Petrobras is investing heavily in oil and gas infrastructure in Brazil through 2022. The legal framework for oil and gas exploration has changed with the discovery of large pre-salt reserves, moving to a production sharing agreement model. Local content requirements mandate that a certain percentage of goods and services used in exploration and production must come from Brazilian suppliers. Foreign companies can establish a presence through forming a Brazilian subsidiary or joint venture. Petrobras, as the national oil company, uses an electronic bidding system for procurement.

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Opportunities in the Oil & Gas Market in Brazil
Some Legal Aspect
Vera Dantas Aberdeen 15 March 2012

2. Pre-
Pre-salt area
SOURCE: Revista Brasileira de Tecnologia e Negócios de Petróleo, Gás, Petroquímica, Química Fina e Biocombustíveis. Ano X jul./ago 2008 n. 61. p. 30.

3. “Its remarkable offshore oil
bonanza could do Brazil a lot of
good. But getting the most out of
it will not be easy.” 5 Nov 2012

4. PRESENTATION TOPICS
1. Petrobras Investments
2. Oil & Gas Sector in Brazil - Legal Framework
3. Local Content Requirements
4. Establishing a presence in Brazil
5. Petrobras

5. 1. Petrobras Investments
Petrobras Investment Plan, as announced last December:
Petrobras will invest circa of US$ 224.7 billion until 2015;
Internal demand in ten years could reach 3.3 million of barrels
per day;
Target : 6 million barrels per day by 2020;
2012 budget : R$ 77.9 billion (approximately £ 27.5 billion) to
be invested in Brazil :
Upstream: 65% for development of production and
18% for exploration;

6. Petrobras Investments – cont.
Downstream:17% for infra-structure – refining, transport and
commercialization (including four new refineries in
Pernambuco, Maranhão, Ceará and Rio Grande do Norte).
Source : Valor Econômico, 19 December 2011

7. Petrobras Investments – cont.
On 7 March 2012, 2:07 PM , O Estado de São Paulo:
“Petrobras already has the funds for investments in 2012 –
Graça guarantees. Objective is that the company invests US$ 50
billion this year, compared to US$ 40 bilhões last year.”
Impact of such investments will be felt in the whole
chain of suppliers of equipment and services that
form the Oil Industry.

8. 2. Oil & Gas Sector in Brazil – Legal
Framework
Petrobras was created in 1953 as a State company
and has maintained the exclusive control of all oil
industry activities until 1995, when its monopoly
came to an end - Constitutional Amendment number
9.

9. Oil & Gas Sector in Brazil – Legal
Framework - cont.
Ownership of natural resources has been retained by
constitutional provision; likewise, monopoly of
Exploration & Production remained of the State, but
the Brazilian Oil and Gas Law (number 9478, of 6
August 1997) allowed private companies to exercise
exploration activities.
With pre-salt discoveries, the legal framework has
changed again with Law 12351, of 22 December 2010.

10. Legal Framework – before the pre-salt
reserves discoveries: concession
agreements
Law 9478 of 6 August 1997 :
Created the NATIONAL COUNCIL OF ENERGY POLICY
(“CNPE”) and the NATIONAL AGENCY OF
PETROLEUM, NATURAL GAS AND BIOFUELS
(“ANP”*), the industry’s regulator and supervisor.
Sets forth the applicable rules for the exploration and
production of oil.
Private companies allowed to exercise activities of
exploration and production of oil through concession
agreements, preceded by invitations to bid.
(*) renamed as such by Law 11097/2005

11. Legal Framework – before the pre-salt
reserve discoveries : concession agreements
– cont.
ANP is responsible for issuing tenders to grant concessions.
Concessionaires are entitled to ownership of all oil
produced subject to taxes; government had signature bonus,
royalties (10% to 5% - the latter where extreme conditions
applied), etc.
Bidders have to meet legal, technical and financial
requirements.
Exploration blocks were defined by ANP.

