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Report – Offshore Brazil prepared for Offshore Center Denmark
OVERVIEW OF THE BRAZILIAN
OIL AND GAS INDUSTRY
Date 01-09-2009 File No. 88.Bras.1 Our ref. 88.Bras.1 Case No.
Table of Contents Executive summary ................................................................................................................ 3
1.1 Current market situation ........................................................................................ 3
1.2 Market expectations ............................................................................................... 3
1.3 Opportunities for Danish suppliers ........................................................................ 3
2 Introduction to Brazil .................................................................................................... 5
2.1 Economical & political situation ........................................................................... 5
2.2 Business culture ..................................................................................................... 9
3 The oil & gas sector .................................................................................................... 11
3.1 History of the sector ............................................................................................ 11
3.2 Location of the oil & gas ..................................................................................... 13
3.3 Current political trends in the sector .................................................................... 14
3.4 The Pre-salt fields ................................................................................................ 15
4 The actors in the sector ................................................................................................ 16
4.1 Institutions in Brazilian Oil & Gas sector ............................................................ 16
4.2 Market Actors ...................................................................................................... 17
5 The actual market size ................................................................................................. 19
5.1 Sector development in terms of production ......................................................... 19
5.2 Projected production rates ................................................................................... 20
6 The future of the market .............................................................................................. 21
6.1 The pre-salt discoveries ....................................................................................... 21
6.2 Petrobras Investment plan 2009-2013 ................................................................. 22
6.3 Expected growth until 2020 ................................................................................. 24
6.4 Calculation based on the formula: R/P = Y (R/P ratio) – (R – Resources, P –
Production, Y – Years) .................................................................................................... 26
7 Market demands .......................................................................................................... 27
7.1 Technological challenges..................................................................................... 27
8 Entering the sector ....................................................................................................... 29
8.1 Political consideration ......................................................................................... 29
8.2 Possible new governmental structure/institution managing the pre-salt
exploration ....................................................................................................................... 29
8.3 Barriers to entry ................................................................................................... 30
9 The regulatory framework ........................................................................................... 32
9.1 Special import/taxations regimes pertinent to the sector ................................... 32
9.2 Other legislation .................................................................................................. 33
9.3 Export methods .................................................................................................... 35
9.4 How to establish a company in Brazil ................................................................. 36
9.5 Petrobras Vendors list .......................................................................................... 38
9.6 Requirements to become a regular supplier ......................................................... 38
9.7 CADFOR ............................................................................................................ 39
10 Financing ..................................................................................................................... 40
10.1 The national development bank (BNDES) .......................................................... 40
11 Final considerations..................................................................................................... 41
Appendix 1 – PROMIMP Product & Service demands ....................................................... 42
Critical Services needed for pre-salt production ......................................................... 42
Critical Products needed for pre-salt production: ........................................................ 42
Appendix 2 - CADFOR Product & Service demands .......................................................... 43
CADFOR Product Demands ....................................................................................... 43
CADFOR Services Demands ...................................................................................... 44
Appendix 3 – Potential for the Danish offshore sector ........................................................ 46
Upstream .......................................................................................................................... 46
Downstream ..................................................................................................................... 47
Appendix 4 – Interview with a Danish supplier ................................................................... 47
Appendix 5 – Interview with a Danish supplier ................................................................... 49
Appendix 6 – Currency Exchange Rate BRL - USD ........................................................... 50
Appendix 7 – The Trade Council and its services ................................................................ 51
Appendix 8 – Useful Contacts .............................................................................................. 52
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Executive summary
1.1 Current market situation
The Brazilian Oil & Gas sector has evolved dramatically since the monopoly of
Petrobras ended with market de-regulation in 1997. Over the following 12
years, most major multinational oil companies have entered Brazil, which
became a net oil exporter in late 2007.
Also in 2007, Petrobras discovered the first major pre-salt oil field - the Tupi
field - with an estimated 5-8 billion barrels of oil equivalent. The pre-salt
discoveries can potentially make Brazil the 5th
largest oil nation in the world,
with estimates of up to 114 billion barrels of oil reserves.
On August 31st 2009 the Brazilian government sent a new regulative proposal to
the senate, which if passed, will change the entire market structure of the pre-
salt area.
Traditionally, national and international oil companies bidding at concession
rounds would win the right to operate the specific field and own the oil they
might find in return for paying royalties to the local state.
The new regulative will introduce four new laws, which if passed, will introduce
a "shared production" regime to replace the concessions-based system. Essential
to the new laws is the creation of a new state oil company, Petrosal, which will
have the objective of managing the pre-salt reserves. Furthermore, a fund will
be created to manage the government's revenues from the reserves, directing
them towards social spending on areas such as poverty relief, education and
infrastructure. Last, but not least, the government controlled Petrobras will be
issued $50bn of new capital.
1.2 Market expectations
The expectations for the Brazilian Oil & Gas sector are very optimistic, not least
due to an investment plan of Petrobras to invest US$ 174,4 billion from 2009-
2013, including 63 new vessels and platforms.
The expected Brazilian Oil & Gas output for 2009 is 2,51 million boe/d up from
2,18 million I 2008. With an expected 7,5 % annual increase in production,
Petrobras will produce an estimated average of 5,18 million boe/d by 2020.
1.3 Opportunities for Danish suppliers
As the ultra-deep oil fields in the pre-salt area has caused the biggest investment
plans in the history of the country, it has also made Brazil one of the most
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interesting and promising markets for the Danish offshore industry. As a way to
illustrate the opportunities and the threats for Danish suppliers and sub-suppliers
entering the Brazilian market, the Consulate General has prepared a simple
SWOT analysis: Strengths
Huge reserves (high R/P ratio)
Leading O&G development in global
comparison
No restrictions on business establishments
Weaknesses
Bureaucracy:
Red Tape infrastructure
Government inefficiency
Complex tax system
Slow custom clearance
Geographical distance from DK
Opportunities
Economical benefits:
Brazilian Real
Brazilian Real 63% stronger than
US$ over a five year period Oct.
2004 – Oct. 2009
REPETRO custom regime
Financial Aspects:
The Danish Export Credit Fund
- Export loan agreement (20 billions)
- Re-insurance agreement
Considerable low interest rates
Cultural difference:
Brazil in need of educated workforce
Supplier market openings:
Local company agent
Danish Consulate Incubator service
Trade fairs like Rio Oil & Gas and
Brasil Offshore
CADFOR
Petrobras Vendors list
Expected domestic expenditure:
Infrastructure development projects
Petrobras investment plan 2009-2013
US$ 5 billion investment cap to close
within two years
Industrial
Downstream oil refining and
processing technology
Upstream deepwater components.
71PDE companies operating in Brazil
Huge investments in Brazilian
shipyards
Prospective business areas described
by Danish Trade Council (appendix 3)
Petrobras focus on environmentally
sound production processes
Threats
Economic disadvantages:
Closed economy (entry barrier, WEF
87th)
High Tariffs
Corruption
IBP
Oil price volatility
- Investment uncertainty
- Purchasing price fluctuations
Financial aspects:
Difficulties acquiring new investors
Cultural difference:
Language difficulties
Hierarchy decision process
Understanding of time
Monopoly business culture:
Local industrial protection
Global/local content percentage
40/60
Petrobras market dominance
Difficulty of getting on Petrobras
Vendors list
Legal Framework:
Difference in legal framework
Red tape when setting up a local
company
Non-tariff barriers such as needs for
legal authorization
Time of acceptance of supplier’s competitive
advantage (products & services)
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2 Introduction to Brazil
2.1 Economical & political situation
The present situation
With a population of 190 million Brazil is Latin America's largest market, the
world’s fifth-most-populous country and the tenth-largest world economy in
terms of gross domestic product.
Being a global economy, Brazil has been affected by the global crisis of late
2008, resulting in a technical recession in early 2009. That being said, Brazil has
surprised both politicians and economic analysts, as the country fared better
than in any other economic crisis during the history of the country.
The Brazilian state and the Brazilian state banks are financially solid and
support counter-cyclical measures to lessen the effect of the global financial
crisis on the Brazilian GDP.
The Brazilian Central Bank has lowered interest rates to the lowest level since
the 1960’s in an attempt to increase capital investments. The Brazilian
development bank BNDES has been aggressive in increasing credit for projects,
and an accelerated infrastructural government growth program, PAC has been
launched to support investments in the Brazilian infrastructure.
Despite a contraction of 3,6% in the fourth quarter of 2008, the Brazilian
economy expanded by an overall of 5,1% in 2008. According to the Brazilian
Central Bank, the economy is forecasted to contract slightly in 2009, while the
projected annual growth for the five year period of 2009-2013 is 4,1%, only a
bit less than the 4,5% annual growth average of 2004-2008.
The decrease in real GDP in the first quarter of 2009 primarily reflected a
decrease in industrial activity of 3.1 percent. Agriculture registered a decrease
of 0.5 percent and retail registered an increase of 0.8 percent. During the same
period, gross fixed capital formation fell 12.6 percent. Depreciation in credit,
higher interest rates and a depreciation of the Real made it difficult to import the
machinery and equipment necessary to expand the economy.
Overall, economic indicators of mid 2009 were a mixed witness of the state of
the Brazilian economy. After a terrible performance in the end of 2008 and early
2009, production data has shown only a modest recovery. On the other hand,
both retail sales, credit and confidence indicators all show signs of encouraging
domestic environment despite of the negative international environment.
Furthermore, on the external front, Brazilian exports performed better than
expected, mostly owing to robust Chinese demand for some of the country's
main commodities.
Recent discoveries of oil in the Tupi field off the coast of Rio de Janeiro, with
estimated reserves of between 5-8 billion boe (Barrels of Oil Equivalent),
spurred Petrobras’ announcement of a significant increase in investment plan
projected for the five year period 2009-2013. Recently, various international oil
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companies operating in Brazil have disclosed intentions to increase investments
in the country, clearly distancing themselves from their strategies in other parts
of the world. Britain’s BG, Spain’s YPF Repsol and the USA’s Hess are among
these companies.
Over the last 3 years the Brazilian production of oil has increased significantly.
The country produces 2,18 million boe/day, a tripling of the 1990 production.
Furthermore, Brazil produces above 3 million cubic meter of gas per day,
though it should be noted that Brazil is still depending on 50% of its gas as
imports from Bolivia, a number which is diminishing.
On Christmas day 2007, Brazil for the first time in history produced more oil
than it consumed and hence went from oil import dependency to self
sufficiency.
Economic Projections The Brazilian oil and gas sector is one of the most economically interesting
sectors in the country backed by the promising oil finds in recent years and the
consequently biggest investment plans the country has ever seen.
The current unemployment rate of 9,3% in 2009 are expected to fall to 8,6% in
2010, and continue downwards. The unemployment rate is a central theme
within the investment plans of the Brazilian oil and gas sector. A general
discourse from government spokes people, and from Petrobras, is a plan to
source new investment projects from national companies as much as possible.
Therefore, a central challenge for Petrobras in the coming years will be a
challenge of human resources. Expectations are that more than one hundred
thousand new job functions are needed within the oil & gas sector if Petrobras is
to carry out its massive investment plans.
