brazil joint venture on supply chain

Joint Ventures in the Brazilian Oil & Gas Supply Chain

For internal use only. A copy of the acts mentioned in this newsletter may be provided by the Library upon

request. This material does not purport to offer legal advice or counsel. 2014 Pinheiro Neto Advogados. All

rights reserved.

Written by Anna Carolina S. Bermudes

Corporate associate at Pinheiro Neto Advogados

1. The current scenario indicates that Brazil has a great potential as an oil

and gas producer and, therefore, can attract a large number of foreign investors,

including for its supply chain.

2. Strategic partnerships between foreign and local companies are proving

to be an interesting mechanism to enable international players, which are not

familiarized with the Brazilian market and legislation, to participate in business

opportunities in the country. The basic reasons to invest in Brazil by means of a

joint venture are discussed below.

3. The legal framework applicable to oil and gas exploration and production

activities in Brazil contains different rules which shall be carefully considered by

companies interested to participate in its supply chain. The Brazilian Federal

Constitution establishes that oil and gas exploration and production are a

monopoly of the Federal Government, which may contract with government or

private owned companies to carry out such activities.

4. Recent legislation establishing the regulatory framework applicable to

pre-salt and strategic areas provides for the possibility of direct contracting of

Petrleo Brasileiro S.A. - Petrobras under the production sharing regime or

onerous assignment in specific circumstances. Production sharing contracts

awarded based on a public bidding must also have Petrobras as the operator

with at least 30% of participation in the concession.

5. While the activities related to oil and gas are not limited to those subject

to the monopoly of the Federal Government, the supply chain ends up affected

by the contracts and regulations arising from such monopoly. Local content

requirements, specific rules for contracts with the government (including mixed

capital companies like Petrobras), environmental and labor laws, special

customs, tax regimens and foreign exchange controls, for instance, need to be

considered.

Why Cross-Border Joint Ventures?

6. The decision to find a joint venture partner may be driven by several

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Pre-salt: Direct contracting of Petrobras under the Production Sharing Regime

factors. It may be the lack of a particular know-how or expertise, the need to

share risks involved in a complex project, access to funding opportunities and

specific suppliers, among others.

7. The attention of the oil and gas sector in Brazil is very focused on the

technical, capital and logistics challenges to be overcome for development of

pre-salt blocks. Associations related to the oil & gas industry indicate that the

existing capacity of the local suppliers of equipment and services might not be

sufficient to meet the expected demand.

8. Notwithstanding the fact that Brazil has a growing educated workforce in

this field as well as investments in research and development, joint ventures

with experienced suppliers abroad are envisaged to assure that certain assets

may be delivered with the required quality, performance levels and adequate

budget.

9. On the other hand, Brazilian oil and gas industry is subject to certain local

content requirements. As from the 7th bidding round, the Brazilian National Oil,

Natural Gas and Biofuels Agency (ANP) has introduced new rules and

requirements for concessionaires on the acquisition of local labor, equipment and

services. ANPs strategy purports not only to foster strong domestic investments

but also to improve post-sales and maintenance services, delivery times as well

as hedge against global demand-causing delays.

10. The National Bank for Economic and Social Development (BNDES), which

is the largest long-term financier of infrastructure in Brazil, also requires a

minimum local content certification for specific lines of credit.

11. Considering its relevance in the industry, aspects of simplified public

bidding regulations applicable to Petrobras shall also be taken into consideration

on this matter. The call for bidding may require minimum local content index for

a particular contract. The participation of foreign and Brazilian companies joined

as a consortium may also be allowed by the bidding rules, in which case the

Brazilian company shall be the leader and the consortium members shall be

jointly and severally liable before Petrobras. Moreover, in case of concession for

oil fields or profit sharing agreements, pursuant to Brazilian law, any foreign

company in the bid (either individually or in a consortium) shall undertake to

establish a company under Brazilian law, with main offices and management

located in Brazil in the event of being awarded a contract.

12. Another reason to consider a joint-venture with Brazilian partners is the

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fact that one of the public bidding modalities under the simplified public bidding

rules applicable to Petrobras is the Invitation Letter. In such modality, Petrobras

calls, at its own discretion, at least three individuals or entities performing

activities compatible with the bidding. Thus, in order to participate in a project

with this type of bid, a company which has not been invited must partner with an

invited supplier. In any event, Petrobras shall review the technical, legal, tax,

economic and financial qualification of the joint venture partners.

