namely in logistics, which will demand heavy investments Exploration 19% Local content requirements imposed by the government could cause delays and cost overruns Infrastructure and Production Support Development 69% 12% Focus on pre-salt discoveries resulted in lack of maintenance investments in existing fields, which led to production drops Royalties imbroglio has hindered new bidding rounds by ANP Source: Petrobras.18
    • Downstream: Much Needed Modernization to Take Place Investment breakdown until 2016 (%) Current installed capacity is outdated (last refinery built in the 80’s) US$71.6 bn Refineries have low complexity indexes and Improvement cannot efficiently process heavy crudes 17% Quality & Fast growing demand, coupled with lack of Conversion 21% investments in additional supply, has made Brazil become an importer Refining Capacity Expansion 44% Logistics for Oil Government intervention in pricing policy 8% has negative impacts on returns and cash Others flows. Petrobras’ investment plan foresees additional capacity of 1.4 Mbbl/d, reaching 3.4 Mbbl/d by 2020. Source: Petrobras.19
    • Gas & Energy: Logistics is the Bottleneck Investment breakdown until 2016 (%) Despite substantial natural gas reserves, production has grown at a slow pace due to US$13.5 bn the lack of investments in logistics Expansion - Natural gas accounted for only 9% of Regassification energy consumption in 2011, versus 51% in 14% Argentina Expansion - Gas Chemical 42% Expansion - Petrobras controls most of the country’s Natural Gas Logistics reserves, is responsible for the majority of 17% production and imports, controls the national transmission network, and holds stakes in 2/3 of state-owned natural gas Expansion - companies Others Electric Energy 15% Generation 12% The company’s investment plans foresees relevant expansions, reaching 3.4 bcf/d of production by 2020 Source: Petrobras.20
    • Biofuels: Promise for the Future Investment breakdown until 2016 (%) Brazil’s leading role as a producer of ethanol from sugarcane places it as the 2nd US$2.5 bn largest producer of biofuels behind the US Corporate The country also stands out in biodiesel and 0.4% is expected to become the largest producer Agricultural Supply in 2012. It is currently the largest consumer 16% in the world. Biodiesel 11% The country benefits from favorable climate, Ethanol 73% availability of arable land, and efficient technology for crop cultivation Mandatory biofuel blends in gasoline and diesel are important drivers of expected growth in upcoming years Source: Petrobras.21
    • Extensive Government Presence in O&G The Brazilian Government plays a significant role in the local O&G industry, both in terms of legislation and through the control of Petrobras. Local Content Requirement Other Policies & Legislation Local Content Requirement laws stipulate that a minimum percentage A Fixed Fuel Prices of equipment and services contracted by an operator must be supplied by local companies • Government policy regulates downstream prices Local Content • Despite recent readjustments (after 6 years), (%) 62% there is still a 21% deficit to import prices +7 p.p. E&P 55% B Pre-Salt Operation • Proposed legislation foresees product sharing 2004 2011 contracts, by which Petrobras would hold a minimum of 30% of any new pre-salt +10 p.p. 92% reservoirs Supply • Petrobras would also be the sole operator of 82% PSAs 2004 2011 C Transfer of Rights +20 p.p. 90% • Agreement made with Petrobras by which the 70% Government assigned the right to explore pre- Energy Gas & salt areas subject to a maximum production of 5,000 Mboe for US$ 42.5 bn. • Subsequent price and volume revision could 2004 2011 trigger value adjustments Source: ANP and Wall Street Research22