The crude oil price has undergone a significant decrease since its record peak in
July 2008 where it traded above US$ 140 per barrel. On December 23, 2008,
crude oil fell to US$30.28 a barrel, the lowest since the beginning of the global
financial crisis, and it has been trading between US$35 a barrel and US$72 a
barrel in 2009. The increasing oil price in 2009 has been an important factor in
maintaining investment enthusiasm among the major players within the
Brazilian oil and gas sector.
British BG are expecting an increase in production of 166% over the next 10
years, from 600 thousand boe produced today to 1,6 million boe, where 25% are
expected to be extracted from the Brazilian pre-salt area. BG is currently not
producing in the pre-salt area, but BG vice-president, Martin Houston, has said
that Brazil together with Australia and Kazakhstan are the expected locomotives
of the company’s future growth. BG plan to invest US$ 4 billion in the pre-salt
area in the coming years. Since BG entered Brazil in 1994 it has invested
approximately US$ 1,5 billion, of which a majority has been invested together
with Royal Dutch Shell in the company Comgas.
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According to BG’s own studies the pre-salt area has the potential to reach 90
billion boe of good quality oil, which with an average oil price of US$ 60 will
have a US$ 5,4 trillion market value.
British Hess Corporation published in late 2008 its plans to invest US$ 3,1
billion in Exploration & Production (E&P) in Brazil during 2009. The
investment was to be divided by US$ 1,4 billion in production, US$ 900 million
in production development and US$ 800 million in exploration.
So far, seven blocks of the pre-salt area, equivalent to 38% of the 112 thousand
square kilometres have been licensed. Petrobras is the operator in six out of the
seven blocks.
According to Petrobras, they are prudently planning their investment projects
based on an oil price of US$ 40 per barrel to be economically viable.
The Tupi field is not the first pre-salt oil produced offshore in Brazil, but it will
set the tone for the development of the rest of the 200 km wide pre-salt band
stretching over 800 kilometres of the Brazilian coast.
The political Situation
Brazil has a federal presidential system. Luiz Inácio Lula da Silva of the left-
wing Partido dos Trabalhadores (PT – Workers Party) was elected president in
2002 and re-elected for a second four year term in October 2006. He formed a
broad coalition of a dozen political parties, including the centrist Partido do
Movimento Democrático Brasileiro (PMDB – Party of the Brazilian Democratic
Movement).
Greater macroeconomic stability consolidated by the first Lula administration
through orthodox policies in the context of a positive external environment,
permitted an increased emphasis on anti-poverty programmes. This boosted
Lula's popularity, despite a series of corruption scandals in his government since
2005. At the outset of his second term, Lula announced an economic
programme aiming to accelerate economic growth through increased
investment, called the Programa de Aceleracão do Crescimento (PAC), which
he has used as a political platform.
Country Energy Profile
The total Brazilian domestic energy supply in 2008 reached 251,5 thousand
tonnes of oil equivalent. This corresponds to a per capita consumption of 1,34
tonnes of oil equivalent, which is 3,9% above the 2007 level, but still lower than
the world average of 1,8 tep/hab (tonnes of petroleum equivalent per habitant)
and a lot lower than the OECD average of 4,7 tep/hab.
Of the total Brazilian domestic energy supply, 45,4% (114,2 thousand tonnes of
oil equivalent) comes from renewable energy sources. This is the highest
proportion worldwide, significantly contrasting with the world average of
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12,9%, and even more with the OECD countries, which averages 6,7% of
renewable energy sources for domestic supply.
Most of Brazil's crude oil production is offshore in deep or ultra-deep water and
consists of heavy grades, which need to be refined abroad. Of the 2009-2013
US$ 174.4 billion investment plan from Petrobras, approximately 25% (US$
43.4 billion) are planned to be invested in domestic RTC (refineries, transport
and commercialization).
It is expected that the oil extracted from the Santos Basin pre-salt area will help
change the negative commercial balance of Petrobras. The commercial balance
currently shows an approximately US$ 3 billion in deficit.
The oil found in the Santos basin is not as light as the Brent or the WTI, though
the oil is of better quality than the oil extracted from the Campos basin, and
should have a higher aggregated value when produced in large scale. When the
platforms in the Santos Basin will commence operation in 2015, Petrobras
projects it can substitute the import of light oil and export Santos Basin oil at a
better value.
The oil from the Tupi field in the Santos Basin is characterized as medium
quality oil according to the American Petroleum Institute (API) measure.
According to the API scale, oil is considered light when it has an API higher
than 31,3 and heavy when it has an API less than 22,3 degrees (an API between
22-31 is considered medium oil). In the Campos Basin, which is responsible for
more than 80% of the oil produced in Brazil the average API is around 18
degrees. The oil produced at the Tupi pre-salt have an average of 28,5 degrees
API. An extraction of heavy oil is much more complex and more expensive than
light oil and therefore in some cases, the reserves are considered commercially
un-viable.
Despite the announcement of domestic self-sufficiency in 2007, Petrobras
continues to be dependent on the import of light oil to turn the process of oil
refinery less costly. In effect this means that Petrobras imports expensive light
oil, and exports heavy oil which is less expensive, generating a significant
commercial balance deficit.
According to the latest numbers from the National Petroleum Agency, ANP,
referring to the month of April 2009, Petrobras imported oil at US$ 50 on
average per barrel and exporting oil at an average of US$ 32 per barrel.
There might still be a long way for Petrobras to produce oil at an API of 40
degrees as the WTI or 39 degrees API as Brent, but it has already reached a
significant advance in oil quality according to what is being produced today.
9
2.2 Business culture
Meeting & Greeting
Greetings in Brazil are relaxed. Handshakes are used for greetings between
men, and a woman is greeted by either a handshake, or if the event is more
informal, one or two kisses on the cheeks (used interchangeably).
Brazilians present themselves either by first name only, or a combination of first
and surname. Although Brazilians are quite informal in communication, it is
common good practice to use Mr. and Mrs./Miss. plus the surname, until the
Brazilians themselves move to use first name.
Communication
Brazil has a very strong group culture, and it is important that nothing is done to
appear to embarrass a Brazilian. It is fine to argue, but be careful not to sound
too aggressive. The direct Scandinavian form of communication can lead to loss
of face in Brazil.
This being said, communication does not rely on strict rules of protocol. Anyone
who feels they have something to say will generally add their opinion.
Interruptions whilst speaking or making a presentation should be expected, as it
is considered acceptable in Brazil to interrupt someone who is speaking.
Brazilians are emotional people, and personal opinions are often accepted on
even level as objective analysis. If presenting, don't be afraid to demonstrate an
opinion, but it is advised to be able to back it up with facts.
When dealing with Brazilian companies, expect many questions about your
company since Brazilians are more comfortable doing business with people and
companies they know. In the same line, Brazilians prefer face-to-face meetings
to written communication as it allows them to know the person with whom they
are doing business.
Relationship building and personal contact is very important for Brazilians.
Wait for your Brazilian colleagues to raise the business subject. Never rush the
relationship building time.
Despite the preference of face-to-face oral communication over written
communication, it is important to note that when it comes to business
agreements, Brazilians insist on drawing up detailed legal contracts.
Business Meetings & Negotiations
Brazilian business meetings are informal but respectful. Meetings are often
started with casual conversation and small stories to break the ice. However, the
informal and extroverted atmosphere should not be seen as an excuse to act
unprofessionally.
10
Brazilians take time when negotiating. Do not rush them or appear impatient.
Expect a great deal of time to be spent reviewing details.
Brazilian business is hierarchical. Decisions are made by the highest-ranking
person. Brazilians negotiate with people not companies. Be careful about
changing your negotiating team or you may have to start over from the
beginning.
In São Paulo and Brasilia it is important to arrive on time for meetings. In Rio
de Janeiro and other cities it is acceptable to arrive a few minutes late for a
meeting.
Do not appear impatient if you are kept waiting. Brazilians see time as
something outside their control and the demands of relationships takes
precedence over adhering to a strict schedule.
Level of corruption in Brazil
The Transparency International Corruption Perceptions Index 2008, ranks
Brazil as number 80 out of 180 countries, together with Burkina Faso, Morocco,
Saudia Arabia and Thailand.
On the Corruption Perception Index (CPI), Brazil got an average score of 3,5
out of 10. The CPI Score relates to perceptions of the degree of corruption as
seen by business people and country analysts, and ranges between 10 (highly
clean) and 0 (highly corrupt).
The CPI focuses on corruption in the public sector and defines corruption as the
abuse of public office for private gain.
Corruption has long been one of Brazil's serious challenges both for domestic
business, and as an image around the world.
Most Brazilian governments have been seriously damaged by corruption
scandals, which have led to a widespread sentiment that corruption is part of
how things work when doing business in Brazil.
We strongly emphasize, however, that corruption is strictly illegal no matter
what shape it might take. The best way to deal with the problem of corruption is
simply to adhere to the high standards of Scandinavian companies. Once it
becomes clear for corrupt authorities or business partners that Scandinavian
companies do not accept corruption, these companies are usually being left in
peace.
Democracy in Brazil
Related to corruption, The Economist Intelligence Unit's 2008 democracy index
ranks Brazil 41st out of 165 countries, putting it among the 50 countries
considered "flawed democracies". The Index provides a snapshot of the current
state of democracy worldwide for 165 independent states and two territories.
11
The Economist Intelligence Unit’s democracy index is based on five categories:
electoral process and pluralism; civil liberties; the functioning of government;
political participation; and political culture. Countries are placed within one of
four types of regimes: full democracies; flawed democracies; hybrid regimes;
and authoritarian regimes.
International Commerce
The World Economic Forum classified Brazil as one of the most closed
economies worldwide regarding international commerce. According to the
WEF, Brazil occupies the 87th
(80th
in 2008) position in the ranking of open
economies. The ranking which was published in early July 2009, analyzed
commercial protectionism and its economic consequence in 121 countries.
The ranking leaves Brazil behind other Latin American countries such as Chile
(19th
), Costa Rica (43rd
) and Mexico (74th
), but still in front of Argentina (97th
).
Among the BRIC countries Brazil comes after China (49th
) and India (76th
) but
before Russia (109th
).
Weighing against Brazil in the evaluation are aspects such as the high tariff
barriers, high custom tariffs, the poor quality of the infrastructure, the corruption
and the inefficiency of the government.
3 The oil & gas sector
3.1 History of the sector The history of Petrobras
The history of the oil & gas sector in Brazil is marked by three key events. First
of all the creation of Petróleo Braseilero S/A - Petrobras in 1953, a mixed
economy company with thousands of private investors owning most of the
company, but with government still holding the majority of the voting shares.
Petrobras enjoyed a monopoly position in the sector covering everything in the
upstream-downstream areas from exploration to retail outlets, from its creation
up until 1997. Only retail fuel distribution was open to limited competition with
fuel bought from Petrobras refineries and fixed prices set by government. Up
until the late 1960s the company solely focused on onshore activities, but as no
major fields were discovered they started exploring the offshore possibilities.
By 1970 Petrobras confirmed the first reservoirs in the shallow waters of the
Sergipe Basin. Five years later they had confirmed offshore resources equalling
the onshore finds and from then on the offshore exploration has lead to an
exponential growth of Brazils confirmed oil reserves. Especially the
development of the huge Campos Basin off the coast of Rio State through the
1980s and 90s contributed to this expansion.
12
Brazil today holds a reserve of 14.09 billion boe of which the main part is
located in deep or ultra deep waters - deeper than 300m and 1000m respectively
- thereby making Brazil a pioneering nation in terms of deepwater production.
