Supply Chain Opportunities within            PetrobrasCountry, Industry, Market Overview and Supply Chain      Feasibility...
Page 2 of 71Universal ConsensusUniversal Consensus is a provider of strategic international advisory and trainingservices....
Page 3 of 71Executive SummaryThis document is a feasibility study of supply chain opportunities within Petrobras. The stud...
Page 4 of 71Table of ContentsExecutive Summary ..............................................................................
Page 5 of 71    Finances ....................................................................................................
Page 6 of 71    Petrobras Maritime Market Trends ............................................................................
Page 7 of 71         O&G Terminals ..........................................................................................
Page 8 of 71Brazil                                                          Introduction                                  ...
Page 9 of 71da Silva’s administration as an example of the second. The shift between right and left wing hasoften been cyc...
Page 10 of 71president – see oil and gas sector history section), introduced a new currency, the Real, and a neweconomic p...
Page 11 of 71The Brazilian railroad industry was privatized and an effort is in place to deal similarly with adeterioratin...
Page 12 of 71 Starting a Business                                 Protecting Investors Procedures (number) 15             ...
Page 13 of 71are very important in Brazil because of the country’s high interest rates. In fact, it is not unusual fora lo...
Page 14 of 71Establishing OperationsIt takes an average of 15 procedures and 120 days to start a new business. The annuala...
Page 15 of 71Brazil’s Fuel and Energy SectorHistoryThe Government of Brazil undertook an ambitious program to reduce depen...
Page 16 of 71Three key milestones in Petrobras’ history are:         1953: Petrobras monopoly introduced.         1995: ...
Page 17 of 71About 92 percent of Brazil’s oil production in 2010 originated from offshore fields, mostly atextreme depths....
Page 18 of 71Government PoliciesBrazilian oil industry contractors are often traditional engineering/construction/servicec...
Page 19 of 71adhere to local content requirements.38 In general, the local content requirement is that up to 70%of supply ...
Page 20 of 71Petrobras is involved within the Prominp program, as can be seen in the governance structurebelow. The Promin...
Page 21 of 71Industry OrganizationsBrazils National Petroleum AgencyBrazils National Petroleum Agency (Agência Nacional do...
Page 22 of 71ONIP, a private non-profit established in 1999, serves as a forum for all the companies andgovernment agencie...
Page 23 of 71prices on local refining costs. Higher pump prices could help to curb demand, but the government isworried ab...
Page 24 of 71Petrobras in BrazilOverviewPetrobras is a publicly-held energy company headquartered in downtown Rio de Janei...
Page 25 of 71A graphical presentation of Petrobras operations:Petrobras in comparison with its competitors:5353   http://w...
Page 26 of 71Annualized revenue growth comparison 2004-2009:FinancesFinancial PerformanceQ1 2011 net profit was up 41% fro...
Page 27 of 71Management          Chairman - Brazilian Finance Minister Guido MantegaGuido Mantega is a Brazilian economist...
Page 28 of 71The corporate structure (chart below) is a mix of functional and geographical departments withelements of mat...
Page 29 of 71Executive Board (selection)      Title                                                                       ...
Page 30 of 71National SentimentThe history of Petrobras has been marked by a strong connection with its country of origin....
Page 31 of 71Petrobras Internationally                              International Operations                              ...
Page 32 of 71city to live in and the country (which is also former Portuguese colony) is expected to be one of thefastest ...
Page 33 of 71Petrobras’ Strategy 2011-2015                                                                                ...
Page 34 of 71Petrobras’ estimate is that the Brazilian economy will grow 3.8% annually, which will stimulatedomestic energ...
Page 35 of 71InvestmentsPetrobras made an effort to address private investors concerns by spending more in its updated2011...
Page 36 of 71Petrobras’ Supply Chain – Best ProspectsBackgroundPetrobras has significant problems satisfying its supply ch...
Page 37 of 71The supply chain for Petrobras involves more than 1,300 items, reaching considerable volumes.Some examples of...
Page 38 of 71                              Petrobras supply chain sectors and challenges.Brazil Supply Chain ChallengesPet...
Page 39 of 71TransportationIn the transportation area, there is a greateffort by the government to change thecurrent matri...
Page 40 of 71Drilling & Exploration                                      2010 was a record year in terms of production for...
Page 41 of 71Petrobras will have at least 63 operative rigs in 2013-2017:Drilling and Production UnitsPetrobras and other ...
Page 42 of 71Critical Equipment Exploration and ProspectingPetrobras considers the following critical equipment and servic...
Page 43 of 71Petrobras has quantified its need in terms of material and equipment:Items Units of               Measurement...
Page 44 of 71Moreover, all sorts of service and repair services related to critical equipment will be in highdemand. Espec...
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
Supply Chain Opportunities within Petrobras - Feasibility Study
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Supply Chain Opportunities within Petrobras - Feasibility Study

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This is a comprehensive feasibility study of the opportunities for companies to work with Petrobras.

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Supply Chain Opportunities within Petrobras - Feasibility Study

  1. 1. Supply Chain Opportunities within PetrobrasCountry, Industry, Market Overview and Supply Chain Feasibility Study by Universal Consensus By: Andreas Fried, M.Sc., About the Author: Andreas Fried is the Director of Business Development & Strategic ClientServices at Universal Consensus, LLC and Board Member of the Swedish American Chamber of Commerce, San Diego. Connect on LinkedIn: http://www.linkedin.com/in/andreasfried August 29, 2011 info@universalconsensus.com www.universalconsensus.com © Universal Consensus 2011-2012
  2. 2. Page 2 of 71Universal ConsensusUniversal Consensus is a provider of strategic international advisory and trainingservices. Universal Consensus’ proprietary model, the Business Model of Intercultural Analysis(BMIA™), was developed to drive significant business and organizational results. This model hasbeen used to develop a quantifiable return on investment for clients who are struggling in theunderdeveloped field of cross-cultural supply chain management, management consulting, andbusiness development.Learn More: http://www.universalconsensus.com/View Us on YouTube: http://www.youtube.com/universalconsensusFollow Us on Twitter: https://twitter.com/UnivConsensusLike Us on Facebook: http://www.facebook.com/Univconsensus
  3. 3. Page 3 of 71Executive SummaryThis document is a feasibility study of supply chain opportunities within Petrobras. The studyprovides a background of Brazil, and a synopsis of the Brazilian oil market, Petrobras, andPetrobras supply chain opportunities.Petróleo Brasileiro S.A., better known as Petrobras (NYSE: PBR), is an oil giant, the largest companyin Latin America, and the 34th largest company in the world. Petrobras plans to spend $224.7 billionin their supply chain from 2011-2015. The possibilities for entry into the Brazilian market, due tothis corporate monster’s resources, are astounding. Due to Brazilian bureaucracy and traderegulations, the challenges of entering the Brazilian market are equally staggering without access tothe right deal and transition team.Petrobras plans to double its proved reserves through 2020 and will by then be one of the largestcompanies in the world. In order to achieve this, Petrobras needs massive investments in its supplychain. Some estimates put the total required supply chain spending at $1 trillion.Recent legislation requires Petrobras to have local content of up to 70% in their supply chain. As aresult, it is currently experiencing a severe supply chain bottleneck. We intend to relieve thisbottleneck by helping our American clients to take part in some of this $1 trillion need and at thesame time utilize this opportunity to satisfy a need for our clients to emerge in Brazil, to take theirplace in one of the fastest growing economies in the world.We have assembled a team of some of the most renowned international attorneys, bankers, taxadvisors, investment advisors, deal brokers, and cross cultural experts in the United States. Shouldthis feasibility study interest you, we would like to meet with you for a complimentary session togive you the opportunity to ask questions and to further explore this opportunity.The objectives of this feasibility study are to:  Provide background information on Brazil, Petrobras and the Brazilian oil industry  Identify general and projected oil industry supply chain problems.  Outline Petrobras supply chain  Identify current bottlenecks in Petrobras’ supply chain  Describe opportunities for U.S. companies in Petrobras’ supply chain
  4. 4. Page 4 of 71Table of ContentsExecutive Summary ................................................................................................................................................................ 2Brazil ............................................................................................................................................................................................. 8 Introduction .......................................................................................................................................................................... 8 Politics ..................................................................................................................................................................................... 8 Economy ................................................................................................................................................................................. 9 Brazil’s Industry, Resources, and Technology ...................................................................................................... 10 Doing Business in Brazil ................................................................................................................................................ 11 Challenges ....................................................................................................................................................................... 11 Distribution and Sales Channels ............................................................................................................................ 12 Selling in Brazil ............................................................................................................................................................. 12 Law 12.349 .................................................................................................................................................................... 13 Establishing Operations ............................................................................................................................................ 14 Getting Paid .................................................................................................................................................................... 14 2014 World Cup and 2016 Olympics........................................................................................................................ 14Brazil’s Fuel and Energy Sector ....................................................................................................................................... 15 History ................................................................................................................................................................................... 15 Energy Reserves ................................................................................................................................................................ 16 State Owned Enterprises (SOE) .................................................................................................................................. 17 Government Policies........................................................................................................................................................ 18 Local Content Requirement - Prominp ............................................................................................................... 18 Exploration - Pre-salt Legislation.......................................................................................................................... 20 Industry Organizations................................................................................................................................................... 21 Brazils National Petroleum Agency..................................................................................................................... 21 Brazil’s National Energy Council ........................................................................................................................... 21 Brazilian Petroleum Institute (IBP) ..................................................................................................................... 21 National Organization of the Oil Industry (ONIP) .......................................................................................... 21 Refining Capacity .............................................................................................................................................................. 22 Local Demand ..................................................................................................................................................................... 22Petrobras in Brazil ................................................................................................................................................................ 24 Overview .............................................................................................................................................................................. 24