12. After the Pre-Salt reserves discoveries: Law
12351 of 22 December 2010 – the
Production Sharing Agreement (PSA)
New regulatory structure :
Exploration and production of oil : activity will be exercised,
through concession, authorization or under the production
sharing regime (Article 5 of Law 9478, as modified in
December 2010).
Now the CNPE defines the blocks that will be offered under
the concession or the production sharing regime (Article 2,
VIII) – before, it was the ANP.
Likewise, it decides which blocks will be contracted directly
with Petrobras under a PSA and which blocks will go to
auctions, also under a PSA. The ANP suggests, the Council
decides.

13. New Rules – Law 12351/2010 – cont.
Production Sharing Agreements : between the State and
Petrobras (no tender) or between the State, Petrobras and the
Oil Company, preceded by tender (auction type).
ANP still responsible for issuing invitations to bid both for the
exploration and production of oil under a) PSAs (Article 11,
III); and under b) concessions agreements (Article 8, IV and
36).
ANP still supervises (directly or indirectly with Brazilian States
or other, as foreseen in Law 8078/1990) the oil industry
activities (VII).

14. New Rules – Law 12351/2010 – cont.
Petrobras is the Operator.
Where an oil company is allowed to bid for an exploration
block and wins the bid: consortium agreement between
Petrobras, the bid winner and the Pre-Sal State company.
If hired directly, or if it wins the bid, Petrobras will enter into a
consortium agreement with the Pre-Sal State company (Pré-
Sal Petróleo S.A. – PPSA, controlled by the Brazilian
Government).
Foreign company must undertake, when participating of the
invitation to bid, that it will create a Brazilian company if it
wins – same rule, as before (Article 17, IV).

15. 3. Local Content Requirements
“Its remarkable offshore oil
bonanza could do Brazil a lot of
good. But getting the most out of
it will not be easy.”
But it is never too easy, is it ?

16. Local Content Requirements – cont.
The local content requirement is present both in the
concession and in the PSA regimes as well as in the
downstream contracts with Petrobras.
It is policy of the Brazilian Government.
Concession system
Local Content is imposed in the concession agreement
executed between ANP and the concessionaire, who must
observe a minimum percentage of participation of Brazilian
companies in the supply of equipment and services under the
agreement.

17. Local Content – cont.
This percentage is determined in the invitation to
bid and detailed in the concession agreement.
The clause in the agreement states that the
concessionaires must give preference to Brazilian
suppliers whenever their services or products
present conditions of price, term and quality
which are equivalent to those of other suppliers
invited to quote.

18. Local Content – cont.
PSA system
The CNPE will decide on the applicable local content
requirements (upon suggestions received from the Ministry of
Mines and Energy of Brazil – Article 10, III, e) from the new
law).
The minimum local content requirements will be specified in
the invitation to bid and in the model of agreement attached
to it (Article 15,VIII of Law 12351/2010).

19. Local Content – cont.
In the first rounds, the local content percentages
offered by the bidders were taken into consideration
for the effects of punctuation of the offers for
acquisition of the blocks.
As of the 5th bidding round, local content percentage
has reached approximately 80% in the exploration
phase and 85% in the development phase.
As of the Seventh Round, there were more specific
requirements and a Booklet of Local Content was
published.

20. Local Content – cont.
In 2007 ANP created a system for the certification of Local
Content .
The accredited entities measure and inform ANP the local
content of goods and services hired by the concessionaires of
the activities of Exploration & Production (we had no company
operating under a PSA at time of writing).
ANP has four Regulations that deal with the matter.

21. Local Content – Petrobras
Presently, the Local Content requirement is only regulated in
the upstream sector, in the concession agreements and PSAs
(new law is clear about it) and in the Local Content
Certification System.
However, Petrobras, in spite of the lack of regulation of local
content for the downstream segment, has been asking for the
clause. The majority of contracts of construction of refinery
for example include specific clauses of minimum Local
Content, to be reached by the Contracted Parties.