By 2008 Petrobras operated 22% of all global deepwater production, making
them world leaders in the field. The latest successful drilling was in 2.2km
depth in the first of the developed Pre-salt fields. Liberation of the Oil and Gas Sector
In 1997, Congress liberated the oil and gas sector by allowing foreign and local
private participation in all petroleum and natural gas activities, thereby marking
the second key development for Brazilian oil and gas. At the same time the
ANP (National Petroleum Agency) was created as a regulatory agency to
manage the sector and organizing the forthcoming concessionary bidding
rounds for undeveloped oilfields.
By the end of 2008, 71 national and international companies were involved with
production, development or exploration in the Brazilian oilfields, though
Petrobras still holds a significantly dominant position.
Discovery of the pre-salt
The latest development came in late 2007, with the major discoveries off of the
Rio State coast in the Santos Basin. The fields, called the pre-salt fields due to
the 2000 meters thick layer of salt above the oil, contain an estimated 30 – 100
billion boe. The President of ANP, Haroldo Lima, estimate the fields to hold
between 70 - 80 billion boe. Though test-production has only begun in the Tupi-
field, it is expected that the pre-salt fields will have a huge impact on the sector
in the years to come. When Petrobras published its revised investment plan for
the next five years, its proposed capital investment of US$ 174 billion over the
period (2009 – 2013) is bigger than the entire economy of Chile. By 2020,
according to the plan, Petrobras and its foreign partners will be producing 5.7m
barrels of oil and gas per day, more than half the output of Saudi Arabia.
13
3.2 Location of the oil & gas
Location of the Brazilian Oil & Gas Sector
The Oil and Gas reservoirs of Brazil are spread over the entire area of the
country, though the onshore reservoirs only account for a small part of the total.
The offshore reservoirs are spread from the northern shores of Amapá state to
the country’s southern tip of Rio Grande do Sul. The oil and gas is
predominantly located in the south east regions of Brazil, though sizable
reservoirs have been confirmed off the coast of Ceará and Rio Grande do Norte
in the Northeastern part of the country.
The great Campos Basin, which lies about 100 km from Rio State coast, holds
an approved 9.5 billion barrels of oil, while the fields off the coast of the state of
Espirito Santo holds an estimated 753 million barrels. The Pre-salt fields are not
included in these numbers since the exact volume has yet to be confirmed.
Petrobras has incorporated its Campos activities in the port-city of Macaé, about
150 km north of Rio de Janeiro, which has become the center of operations in
the Brazilian offshore sector. Macaé city hosts the biennale event ―Offshore
Brazil‖, where more than 530 offshore players exhibit for approximately 44
thousand visitors.
14
3.3 Current political trends in the sector
Political plans for the Oil & Gas sector
The pre-salt discoveries have had a huge impact on the Brazilian perception of
the Oil and Gas industry. While the role of the state oil company is not in
question, the level and manner of participation by the private sector is not as
clear. Since the liberation of the sector, ANP has held annual bidding rounds for
the concessions which has become a model of transparency and have attracted
large numbers of private participants.
But Brazil’s new oil and gas potential has raised doubts about the extent of the
future openness, as the government debates the preferred degree of private
participation. Following the Tupi discovery, the government removed 41
deepwater blocks in the pre-salt region from the ninth bidding round, which was
the first time blocks got removed since the start of the international bidding
rounds in 1998. In 2008 the government again withheld offshore blocks from
the 10th bidding round. Seven companies currently hold concessions for the
development of the pre-salt: Petrobras, BG, Galp, Repsol, Shell, Exxon and
Amerada Hess.
A government task force is studying possible changes to the concession laws
that would provide Petrobras an advantage in the development of the Tupi area.
Along the same lines President Luiz Inácio Lula da Silva called for the creation
of a new state company, Petrosal, to manage the Pre-salt area. The new
government regulative regarding Petrosal is expected to go through congress in
the autumn of 2009.
In September 2008 President Lula da Silva stated: ―The petroleum produced in
the pre-salt fields will be a direct bridge between natural resources and the
eradication of poverty‖. In the same address to the nation he called for a
strengthening of the national supply chain, ultimately rendering Brazil self-
sufficient in terms oil and gas equipment. With Petrobras being a mixed public-
private company its decision making is often highly influenced by the
government’s political agenda. As an example the recent rise in the
unemployment rates due to the financial crisis, lead to both President Lula de
Silva and Petrobras CEO José Sérgio Gabrielli, to stress that future contracts
will be given to national suppliers if possible.
Political preferences aside, the national supply chain for the oil and gas sector is
not equipped to handle the present demand, not to speak of the expected future
demand related to the exploration and development of the Pre-salt fields.
Planning director of BNDES, João Carlos Ferraz, have pointed out, that the
supporting industries for the oil and gas sector needs US$ 5 billion in
investments by 2011 just to cope with Petrobras’ demand, which respond to
between 20-25 % of the global demand for offshore equipment. Controversial to
the high demand for global offshore equipment, for the 2009-2013 investment
plan Petrobras aims to reach a national content of 65 %.
Another indirect outcome of the financial crisis has been the high volatility in
oil prices, where the steep drop in prices brought Petrobras to demand reduced
prices from its suppliers. In some cases the state oil company has already
15
cancelled or postponed contracts, pointing to the elevated prices from the
suppliers. President of the Brazilian Institute for Petroleum, Gas and Biofuels
(IBP), João Carlos de Luca, points out that while it was accepted that suppliers’
prices rose during the peak of demand, these prices are no longer viable with the
low prices on barrels. This goes equally for Petrobras as for the other petrol
giants operating in Brazil. They all call for a significant reduction in costs from
the supporting industries.
3.4 The Pre-salt fields
Introduction to the pre-salt fields
In 2007 Brazil discovered the largest oil deposits in the country's history and the
world’s most promising fields since the discoveries made in Kashagan in
Kazakhstan in 2000. The discoveries can potentially make Brazil the 5th
largest
oil nation in the world, with up to 114 billion barrels of oil reserves.
The finds are located in the Santos Basin, 300 km from the coast at Rio de
Janeiro in south-eastern Brazil. The first discovery—the giant Tupi field—
which was made in November 2007, inaugurated test-facilities on May 1st 2009.
Potential reserves are estimated by Petrobras at 5-8bn boe, which would make it
the largest-ever deep-water oil field discovery.
It is still uncertain whether the heavy oil in the pre-salt area is commercially
viable, as the final production costs per barrel have not yet been determined. This is mainly due to the extreme circumstances under which the oil is going to
be extracted. The reserves are located in the pre-salt area below a thick salt layer
and more than 4 km below the sea bed, under a series of layers of rock and salt.
The sea bed in turn, lies about 2 km from the surface, which means the oil is
about 6 km from the drilling rig and 300 km off the coast.
16
The depth of the oil reservoirs, though, is not the main challenge, since
Petrobras ranks among the world’s best-qualified companies in offshore deep-
water exploration and is already exploring fields located at similar depths. The
depth and thickness of the salt formation poses more problems. Unlike drilling
through rock, which can be difficult owing to its thickness but once drilled
remains stable, it is tough to maintain the dimensions of the well after drilling
through salt. Another challenge is the temperature change of the oil as it travels
up to the surface. Not to mention the logistic strain of all operation talking place
at about 300 km from the nearest port.
4 The actors in the sector
4.1 Institutions in Brazilian Oil & Gas sector ANP (National regulatory agency)
The ANP (Agência Nacional de Petróleo, Gás e Biocombustíveis) is the
National Regulatory Agency of Oil, Gas and Biofuels. The agency was founded
in 1998 according to law n0
2.455 of January 14th
of 1998. ANP acts as the
regulatory institution for all activities related to oil, gas and biofuels in Brazil.
ANP promotes bidding rounds and administrate contracts representing the union
of concessionaries in E&P activities.
IBP (Brazilian Petroleum Institute)
IBP (Instituto Brasileiro de petróleo, Gás e Biocombustíveis) is a private
organization counting approximately 230 associated companies. The focus of
IBP is to develop the national sector of oil and gas by increasing
competitiveness, sustainability, ethics and social responsibility.
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ONIP (National Organisation of the Petroleum Industry)
ONIP (Organização Nacional da Indústria do Petróleo) is a national
organization acting as intermediary for the cooperation between upstream,
midstream and downstream companies, as well as suppliers and government
institutions within the oil sector in order to enhance competitiveness within the
sector. ONIP created the CADFOR in a partnership with the biggest oil
companies operating in Brazil.
ABPIP (National Association of Independent Producers of Oil and Gas)
ABPIP (Associação Brasileira de Produtores Independentes de Petróleo e Gás)
Is a national association with the main purpose to promote, defend and stimulate
the development of E&P activity of oil and gas in Brazilian basins.
ABPIP as an association represents and defends the consolidation of the
independent producer segment by working to eliminate obstacles as well as
incentivising policies for smaller and medium sized companies. MME (Ministry of Energy & Mining)
MME (Ministério das Minas e Energia) as a ministry regulates the oil and gas
market in Brazil as part of the broader energy market.
CADFOR (Suppliers Registration System)
CADFOR (Cadastro de Fornecedores) is a system created by ONIP in
collaboration and with the major oil companies operating in Brazil. The purpose
of CADFOR is to obtain qualified information about suppliers of goods and
services throughout the oil industry. To become part of the CADFOR supplier’s
list, a company must be qualified in agreement with the ONIP oil and gas
requirements.
4.2 Market Actors
Petrobras
Petrobras is today present in 27 countries, being the 7th largest publicly held oil
company in the world. Though the company has 208.962 shareholders the
Brazilian government still holds the dominant vote.
In early 2008, Petrobras was acknowledged by a Management & Excellence
(M&E) survey as the world’s most sustainable oil company. Ranked first,
scoring 92.25%, the company is a global authority on ethics and sustainability
based on 387 international indicators, of which the most important were; less
pollution, reduction in emissions, less oil leaks, less power consumption, and a
transparent vendor service system.
In 2008 Petrobras published net earnings of R$ 215 billion, and net income of
R$ 33,96 billion (increase of 58% from 2007) and an EBITDA of R$ 57,21
billion (14% above 2007) .
The Petrobras fleet consist of 109 drilling rigs, 112 production platforms and a
tanker fleet of 189 vessels.
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In addition to its holding activities, the Petrobras System includes subsidiaries -
independent companies with their own executive boards and independent
business areas, linked to the main Petrobras head office. These companies are:
Petrobras Distribuidora S.A.
Petrobras Energía Participaciones S.A.
Petrobras Química S/A (PetroQuisa)
Petrobras Gás S/A – (GasPetro)
Petrobras Transporte S/A – (TransPetro)
Downstream Participações S.A
Petrobras International Finance Company
Downstream Participações S.A
International companies operating in Brazil
By the end of 2008, 71 companies were operating within the oil and gas sector
in Brazil. Though none of these companies comes near to the dominant position
of Petrobras, their importance is growing as the Brazilian oil and gas sector is
becoming increasingly international in scope.
In continuum follows a listing of companies currently active in the upstream
sector. The companies have been arranged in accordance with their respective
level of participation.