  5. 5. Page 5 of 71 Finances ................................................................................................................................................................................ 26 Financial Performance ............................................................................................................................................... 26 Management................................................................................................................................................................... 27 Reserves ............................................................................................................................................................................... 29 National Sentiment .......................................................................................................................................................... 30 Workforce ............................................................................................................................................................................ 30Petrobras Internationally................................................................................................................................................... 31 International Operations ............................................................................................................................................... 31 South America ............................................................................................................................................................... 31 Africa ................................................................................................................................................................................. 31 China.................................................................................................................................................................................. 32 India................................................................................................................................................................................... 32Petrobras’ Strategy 2011-2015 ....................................................................................................................................... 33 Overview .............................................................................................................................................................................. 33 Investments......................................................................................................................................................................... 35Petrobras’ Supply Chain – Best Prospects................................................................................................................... 36 Background ......................................................................................................................................................................... 36 Demand ................................................................................................................................................................................. 36 Supply Chain Challenges ................................................................................................................................................ 36 Petrobras Supply Chain Challenges ...................................................................................................................... 37 Brazil Supply Chain Challenges .............................................................................................................................. 38 Infrastructure ..................................................................................................................................................................... 38 Transportation .............................................................................................................................................................. 39 Drilling & Exploration ..................................................................................................................................................... 40 New Rigs .......................................................................................................................................................................... 40 Drilling and Production Units ................................................................................................................................. 41 Critical Equipment Exploration and Prospecting ........................................................................................... 42 Critical Exploration & Prospecting Services: .................................................................................................... 43 Price and Delivery Terms ......................................................................................................................................... 44 Ships and Support Vessel .............................................................................................................................................. 45 Petrobras’ Fleet Modernization and Expansion Program – PROMEF I and II: ................................... 45
  6. 6. Page 6 of 71 Petrobras Maritime Market Trends ..................................................................................................................... 47 Recent Maritime Deals ............................................................................................................................................... 47 Unspecified Demand ................................................................................................................................................... 48Supplier................................................................................................................................................................................. 49Finance and Investments............................................................................................................................................... 49 Supply Chain Financing ............................................................................................................................................. 49 Risk and Diversification - Supply Chain Acquisitions ................................................................................... 50 Petrobras Finance Company – PICFCo ................................................................................................................ 50Insurance.............................................................................................................................................................................. 51Human Resources ............................................................................................................................................................. 51 Human Resource Demand ........................................................................................................................................ 52 Training............................................................................................................................................................................ 53 Worker Safety & Health............................................................................................................................................. 53Procurement ....................................................................................................................................................................... 54 U.S.-Brazil Differences................................................................................................................................................ 54 Procurement Process ................................................................................................................................................. 54 Procurement Portal..................................................................................................................................................... 55 Local Content ................................................................................................................................................................. 55Pipelines, Refining & Petrochemicals ....................................................................................................................... 56 Downstream Best Prospects: .................................................................................................................................. 56 Refining ............................................................................................................................................................................ 56 Petrochemicals.............................................................................................................................................................. 57 Biofuels............................................................................................................................................................................. 57 Pipelines .......................................................................................................................................................................... 57Research & Development .............................................................................................................................................. 57 UFRJ Technology Park ............................................................................................................................................... 58 Supply Chain Material and Equipment Development ................................................................................... 58Environmental Technology, Safety & Security ..................................................................................................... 59 Environmental Technology – Distribution ........................................................................................................ 59 Accident Prevention.................................................................................................................................................... 59Distribution & Terminals............................................................................................................................................... 59
  7. 7. Page 7 of 71 O&G Terminals .............................................................................................................................................................. 59 Gas Station Network ................................................................................................................................................... 60Sources ....................................................................................................................................................................................... 66Disclaimer ................................................................................................................................................................................. 71
