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  1. 1. São Paulo | Rio de Janeiro Brasília | Curitiba | Porto Alegre | Recife Belo Horizonte | Campo Grande London Lisbon | Shanghai | Miami | Buenos Aires | Beijing | Johannesburg |New Delhi Opportunities and Challenges in the Oil Market in Brazil – some legal aspectsVera Dantas Aberdeen 11 October
  2. 2. PRESENTATION TOPICS1. Recent History of Brazilian Oil Industry2. Petrobras’s Investments3. Legal Framework of the Oil Sector in Brazil4. Local Content Requirements5. Establishing a presence in Brazil6. Becoming a Supplier to Petrobras
  3. 3. 1. RECENT HISTORY OF THE BRAZILIAN OILINDUSTRY  2005 – Brazil produces 1.85 million barrels a day Petrobras : 1.684 mbpd  2006 – Brazil achieves self-sufficiency in oil
  4. 4. 1. RECENT HISTORY OF THEBRAZILIAN OIL INDUSTRY8 November 2007 – Discovery of Tupi oilfield, located in the offshore Santos Basin, with estimated 8 billion of barrels of oil was announced.
  5. 5. “All this and oil too.God may indeed beBrazilian after all”15 November 2007And Scottish too! GreatOpportunity for ScottishCompanies with subsea technology and know-how.
  6. 6. 1. RECENT HISTORY OF THEBRAZILIAN OIL INDUSTRY – cont. 2008 – Discovery of Carioca oilfield with estimated 70 billion barrels of oil. Discovery puts Brazils oil reserves among the worlds largest. 2008 – Last Bidding Round under the concession regime takes place.
  7. 7. 1. RECENT HISTORY OF THEBRAZILIAN OIL INDUSTRY – cont. 2010 – New regulatory regime is approved April 2011 – 11th Round authorised by the National Council of Energy Policy by Congress.
  8. 8. 1. RECENT HISTORY OF THE BRAZILIAN OILINDUSTRY – cont. 18 September 2012 – the Minister of Mines and Energy Edison Lobão announces that the 11th Round for exploration blocks will take place in May 2013 subject to royalties division law between States being approved by Congress. 19 September – first bidding round for the Pre-Salt area is announced by Minister Lobão (also subject to royalties approval).
  9. 9. 1. RECENT HISTORY OF THE BRAZILIAN OIL INDUSTRY – cont.Petrobras Oil Production – Targets and Real Productionmillions of barrels per day  PRODUCTION TARGETS REAL PRODUCTION  2008 : 2050 (2008- 2012) 1.855 mbpd  2009 : 2050 (2009- 2013) 1.971 mbpd  2010 : 2100 (2010 -2014) 2.004 mbpd  2011 : 2100 (2011- 2015) 2.022 mbpd
  10. 10. 2. PETROBRAS’S INVESTMENTS- cont. Petrobras Investment Plan, as announced on 14 June 2012 1 : Petrobras will invest US$ 236.5 billion until 2016 US$ 131.6 billion in Exploration & Production:  Production : US$ 89.9 billion (68.31%)  Exploration : US$ 25.4 billion (19.30 %)  Support and infrastructure : 16.3 billion (12.3%)1- Petrobras Road de Negócios e Gestão 2012-2016
  11. 11. 2. PETROBRAS’S INVESTMENTS - cont. 2020 : Petrobras plans to double production by 2020 from the present 2 million bpd to 5.43 million/day in 2021. Impactof such investments will be felt in the whole chain of suppliers of equipment and services that form the Oil Industry.
  12. 12. 2. PETROBRAS’S INVESTMENTS- cont. Petrobras needs “38 stationary units, 5 new core drills, 49 Promef vessels and train approximately 200,000 professionals...” “It is like building a new company” – Graças Foster, Petrobras’s President (2)(2)Revista Veja,20 September2012
  13. 13. 3. LEGAL FRAMEWORK OF THE OILSECTOR IN BRAZIL3.1 Quick Overview : Petrobras was created in 1953 as a State company and has maintained the monopoly of all oil industry activities until 1995. Constitutional Amendment number 9, of 9 November 1995: the Union may hire State or private companies to perform oil industry activities.
  14. 14. 3. LEGAL FRAMEWORK OF THE OILSECTOR IN BRAZIL - cont. Accordingly: ownership of natural resources has been retained by constitutional provision; likewise, monopoly of exploration & production remained of the State, but private companies were allowed to exercise such activities in Brazil. 1997 : the Petroleum Law (number 9478, of 6 August 1997) was passed, establishing the legal framework for the exploration of oil and gas in the country.