Companies currently producing oil:
Repsol YPF, Shell, Devon Energy, SK Brasil, Unopaso, Coplex, Manati,
Brasoil, Coral, BS-3, Petrosynergy, W. Washington, Norse, UP Petroleo,
Brazalta, Severo villares, Rio das Contas, Brasoil Manati, Reconcavo, Orteng,
Starfish, TDC and Delp Eng.
Companies holding concessions in development oil fields:
Petrosynergy, El Paso Oleo e Gas, Shell, Norse, Esso Campos, Potioleo,
Chevron Brasil, UniPaso, Chevron Overseas, Anadarko, Norsk Hydro, Total
E&P do Brasil, Frade Japão and Devon Energy.
Companies holding concessions in drilling blocks:
Petrosynergy, Petrogal, Phoenix, Repsol YPF, W.Washington, Shell, BrazAlta
Brasil, Quantra, Aurizônia, Starfish, Devon Energy, Silver Marlin, Statoil, BG,
Koch, El Paso, Q. Galvão, Partex, Nord Oil, Oil M&S, Eni Oil, Anadarko,
Mercury, Encana, Vitoria, Potioleo, Brasoil Manati, Newfield, Amerada Hess,
Cisco Oil and Gas, Woodside, Norse, Maersk Brasil, Total Fina Elf, Codemig,
SK Brasil, Esso, Orteng, Delp and Logos.
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5 The actual market size
5.1 Sector development in terms of production
From the first deep-water reservoirs being proven in 1984 the Brazilian oil
reserves has steadily climbed through the following 25 years till the 14,09
billion boe of today. The various finds have by and large been in waters deeper
than 300 m, following an intensification of the exploration in these waters. The
tendency continues as more than half the exploration in 2008 took place in
waters deeper than 300 m. Of the proven reserves in 2008 the deep- and Ultra-
deep water reserves totalled 71 % of the proven reserves or approximately 10
billion boe.
In 2008 domestic oil and gas production reached 2,176 million boe/d, up from
2.066 boe/d the year before. With the sector largely being dominated by
offshore extraction only 15 % came from onshore production, meanwhile deep-
and ultra-deep water production totalled 72 %, equivalent to approximately 1,5
million boe/d. Considering the entire production, domestic as well as foreign,
Petrobras has increased its output with an yearly average of 5,6 % since 2001.
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5.2 Projected production rates
Due to the development in the pre-salt fields Petrobras expects the growth in
production to be dramatic in the years to come. This expectation coincides with
the companies increased know how in deep- and ultra-deep water production,
cutting down timeframes for development of the fields. While it has earlier taken considerable time for Petrobras to develop their fields
and accelerate production into full speed, this is expected to be relatively quick
in the future.
The company expects production at pre-salt fields to hit the magic mark of 1
million boe/d after just twelve years. This is less than half the time it took the
company to reach the same level in the Garoupa fields in the Campos Basin and
ten years sooner than the same output was generated from other giant fields also
in the Campos basin. Petrobras’ substantial know how in oil production and especially its leading
position in deep and ultra-deep oil extraction has also been well reflected in the
company’s relatively low lifting costs, which through recent years have been
considerably less than average industrial lifting costs.
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6 The future of the market
6.1 The pre-salt discoveries Following the Santos Basin pre-salt Tupi field discovery Petrobras stepped up
its exploration activities, which led to a string of large finds in the area, among
which the Sugar Loaf field is estimated to hold up to 33 billion boe and the
Jupiter natural gas field estimated to match Tupi field in size. Other discoveries
in the area include Parati, Bem te-vi, Carioca, Iara, Tupi Sul and Iati.
The Tupi field, where test production facilities were inaugurated in May 2009,
has a sea depth of about 2.200 m and salt layers with a thickness till 2.000 m.
With predominantly medium to light oil and gas, the first well tests indicates
22
potential flow rates of 15-20.000 bopd per well, with oil API being 28-30º,
viscosity at approx. 1 cP, GOR between 140 and 220 m³/ m³ and with an initial
pressure of 580 kgf/cm². Till present day there has been no confirmation of the total oil content of the
pre-salt area, but estimates range between 30 billion boe and 100 billion boe.
6.2 Petrobras Investment plan 2009-2013
The investment plan, including investments in the pre-salt fields of the Santos
basin, estimate total investments of US$ 174.4 billion in the five year period
from 2009-2013. This represents an annual average of US$ 34.9 billion, 90%
(US$ 157.3 billion) of which are planned in Brazil and 10% (US$ 16.8 billion)
abroad. In other words, the Brazilian oil and gas sector are expecting daily
investments worth US$ 100 million from 2009 and till the end of 2013.
In comparison with the investment plan 2008-12, the most significant increase
has been in Exploration and Production (E&P) which increased to US$ 104.6
billion from US$ 65.1 billion, or 59% of the US$ 174.4 billion for the 2009-13
period.
The Downstream segment (RTC), with a 25% share of the planned investments,
has seen increases to US$ 43.4 billion. Furthermore, there has been a 139%
increase in investments within Gas and Energy, albeit representing only 7% of
the total investment plan.
Of the total US$ 47.9 billion in the investment plan allocated to new projects,
E&P accounts for 76.4% (US$ 36.6 billion). Petrobras is hence dedicating
23
significant efforts in the evaluation, development and production of discoveries
in the pre-salt layer of the Santos and Espírito Santos basins. Of the new
projects in the E&P segment, about US$ 28 billion relate to pre-salt
development.
In January 2009, oil barrel prices dropped to US$ 36, down 75 % from only the
year before. The global economic crisis, low oil prices and a hostile financial
market prompted speculations to whether Petrobras would be able to fund its
ambitious investment plan in the short term.
The Brazilian economy has since then showed signs of recuperation and barrel
prices are of June 2009 up above USD 60 p/b. In May 2009 President Lula da
Silva and Petrobras CEO Gabrielli secured Petrobras a US$ 10 billion loan from
the Chinese Development Bank, thereby securing the company’s 2009
investments.
The investment plan’s revision has incorporated the new economic environment
and its effects on oil price fluctuations, short-term revenue variation and funding
needs for 2009 and 2010. Expecting high oil prices over the long term, the
investment plan for 2009-2013 period is expected over time to be largely self
funding.
In the long term, global supply of oil is expected to be lower than demand due
to depletion of existing production fields. Petrobras uses the average Brent price
assumption of US$ 42 per barrel for its analysis of financial feasibility, leverage
targets, and rates of return.
Though oil prices are still fluctuating and the economic crisis has not yet passed,
it appears that investments at are going according to the plan and Petrobras has
confirmed that they have sufficient funding for completing all planned
investments until 2013.
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Gas Supply and Demand
Natural gas consumption grew rapidly in 2001-2008, reaching 25.2bcm in 2008.
Brazil may have sufficient gas resources to meet higher consumption, but is
committed to imports, particularly from impoverished neighbour Bolivia. These
look set to fall from 11.3bcm in 2008 to 6.2bcm in 2013 if supply growth targets
are met.
Petrobras’ investment in the gas and energy segment in its 2009-2013 business
plan is a 70% increase on the US$6.2billion outlined in the 2008-2012 plan. Of
the total scheduled for investment between 2009 and 2013, US$5.2 billion will
be in new projects, while US$5.4 billion will be invested in projects already in
progress. Of the investments laid out in the 2009-2013 plan, US$8.2 billion will
be allocated to completing the Southern and North-eastern network expansion
construction work and to building new LNG import terminals, while US$2.4
billion will be invested in building thermoelectric plants and small hydroelectric
plants and in participation in new electrical energy businesses, including wind
farms.
In January 2006, Petrobras said it would lead a US$18 billion effort, seeking to
increase power generation and cut dependence on foreign natural gas. By 2011,
Petrobras expect to produce 11bcm per annum of gas from the Santos Basin, as
much as 16bcm per annum from its Merluza, Mexilhão and BS-500 fields and
another 1.1bcm from fields it is developing in the district’s southern and central
reaches. BS-500 alone is expected by Petrobras to produce as much as 7.3bcm
per annum early in the next decade.
Brazil’s gas pipeline network grew from a total of 5,451km in 2003, to 6,933km
in 2008. By 2010, it is planned to reach 9,228km.
6.3 Expected growth until 2020
While it has not been possible to obtain extensive information from third party
market actors in respect to their short term projected growth rates, Petrobras has
released extensive material about its own expectations. The lack of third party
information might possibly be blamed on the current market insecurity.
IEA has recently released a study indicating that the major companies in the
global oil and gas sector are postponing or cancelling projects due to the world
crisis. It is expected that the global investments in 2009 will drop by 20 % from
2008. It is important to emphasize that the investment expectations for Brazil
are quite different than the world average.
With offset in investments of USD 174.4 billion by 2013 and the prevision of
accessible reservoirs in the pre-salt area, Petrobras expects an average
production growth of 7.5 % until 2020.
25
The expected Brazilian Oil & Gas output for 2009 is 2.51 million boe/d up from
2.18 million I 2008. With an expected 7.5 % annual increase in production,
Petrobras will produce an average 5.18 million boe/d by 2020. This is more than
half the output of Saudi Arabia, making Petrobras one of the largest oil
companies in the world. It should be noticed that these projections are based on
already proven reserves and do not include potential new finds. Extraction from
the pre-salt fields is expected to increase exponentially from 0.2 million boe/d in
2013 to 1.8 million boe/d in 2020.
Petrobras expects to reach this level of production output by acquiring an
impressive 63 new platforms by 2017.
The great majority of these (54) will be FPSO’s (Floating, Production, Storage
and Offloading) platforms commonly used in ultra-deep waters. Besides the
already known FPSO platforms, Petrobras plans to introduce the pioneering
Round-hull FPSO-type platforms.
Though it has not been possible to get specific numbers from third party
companies on their expectations for their Brazilian operations, it is possible to
project allocations in the sector based on the division of oil field concessions.
Petrobras will be the dominant market player for years to come, but the
quantitative data shows that the almost monopolist position is about to change.
By looking at the quantitative share held by each company in production,
development and exploration in the Brazilian oil fields, we can get an idea of
the sectors development over time.
26
In 2008 Petrobras produced 96.7 % of the oil extracted in Brazil. By looking at
the oil fields currently under development, it appears that the monopolist
position will likely lessen. By quantitative numbers, Petrobras holds 77.9 % of
oil fields currently under development – these being the fields that will start
producing in the near future. In the latest bidding rounds Petrobras’ quantitative
share of new exploration blocks has fallen to 47.7 % and a range of new
companies have been introduced in the sector.
Even though no other company holds a quantitative share of blocks even close
to that of Petrobras, it should not be ignored, that the situation with Petrobras
being the one and only actor in the Brazilian oil and gas sector is changing.
International companies play an increasingly important role for contractors and
sub-contractors in the Brazilian oil and gas sector.
6.4 Calculation based on the formula: R/P = Y (R/P ratio) – (R – Resources, P – Production, Y – Years)
With the present production and proven reserves 14.09 billion boe and average
daily production 2.176 million boe/d Brazil can keep producing at this level for
18 more years.
With an estimated 60 billion boe in the pre-salt layer and a potential production
rate up to 5.729 million boe/d production could keep on till approx. 2050.
These numbers only takes into account the Petrobras production, as the
international companies have not disclosed their production.
27
7 Market demands
7.1 Technological challenges The pre-salt and the FPSO platform
Approximately 72% (approx. 1.5 million boe/d) of all E&P activities within the
Brazilian oil and gas sector are located in deep or ultra-deep waters, leaving
28% of activities to shallow water and onshore E&P.