  8. 8. Page 8 of 71Brazil Introduction Brazil, with more than 200 million people and an area roughly the size of the U.S., underwent more than half a century of populist and military government until 1985 when the military regime peacefully yielded power to civilian rulers. Brazil was plagued by high inflation in the early 1990s but stricter financial policies and increased wealth based on vast natural resources has spurred Brazilian growth. Brazil also escaped relatively unharmed from the financial crisis. 1 A highly unequal income distribution and a high crime rate as well as a high taxation level (38% of GDP) and significant bureaucracy remain pressing problems.2 The challenges associated withdoing business in Brazil have kept many companies from entering the country. Subsequently, lackof international competition now presents an excellent opportunity for U.S. companies to capitalizeon growth opportunities in Brazil and gain an early-mover advantage – with the right team in placeto make it happen.PoliticsBrazil is a federal republic with two Chambers. The President of Brazil is both head ofstate and head of the government. The president is elected to a four-year term by the people. Brazilhas a multi-party system. Parties often fail to claim majority power without forming cross-partycoalitions. The next presidential and general election is in 2014.3Brazilian politics is divided between internationalist liberals and statist nationalists. The first groupconsists of politicians which argue that the internationalization of the economy is essential for thedevelopment of the country, while the other group rely on interventionism, and protection of stateenterprises. Fernando Henrique Cardoso’s administration is an example of the first group and Lula1 https://www.cia.gov/library/publications/the-world-factbook/geos/br.html2 http://www.heritage.org/index/Country/Brazil3 DOC: Country Guide Brazil 2011.4 http://terramagazine.terra.com.br/interna/0,,OI4683023-EI6578,00-
  9. 9. Page 9 of 71da Silva’s administration as an example of the second. The shift between right and left wing hasoften been cyclical.Socialist president Dilma Rousseff of the Worker’s Party (PT, Partido dos Trabalhadores), who tookoffice on January 1, 2011, has indicated her intention to continue the former president Lula daSilva’s economic policies, including sound fiscal management, inflation control, and a floatingexchange rate. PT changed its political orientation (from a far-left socialist to a centre-left social-democratic party) after Lula was elected.4 The main challenger to the ruling PT is the BrazilianSocial Democracy Party (PSDB). PSDB has also moved to a more centrist role in the last decades.5Due to the fragmented landscape of Brazilian political parties like PSDB often form a collation witha center-right-wing party, such as the Democrats (PFL).6President Rousseff has failed in polls in mid-2011 and been forced to fire two ministers on chargesof corruption. Furthermore, defense minister Nelson Jobim was fired in August 2011 aftercriticizing Rousseff’s cabinet and calling two female ministers “idiots”. An August poll showedRousseff having a 49% approval rating; Lula da Silva left office with an 83% approval rating.7 Lulada Silva says he has no plans to run for office in 2014 and that he chosen his successor in DilmaRousseff.8EconomyBrazil’s economy has historically been based on commodities exports of wood, livestock, sugar,gold, rubber, and coffee. During 1968-1973 GDPgrowth averaged more than 11% annually asthe country was rapidly being industrializedand the economy diversified. The economycooled to an annual growth rate of 6% between1974 and 1980, mainly because of increased costs of imported oil. The Brazilian economy has always been subject to high inflation. Even as economic growth surged in the mid-1980s, triple-digit inflation persisted. In 1990, recession hit and GDP fell by an unprecedented 4%. In 1994 inflation peaked at 2,700%. That year, the finance minister, Fernando Henrique Cardoso (later4 http://terramagazine.terra.com.br/interna/0,,OI4683023-EI6578,00-PT+ainda+e+esquerda+no+Brasil+analisa+sociologo.html5 http://www.psdb.org.br/6 http://www.dem.org.br/7 http://www.wsvn.com/news/articles/world/21005028113348/8 http://www.reuters.com/article/2010/02/19/brazil-lula-idUSN1910259620100219
  10. 10. Page 10 of 71president – see oil and gas sector history section), introduced a new currency, the Real, and a neweconomic plan called the Real Plan. The plan featured privatization of state-owned industries,lowering of tariffs, and counter inflation-measures. Inflation dropped to 6.9% by 1997, and hassince remained in single digits.9Brazil boosted 2010 growth of 7.5%. The 2011-2015 forecasts are 4% to 5% annual growth. Theeconomy is the world’s eighth-largest and is expected to rise to fifth within a few years. Surgingexports, increased consumer spending and social programs have fueled the economy. As millionshave been lifted from poverty and GDP per capita has risen, domestic consumption has become amajor growth driver. Rising wages and high commodities prices combined with a laxer fiscal policyhas pushed inflation above 6%.10Since domestic savings are not sufficient to sustain long-term high growth rates, Brazil mustcontinue to attract FDI, especially as the government plans to invest billions of dollars in the energyand infrastructure sectors over the next few years. The U.S. is the main foreign direct investor in theBrazilian economy. FDI in the Brazilian economy grew 85% annually in 2009-2010. This madeBrazil leapfrog from 15th to 5th place in terms of the world’s FDI-recipients.11President Rousseff will continue to make economic growth and low inflation top priorities. Interestrates remain among the highest in the world in a bid to cool inflation. To increase exports, thegovernment is seeking access to foreign markets through trade negotiations and increased exportpromotion as well as measures to promote exports and local content requirements.12 No majorinitiatives are underway to deal with stifling trade rules and bureaucracy. As mentioned, Rousseffhas spent her first year in office having to handle three major corruption scandals in her cabinetwith two more scandals underway. Rousseff has been tougher on graft than her predecessor, Lulada Silva.13Brazil’s Industry, Resources, and TechnologyBrazils economy is based on industries such as automobiles and parts, machinery and equipment,textiles, shoes, cement, computers, aircraft, and consumer durables. Brazil continues to be a majorworld supplier of commodities and natural resources. Brazil also has a diverse and sophisticatedservices industry, including developed telecommunications, banking, energy, commerce, andsoftware sectors. The largest financial firms are Brazilian (and the two largest banks aregovernment-owned), but U.S. firms have an important share of the market.149 http://www.nationsencyclopedia.com/Americas/Brazil.html10 DOC: Country Guide Brazil 2011.11 United Nations Conference on Trade and Development: World Investment Report 2011.12 DOC: Country Guide Brazil 2011.13 http://news.yahoo.com/political-scandals-economy-toll-brazils-rousseff-185854963.html14 DOC: Country Guide Brazil 2011.
  11. 11. Page 11 of 71The Brazilian railroad industry was privatized and an effort is in place to deal similarly with adeteriorating national highway system (Brazil has half the mileage of paved roads of the U.K.despite being the size of the U.S).15 New opportunities are also expected to arise with the opening ofthe Brazilian civil airports to private management and investment. 16Doing Business in BrazilChallengesThere are a number of challenges in the Brazilian market, including uneven income distribution,below average public education, high market power concentration, and an informal economy aswell as numerous burdensome fees, rules and regulations, especially for trade and customs. Asalways, you need intimate knowledge of the local environment and culture, including the implicitcosts of doing business (referred to as the “Custo Brasil”). Implicit costs are often related todistribution, government procedures, employee benefits, and environmental laws.18 The UniversalConsensus team has been developed, in part, to advice on these issues.Distribution channels are fragmented; it is estimated that a container in Rio sits four time as long onthe wharf as a container in Rotterdam due to logisticsbottlenecks. 19 In addition the trade barriers aresignificant and the legal system has a lengthy processfor enforcing IP-rights and commercial law. Heavy taxesincrease consumer prices up to 100%, whilebureaucratic procedures and onerous product licensingalso raise costs. The World Bank ranks Brazil 127 out of183 economies in the world in terms of ease of doingbusiness. The challenges have kept many companiesfrom entering the country. Subsequently, lack of international competition now presents anexcellent opportunity for first-mover advantage by U.S. companies.15http://online.wsj.com/article/SB10001424053111904823804576504641852736916.html?KEYWORDS=brazil+paved+roads16 DOC: Country Guide Brazil 2011.18 DOC: Country Guide Brazil 2011.19http://online.wsj.com/article/SB10001424053111904823804576504641852736916.html?KEYWORDS=brazil+paved+roads
  12. 12. Page 12 of 71 Starting a Business Protecting Investors Procedures (number) 15 Extent of disclosure index (0-10) 6 Time (days) 120 Extent of director liability index (0-10) 7 Cost (% of income per capita) 7.3 Ease of shareholder suits index (0-10) 3 Paid-in Min. Capital (% of income per capita) 0.0 Strength of investor protection index (0-10) 5.3 Dealing with Construction Permits Paying Taxes Procedures (number) 18 Payments (number per year) 10 Time (days) 411 Time (hours per year) 2600 Cost (% of income per capita) 46.6 Profit tax (%) 21.4 Labor tax and contributions (%) 40.9 Other taxes (%) 6.7 Total tax rate (% profit) 69.0 Registering Property Trading Across Borders Procedures (number) 14 Documents to export (number) 8 Time (days) 42 Time to export (days) 13 Cost (% of property value) 2.7 Cost to export (US$ per container) 1,790 Documents to import (number) 7 Time to import (days) 17 Cost to import (US$ per container) 1,730 Getting Credit Enforcing Contracts Strength of legal rights index (0-10) 3 Procedures (number) 45 Depth of credit information index (0-6) 5 Time (days) 616 Public registry coverage (% of adults) 26.9 Cost (% of claim) 16.5 Private bureau coverage (% of adults) 53.5 Closing a Business Recovery rate (cents on the dollar) 17.1 Time (years) 4.0 Cost (% of estate) 12 Administrative measures; the resources required or quality rating.Distribution and Sales ChannelsBrazilian importers generally do not maintain inventory of capital equipment, spare parts, or rawmaterials, partly because of high import and storage costs. Bonded warehouses are a way tocircumvent this. The importer or the distributor is responsible for support and after sales servicesin accordance with Brazil’s consumer protection law.20Selling in BrazilPrice and payment terms are the most important sales factors. To be competitive, U.S. companiesshould adapt their products to local technical requirements and local culture. Emphasizing productquality, customer service, and warranty terms are key factors for U.S. companies. Payment terms20 MOITI: Doing Business in Brazil.
  13. 13. Page 13 of 71are very important in Brazil because of the country’s high interest rates. In fact, it is not unusual fora local company to select a U.S. supplier with higher prices but better finance terms.Import-related costs are generally high because of import duties and taxes; an on-the-groundpresence in Brazil is preferable. In addition, Brazilian buyers prefer to purchase from companieswith a local presence as they believe that this will be a guarantee for high quality in after-sales andsupport activities.21Advance descriptions of U.S. suppliers capabilities can prove influential in winning a contract, evenwhen they are provided before the exact terms of an investment plan are defined or the projectsspecifications are completed. Such a proposal should include financing, engineering, and equipmentpresentations.22Brazilians are a friendly people and they may soon take on more of the persona of a friend than abusiness contact. You may be entrusted with confidential information significantly soon than youwould in the United States. This is especially true when meeting with junior management or otherstakeholders that are not necessarily decision-makers.23The selling factors listed above are merely a selection of important considerations related to doingbusiness in Brazil; Universal Consensus and our team can give you the full scope.Law 12.349Law 12.349, enacted in December 2010, provides preferential treatment for domestic suppliersover foreign firms in public procurement, even if the Brazilian company’s prices are up to 25%higher. The preference applies to government procurement at all levels. As a consequence, U.S.companies may find it preferable to be associated with a local firm or have local presence.Government procurement of foreign telecommunications and IT is exempt from Law 12.349.24Law 12.349 was enacted as a response to several factors which have been unfavorable forBrazilian-made products. The Brazilian Real has appreciated nearly 50% against the dollar inrecent years which has pushed domestic labor costs (and subsequent payroll tax costs) significantlyhigher. As a result, the government in early August unveiled a plan to further support local productsthrough temporary tax cuts (for example on skilled services payroll-taxes) and increased localpublic spending. The move comes after recent data for industrial production in Brazil showedsignificant problems for local manufacturers.21 http://thebrazilbusiness.com/article/5-secrets-about-business-in-brazil22 DOC: Country Guide Brazil 2011.23 http://thebrazilbusiness.com/article/5-secrets-about-business-in-brazil24 DOC: Country Guide Brazil 2011.