Joint Ventures in Brazil

13. Brazilian legislation does not establish any systematic treatment for joint

ventures, which can be structured either as unincorporated or incorporated

ventures. The joint venture agreement shall establish the basis of the joint

venture, its term, object and the manner in which the partners intend to

implement the particular project. It shall also regulate, on a case-by-case basis,

the governance of the consortium or company and define the rights and

obligations of each party in terms of civil, labor, environmental and tax liabilities,

as well as the remedies in case of default or exit by one of the parties prior to

the completion of the venture.

14. Prior to the joint venture agreement, the parties may discuss core aspects

of the transaction and execute binding or non-binding letters of intent (LOIs)

or memoranda of understandings (MOUs) to set forth the basis for further

negotiation of the joint venture agreement, which shall be carefully negotiated

taking into account the specificities of the particular venture.

15. The unincorporated joint venture (like a consortium for example)

consists of an agreement whereby the joint venture partners join their efforts

with a view to implementing a given project. The features discussed above would

then be regulated in the consortium agreement, which must meet the

requirements established by Brazilian law.

16. In a consortium, the participating companies shall maintain their

respective legal identities, each retaining its own administration, assets and

liabilities, including for tax purposes with due regard to certain exceptions

provided by law. Such type of arrangement may be suitable for a foreign

company interested in participating of a single project, as the consortium does

not entail the formation of a new company which might need to be liquidated by

the end of the project.

17. Incorporated joint ventures, on the other hand, consist in the creation of

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a company organized by the joint venture partners. Although there is no golden

rule, incorporated joint ventures may be more suitable for foreign companies

which are interested in having a significant presence in Brazil, either for a

particular project or for future activities as this type of joint venture involves the

formation of a corporate entity with its own legal identity and assets.

18. Likewise the consortium agreement, the rights and obligations of each of

the partners in the joint venture company can be regulated by means of a

shareholders agreement, in which the long term partnership features could be

established in more details. Such agreement may also regulate the risk

allocation amongst the shareholders/joint venture partners, as well as any

limitation with respect to purchase and sale of shares, right of first refusal to

acquire shares, exercise of voting rights or controlling powers, among other

governance matters.

19. The decision to form an incorporated joint venture may also be driven by

tax benefits, regulatory licenses (like the operation of ports, for instance) or

customs regimens which may only be applicable to Brazilian companies.

20. The parties shall also bear in mind that joint ventures and agreements in

general which may cause an impact on the local market must be submitted to

the local antitrust authorities in Brazil. Transactions with direct or indirect impact

in Brazil require prior consent in case the parties (or their respective economic

groups) have recorded, in the previous fiscal year, annual gross revenues

exceeding: (i) R$ 750 million; and (ii) R$ 75 million, respectively. The analysis

as to whether antitrust clearance would be necessary shall be conducted on a

case-by-case basis, as there are specific exceptions which may apply (a

consortium for the specific purposes of participating in a public bid, for example).

Final Comments

21. Brazilian oil and gas industry is experiencing a time of great

opportunities, with a potential for growth in the supply chain. Joint ventures with

Brazilian suppliers may be a good strategy for foreign investors to enjoy such

opportunities and meet the demands of the oil and gas sector taking into

account the specificities of Brazilian market. Brazilian industry may, in turn,

benefit from technological innovations and new business models brought by

experienced foreign players, which could improve the supply chain of such

strategic sector of the Brazilian economy.

22. In this scenario, the Brazilian Agency for the Promotion of Exports and

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Investments (Apex) and the National Organization of the Petroleum Industry

(Onip) have recently joined efforts to promote the formation of joint ventures

between Brazilian and foreign companies in the oil and gas supply chains, more

particularly in subsea and ship parts segments. The initiative is called Brazilian

Petroleum Partnerships. Apex and Onip expect Brazil to attract companies which

may supplement the existing capacity of Brazilian suppliers, contributing to the

increase of local content and covering any shortfalls in the sector.

Rio de Janeiro, October 8, 2014

brazil joint venture on supply chain

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