This provides a different set of opportunities for Danish offshore companies
than what they are accustomed to in the shallow waters of the North Sea.
Due to the extreme depths of the ultra-deep oil fields (> 1.000m) combined with
the distance of the fields from the coast, shallow water platforms are not viable
in this environment. Instead, the main exploration platform used in the Brazilian
deep and ultra-deep oil fields is the FPSO (Floating, Production, Storage and
Offloading). A full floating platform can also be used, but the FPSO are more
flexible, and therefore the preferred platform.
An FPSO is usually a converted old tanker, used to preliminary store and load
oil and gas, and pre-processing oil and gas by separating water. A single unit
FPSO costs approximately US$ 0,7-1,5 billion.
Petrobras is the biggest FPSO operator worldwide, and currently has three new
FPSO's under construction. Several international oil companies such as
Chevron, SBM, Prosafe, Maersk and StatoilHydro are also currently
constructing FPSO's.
The construction of huge vessels like the FPSO often occurs at different
locations. The construction of the hull, building of topside or platform modules
as well as the assembly can happen at different shipyards.
Brazilian shipyards are operating at full capacity, and are by international
operators often criticised for not being sufficiently efficient. The most important
Brazilian offshore shipyards are Keppel Fels, Mauá, Atlântico Sul, Ultratec and
Jurong McLaren.
There are approximately 21 FPSO's operating in Brazil, some under Brazilian
flag, but most under international flag. The question of flag is particularly
important as international vessels operating in Brazilian waters have to be re-
contracted on a yearly basis. If a Brazilian flag carrying vessel with similar
capabilities as an international vessel are available, the contractor are forced to
contract the Brazilian flag carrying vessel, disregarding costs.
Petrobras announced in September 2009, the strategy to hire 28 new drilling rigs
to be built in Brazil, with increasing national content, and to be used for ultra-
deep water exploration, including the fields located in the pre-salt layer. The
rigs are planned to be delivered between 2013 and 2018.
The volume of orders will not only make feasible the expansion and upgrading
of existing shipyards, as well as the creation of new, modern shipyards in Brazil.
It is expected that the investment in new and existing yards will lead to the
28
implementation of a new Brazilian naval industry that can compete with the best
international shipyards in the offshore industry segment.
To make it feasible to execute this huge project, which will certainly drive the
Brazilian economic development and may generate upwards of 40,000 new
direct and indirect jobs after all orders have been placed, the Federal
Government will allocate, via the Guarantee Fund for Naval Construction, R$ 4
billion (US$ 2.2 billion) exclusively to support the construction of these 28
drilling rigs.
Potential for Danish companies
For Danish offshore companies the Brazilian Oil & Gas sector offers large
opportunities within broad areas like:
Oil & Gas, prospect and production
Drilling technology
Oil platforms and drilling components
Ships for service and supply
Oil & Gas transport
Regarding technological challenges within the national oil industry the main
studies are done by Petrobas in a Partnership with PROMINP (Programa de
Mobilização da Indústria Nacional de Petróleo e Gas - National Program for the
mobilization of the national Industry of Oil and Gas). Based on these studies,
please see appendix 1 for a full lists of products and services critical for the
Brazilian Oil & Gas industry according to PROMINP.
The CADFOR (Cadastro de Fornecedores) supplier registry made a list of the
most critically demanded products and services for the Brazilian oil & gas
sector according to their requirements (please see appendix 2 for further
information).
The Danish Consulate General in São Paulo estimate the best possibilities for
Danish offshore companies are to be found within the following up- and
downstream sectors:
Upstream (processes and equipment related to Exploration & Production):
- Exploration: testing equipment and test drilling equipment
- Development: instalment of exploration equipment
- Maintenance: operation of concession, maintenance of equipment
- Service for the fields: catering, communication
Downstream (service and equipment related to the processing of oil):
- Transport
- Refinery, oil/gas and petrochemistry
- Maintenance/monitoring equipment
29
Please see to appendix 3 for an in depth list of potential areas of interest within
the Brazilian up- and downstream sectors according to the Danish Consulate
General.
8 Entering the sector
8.1 Political consideration
Petrobras market dominance
Although the Oil Law of 1997 approved a discontinuation of the public
monopoly in oil, new entrants to the sector did not arrive until years later. The
National Petroleum Agency (ANP), the industry regulator, decided to auction
drilling rights to ensure more access for new entrants to compete with Petrobras.
Tax and price regulations and internal transfers between the Treasury and
Petrobras ended in January 2002. This removed the Petrobras monopoly on the
external trade of oil, domestic oil refining and the wholesale market for oil
derivatives. But because of the oil industry's long maturation cycle, there is still
little competition in production or refining of oil in the country.
Brazil needs more private investment in natural gas but lacks legislation to
regulate activities in the sector. Petrobras now has a monopoly on natural gas
production and controls some 90% of natural gas imports. It also controls the
transport of domestically produced natural gas and 46% of Brazil's pipeline
capacity through Transpetro, its subsidiary. Petrobras has an equity stake in 20
of the country's 27 natural gas distributors; equity stakes are between 24%-
100%.
8.2 Possible new governmental structure/institution managing the pre-salt exploration
Petrosal - A new regulatory oil company
Following the Tupi field discovery in 2007 and the great pre-salt reserve
estimates, the Brazilian government has been discussing the need to review the
rules of the oil concession model, stating that changes are necessary to better
distribute the oil proceeds to a wider part of the Brazilian population.
The Brazilian President Luiz Inácio Lula da Silva announced on August 31st
2009, a new regulative, which if passed in congress, will lay the foundation for
future management of the country’s pre-salt oil reserves, as well as other
strategic oil reserves.
Under the current model for oil concession management, a field operator enjoys
ownership of any oil found, in return for paying royalties to the local state
government.
30
The new concession model - the so called partnership model - essentially state
that future oil founds belong to the federal state. Field owners will instead
receive a percentage of the found oil, or a payment for it, and the percentage
will be set by the state when entering the concession partnership contract.
The new regulative has been proposed through four law proposals which was
sent to congress as an urgency matter. The urgency matter gives the congress 90
days to vote on the issue, a matter deemed necessary for the government to have
the issue of the pre-salt area clarified as fast as possible. The urgency label has
later been removed after pressure from the opposition parties and four
government parties, demanding a thorough and detailed discussion of the law
proposals with special focus on the question of royalties.
Central to the new regulative is the foundation of a new state owned oil
company, Petrosal, which will focus on the management of the pre-salt area.
Petrosal will furthermore have authorization to veto decisions made by private
oil companies operating in the pre-salt area. Also, a new state fund will be
created to manage the profit from oil activities focusing on financing programs
aimed at poverty reduction, educational promotion programs and for the
promotion of technological development.
Under the partnerships model the state controlled oil company, Petrobras, will
be the operator on all Brazilian pre-salt oil fields. Petrobras can choose to
collaborate with international oil companies, but will be guaranteed a minimum
of 30% control in all consortiums, and will in some cases be given the exclusive
right to certain pre-salt fields. International companies will in general have the
opportunity to bid for participation in the pre-salt fields, and the winner will be
the companies offering to pay the largest percentage of their profit of the oil
exploration to the government.
Since 1997 Brazil has successfully completed 10 concession bidding rounds,
with the 11th round planned to take place during 2009 or 2010.
The insecurity regarding the importance of the pre-salt area has meant that no
off shore fields were included in the latest auction round of December 2008.
The new rules are expected to be finally determined and approved by the
Brazilian government during the first half of 2010, and the 11th
concession
round is expected to happen in late 2011.
8.3 Barriers to entry
Language
Language is often the first encountered serious barrier to entry when dealing
with the Brazilian market. English is not as widely spoken as it is in northern
Europe, and it is advised to either speak Portuguese or to team up with someone
who does when doing business in Brazil.
31
A business contract is often only made after several meetings of discussing
details. Furthermore, it is important for Brazilians when interacting to get a feel
for the person they are in business with. A language barrier in these situations
will be a serious handicap.
Cultural
The importance of network cannot be over-estimated in Brazilian business
settings. There are certain ways of conduct different to the Danish way of doing
business. The personal relationship is of high importance in Brazil, and efforts
and resources are spent to maintain relationships and networks.
Legal
All products imported into Brazil have to be qualified and registered by the
Ministry of Employment. Several technological qualifications exist to protect
Brazilian products from foreign products.
The Brazilian tax system is infamous for its lack of transparency and its
complicated rules working on both the municipal, state and federal level.
Brazil is experiencing a national protectionism within the oil & gas sector, as
witnessed by the extensive power of the new governmental Petrosal and the
widened authority of state controlled Petrobras.
It is the official policy of Petrobras to work with Brazilian suppliers and sub-
suppliers where possible.
The Brazilian development bank, BNDES, demand that to qualify for project
finance at least 60% of the projects parts measured by financial worth should be
offered as local content.
It is the advice of the Consulate General in São Paulo that a consideration of
local company presence or at least a local partner should be essential to any
Danish company interested in the Brazilian offshore industry.
PROMINP - Challenges for equipment suppliers
According to PROMINP (Programa de Mobilização da Indústria Nacional de
Petróleo e Gas - National Program for the mobilization of the national Industry
of Oil and Gas) the main challenges for international equipment suppliers are:
Lack of a trained work force to handle the equipment.
Technical Requirements by Petrobras might be incompatible with
international marked requirements.
Bottlenecks regarding to importation and delay of customs liberation.
Contractual conditions might be extremely unilateral and out of
international practises.
Small negotiation spreads and price pressure by the operator.
The Danish Consulate General has conducted two short interviews with the
Danish companies Rocktec and Aalborg Industries - companies with a vast
32
experience in the Brazilian offshore industry. The interviews focus on barriers
to entry, and can be found in appendix 4 and appendix 5 respectively.
9 The regulatory framework
9.1 Special import/taxations regimes pertinent to the sector
The Brazilian Tax System is very complex and it is not consolidated into a
single tax code, thereby making it difficult for foreign companies to navigate
between the many different rule sets. Depending on the specific import product,
the import transaction can be subjected to several different taxes.
Import duty (Imposto de Importação - II) - is levied on imported goods based
on the customs value of the goods. Customs value is calculated on the product
price, insurance and freight costs (CIF) plus additional costs specified by the
customs valuation rules. The customs duty rate, vary in accordance with the
Common External Tariff for non-Mercorsur members. In this system each
specific product has a specific External Tariff Code (TEC), which determines
the specific import duty rate. Import duty is a non-recoverable tax, thus, a cost
for the importer.
Federal VAT (Imposto sobre Produtos Industrializados or IPI) - is levied
through the first sale of imported goods on first sale of goods and on
transactions involving manufactured goods. The Federal VAT rate varies
depending on the traded product and ranges from 0% to 365%. IPI generally
becomes a tax credit to offset IPI charged on subsequent transactions. The IPI is
calculated on the CIF value and the added Import Duty.
State VAT (Imposto sobre operações relativas à circulação de mercadorias e
sobre prestações de serviços de transporte interestadual e intermunicipal e de
comunicações or ICMS) - is levied on the import of goods and on the movement
of imported and manufactured goods, even if goods are transferred between
branches of the same legal entity. ICMS paid on imports as well as on local
acquisitions generally becomes a tax credit to offset ICMS due on subsequent
transactions.