  14. 14. Page 14 of 71Establishing OperationsIt takes an average of 15 procedures and 120 days to start a new business. The annualadministrative burden to a medium-size business of tax payments in Brazil is an average of 2,600hours versus 199 hours in the OECD high-income economies. Taxes on commercial and financialtransactions are particularly burdensome, and businesses complain that these taxes hinder theinternational competitiveness of Brazilian products.Joint ventures are very common in Brazil, particularly as a way for foreign firms to compete forgovernment contracts or in heavily regulated industry sectors, such as telecommunications andenergy. Usually joint ventures are established through "sociedades anônimas" (≈corporation) or"limitadas" (≈LP). Licensing agreements are also common in Brazil.We have a strong and experienced team to introduce our clients to key stakeholders and steer clearof market entry pitfalls that will substantially ease the market entry process and reduce marketentry risk.Getting PaidIn Brazil, accounts can only be kept in local currency (Brazilian Real, R$).25 Given high interest ratesand intermediary spreads, Brazilian buyers are likely to push for open account or cash up front.26Petrobras often has 5-day payment terms for their customers.272014 World Cup and 2016 OlympicsYou cannot do business in Brazil in the coming years without considering the opportunitiespresented by the upcoming World Cup in 2014 (nationwide) and Olympic Games (in Rio de Janeiro)in 2016. Brazil will host several international sporting events leading up to the games, including the2011 World Military Games, the 2011-2012 Pan-American Maccabi Games, and the 2013Confederations Cup.The Government of Brazil expects to invest $106 billion in Game preparations. Opportunitiesinclude construction of new hotels, the renewal of stadiums, the expansion and modernization ofsubways and airports, the construction of new roads, the construction of rapid transit rail lines andthe revitalization of ports. Improvements in sanitation, power, telecommunications, hospitals andpublic security will also be necessary.2825 DOC: Country Guide Brazil 2011.26 DOC: Country Guide Brazil 2011.27 Petrobras Procurement Document: PROCEDIMENTO LICITATÓRIO: 270-9009/1128 TozziniFreire Advogados: Investment Opportunities In Brazilian Infrastructure.
  15. 15. Page 15 of 71Brazil’s Fuel and Energy SectorHistoryThe Government of Brazil undertook an ambitious program to reduce dependence on imported oil.In the mid-1980s, imports accounted for more than 70% of Brazils oil and derivatives needs; thenet figure is now close to zero.In the 1980s and part of the 1990s, the government set artificially low prices for Petrobras gasolineand other products to try to cool the sky-high four-digit inflation that then ravaged Brazil. Thepolicy starved Petrobras of investment capital. When oil prices rose, Petrobras was selling high-priced imported oil at a loss.80% of Brazils oil is offshore; Petrobras consequently began adapting land rigs for offshoreconditions. Despite the companys technical competence, its management was provincial andsometimes undermined by politicians. The board consisted of Petrobras top executives, and thecompanys monopoly on Brazilian territory relieved it of the need to raise efficiency. The companysinternational trading arm was grossly inefficient. In 1995 Petrobras was in a state of total disorder. Newly elected president Fernando Henrique Cardoso wanted to shake the company up. This resulted in the powerful oil- workers union challenging him with a national strike. But the strike backfired and public opinion swung against the status quo at Petrobras. Mr. Cardoso called his policy for Petrobras "flexibilization." Cardoso wasnt willing to privatize Petrobras fully, but he used market forces, like a stock flotation and foreign competition, tomake Petrobras behave more like a private company. New top management renegotiated suppliers-deals and started anincentive-based bonussystem for managersand cleaned up thebooks byacknowledging billionsof dollars in pensionand health liabilities. A2000 NYSE listinghelped improvegovernance and forcefurther transparency.2929 Matt Mofett: How a Sleepy Oil Giant Became a World Player. Wall Street Journal 30 Aug 2007.
  16. 16. Page 16 of 71Three key milestones in Petrobras’ history are:  1953: Petrobras monopoly introduced.  1995: End of monopoly.  1997: The “Petroleum Investment Law”, which established a regulatory framework that liberalized the oil industry.30Energy ReservesIn 2008, Brazil announced the discovery of the Tupi and Carioca oil fields off the coast of Rio deJaneiro. Output from the existing Campos Basin and the discovery of the new fields will make Brazila significant oil exporter by 2015. Hydropower currently accounts for 77,000 megawatts (69%) ofBrazil’s energy supply. Brazil is also the world’s largest biofuels exporter and sugar-based ethanolmakes up over 50% of Brazil’s vehicle fuel usage. O&G fields along the Brazilian coast.Brazil as a whole could have a potential of 60 billion barrels of crude oil according to a July 2011estimate, up somewhat from previous forecasts. The new estimate would take the reserve grossvalue to $5.4 trillion at $90/barrel. Furthermore, Petrobras will reach its target of 2.1 millionbarrels a day of average oil production in Brazil for 2011. Petrobras plans to triple production to 6million barrels a day by 2020.30 http://www.petrobras.com.br/pt/
  17. 17. Page 17 of 71About 92 percent of Brazil’s oil production in 2010 originated from offshore fields, mostly atextreme depths. Petrobras’ oil and gas production accounts for nearly 95 percent of Brazil’s total production. In 2010, Brazil exported 230,492,050 barrels of oil (or, approximately 631,485 bpd). During the same period, Brazil refined about 1.9 million bpd, 338,763 bpd of which were light oil imported to mix with Brazil’s predominantly heavy crude.31State Owned Enterprises (SOE)Three-quarters of the worlds reserves are now in the hands of national oil companies; the toppublicly owned international oil companies have direct access to only about 5% of the worlds oilreserves, with an additional 30% theoretically open through joint ventures.Petrobras "learned over the last 10 years to think on its feet like an international oil company butstill retained the strengths and advantages of a national company," says Richard D. Taylor,president of BPs Brazilian operations. Petrobras officials argue that the companys dual identity —part embodiment of Brazilian nationalism, part Wall Street growth play — is an asset. "We viewourselves a having the best of both worlds," says financial director Almir Guilherme Barbassa.3231 http://www.petrobras.com.br/pt/ and http://www.anp.gov.br/32 Jenik Radon and Julius Thaler: Resolving conflicts of interest in state-owned enterprises. UNESCO.
  18. 18. Page 18 of 71Government PoliciesBrazilian oil industry contractors are often traditional engineering/construction/servicecompanies, some of which have been nurtured under years of protective national developmentpolicies. The main goals of Brazilian federal policies have been safety and sustainability, domesticeconomic growth, and low levels of inflation.33Much of the groundwork for the Petrobras’ transformation was laid under the centrist governmentof Fernando Henrique Cardoso, who left office at the beginning of 2003. His successors the leftistsLula da Silva and Dilma Rousseff have injecting a tint of politics in the companys management.34The Brazilian government wants to avoid inflow of foreign investment that inflate the domesticcurrency’s value but bring little local technological or infrastructure development to Brazil. This is achief reason why local content requirements have been implemented.PetrosalLula da Silva’s government created a new public company, dubbed Petrosal by the media, which willown and influence the concession bidding process. The yet not fully implemented new regulatoryframework would demand that Petrosal be given Board positions in new concession consortiums,to act as the Brazilian government representative. Petrosal would own the concessions and sell theconcession rights in order to build wealth. The wealth would be used to operate Petrosal as asovereign wealth fund, much like Norway’s Petoro AS. The future of Petrosal is very much in limbo;several international investors in Petrobras have indicated they will litigate the commencement ofPetrosal.35Local Content Requirement - ProminpMr. da Silva initiated the requirement that Petrobras buy more Brazilian-made equipment in orderto stimulate domestic industries. Prominp – the Mobilization Program of the National Oil andNatural Gas is the program (coordinated by the Ministry of Mines and Energy) that governs andpromotes local content requirements.36 After a couple of largely Brazilian-made rigs came insubstantially over budget during the 2000s, analysts have questioned the local content policy. Thelocal content policy has been one of the reasons why Petrobras’ stock performance has beenabysmal the last few years.37The local content requirement can vary and is subject to regulatory oversight and instructions fromthe National Petroleum Agency and the National Organization of the Oil Industry. Petrobras isexpected to be fined by the government in September 2011 as the company has failed to fully33 DOC: Country Guide Brazil 2011.34 Matt Mofett: How a Sleepy Oil Giant Became a World Player. Wall Street Journal 30 Aug 2007.35 http://www.economist.com/node/1696409436 http://www.prominp.com.br/37 Matt Mofett: How a Sleepy Oil Giant Became a World Player. Wall Street Journal 30 Aug 2007.