22. 4. Establishing a presence in Brazil
Preliminary Considerations
Setting up your own Company

23. Establishing a presence in Brazil
Preliminary considerations
Memoranda of understanding are binding in Brazil
Defaults of obligations under a proposal will be subject
to indemnification of losses and damages under the
general rules of the Civil Code, to which one should add
court fees and legal costs.
Term Sheet must be cautiously drafted by experienced
lawyers, in order not to create a binding obligation
between them.

24. Setting up your own company; joint
ventures
Which Type of Company?
Most frequently used company structures:
"Sociedade Anônima" (S.A.) and
"Sociedade Empresária Limitada" (“Limitada”)
in both cases the participants have limited liability.

25. Decision process – of relevance if the
investor is a minority shareholder
(a) in a Limitada – the social contract and the 75% vote
rule
Decisions must be taken by majority of votes, except for the
cases of alteration of the social contract or merger,
consolidation or winding up of the company, in which cases it
must be taken by at least 75% of the votes representing the
social capital.
Be careful with quotaholders agreement!

26. Decision process – of relevance if the
investor is a minority shareholder
(b) in a S.A. – Shareholders Agreement
General rule applying to S.A.s : decisions are taken by the
majority of voting shareholders.
Obligations set forth in a Shareholders Agreement can be
subject to specific performance. Under its umbrella, important
matters can be decided : quorum for strategic decisions;
management mechanisms; board of directors may be
integrated by foreign individual; corporate governance policies;
right of first refusal; tag along; etc.

27. If despite Local Content requirements
there is no local presence...
Services Agreement:
Tax – payable at remittance
Services – 25% income tax
Royalties – 25%
(15% income tax + 10% CIDE)
Agreement to state clearly which party is to be
responsible for that payment.

28. Compared to taxation of a Brazilian
company…
Basic rate of income tax on corporate profits (including
capital gains), as adjusted for tax purposes, is 15%, with an
additional surtax of 10% on taxable profits exceeding R$
240,000 (approximately £ 84,000) per annum.
Social Contribution on profits is 9% of taxable profits.
Top tax rate on profits is therefore 34%.
There is no withholding tax on distribution of dividends.

29. 5. PETROBRAS
Petrobras is subject to the Simplified Bidding Process
(Procedimento Licitatório Simplificado da Petrobras)
established by Decree number 2745, of 24 August
1998.
Electronic procurement is widely used : Petronect.
Bidders must be registered with the system in order
to receive bidding notices.

30. PETROBRAS – cont.
Legal Representative in the country is required (power of
attorney) by law.
Commercial Representative is normally required by
Petrobras.
Normally agreements are not “negotiable”.
In case of doubts or comments, these must be presented
in writing before the bid takes place.
Clauses in the agreement will deal with issues of liability.

31. PETROBRAS – cont.
Product and service suppliers are liable, independently of
fault, for damages caused to consumers by defect in the
product or in the rendering of services (Protection of
Consumers Code).
Civil Code :damages due to the creditor shall comprise
what the creditor has effectively lost and the
“reasonable” lost profits (Article 402); damages only
include “effective losses” (actually suffered) and “lost
profits arising directly and immediately” from the
inexecution of the obligation (Article 403).

32. PETROBRAS – cont.
Documents issued or signed out of Brazil (such as POA or
Commercial Representation Agreement required by
Petrobras) must follow the rules of notarization and
legalization at the Brazilian Consulate.
Instruments executed in a foreign language must be
translated into Portuguese by sworn translators in Brazil
for use in Brazil.

33. Thank you.
NORONHA ADVOGADOS, London
Vera Dantas
Phone: (20) 7581-5040
Facsimile: (20) 7581-8002
vmd@noronhaadvogados.com.br
www.noronhaadvogados.com.br