ICMS tax rates vary according to the state where the company and the acquirer
of the goods or services are located. Imports are generally subject to a 17% or
18% rate, while local transactions are subject to rates varying from 7% to 18%.
The ICMS is charged on the CIF value of the goods plus import duty, IPI, ICMS
itself and PIS-Import and COFINS-Import (federal social contributions), plus
other customs charges.
PIS-Import and COFINS-Import are levied on the importation of goods and
services. Generally they are charged at a combined rate of 9.25%. The tax basis
for PIS-Import and COFINS-Import on imported products is the customs value
33
plus ICMS and PIS and COFINS itself, which leads to an effective tax rate of
around 13.45%.
The Municipal tax on services (Imposto sobre serviços de qualquer natureza -
ISS) is charged on certain services included in a Federal list of taxable services.
Rates vary from 2% to 5%. Imported services are also subject to ISS taxation.
REPETRO, Tax Incentives for the Oil and Gas Sector (Regime Aduaneiro
Especial de Exportação e Importação de Bens Destinados às Atividades de
Pesquisa e de Lavra das Jazidas de Petróleo e de Gás Natural) - is a Brazilian
special customs regime applicable to the importation and exportation of goods.
This special regime is designed to prompt growth of the oil and gas industry in
Brazil. The REPETRO is applicable to a determined set of products used in the
production and extraction of oil and gas.
REPETRO allows for the exportation of goods without the physical exit of
Brazilian territory with subsequent importation into Brazil through the
temporary admission regime, which results in a decrease of the tax burden in
comparison to an ordinary importation. REPETRO also allow the importation of
raw material to be used in the industrialization process with import duty, PIS,
COFINS and IPI suspension through the use of the "drawback suspension"
special customs regime. REPETRO grants import duty, PIS, COFINS and IPI
suspension upon importation of finished goods under the temporary admission
regime.
Regarding Danish companies it is important to note that the REPETRO is not
applicable to the importation of goods originated from abroad under a leasing
agreement with a foreign entity.
9.2 Other legislation
Concession clauses
In each concession round, the ANP secure the nations interest in a number of
clauses, some of which can have a direct effect on foreign suppliers. Two issues
of particular interest are:
1) The concession contracts specifications regarding Global/Local Content, and
2) The environmental standards required of the operations.
The concession contracts have a Global/Local Content requirement according to
the specifications entailed in the concessions bidding rounds. In the latest
bidding rounds held by ANP the Global/Local Content percentage was 40/60.
This division might alter from bidding round to bidding round, and in the light
of governmental plans to increase the role of the oil and gas sector to vitalize the
broader Brazilian economy, it is not expected that the local content requirement
will diminish.
34
The content requirement means that every company bidding in the oil
concessions are obliged to give detailed specifications for every part of their
prospect, in order to ensure, that the concession winner use at least a minimum
of 60% of national content. It is expected that the concession bidder has made
prior investigation into the national supply market, just as any national supplier
shall receive information regarding sub-contracts put into auction. The national
content requirement can only be set aside in cases where this is a significant
disadvantage in choosing the national supplier. ―Significant‖ does not cover
price difference, delivery time, quality etc.
Since the local content requirement applies to every little part of a given
concession prospect, and the given amount of local content in a specific project
part is highly debatable (parameters being, price, size, weight, manual labour
etc.), it is virtually impossible to give an accurate description in terms of actual
national content. Many companies, acting within the framework of ANP,
therefore prefers to provide estimates respecting the bidding terms, and then
afterwards pay any eventual fine in case that the actual Global/Local Content is
lower than required.
A foreign company should be aware that the concession terms restrain
concession holder’s use of foreign suppliers, and even though this is not always
strictly upheld, it brings a negative bias toward non-national suppliers.
In the concession contracts environmental clause, it is established that the
bidders operations shall comply with Brazilian environmental law as well as
best practices within the oil and gas sector. While it is not within the scope of
this report to make a detailed analysis of the legal framework, it should be noted
that Brazil since the 1980’s has approved a series of laws to protect the general
environment. In 1998, following the disclosure of the sector in 1997 and before
the first concession auctions in 1999, Brazil approved one of the worlds strictest
environmental laws, which established severe sanctions for causing damages to
the environment. Further specification can be found in the various CONAMA
(Conselho Nacional do Meioambiente - National Enviromantal Council)
resolutions.
The Brazilian focus on environmental issues is also illustrated through the
operations of Petrobras. As early as 1990 Petrobras implemented the Air
Emissions Management System (SIGEA), which monitors all the company's
operations, mapping greenhouse gas emissions.
From 1992 to 2004, Petrobras avoided emissions of approximately 5,2 million
tonnes of CO2 equivalent and 17,000 tonnes of NOX, 1,600 tonnes of
Particulate Material and 19,600 tonnes of SO2. If only the year 2004 is
considered, the Program saved the company 945 thousand barrels of oil
equivalent and, consequently, avoided the emission of approximately 367
thousand tonnes of CO2.
35
9.3 Export methods Market Approach
Trade Fairs in Brazil are of high importance in business contexts. The fairs are a
great way to demonstrate products, and to engage in networking within the
sector. Trade fairs are highly successful in Brazil, and the country's Oil & Gas
trade fairs are among the biggest of their kind worldwide.
The Danish Consulate General highly recommend Danish companies with an
interest in the Brazilian offshore industry to participate in the Rio Oil & Gas fair
and the Brasil Offshore fair - the two largest and most important fairs within the
sector. The Rio Oil & Gas fair is held in even years, usually in September. The
Brasil Offshore Fair is held in uneven years, often during June.
As mentioned in the cultural section, networking and personal connections are
essential when doing business in Brazil. Many companies within the sector see
trade fairs as the main stepping stone to build a network and a chance to follow
up on leads and connections made.
Acquisition of an existing firm Brazilian law allow mergers, acquisitions and reorganizations with no special
restrictions applying to foreign companies. Brazil's strong economy, surging
commodities prices, and not least recent discoveries of huge offshore oil
reserves have spurred foreign investment in Brazil, making the country a
preferred investment location. As a result, M&As have surged in Brazil since
2006, while dropping in the rest of the world.
Establishing a local company
Foreign firms may engage in business in Brazil by acquiring an existing
company or by forming a local subsidiary. Many foreign firms which choose the
latter route prefer to establish a limited liability company, the so called limitada.
This form is easy to set up, has fewer formalities and less public disclosure
requirements than the alternative option - one of several types of sociedade
anonima (SA) comparable to a British ―Public Limited Company - PLC‖ or
Danish ―Aktieselskab A/S‖.
Establishing a branch A firm may organise a branch in Brazil. However, unless there is a substantial
tax advantage in the investor's home country, the disadvantages of this form
would probably outweigh the advantages. For example, there is more red tape to
establish a branch, which takes about six months, and the establishment costs
are just as great as for other business forms. Branch profits, whether remitted to
a parent company or not, have been exempt from withholding tax since 1996.
Incubator and the Danish Consulate General Danish companies wishing a presence in Brazil, but not yet sure if they are
ready for a full scale entry into the market in form of a company set-up, can
with advantage make use of the incubator service of the Danish Consulate
General in São Paulo.
36
9.4 How to establish a company in Brazil
Foreign investors wishing to establish themselves in Brazil can do this by either
setting up their own company, or by buying shares in an existing company.
The two main company structures existing in Brazil are "Sociedade Limitada"
and "Sociedade Anónima". Roughly speaking, and without otherwise making
any comparison with Danish law, these companies correspond to a Limited
Liability Company (Danish anpartsselskab) and a Public Limited Company
(Danish aktieselskab), respectively.
Sociedade Empresária Limitada This type of company, commonly referred to simply as ―Limitada‖, is relatively
simple to set up and only requires a modest set of operational rules for the
company. It is therefore the most widely used form of establishment for Danish
small & medium-sized enterprises establishing themselves in Brazil.
A Limitada, as the name indicates, is a limited liability company. Shareholders
are only liable for the capital invested in the company, and directors do not
incur personal liability in connection with company obligations, unless the
company statutes or the law is violated.
A Limitada consists of two or more shareholders, either natural or legal persons,
which together, in agreed circumstances, are the owners of the company.
Foreign shareholders, not residing in Brazil, must be represented by an agent in
Brazil, with the power, inter alia, to receive summons on behalf of the
shareholders.
The company name must include the word "Limitada", or an abbreviation
"Ltda.", as well as refer to the company's main activity.
The procedural setting of a Limitada starts with the preparation of the
company’s statutes. The statutes must subsequently be filed with the regional
authorities (Conselho Regional) and registered with the relevant authorities;
including the tax authorities (Secretaria da receitas Federal do Brasil).
In principle there is no minimum capital requirement, nor any regulatory
approval to be obtained from the authorities, before the creation of a limitada. If,
however, one or more of the directors are not Brazilian nationals, the company
is required to have a starting capital equivalent to a minimum amount of app.
DKK 200.000,- per foreign director, or DKK 50.000,- plus a commitment to
create 10 jobs within the company.
The Limitada model makes it relatively easy to set up a company which on the
one hand reduce the personal liability, while on the other hand, does not bind
too many resources in the establishment and operation of the company. The
model also provides shareholders with relative freedom to allocate rights and
duties between themselves when drafting the statutes.
(Legal rules governing a Sociedad Limitada is available in the Brazilian Civil
Code: Codigo Civil, Livro II, Titulo II Subtitulos II capitulo IV).
37
Sociedade Anônima
A Sociedade Anónima is a limited company which must consist of at least two
shareholders. Shareholders may be natural as well as legal persons and there is
no requirement that they must be residents of Brazil.
The Company name must include the words "Sociedade Anónima", or
"Companhia" or the initials "SA" or "CIA.". Regarding the operation of a
Sociedade Anónima, it is a minimum requirement to appoint two directors
(Diretores), a Budget Committee (Conselho Fiscal) and a board of directors
(Conselho de Administração) for publicly listed companies. There can
furthermore be appointed a non-listed board in a Sociedade Anónima. Only
shareholders can be appointed to the board, but there is no requirement for
Brazilian citizenship or residency in Brazil.
In a company with a board, it is the responsibility of the board to appoint the
company directors. It is not required that company directors are shareholders of
the company or Brazilian nationals, but directors must, however, reside in
Brazil.
If the company has not appointed a board of directors, the directors will be
elected by the shareholders at the annual general assembly. The Budget
Committee shall consist of between three and five appointed members, all of
which must be residents of Brazil. The Committee acts only on the
recommendation of the stakeholders.
If nothing else is defined in the statutes, then Company Law (Lei n º 9457, DE 5
de Maio de 1997) establishes that decisions are to be made by simple majority.
This in effect means that a decision is valid if it is supported by more than 50%
of the voting shares at a general assembly.
There can in relation to the creation, and subsequent General Assembly
resolution, be issued shares in different classes. B-shares, which generally do
not obtain voting rights, cannot exceed half of the company shares. Furthemore,
for Sociedade Anónima’s which are not publicly quoted, B-shares have certain
offsetting properties, such as priority in connection with a distribution of
company profits.
Voting rights, distribution, restrictions on resale, and so forth can be freely
adjusted by agreement between shareholders. The Companies Act does however
contain a number of measures to protect minority shareholders, for example
from the distortion of company funds by shareholder majority.