  19. 19. Page 19 of 71adhere to local content requirements.38 In general, the local content requirement is that up to 70%of supply chain activities must be Brazilian (performed by company incorporated in Brazil).The government has indicated that national content requirements in exploration and production(E&P) will rise to around 90% for pre-salt fields. Companies will have to establish significant localpresence, in particular equipment suppliers (topsides, pipes, risers, drilling packages, powerpackages for offshore units), who will likely need to build production facilities in Brazil.39As mentioned, what constitutes local content and what the requirements are varies, and is oftenspecified in each individual contract. But a company is deemed to be a ‘Brazilian company’ for localcontent purposes if it is incorporated in Brazil. Regulators will also verify that the company isBrazilian in the normal sense of the word (Brazilian employees and assets). Companies also need toget a certification of local content from ONIP, the industry organization. ONIP and ANP simplifiedthe certification process in 2011. Fines are proportional to the missing local content investment.Regulatory requirements are mostly governed by Resolution ANP No. 36, issued in 2007. Prominp plan to increase local content. The plan includes incentives for new international entrants.The local content requirement is in effect for current tenders of 19 oil rigs that have to becompleted in Brazilian shipyards. Petrobras withdrew the tender, as it did recently with a requestfor new ships. Petrobras has decided to re-tender for the construction of the new rigs in order todrive down the price.4038 http://www.upstreamonline.com/live/article272219.ece39 Heller Redo Barroso and Marcos Macedo: Brazilian basics.40 http://247wallst.com/2011/07/23/stunning-petrobras-spending-224-7-billion-on-offshore-oil-pbr-ne-do-rig-hal-bhi-slb/
  20. 20. Page 20 of 71Petrobras is involved within the Prominp program, as can be seen in the governance structurebelow. The Prominp governance structure:41 MME – Minister MDIC – Minister PETROBRAS – President and Services Director Steering ONIP – CEO/President BNDES – President Committee IBP – President MME – Oil, Natural Gas and Renewable Fuels Secretariat Oil, Natural Gas and MDIC – Development, Industry and International Trade Renewable Fuels Secretariat Secretariat BNDES - Director Executive PETROBRAS – Engineering Executive Manager PROMINP – Executive Coordinator Committee ONIP – Director IBP – Director Executive Coordinator Associations – President / Director (ABCE, ABDIB, ABEMI, ABIMAQ, ABINEE, ABITAM SINAVAL e CNI) Sectorial Committee Exploration Maritime G&P and Downstream & Production Transportation Pipelines Environment Thematic Committee P&G IND Technology Thematic CommitteeExploration - Pre-salt LegislationIn 2010 Brazil abandoned its previous concession model for a production sharing model for thepre-salt fields. Tendered pre-salt reserves will belong to the Brazilian government (Petrosal) andthose future pre-salt fields and areas judged strategic for the Brazilian government will be ruledthrough production sharing agreements (PSAs). Petrobras will hold at least 30 percent equity ineach oil block.Additionally, Petrobras will be the operator in all future oil fields. In specific cases, as decided bythe Brazilian National Energy Council, Petrobras may be called upon to explore selected pre-salt oilfields without a tender process. 29 percent of the pre-salt area has been auctioned off through theprevious concession regime. The new PSA legislation will regulate the remaining 71 percent of thepre-salt fields. Consortiums will share the produced oil with the Brazilian government and will payroyalties. The new government company, Petrosal, will most likely demand Board seat in any PSAconsortium.4241 http://www.prominp.com.br/42 DOC: Country Guide Brazil 2011.
  21. 21. Page 21 of 71Industry OrganizationsBrazils National Petroleum AgencyBrazils National Petroleum Agency (Agência Nacional do Petróleo, Gás Natural e Biocombustíveis –ANP) is the main oil industry regulatory body. It is a federal government agency linked tothe Ministry of Mines and Energy.43 ANP monitors and audit contractual local content requirements.ANP’s role in regulatory oversight of local content in concession bids:Brazil’s National Energy CouncilThe Brazilian National Council of Energy Policy (Conselho Nacional de Política Energética - CNPE) isthe governmental organ responsible for developing energy policies. CNPE is formed by stategovernment representatives, experts in energy, non-governmental organizations and sevenministers.44Brazilian Petroleum Institute (IBP)The Brazilian Petroleum, Gas and Biofuels Institute (Instituto Brasileiro de Petróleo, Gás eBiocombustíveis – IBP) is a private non-profit funded in 1957 which currently has over 200member companies. IBP is promoting the development of Brazil’s petroleum industry aimed at anindustry competitive, sustainable, ethical and socially responsible.45National Organization of the Oil Industry (ONIP)ONIP supports the development of a favorable environment for new investments and operations inthe Brazilian petroleum sector to promote the increase of local content on a competitive basis.43 http://www.anp.gov.br/44 http://www.planalto.gov.br/ccivil_03/Leis/L9478.htm45 http://www.ibp.org.br/
  22. 22. Page 22 of 71ONIP, a private non-profit established in 1999, serves as a forum for all the companies andgovernment agencies involved in the oil & gas sector in Brazil.46Refining CapacityBrazil has become increasingly dependent on importsof refined oil products over the past few years.Petrobras said earlier in 2011 that they are nearingpeak refinery capacity. Increased production of crudewill magnify the problem. Petrobras’ CEOGabrielli said it would be “suicide” not to invest inrefining capacity.As of 2010, Brazils refining capacity was 1.9 millionbarrels per day of crude oil. Capacity is due to rise to3.6 million barrels per day by 2015. Current crude oiloutput is above 2.18 million barrels per day.Petrobras has $40 billion allocated for thedevelopment of refineries through 2014.47Local DemandAs more than95% ofPetrobras’reserves are inBrazil and onlya fraction isbeing exported,the company isextremelydependent onlocal demandconditions.48Increase in local demand will be Petrobras’ main demand driver. Petrobras said a few weeks agothat petroleum import will have to rise to satisfy local demand as Petrobras can’t keep pace. Amajor reason for Petrobras’ slow increase in production pace is the adverse impact of rising oil46 http://www.onip.org.br/47 http://www.downstreamtoday.com/news/article.aspx?a_id=2576048 http://www.petrobras.com.br/pt/
  23. 23. Page 23 of 71prices on local refining costs. Higher pump prices could help to curb demand, but the government isworried about the impact they would have on inflation.49Local demand in relation to supply (thousand barrels per day):50 3000 2500 2000 1500 Demand Supply 1000 500 0 2006 2007 2008 2009 2010Bottleneck SectorsThis chart outlines Brazilian O&G industry bottlenecks identified by ANP:49 http://www.guardian.co.uk/business/feedarticle/977498450 http://www.eia.gov/
  24. 24. Page 24 of 71Petrobras in BrazilOverviewPetrobras is a publicly-held energy company headquartered in downtown Rio de Janeiro. Petrobrasis the third biggest energy company in the world in terms of market value and in terms of provenoil reserves. The company has 80,500 holding company employees and more than 200,000 peopleworking for contracted companies. Like most oil companies, Petrobras operates an integratedbusiness model. The company also operates in the natural gas, energy and biofuels segments.Petrobras’ specialty is in ultra deep water oil and gas exploration. The Brazilian government is themajority owner of Petrobras.51 Petrobras’ ownership distribution.A decade ago, state-controlled Petrobras was such an industry laggard that it earned thenickname Petrosaurus. Workers were 25% less productive than the industry average, and Brazildepended on imports for nearly half its oil. Petrobras board consisted solely of company insiders.But introducing an independent Board of Directors and opening up the Brazilian oil market toprivate competition forced Petrobras to become more productive.Today, Petrobras boasts more crude reserves than Chevron and lower costs of finding oil thanExxon Mobil. A threefold increase in research and development spending 2001-2006 helpedPetrobras to develop cutting-edge technology that has helped double its production over the pastdecade and increased its reserves by 50 percent. 5251 http://www.petrobras.com.br/pt/52 Matt Mofett: How a Sleepy Oil Giant Became a World Player. Wall Street Journal 30 Aug 2007.