  15. 15. 3. LEGAL FRAMEWORK OF THE OILSECTOR IN BRAZIL - cont. With pre-salt discoveries, the legal framework has substantially changed again with Law 12351, of 22 December 2010, which amended the Petroleum Law and introduced the production sharing agreement regime for exploration and production in Brazil. It also altered the roles of the government agencies, created Brazil’s sovereign oil fund and the Pre-Salt State Company – PPSA.
  16. 16. 3. LEGAL FRAMEWORK OF THE OILSECTOR IN BRAZIL - cont.3.2 Governmental Agencies MME – Ministry of Mines and Energy CNPE –National Council of Energy Policy (created by Law 9478/97) ANP – National Agency of Petroleum, Natural Gas and Biofuels
  17. 17. 3. LEGAL FRAMEWORK OF THE OIL SECTOR IN BRAZIL - cont.MME :responsible for implementing Brazil’s energypolicy and establishing the guidelines for theindustry.proposes to the CNPE, after consultation tothe ANP, the blocks to be explored under theconcession or the production sharing regimes.
  18. 18. 3. LEGAL FRAMEWORK OF THE OIL SECTOR IN BRAZIL - cont. CNPE : proposes to the President when the bidding rounds will take place; the blocks that will be offered under the concession or the production sharing regime (Article 2, VIII, Petroleum Law) – before, it the ANP decided on that. likewise, the CNPE proposes to the President of the Republic the cases in which Petrobras will be contracted directly for a given area under the production sharing agreement regime and which blocks will go to auctions, also under a PSA regime (Article 9, II and III new Law). The ANP suggests, the CNPE proposes to the President, who ultimately decides.
  19. 19. 3. LEGAL FRAMEWORK OF THE OIL SECTOR IN BRAZIL - cont. ANP : remains the industry’s regulator and supervisor. promotes the bidding rounds (subject to CNPE’s authorisation, as seen), 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).
  20. 20. 3. LEGAL FRAMEWORK OF THE OILSECTOR IN BRAZIL - cont. New regulatory structure – concession, authorisation and PSA regimes : E & P : Activity will be exercised, through concession, authorization or under the production sharing regime – PSA (Article 5 of Law 9478, as modified in December 2010). E & P in the pre-salt layer and in strategic areas will be done exclusively under the PSA regime (Article 3, PSA Law). “Strategic” yet to be defined by the CNPE.
  21. 21. 3. LEGAL FRAMEWORK OF THE OIL SECTOR IN BRAZIL - cont. Concessions: Petrobras and private companies will be allowed to exercise E&P activities only in areas deemed “non strategic” and outside the Pre-Salt area through concessions granted by ANP, preceded by a bidding process or authorisations.
  22. 22. 3. LEGAL FRAMEWORK OF THE OILSECTOR IN BRAZIL – cont.Concession Agreements  ANP is a party to the Concession Agreement, representing the Union.  ANP promotes the bidding rounds for block under concession, defining the blocks.  ANP publishes the invitation to bid with a copy of the Concession Agreement.  Bidders have to meet legal, technical and financial requirements.  Concessionaires are entitled to ownership of all oil produced, but must compensate the government accordingly : signature bonus, special participation, area occupation fee, royalties (10% to 5% - the latter where extreme conditions apply – Article 47, paragraph I Petroleum Law).
  23. 23. 3. LEGAL FRAMEWORK OF THE OIL SECTOR IN BRAZIL – cont.Authorisation to PetrobrasCNPE can propose to the President of theRepublic the cases in which, considering thenational interest, Petrobras will be contracteddirectly by the Union for the E&P of oil andnatural gas under the production sharing regime– Article 12, PSA Law.
  24. 24. 3. LEGAL FRAMEWORK OF THE OIL SECTOR IN BRAZIL – cont.Production Sharing Agreement Production Sharing Agreements - two types : between the State and Petrobras (no tender – authorisation, as seen in the previous item) or between the State, Petrobras and the Oil Company, preceded by tender (auction type).
  25. 25. 3. LEGAL FRAMEWORK OF THE OIL SECTOR IN BRAZIL – cont.Production Sharing AgreementWhere an oil company is allowed to bid for anexploration block and wins the bid: consortiumagreement between Petrobras, the bid winnerand the Pre-Sal State company (Pré-Sal PetróleoS.A. – PPSA, controlled by the BrazilianGovernment).If hired directly, or if it wins the bid, Petrobraswill enter into a consortium agreement with thePre-Sal State company.