In a Sociedade Anónima shareholders are liable only for the capital which has
been invested in the company through the purchase of shares.
A Sociedade Anónima is an ideal design structure for large companies wanting
the closer regulation of company operations, as follow from the more
comprehensive Companies Act, as well as the security a public company
generally inspires. Furthermore, it is only with this construction that the
38
company has the opportunity to open itself to the public, and thereby achieve
further self-financing.
Additional information regarding the establishment of a company in Brazil,
including referral to competent legal assistance, can be obtained from the
Danish Consulate General in São Paulo.
9.5 Petrobras Vendors list
The Petrobras Vendors List is a registry of companies divided in accordance to
their specific equipment, materials or services. Petrobras includes a Vendors
List with every contract regarding engineering, procurement and construction,
thereby pre-selecting qualified sub-contractors for third-party companies who
have won contracts from Petrobras. Each project of a certain size outsourced by
Petrobras will thus have a selected list of companies, from where the hired
company can choose its suppliers.
Petrobras keeps a Master Vendors List where all associated suppliers are
registered. The Master Vendors List is a reference database from which the
Vendors Lists companies are selected. To be registered in the Master Vendors
List it is a prerequisite that the company has obtained a Certificate of
Registration and Record Classification (CRCC, Certificado de Registro e
Classificação Cadastral). To obtain a CRCC the requesting company must go
through a complete assessment focusing on following five criteria: Technical,
Economical, Legal, SMS (Health, Environmental & Security) and Management
& Social Responsibility.
The CRCC system is divided between national and international suppliers. The
CRCC certificate obtained by foreign companies gives the holder access to the
international bidding rounds. If the foreign supplier wants to participate in the
national bidding rounds, he has to appoint a Brazilian re-seller.
A CRCC certificate expires after 12 months. The registered company can begin
a renewal process 30 days before expiration.
9.6 Requirements to become a regular supplier Becoming a regular supplier - CRCC
It is not within the limit of this report to give an in depth description of the
requirements to obtain a CRCC, but following is a brief description of the
emphasis given under each criteria.
The Technical Criteria – assess the technical capacity of the company’s
enterprise in terms of necessary resources/materials and supplied services,
thereby evaluating proper performance in regard to production of goods and
delivering of services.
39
There are differentiated requirements for suppliers of services and for
manufacturers of goods. These requirements are again subdivided into a number
of specific categories to be disclosed by the applying company.
Suppliers of services needs to give specific details regarding their administrative
and industrial installations, detailed information about equipment in use, i.e.
location, ownership, handling etc., about materials used in the production as
well as stockpiled, human resources, technologies and a technical portfolio of
realized project as well as production capacity.
The Economic Criteria – seeks to ensure that the company in question has
sufficient economic strength and liquidity to complete deliveries and services.
To meet the Economic Requirements the company will have to produce Balance
Sheets and Income Statements for the prior three years.
Furthermore, the applying company shall produce a disclosed Annual Report in
Portuguese, English or Spanish. The Annual Report shall be presented in the
American (USGAAP) or European (FASB) accounting standards.
Legal Criteria – assess the companies regularity in fulfilling their obligations,
these being toward other companies or governmental. For foreign companies
this consists primarily in a disclosure of legal documents regarding
incorporation, legal representatives in Brazil, proof of membership in branch
organization and bankruptcy.
Health, Environment & Security - to ascertain the degree of implementation pre-
emptory measures regarding Health, Safety and Environment.
Completion of these criteria is evaluated against the environmental standards of
ISO 14001 and the Occupational Health and Safety Assessment Series OHSAS
18001.
Managerial & Social Responsibility Criteria – assess the position and
importance of Management and Social Responsibility for the companies. It
seeks to evaluate the commitment to quality and continuous improvement,
promoting and stimulating certification according to ISO 9001. Petrobras gives
value to partnerships with companies emphasising the involvement of business
within the social context. The focus points are securement of managerial
quality, organizational responsibility, company policy regarding human
resources, working environment, quality securement through monitoring,
development and evaluation of work processes.
Specific information regarding registration can be found at:
http://www2.petrobras.com.br/negocios/ingles/pdf/Abc_Ingl_Jan03.pdf
9.7 CADFOR CADFOR - Vendors list for the regular supplier
CADFOR (Cadastro de Fornecedores – Supplier Registry) is an organization
established between ONIP and the principal players in the Brazilian oil and gas
sector. CADFOR is a vendor’s list system, which is used by sponsors of the
40
register. As of June 2009 the following companies was registered as sponsors:
Anadarco, Devon, Chevron, El Paso, Maersk, Shell and Statoil Hydro.
In order to become registered in the CADFOR a company needs to be invited by
the register. A company who has not received such invitation can apply for
membership through CADFOR’s webpage, in which case the company has to
deliver a series of information and documents. The requirements for entering the
CADFOR register are quite similar to the ones required by Petrobras.
Like registration with Petrobras, assessment of the applying company is divided
in five criteria: Technical, Economical, Legal, SMS (Health, Environmental &
Security) and Management & Social Responsibility. Each criterion is divided
into a number of sub-requisites which seeks to secure that the applying company
meets the quality requirements established by the CADFOR sponsors.
For an individual description of each criterion see the above section for
mentioned criteria for obtaining a CRCC certificate.
The main difference between the two vendors lists systems, is that CADFOR
only register national suppliers, why a foreign supplier will have to appoint a
national reseller, in order to register.
Detailed information regarding registration in CADFOR can be found through:
http://www.cadfor.com.br/instrucoesGerais.html
10 Financing
10.1 The national development bank (BNDES)
The Brazilian Development Bank (Banco Nacional de Desenvolvimento
Economico e Social – BNDES) is a federal public company associated with the
Ministry of Development, Industry and Foreign Trade. The objective of BNDES
is to provide long-term financing for endeavours which contribute to the
development of the country.
Since its establishment in 1952, BNDES has financed large-scale industrial and
infrastructure endeavours, and has played a significant role in the support of
investments in agriculture, commerce and the service industry as well as in
small and medium-sized private businesses.
BNDES considers it fundamentally important, in the execution of its credit
policy, to take into account ethical and environmental principles. As such,
BNDES is firmly committed to the principles of sustainable development.
41
The financial support lines and programs offered by BNDES serve the
investment needs of companies of any size and sector that have been set up in
the country.
BNDES does not provide loans for international companies. If an international
company intends to obtain finance for a project from BNDES, this company
must have established presence in Brazil.
Local presence can be obtained by either creating a subsidiary or by entering
into a joint venture with a Brazilian company, but it is important to note that
BNDES will only provide financing for projects with at least 60% of local
content. The rule of local content applies not only to the finished project, but to
any part of the project. In effect this means that Brazilian contractors will be
inclined to choose national sub-contractors over international ones.
The parameters to determine whether national content has been met are among
others: Nationality of employees as well as weight, price and volume of
materials.
The only situation where the rule of local content does not apply is if an
equivalent product does not exist in the Brazilian market.
To determine whether an equivalent product can be found in the national market
is a matter of assessment, where among others product quality, duration, weight,
size, price etc. are characteristics that will be taken into consideration.
Clearly, such an assessment requires specific and in depth sector knowledge,
why BNDES de facto consults Petrobras, CADFOR or like agencies when such
doubt occur.
11 Final considerations
The Brazilian oil & gas sector holds great potential for the Danish offshore
industry. If the Danish companies can overcome the barriers to entry in the
Brazilian market, such as the cultural and language barriers as well as the legal,
institutional and market barriers they will enter one of the most interesting and
promising oil and gas markets worldwide.
The investment plans of Petrobras combined with the potential of the pre-salt
area means that not only will the offshore oil & gas sector be the driving
locomotive of the Brazilian economic growth, but in a world where oil fields
have peaked in many regions, Brazil promise a future of unique potential.
There are clear costs connected with participating in the Brazilian adventure,
and barriers to entry are not to be ignored. But by establishing a presence in
Brazil many of the barriers to entry can be overcome. We believe that the
Brazilian offshore oil & gas sector will be a most interesting sector to follow in
the years to come.
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Appendix 1 – PROMIMP Product & Service demands PROMINP (Programa de Mobilização da Indústria Nacional de Petróleo e Gas
- National Program for the mobilization of the national Industry of Oil and Gas).
Critical Services needed for pre-salt production
Drilling
Well completion
Flexible Lines and umbilical’s
Diving Support
ROV Vehicle’s support
Mooring Activities Support
Special support boats
Underwater well connexions
Critical Products needed for pre-salt production:
Flexible Lines & Tubes
Pumping Rods
Non Metallic Tubes and Connexions
Compressors and vacuum pumps
Air Coolers
Exchanger’s hull heater and tube
Board Exchange Heater
Steel Towers
High Pressure Cylinders
High Pressure Pumps
Spinner Compressors
Hoists
Breakdown truck for platforms
Steam engines, Diesel Engines Steam Turbines, Screw compressors
1500 t Polyester Ties
Safety Boats
43
Appendix 2 - CADFOR Product & Service demands CADFOR - Cadastro de Fornecedores – Supplier Registry
CADFOR Product Demands
Priorities by CADFOR product demands:
1) Boiler Equipment:
Air coolers;
Carbon Steel Plate;
Special Steel Plates;
Radio-communication Equipments;
Filters screen;
Warming ovens;
Pre Warmers of air;
Burners (Flare);
Process reactors;
Sensors;
Coque Drum;
Production Storage Tank;
Paint;
Drilling Rig;
Heat exchanger casco;
Fans;
Board heater exchange;
2) Electric Equipments:
Generator (electrical);
Electric Engines;
Control Panel;
Electric Distribution Panel;
Oil Transformers;
Dry Transformers
3) Mechanic Equipments
Reciprocating pump;
Centrifugal pump;
Dose pumps;
Rotator Pumps;
Reciprocating Compressor;
Rotator Compressor;
Hoists;
Gas Engine;
Diesel Engine;
Gas Turbine;
44
4) Subsea Equipments or Underwater Equipments
Ties;
Polyester Ties (wiring ties)
Anchors;
Christmas Trees;
Submarine well head;
Electric wire;
Water injection Line;
Gas injection line;
Flow line;
Manifold;
PLEM
PLET;
Umbilical;
5) Tubing:
City Gates;
Tubing connexions;
Industrial valves
6) On Shore Equipments required by CADFOR:
Plungers;
pumping rods;
Pumping Units;
CADFOR Services Demands
Priorities by CADFOR services demands:
1) Construction, Maintenance and Naval repair:
Compressors and Pumps;
Marine Crafts;
Reducing Gears;
Automated Equipments;
Auxiliary Equipments;
Maintenance and repairs on crafts and drilling mobile units/production
oil and gas;
Intern Bursting Engine; use in general;
Structural Repairs;
Carpentry Services; naval;
Dock services;
Cleaning Services- Naval;
Cleaning Services on going constructions / floating crafts;
Tubing;
Turbines;
Exhausters and fans;
45
2) Industrial Assembling and Installations:
Furnaces and Structures;
Electric Equipments;
Mechanical Equipments;
Subsea Equipments;
Instrumentation;
Tubing.