  25. 25. Page 25 of 71A graphical presentation of Petrobras operations:Petrobras in comparison with its competitors:5353 http://www.petrobras.com.br/pt/
  26. 26. Page 26 of 71Annualized revenue growth comparison 2004-2009:FinancesFinancial PerformanceQ1 2011 net profit was up 41% from Q1 2010, mainly due to 7% domestic demand increase. Theincrease would have been far bigger if gasoline prices were not influenced by the Braziliangovernment. The government is constraining domestic fuel prices to combat inflation. Petrobras leverage level (17%) is substantially lower than their 35% leverage target, indicating Petrobras can loan to fund growth. Petrobras increased investment 7% in 2010, primarily to boost production and enhance Brazilian oil- infrastructure and logistics operations.54 Petrobras is extremely exposed to the development of the overall Brazil economy. The Brazil Real is the world’s most overvalued in termsof purchasing power parity, valued 52% abovefair value. If GDP/capita is considered, the Real isvalued 150% higher than the U.S.-dollar.55The vast majority of Petrobras’ reserves are inBrazil and South America. International reservesfluctuate significantly due to their small relativesize. Many analysts have criticized the companysheavy investment in local refining capacities, which they say doesnt generate enough return for thecompany. The major growth prospects outside Brazil are in Africa.54 Petrobras: Q1 2011 Quarterly Report.55 http://www.economist.com/blogs/dailychart/2011/07/big-mac-index
  27. 27. Page 27 of 71Management Chairman - Brazilian Finance Minister Guido MantegaGuido Mantega is a Brazilian economist, politician and currently Brazils Finance Minister. He has long been associated with the left wing Workers Party and was a key member in the successful presidential campaign of the partys founder and leader, Lula da Silva. A long-time advocate of more development spending in Brazil, Mantega has presided over the countrys rapid economic rebound from a global financial crisis.Recently there has been a heated debate in Brazil involving Guido Mantega as Petrobras’ Boardtwice rejected investment plans from the company. Brazils government - which is Petrobrasleading shareholder - wanted the company to rein in spending to take some of the heat out ofinflation. The plan approved in late July 2011 somewhat kept the lid on spending.56 CEO - José Sergio Gabrielli de AzevedoSergio Gabrielli was CFO and head of IR at Petrobras for 3 years before taking over as CEO in 2005. Mr. Gabrielli is a professor in economics. He has written several articles and books on productive restructuring, labor markets, macroeconomics and regional development. He got his PhD from Boston University in 1987. During 2000-2011 he was a visiting scholar at the London School of Economics. Mr. Gabarielli is a frequent guest-speaker at renowned business schools. He has often encouraged use of new technology and has put that notion into practice as CEO. He has also stressed importance of developinginternational trade links with competitors to form win-win situations. Corporate GovernancePetrobras has adopted U.S. accounting standards and faces scrutiny from analysts as one of themost widely traded overseas issues on the NYSE. Under the companys two-tier stock structure, thefederal government maintains a slight majority of voting shares, but almost 75% of overall equity isnow in the hands of outside shareholders.56http://www.fazenda.gov.br/portugues/institucional/guido_mantega.asp andhttp://www.ft.com/cms/s/0/9fa5bd4a-cb2e-11df-95c0-00144feab49a.html
  28. 28. Page 28 of 71The corporate structure (chart below) is a mix of functional and geographical departments withelements of matrix structure.The Company is composed of a Board of Directors and Management Committees, of an ExecutiveBoard of Directors, an Audit Committee, Internal Auditor, a Business Committee, and ofManagement Committees.The Board of Directors is an autonomous body. It consists of nine members, elected in an OrdinaryGeneral Meeting for a one-year term, with reelection being allowed. The Executive Board (chartbelow):
  29. 29. Page 29 of 71Executive Board (selection) Title Primary Company Age Chief Executive Officer, President, Member of the Executive Board, Director,José de Azevedo Director of Petrobras Energía Participaciones SA and Director of Petrobras Petrobras 62 Energia SA Chief Financial Officer, Chief Investor Relations Officer, Member of ExecutiveAlmir Barbassa Board, Chief Executive Officer of PIFCos, Executive Manager of Corporate Petrobras 63 Finance of Petrobras and Director of PIFCos Chief Accountant Officer and Director of Petrobras International FinanceMarcos Menezes Petrobras 59 Company Executive Manager of Corporate Finance, Chairman of PIFCo and Chief ExecutiveDaniel de Oliveira Petrobras 59 Officer of PIFCoBoard of Directors (selection)Guido Mantega -- Petrobras 62Fabio Barbosa -- Banco ABN AMRO Real S.A. 56Antonio Palocci Filho -- Petrobras 51Jorge Johannpeter -- Gerdau USA, Inc. 73Francisco de Albuquerque -- Petrobras 74Luciano Galvão Coutinho Ph.D. -- Banco Nacional de Desenvolvimento Economico e Social-BNDES 65Sergio Quintella -- Petrobras 76Márcio Pereira Zimmermann -- Centrais Electricas Brasileiras S.A. 55The Executive Board of Directors undertakes the Companys business, pursuant to the mission,goals, strategies, and guidelines established by the Board of Directors. It comprises of a chairmanand six directors elected by the Board of Directors, with three-year terms, reelection beingpermitted, and may be dismissed at any time. Among the members of the Executive Board, only thepresident is a member of the Board of Directors without, however, presiding over the body.There are two more strategic committees. The Business Committee acts as a forum for theintegration of relevant and strategic issues aimed to promote the alignment between businessdevelopment, company management and the strategic plan guidelines. It acts as a supportmechanism for the senior management in its decision-making processes. The ManagementCommittees are forums where the topics to be presented to the Business Committee can be refinedand detailed. They coordinate in an integrated and complementary manner with the BusinessCommittee, with the other Management Committees, and with the Board of DirectorsCommittees.57ReservesThe graphic below shows current Petrobras reserves and annual changes (split per region). 95% ofPetrobras’ reserves are in Brazil, which highlights the company’s dependence on its Brazilianoperations. Other oil companies (e.g. Shell, Statoil, Anadarko, Chevron, OGX) will be investing $26Oil Reserves 2007 2008 2009 2010 billion in Brazil from 2009 to 2013. A 2011 Booz Brazil 10,819 10,274 11,563 12,138 and Company study predicts that total -5% 13% 5% expenditure (investment and operation) in Africa 66 89 116 132 35% 30% 13% Brazil’s oil and gas sector will reach US$400 South America 769 791 448 459 billion through 2020.58 3% -43% 2% North America 50 36 16 19 -28% -56% 19%57 http://www.petrobras.com.br/58 DOC: Country Guide Brazil 2011.