  26. 26. Brazilian PSA State is the owner of the resources in the ground. Petrobras will always be the operator in all blocks under a PSA and will have at least 30% of participation in the consortium of companies that will explore the block (consortium to be formed between Petrobras and PPSA or between Petrobras, PPSA and the winner of the invitation to bid) – Articles 4 and 20 of Law 12351/2010. Operator is “responsible for conducting and executing, directly or indirectly, all exploration (...) production and decommission activities” (article 2, VI) – challenge, as Petrobras is a public company subject to debt limits and budget restrictions.
  27. 27.  State does not have any of the risks involved in the E&P activities (one exception : if costs are paid from a specific fund created by law). Costs and investments necessary to the execution of the PSA are borne by the Contracted Party. If an oil discovery is made, such costs and investments are paid back to the IOC (“cost oil”). The rest of the oil production which becomes available (profit oil) is then shared between the State and the other companies.
  28. 28.  The PPSA manages the PSA and may hire Petrobras (with no prior public bidding), as an agent, for the commercialisation of its share in the profit oil. The income resulting therefrom will be paid into the Social Fund created by Law 12351/2010 for “social and regional development” through programmes and projects in the areas of education, culture, health, etc. Further costs to oil companies exploring hydrocarbons under a PSA, including Petrobras, are royalties and signature bonuses (to be defined by the Ministry of Mines and Energy for each PSA). These will also be paid into the Social Fund.
  29. 29. 4. Local Content RequirementsThe Opportunity: Pre-Salt area is located approximately 170 Km from the Brazilian coast and is on average 7 Km deep. Massive technological investment is required to explore oil in such depth : “Investments demand for the Pre-Salt will be over US$ 400 billion in materials, equipment, systems and services until 2020.The information was given by the Director-General of the National Agency of Oil, Natural Gas and Befouls (ANP), Magda Cambria, during a talk at the Offshore Technology Conference (OTC), in Houston, USA, last week” – “Pré-sal demandará US$ 400 bilhões até 2020, segundo ANP”, 08 May 2012 16:05 hs - Portal Brasil, ANP (on-line)
  30. 30. 4. Local Content RequirementsThe Challenge: 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. And remember : under the PSA system, Petrobras will be the sole buyer.
  31. 31. 4. Local Content Requirements In the 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.
  32. 32. Local Content Requirements– cont. Thispercentage 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.
  33. 33. Local Content Requirements– cont. PSA system – Pre-Salt and Strategic Areas 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).
  34. 34. Local Content Requirements– 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 Seventh Round, there were more specific requirements and a Booklet of Local Content was published.
  35. 35. Local Content Requirements– 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.
  36. 36. Local Content Requirements–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.
  37. 37. Planning, planning, planning...
  38. 38. 5. Establishing a presence in Brazil  Preliminary Considerations  Setting up your own Company
  39. 39. 5. Establishing a presence in BrazilPreliminary 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.
  40. 40. 5. Establishing a presence in BrazilSetting up your own company; joint venturesWhich 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.
  41. 41. 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!
  42. 42. 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.
  43. 43. 5. Establishing a presence in Brazil For your company, you will need : A local manager (who does not need to be Brazilian, but a resident in Brazil); and an address.
  44. 44. If despite Local Content requirementsthere 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.
  45. 45. Compared to taxation of a Braziliancompany… 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.
  46. 46. 5. BECOMING A SUPPLIER TO 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. In order to render services in Brazil, the foreign company must have a subsidiary in Brazil or demonstrate the existence of a contractual relationship with a Brazilian company.
  47. 47. 5. BECOMING A SUPPLIER TO PETROBRAS – Cont. On-line system for goods and suppliers registration : through this, companies provide all the necessary information and documents as required by Petrobras The first step to supply to Petrobras is to register. By registering, the company will demonstrate its capacity to participate of invitations to bid and contracting processes. Once the company is registered, it will be invited for Petrobras’ international biddings. CRCC : (Certificado de Registro no Cadastro Corporativo) registration in which supplier provides information about the company and its product : . Specialised companies assist foreign companies in obtaining CRCC with Petrobras (valid for one year; must be renewed after that to continue as a supplier).
  48. 48. 5. BECOMING A SUPPLIER TO PETROBRAS – Cont. Further points to be aware of: Legal Representative in the country is required (power of attorney) by law. Commercial Representative is normally required by Petrobras. Normally agreements with Petrobras 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.
  49. 49. 5. BECOMING A SUPPLIER TO 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).
  50. 50. 5. BECOMING A SUPPLIER TO 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.
  51. 51. Thank you. Vera DantasNORONHA ADVOGADOS, London Phone: (20) 7581-5040 Facsimile: (20)