3) Industrial Maintenance:
Furnaces and Structures;
Electric Equipments;
Mechanical Equipments;
Subsea Equipments;
Instrumentation;
Tubing;
4) Services Regarding to Exploration Development and Production:
Rigs Completion;
Rigs Stimulation;
Bore Hole surveying;
Well Boring;
Seismic;
5) Logistical Services:
Offshore Crafts facilitation;
Storing;
Central of Unpackaged cargo or goods (Liquid/Solid)
Fluid Station;
Standpipe;
Chemical products, fuels, lubricators and water supply;
6) Specialized Technical Services:
Risk Analyzes;
Environmental Audit;
Industrial Automation;
Certification;
Risk Analyzes;
Dangerous Area Analyzes;
Destruction testing;
Non destructive testing;
Accidents and occurrences investigation;
Diving;
Distribution Operation base
Environmental Services;
Managing Systems of Quality;
Managing Systems of HES (Health, Environment and Industrial
Security);
Fire and Explosion Protection Systems;
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Appendix 3 – Potential for the Danish offshore sector
The Danish Consulate General estimate the best possibilities for the Danish
offshore companies to enter the Brazilian market within the following upstream
and downstream sectors:
Upstream (processes and equipment related to Exploration & Production):
- Exploration: testing equipment and test drilling equipment
- Development: instalment of exploration equipment
- Maintenance: operation of concession, maintenance of equipment
- Service for the fields: catering, communication
Downstream (service and equipment related to the processing of oil):
- Transport
- Refinery, oil/gas and petrochemistry
- Maintenance/monitoring equipment
Upstream
Oil & Gas exploration:
In general the possibilities for Danish companies within exploration are good,
and especially we see potential within niche areas such as:
- telecommunication
- surveillance equipment
- velting equipment for steel and plastic
Oil & Gas development & extraction:
We estimate a good potential for Danish companies within the segment of oil
extraction, especially within the following niches:
- flexible pipes for deep water drilling
- pre-isolated pipes for the transport of raw oil
- boilers for heating of raw oil
- isolation material
Maintenance of the oil and gas field
The opportunities appear to be good for maintenance and security, especially
within following areas:
- fire extinguish equipment
- equipment for dealing with oil spill
- tractors for the transport of repairing equipment within pipes
47
Downstream
The Consulate General estimates the potential in the downstream sector to be
significantly smaller than the potential in the upstream sector. However, there
are some niches within the downstream sector with fair potential.
Oil transport
Within the transport sector it appears that the best opportunities for Danish
companies are to be found within:
- Pipe systems
- Ship transport
Oil Refineries and Gas processing plants
Petrobras are responsible for 98% of the production of Brazilian refineries. Due
to the heavy oil found in the pre-salt area, Petrobras are planning significant
investments in oil refineries to lessen their dependence of refining oil abroad.
Maintenance and monitoring equipment for processing plants
We estimate a fair potential for monitoring equipment for the production plants.
Appendix 4 – Interview with a Danish supplier
The following Interview is with Niels Husted, founder and CEO of Rocktec – a
supplier to the Brazilian offshore industry.
1. Which barriers to entry do you see as the most serious/most important
to be aware of for a Danish company with an interest in the Brazilian
offshore sector?
It depends a lot on the type of product or service. Our experience is that it was
very heavy to get started. It took a few years to indentify the key decision
makers, and to show them out solutions. In our case we have the advantage that
we have unique solutions which local competition can't match. Therefore, for us
it is about creating awareness about our better constructions and to create a
network of contacts with the marine architects who are designing ships and
platforms.
We got success as these marine architects (which are subcontracted by Petrobras
or by shipyards etc.) started to incorporate Rockwool in their registry of
isolation. Once this happen you have gotten far, and it will be hard for the
competitors to offer other solutions as it entails that the "specs" have to be
revised.
Parallel to this we need to have our eyes and ears open out at the shipyards.
Here the keyword is "personal contact". I have a local person in Rio to focus
especially on networking with shipyards.
48
2. What is the experience of Rocktec regarding Petrobras Vendors list?
At first we thought it was necessary that we had a CRCC so we used a lot of
time and energy to obtain this, which is a long process with countless
documents and a complicated procedure. Finally, after more than a year we got
our CRCC, but then we realized that no one was ever asking for it.
For example, we supplied products to several Petrobras platforms without
having to show our approval. Furthermore, 3-4 documents needed to be
renewed every year, and the complicated rules of Petrobras said that our director
needed to sign, and that the documents needed to be publicly certified at a
notary.
In effect, this meant that a director in the very top management of Rockwool
had to go to the notary on Roskilde every year and sign these documents.
This was not very popular. So we decided not to renew it, and no one has ever
asked us for it.
However, this might depend on the type of product you have, but in our
experience the approval is over rated and not necessary.
3. What is the experience of Rocktec regarding the CADFOR system?
To be honest I didn't know till you asked what CADFOR was. However, I can
now see that it is a registry for suppliers under ONIP.
I guess this suffice to say that for us it has not been relevant at all.
4. Do you have any advice to potential Danish suppliers/sup-suppliers
interested in the Brazilian offshore sector?
If you don't have a good network of contacts then get together with a local
representant which can open the doors for you.
For example, you could try to identify a local company/agent to take you around
and introduce you to the industry. If your products are interesting, then it will
not be hard to get through to the design offices.
On a economic note it is interesting with direct import to the shipyards due to
zero import tariffs. In reality this might be seen as distorting competition in
relation to the local industry, but it is fine for us. We do feel the demand for
local content - sometimes we have to bill through Rocktec to make it "local".
The only Petrobras contact we really have had is to CENPES where they are
working with projects with designs and specs. With Petrobras itself we haven't
had much direct contact - and I think this is all the same, for in my view, it is a
little bit as trying to nail a pudding to a wall, as one politician once put it.
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Appendix 5 – Interview with a Danish supplier
The following Interview is with Knud Bach, CEO of Aalborg Industries South
America – a supplier to the Brazilian offshore industry.
Actually this was specially my focus when I made a speech to Danish Industry
Group for Brazil's Oil & Gas, Sep 2008. And I did send a copy of the speech to
you when you arrived. I enclose some of the more relevant pages.
1. Which barriers to entry do you see as the most serious/most
important to be aware of for a Danish company with an interest in
the Brazilian offshore sector?
a. Cultural barriers to entry?
Understand how to work with Petrobrás
Use local Portuguese speaking managers. Create relations on
more levels
b. Economical barriers to entry?
Payment conditions more severe
Retention or project execution paid with delay (but with
adjustment)
Bids not always straight
c. Institutional barriers to entry?
In reality very difficult
Local content often required
Influenced by government, procedures
d. Other comments? Important to have a local base in Brazil
2. What is the experience of Aalborg Industries regarding Petrobras
Vendors list?
Very difficult, necessary registration both for local and HQ company
3. What are the experience of Aalborg Industries regarding the
CADFOR system? - CADFOR a registration under ONIP
- Not too difficult. This is relayed to local content, it gives an advantage
if you are producing locally
4. Do you have any advice to potential Danish danske suppliers/sup-
suppliers to the Brazilian offshore sector? Be local, produce in Brazil
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Appendix 6 – Currency Exchange Rate BRL - USD
Projects in the Brazilian oil & gas sector are registered in US$.
As demonstrated by the following graph, the Brazilian Real (BRL) has
strengthened considerably over the US$ in recent years. In October 2004, the
BRL was worth USD 0.35, but five years later, in October 2009, the BRL was
worth USD 0.57, an increase in the strength of the BRL of nearly 63%.
The rising oil price combined with a weaker US$ has in effect further
strengthened the Petrobras 2009-2013 investment plan.
The following graph demonstrates the BRL - USD currency exchange rate over
a 5-year period from October 2004 to October 2009.
The following graph demonstrates the BRL - DKK currency exchange rate over
a 5-year period from October 2004 to October 2009.
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Appendix 7 – The Trade Council and its services
The Trade Council has a global Industry Team with specialist knowledge of the
energy and environmental sector. This Team is ready to assist enterprises in
need of professional consultancy support regarding opportunities for
international sales growth or improving their competitiveness. The advisers
have in-depth knowledge of the export markets’ political and commercial
actors, and often the Trade Council’s relations with relevant authorities and
decision-makers can promote the interests of your enterprise.
The Industry Team’s competencies and services include, among other things:
• Market screening/monitoring
• Product and market surveys
• Identifying project opportunities
• Monitoring tenders
• Competitor analyses
• Identifying new customers and business partners
• Trade fairs and export promotion events
• Mapping public sector authorities
• Identifying contacts among authorities
• Mapping political and commercial framework conditions
• Information on locally utilised technologies
• Information on privatisation and liberalisation
• Assistance with technical trade barriers
• Trade promotion events
• Seconding export advisers
• Obtaining approvals and providing consultancy support regarding customs and
tax issues
• Consultancy support regarding business start-up abroad
Make use of the Trade Council’s global network
Through the Ministry of Foreign Affairs’ Embassies, Consulates General and
Trade Commissions, the Trade Council of Denmark is present in all significant
export markets throughout the world. The Trade Council’s global network of
250 advisers with local expertise stands ready to serve Danish trade and
industry. For more information, visit www.eksportraadet.dk or contact the
Trade Council of Denmark.
Danish Consulate General Rua Oscar Freire 379, cj. 31
Cerqueira Cesar
01426-900 São Paulo – SP
Brasil
Tel.: +55 11 2127 0750
Fax. +55 11 3068 9867
E-mail: [email protected]
www.gksaopaulo.um.dk/en
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Appendix 8 – Useful Contacts Danish Consulate General
Rua Oscar Freire 379, cj. 31
Cerqueira Cesar
01426-900 São Paulo – SP - Brasil
Tel.: +55 11 2127 0750
Fax: +55 11 3068 9867
E-mail: [email protected]
www.gksaopaulo.um.dk/en
ANP – Agência Nacional do Petróleo
Rua Senador Dantas, 105, 13. And.
20031-201 Rio de Janeiro – RJ – Brasil
Tel.: +55 21 3804 1000
Fax: +55 21 3804 0100
www.anp.gov.br
IBP – instituto Brasileiro do Petróleo
Av. Alm. Barroso, 52, 26 and.
20031-000 Rio de Janeiro – RJ – Brasil
Tel.: +55 21 2532 1610
Fax: +55 21 2220 1596
E-mail: [email protected]
www.ipb.org.br
ONIP - Organização Nacional da
Indústria do Petróleo
Petrobrás – Petróleo Brasileiro S/A
Av. República do Chile, 65, 601-Q
20035-900 Rio de Janeiro – RJ – Brasil
www.petrobras.com
Petrobras site for international
suppliers:
http://www2.petrobras.com.br/portugue
s/ads/ads_CanalFornecedor.html
MME - Ministério de Minas e
Energia
Esplanada dos Ministérios – bloco U –
8 and.
70065-900 Brasília – DF – Brasil
Tel.: +55 61 319 5452 / 319 5555
Fax: +55 61 321 5628
www.mme.gov.br
BNDES – Banco Nacional d
Desenvolvimento Econômico e Social
Av. Repúblico do Chile, 100, 19 and.
20139-900 Rio de Janeiro – RJ – Brasil
Tel.: +55 21 227 8238 / 8288
Fax: +55 21 2262 8123
http://inter.bndes.gov.br/english/
Av. Graça Aranha, 1/5º andar - Centro
20030-002 Rio de Janeiro - RJ – Brasil
Tel.: 55 21 2563 4615
Fax: 55 21 2563 4616
E-mail: [email protected]
www.onip.org.br
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