  30. 30. Page 30 of 71National SentimentThe history of Petrobras has been marked by a strong connection with its country of origin. Thecreation of Petrobras in 1953, by the then President of Brazil, Getúlio Vargas, represented atriumph for a nationalist movement known as O Petróleo é Nosso (The Petroleum is Ours). In 2009,for the third consecutive year, Petrobras was the company with the best reputation in Brazilaccording to Global RepTrak Pulse.59WorkforcePetrobras have more than 80,000 employees on staff. Working for the oil-giant is seen asprestigious in Brazil. Petrobras employees are renowned for their technological skills and have seta number of world records, including, at one point, the record for the world’s deepest explorationwell. Since the early 90s, one percent of Petrobras gross receipts have been earmarked for R&D.In early July 2011, Petrobras employees voted on a strike-initiative in order to pressure Petrobrasinto increased workforce revenue-sharing. Strikes are common during annual wage and profit-sharing negotiations but arent likely to affect the companys output or profit. The last major strikein 2009 lasted five days and had only a minor impact on production. 6059 Alexandre Chequer: Pre-salt past, present and future. T&B Petroleum #27.60 http://online.wsj.com/article/BT-CO-20110628-712359.html
  31. 31. Page 31 of 71Petrobras Internationally International Operations Petrobras holds more than 100 production licenses in 27 countries in Latin America (Argentina and Venezuela), Gulf of Mexico, and Africa (Angola, Nigeria, Tanzania, Libya). The Bolivia pipeline strengthened gas business in Latin America. Argentina has become the second most important market for Petrobras following the Perez Companc acquisition in 2002. Overseas refining capacity has gone from zero barrels in 2000 to 126.2 thousand barrels of oil per day in 2007.61 South AmericaFrom 1985 on, Petrobras shifted its focus from overseas operations in favor of neighboring SouthAmerican countries, entering Colombia (1985), Ecuador (1987) and Argentina (1989).It was the prospect of an end to the State monopoly over the exploitation of Brazilian reserves thatspurred Petrobras to look for new business opportunities abroad. The idea was to reduce risks bydiversifying assets and markets. This new stage of internationalization for Petrobras also coincidedwith the acceleration of South American economic integration brought about by the trade unionMercosur.Bolivia, Ecuador and Venezuela have been troublesome markets for Petrobras. In the first two,Petrobras is at the heart of conflicts involving ownership of assets, tax burden on undergroundmineral resources and social and environmental damages entailed by oil and gas exploitation.Bolivia finally nationalized its oil industry. In Venezuela, even without the onset of actual openconflicts, Petrobras´ investments have been affected by nationalist measures that have beenreducing the company´s profit margins and general presence in the country.62AfricaPetrobras is also looking increasingly towards Africa. Africa has 13% of the worlds oil reserves.Deepwater fields off the coast of West Africa host some of the largest and most prolific oil and gasfields discovered over the past two decades. Furthermore, East Africa alone has reserves worth $7.3trillion. Libya and Nigeria are the traditional African oil exporters but Angola, Chad and EquatorialGuinea are net oil exporters. The oil boom in Angola has made Luanda the world’s most expensive61 Andrea Goldstein: The Emergence of Multilatinas - The Petrobras Experience. UNIVERSIA BUSINESS REVIEW(2010).62 http://noticias.uol.com.br/economia/ultnot/efe/2006/05/02/ult1767u66304.jhtm
  32. 32. Page 32 of 71city to live in and the country (which is also former Portuguese colony) is expected to be one of thefastest growing in the world.The salt layer, a geological formation off the coast of Africa and Brazil, makes extraction in boththese regions very similar and very challenging (i.e. also expensive). The oil and natural gas liebelow an approximately 2000 m deep layer of salt, itself below an approximately 2000 m deeplayer of rock under 2000-3000 m of the Atlantic. Petrobras’ experience from Atlantic pre-saltdrilling gives it a major competitive advantage in West Africa.63ChinaPetrobras in 2009 signed contracts with China. One deal is with the Chinese Development Bank,which is a clear financial agreement in which the CDB will lend $10 billion with a payback time of10 years. Another agreement was also signed with SINOPEC and it involves the possibility of jointventures and evaluation of different opportunities in exploration in blocks in the northern part ofBrazil; blocks outside of Brazil; and with possibilities in petrochemicals, refining, and logistics.64IndiaPetrobras has been in India since 2007 and has minority stakes in some major fields. Petrobras wasin discussions with Indian conglomerate Reliance Industries a few years ago to form a partnershipin petrochemicals, but nothing came of that. Instead Reliance signed a partnership deal with BP.The British company will get a 75% stake in some of India’s largest oil fields.65 Petrobras’ international exploration sites.63 Africa Research Bulletin: AFRICA – BRAZIL Preparing for Deeper Involvement.64 http://cigienergyblueprint.wordpress.com/2009/08/13/petrobras-ceo-gabrielli-on-brazil-energy-outlook-the-deal-with-china-biofuels-and-more/65 www.petrobras.com.br
  33. 33. Page 33 of 71Petrobras’ Strategy 2011-2015 Overview Petrobras’ 2011- 2015 business plan was released in July 2011. Petrobras plans to double its proved reserves until 2020. Between 2010 and 2015, Petrobras will spend $224 billion (or $ 44.8 billion per year), which represents a 28.4percent increase over its spending in its previous five-year business plan. 95% of investment($213.5 billion) will go to activities in Brazil and 5% ($11.2 billion) to foreign operations, involving688 projects in all, 57% of which have already been authorized for execution and implementation.The new business plan calls for 16 floating production and offloading platforms and/or modulesand 28 offshore drilling rigs, which are currently being re-tendered. Petrobras has the highestgrowth rate target of the industry as shown in the chart above.66 Segment Petrobras will also upgrade a number of existing US$ billion Share Exploration and Production refineries and will build four new refineries, including 127.5 57% Refining, Transportation and Marketing 70.6 31% Gas & Power the Rio petrochemical complex that alone constitutes 13.2 6% Petrochemicals Distribution an $8.5 billion investment. Total planned expenditures 3.8 3.1 2% 1% Biofuels by 2014 in the entire downstream segment, including 4.1 2% Corporate Overhead 2.4 1% gas pipelines and oil, bio-fuels, and gas terminals, willbe $73.6 billion. The petrochemicals subsector will be the third in terms of total plannedinvestment of $ 17.8 billion. Petrobras plans to increase its production of ethanol and biodiesel byinvesting $3.5 billion in that sub-sector through 2014. Petrobras’ supply chain is concentrated tothe coast on the downstream side and especially to South-East Brazil.66 www.petrobras.com.br
  34. 34. Page 34 of 71Petrobras’ estimate is that the Brazilian economy will grow 3.8% annually, which will stimulatedomestic energy demand. July gasoline price in Brazil (at the pump) was $232 per barrel. ForPetrobras, current breakeven costs on its deepwater offshore crude region are at $45 per barreland should fall.67Corporate goals were defined to minimize the potential environmental impacts of activities, ensuresafety in processes and protect the health of the labor force, achieving levels of excellence in the oiland gas industry and contributing to the sustainability of operations.In the human resources area, Petrobras’ main initiatives are aimed at attracting and retainingskilled labor, training and development, career plans and knowledge management. Petrobras’ laborforce will increase from 80,500 employees now to 103,030 in 2015. New executive managementpositions are being created to focus on project execution and management, aiming at higherefficiency, improvements in processes and tracking of critical resources. The area of HRM andBrazilian content was listed as major challenges in the previous 5-year plan.The Company sees the development of the Brazilian supply chain and the establishment of foreigncompanies in the local market in a positive light, not only due to the positive externalities createdby geographic proximity and the development of technological partnerships, but also because of thediversification inbase of suppliers. Inorder to encouragethis development,the company willseek to consolidateits demands andconduct long-termcontracting withincreasing localcontentrequirements;implement initiativesto increase theparticipation ofdomesticsubcontractors; support the development of innovative Brazilian companies; add suppliers outsideof the current supply chain; support supply-chain personnel training programs; and expand use ofthe Progredir program, which aims at improving suppliers’ access to credit.67 http://www.guardian.co.uk/business/feedarticle/9774984
  35. 35. Page 35 of 71InvestmentsPetrobras made an effort to address private investors concerns by spending more in its updated2011-2015 business plan on exploration and production (E&P) and less on refining and marketing.Under the plan, E&P spending will rise from $118.8 billion in the 2010-2014 plan, 53% of overallspending, to $127.5 billion, 57% of total investment. Meanwhile, spending on refining,transportation and marketing will fall from $73.6 billion, equivalent to 33% of spending, to $70.6billion, or 31%.68Petrobras’ previous business plan for 2009-2013 outlined and tracked the development of actualcapital expenditures over time in greater details:68 www.petrobras.com.br
  36. 36. Page 36 of 71Petrobras’ Supply Chain – Best ProspectsBackgroundPetrobras has significant problems satisfying its supply chain needs. Petrobras’ huge supply chaindemand would have been difficult to satisfy under normal circumstances, but with the addedrequirement of local content, it gets even tougher. The local content requirement has forcedPetrobras to actively reach out to both local and international supply chain suppliers in order toconvince them to increase supply chain capacity in Brazil. Petrobras’ supplier credit program,Programa Progredir, is a great example of an effort to boost domestic supply capacity. Petrobrasalso frequently entertains international supplier delegations so as to persuade them to enter theBrazilian market.Petrobras is adding to its net reserves in a time when global supermajors have problems withshrinking net reserves. Petrobras has also positioned itself as a key player in other developingmarkets such as India and Africa. With most of the world’s untapped oil reserves in deep-seaterritory, the Brazilian company has a superb advantage in its technological knowhow in deep-seaexploration and drilling. Soaring global oil prices and increased global oil demand in conjunctionwith shrinking onshore reserves will be further beneficial for Petrobras over time.Petrobras will continue to be in a tug o’ war with the Brazilian government over the speed of thecompany’s expansion. Influential factors will be the rate of inflation in Brazil, the strength of theReal, and the global and domestic supply chain situation.DemandPetrobras aims to double its proven reserves and will invest heavily to reach that target. On theshopping list are: 550 generators, 550 derricks, 350 turbines, 700,000 ton of structural steel forplatform hulls, 550 Christmas trees, 500 wellheads, 80,000 pumps, 18,000 storage tanks, and 4,000km of flexible lines. The list goes on with 55,000 more items, of which drilling packages and FPSOpackages, subsea equipment and compressors are considered to be the most critical.Moreover, rigs will be chartered and serviced; primarily drill ships and semi-submersibles. 200support vessels (especially pipe layers, AHTSs, PSVs, tug and tow boats, and line handlers) and 18FPSOs will be commissioned. Petrobras will also upgrade its tanker fleet.Supply Chain ChallengesThere are tremendous opportunities for already installed companies and newcomers in theBrazilian oil & gas supply chain due to the scale provided by Petrobras’ upstream portfolio. In orderto carry out such a portfolio, Petrobras is looking to establish stable long term businessrelationships with all available companies that are willing to invest in Brazil.
