The document discusses opportunities and challenges in Brazil's oil market, focusing on legal aspects. It provides a history of Brazil's oil industry, details on Petrobras' investments, an overview of Brazil's legal framework for oil exploration, requirements for local content, and considerations for foreign companies seeking to establish a presence or become suppliers in Brazil. The local content requirements present both opportunities in the massive investments needed for pre-salt exploration, as well as challenges for companies to meet the mandated minimum percentages.

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Opportunities and Challenges in the Oil
Market in Brazil – some legal aspects
Vera Dantas Aberdeen 11 October

3. PRESENTATION TOPICS
1. Recent History of Brazilian Oil Industry
2. Petrobras’s Investments
3. Legal Framework of the Oil Sector in Brazil
4. Local Content Requirements
5. Establishing a presence in Brazil
6. Becoming a Supplier to Petrobras

4. 1. RECENT HISTORY OF THE BRAZILIAN OIL
INDUSTRY
 2005 – Brazil produces 1.85 million barrels a
day Petrobras : 1.684 mbpd
 2006 – Brazil achieves self-sufficiency in oil

5. 1. RECENT HISTORY OF THE
BRAZILIAN 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.

6. “All this and oil too.
God may indeed be
Brazilian after all”
15 November 2007
And Scottish too! Great
Opportunity for Scottish
Companies with subsea technology and know-how.

7. 1. RECENT HISTORY OF THE
BRAZILIAN OIL INDUSTRY – cont.
 2008 – Discovery of Carioca oilfield with
estimated 70 billion barrels of oil. Discovery
puts Brazil's oil reserves among the world's
largest.
 2008 – Last Bidding Round under the
concession regime takes place.

8. 1. RECENT HISTORY OF THE
BRAZILIAN OIL INDUSTRY – cont.
 2010 – New regulatory regime is approved
 April 2011 – 11th Round authorised by the
National Council of Energy Policy
 by Congress.

9. 1. RECENT HISTORY OF THE BRAZILIAN OIL
INDUSTRY – 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).

10. 1. RECENT HISTORY OF THE
BRAZILIAN OIL INDUSTRY – cont.
Petrobras Oil Production – Targets and Real Production
millions 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

11. 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 Show:
www.petrobras.com.br/pt/quem-
somos/estrategia-corporativa
Plano de Negócios e Gestão 2012-2016

12. 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.

13. 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 September
2012

14. 3. LEGAL FRAMEWORK OF THE OIL
SECTOR IN BRAZIL
3.1 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.

15. 3. LEGAL FRAMEWORK OF THE OIL
SECTOR 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.

16. 3. LEGAL FRAMEWORK OF THE OIL
SECTOR 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.

17. 3. LEGAL FRAMEWORK OF THE OIL
SECTOR 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

18. 3. LEGAL FRAMEWORK OF THE OIL
SECTOR IN BRAZIL - cont.
MME :
responsible for implementing Brazil’s energy
policy and establishing the guidelines for the
industry.
proposes to the CNPE, after consultation to
the ANP, the blocks to be explored under the
concession or the production sharing regimes.

19. 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.

20. 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).

21. 3. LEGAL FRAMEWORK OF THE OIL
SECTOR 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.

22. 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.

23. 3. LEGAL FRAMEWORK OF THE OIL
SECTOR 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).

24. 3. LEGAL FRAMEWORK OF THE OIL
SECTOR IN BRAZIL – cont.
Authorisation to Petrobras
CNPE can propose to the President of the
Republic the cases in which, considering the
national interest, Petrobras will be contracted
directly by the Union for the E&P of oil and
natural gas under the production sharing regime
– Article 12, PSA Law.

25. 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).

26. 3. LEGAL FRAMEWORK OF THE OIL
SECTOR IN BRAZIL – cont.
Production Sharing Agreement
Where an oil company is allowed to bid for an
exploration block and wins the bid: consortium
agreement between Petrobras, the bid winner
and the Pre-Sal State company (Pré-Sal Petróleo
S.A. – PPSA, controlled by the Brazilian
Government).
If hired directly, or if it wins the bid, Petrobras
will enter into a consortium agreement with the
Pre-Sal State company.

27. 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.

28.  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.

29.  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.

30. 4. Local Content Requirements
The 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)

31. 4. Local Content Requirements
The 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.

32. 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.

33. 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.

34. 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).

35. 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.

36. 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.

37. 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.

38. Planning, planning, planning...

39. 5. Establishing a presence in Brazil
 Preliminary Considerations
 Setting up your own Company

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

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

42. 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!

43. 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.

44. 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.

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

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

47. 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.

48. 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 :www.petrobras.com.br/CanalFornecedor
 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 : http://www.petronect.com.br/irj/portal/anonymous .
Specialised companies assist foreign companies in obtaining CRCC
with Petrobras (valid for one year; must be renewed after that to
continue as a supplier).

49. 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.

50. 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).

51. 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.

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