  37. 37. Page 37 of 71The supply chain for Petrobras involves more than 1,300 items, reaching considerable volumes.Some examples of materials required from the supply chain are: 8 million screws, 15,6 million bolts,9,6 thousand electrical motors, 478 million kilos of wires, 34,3 million liters of paint, 54 millionkilos of steel rods and 32 million meters of electric cables.69Petrobras Supply Chain ChallengesPetrobras identifies their main supply chain challenges as:  Need for equipment  Need for skilled labor  Procurement cost inflationPetrobras strategies to combat these supply chain challenges are to have an aggressive biddingprogram for rigs, support vessels and anchor handlers. The focus has mainly been on building newunits, but vessels are often contracted on a build-lease basis. Petrobras also favors long-termcontract with service providers. This is partially a consequence of the challenges associated withPetrobras’ deep-sea fields; long-term contracts favor long-term joint technical development. Thelong-term approach also helps facilitate another of Petrobras’ supply chain strategies, supportingthe expansion of suppliers’ installed capacity in Brazil. Finally, Petrobras has implementedextensive training programs for Petrobras employees and supply chain contractors to mitigatecurrent human resource shortages. Petrobras supply chain sectors and challenges.69 http://news.seadiscovery.com/?tag=/supply
  38. 38. Page 38 of 71 Petrobras supply chain sectors and challenges.Brazil Supply Chain ChallengesPetrobras also consider the following the greatest supply chain challenges related to Brazil:  Infrastructure Enhancement  Critical Items Supply (imports)  Drilling Equipment  Dynamic Positioning and Propulsion Systems  Steel Manufacturing Process and Supply  Skilled Work Force for Construction and Operation  FinanceabilityInfrastructureOne of Brazils greatest challenges is its poor infrastructure. The rail network is smaller than that ofFrance, a country one-thirteenth Brazils size. Brazilian maritime infrastructure is similarlyneglected; a shipping container spends 10 times as long sitting idle in the Brazilian port of Santos asit does in Hamburg or in Rotterdam. A World Economic Forum survey ranked inadequateinfrastructure as the third-biggest problem for doing business in Brazil, after tax rates andregulations.
  39. 39. Page 39 of 71TransportationIn the transportation area, there is a greateffort by the government to change thecurrent matrix, which is composed mainlyby roads (60%) and railways (20%). Theparticipation of hydro and air transportationin the matrix is almost nonexistent. Most ofthe roads connecting the country haveprecarious conditions and a significantamount of cargo is transported in old trucks.This situation is costly, presents importantlimitations to the economy, and affects thecountry’s international competitiveness.According to ABDIB, the National Transportation and Logistics Plan estimates investments of $131billion in the transportation sector from 2008through 2023.70More than 107,000 ships were berthed in Brazilin 2010 and Brazil has more than 26 major portsalong its coast.71Petrobras Transporte carried 48.9 million tons ofoil products on 52 vessels in 2010, nearly 15%less than a year earlier.72It is probable that every major shipyard in theworld will have significant operations in Brazil (in association with local major contractors) in2015. Korean shipyards have been early entrants in Brazil.7370 TozziniFreire Advogados: Investment Opportunities In Brazilian Infrastructure.71 http://www.wilsonsons.com.br/72 Petrobras: Sustainability Report 2010.73 Heller Redo Barroso and Marcos Macedo: Brazilian basics.
  40. 40. Page 40 of 71Drilling & Exploration 2010 was a record year in terms of production for Petrobras. 6 platforms were connected to new wells. Several production systems are scheduled to go on stream in 2011. For instance a new fixed well at 170 m depth and a semi-submersible well and a 139 km long pipeline of the coast of São Paulo. 3 new platforms will perform extended well tests in 2011. Petrobras grew it reserves 8% in 2010. In 2010, 116 wells were drilled, 67 of which onshore and 49 offshore. Due to the lack of Brazilian installed capacity of international petroleum industry companies, bidding and direct negotiation invitations are currently going mostly to Brazilian contractors, who in turn will procure technological partners, operators, financial partners, and project managers globally. Most of these Brazilian contractors are unfamiliar with the finer details of the offshore petroleum industry and are not to well-versed in offshore high-tech. Thus, Brazilian companies are quite dependent on collaborations with international companies.74 New Rigs E&P units put into production the last few years:74 Heller Redo Barroso and Marcos Macedo: Brazilian basics.
  41. 41. Page 41 of 71Petrobras will have at least 63 operative rigs in 2013-2017:Drilling and Production UnitsPetrobras and other Brazilian companies need for drilling and production units:
  42. 42. Page 42 of 71Critical Equipment Exploration and ProspectingPetrobras considers the following critical equipment and services for exploration and drilling asbest prospects for foreign suppliers:  Production pipelines alloy coatings  Turbo compressors (6-10 Mw)  Polyester mooring cables  Mooring systems  Drilling pipelines  Electrical cables  Control systems for well control  Oil and gas metering systems  Offshore drilling rigs  Gravel packing  Drill bits  Steam generators (25-50 x 10 BTU/d)  Special sphere subsea valves  Subsea sensors for analysis of oil and grease traces in water  Gas turbines  Special steels (alloys, chrome, etc.) to support sub-salt corrosion, and H2SFurthermore, Petrobras have identified the following in-demand equipment critical to avoid supplychain bottlenecks:  HCC Reactors (250-300 mm wall width 200kgf/cm2internal pressure)  Boiler works with special alloys (reactors, towers and pressure vessels)  Boilers (steam generators)  High pressure heat exchangers with H2S traces  Structured packing for process towers  Moto-compressor and bare compressor  Heavy engines  Offshore and marine cranes  Special submarine sphere valves  Forged valves  Basic and thermal design
  43. 43. Page 43 of 71Petrobras has quantified its need in terms of material and equipment:Items Units of Measurement Total Amount (2008-2015 )Structural Steel t 1.252.000Air Coolers un 721Mooring Cables km 2.726Christmas Trees un 3.930Safety boats un 334Pumps un 10.264Lifeboats un 1.978Well Heads un 3.657Compressors un 969Fan Coils un 2.818Heat Furnaces un 252Heat Reformers Furnace un 8Eletric Generator un 439Crane un 220Flexible Pipes m 7.2Diesel Engines un 717Eletric Motors un 17.035Reactors un 317Storage Tanks un 2.824Process Towers un 732Eletric Transformers un 1.236Heat Exchangers un 5.913Pipe lines t 1.542.266Turbines un 441Production Rigs un 36Pressure Vessels un 4.829Critical Exploration & Prospecting Services:Petrobras considers the following services the most vital for international providers to consider:  Drilling  Workover services  Flexible lines and umbilical laying services  Support to ROV vehicles  Support to mooring activities  Special vessels  Subsea interconnection services  Monitoring and inspection techniques for structural integrity of flexible risers7575 Petrobras: Strategic Plan 2010-2014.
  44. 44. Page 44 of 71Moreover, all sorts of service and repair services related to critical equipment will be in highdemand. Especially repair of large vessels (for which extended down-time is extremely costly anddistressing) is a priority to Petrobras. Previous ship repairs have often carried out in MiddleEastern dry-docks.Price and Delivery TermsPetrobras view of the competitive landscape for Brazilian products versus international products:This graph highlights what was mentioned before, that Brazilian products are expensive and thatgreat logistics (delivery terms, support etc.) and payment terms can be a critical competitive factorfor U.S. companies.

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