www.pwc.com.

br

The Brazilian
Oil & Gas Industry

A period of great
transformation
The Brazilian
Oil & Gas Industry

Context
The Brazilian Oil & Gas industry is undergoing a period of great
transformation. The country, which already had a robust infrastructure
for Oil & Gas exploration and production activities and led global
production of hydrocarbons in deep and ultra-deep waters, expanded
significantly its growth opportunities as from 2007, with important
discoveries of light oil in the so called Pre-salt layer. According to
the Organization of Petroleum Exporteing Countries (OPEC), Brazils
proven reserves amount to approximately 14 billion barrels of oil
equivalent (bboe). Also, in accordance with preliminary estimates
made by Coppe/UFRJ (Federal University of Rio de Janeiro), the
country has the potential to expand its reserves by an additional
55bboe, upon exploration of the Pre-salt reserves. Thus, it could be the
nation with the highest reserve increase by 2020, jumping from 14th to
8th plece in the ranking of the worlds oil reserves.

The Brazilian Oil & Gas Industry 1

 World Oil Reserves World Gas Reserves

2.5%

7,8% 31.2%
8.4%

Middle East
13.2% 48.4%
Central and
43% 8.2% South America
North America
7.7% Europe
19.7% 5.8%
Asia

4,1% Africa

Argentina 0.1% Argentina 0.2%

Brazil 0.9% Brazil 0.2%

Colombia 0.1% Colombia 0.2%

Ecuador 0.5% Ecuador 0.1%

Peru 0.1% Peru 0.2%

Trinidad and Tobago - Trinidad and Tobago 0.2%

Venezuela 17.8% Venezuela 3.0%

Other - Other -
According to BP Statistical Energy Review 2013

World Oil Production World Oil Consumption

20.3%
32.5% 33.6% 24.6%

Middle East

Central and
South America
17.5%
North America
9.2%
4% 21.3% Europe
9.6% 10.9% 7.3% 9.1% Asia

Africa

Argentina 0.8% Argentina 0.7%

Brazil 2.7% Brazil 3.0%

Colombia 1.2% Chile 0.4%

Ecuador 0.7% Colombia 0.3%

Peru 0.1% Ecuador 0.3%

Trinidad and Tobago 0.1% Peru 0.2%

Venezuela 3.4% Trinidad and Tobago

Other 0.2% Venezuela 0.9%

Other 1.4%

According to BP Statistical Energy Review 2013

2 PwC
World Gas Production World Gas Consumption

26.8% 32.6%
30.7% 27.5%
Middle East

Central and
South America
16.3% North America
3.7%
5.3% 5% 18.8% Europe
6.4% 12.4%
14.5% Asia

Africa

Argentina 1.1% Argentina 1.4%

Brazil 0.5% Brazil 0.9%

Bolivia 0.6% Chile 0.2%

Colombia 0.4% Colombia 0.3%

Peru 0.4% Peru 0.2%

Trinidad and Tobago 1.3% Trinidad and Tobago 0.7%

Venezuela 1.0% Venezuela 1.1%

Other 0.1% Other 0.2%

According to BP Statistical Energy Review 2013

According to the BP Statistical Review plants. As the Brazilian energy matrix is

2013, Brazil produces 2.1 million
barrels a day (2.7% of the world
production), almost the same quantity
as it consumes, 2.8 million barrels a
day (3.0% of the world consuption).
However, the oil currently produced
in the country is heavy and requires
stronger refining power. Considering
that Brazilian refineries are not able
to refine all the internally consumed
oil, Brazil needs to export crude oil
and to import oil products, mainly
gasoline. Petrobras alone will invest
approximately US$ 147 billion in E&P
over the next 5 years, according to its
2013-2017 Business Plan.
In terms of gas, the Brazilian
consumption (29.2 trillion cubic meters)
is higher than the production (17.4
trillion cubic meters), both according
to the BP Statistical Review 2013.This
deficit is overcome by imports of gas
from Bolivia. Currently, gas distribution
is concentrated in a few cities in large
urban centers and also thermoelectric
based on hydropower, the use of thermal
plants is intermittent. Approximately
US$ 10billion of investments were
announced by Petrobras for the period
2013-2017, mainly in the expansion
of natural gas logistics and chemical
transformation.
As a result of the Pre-salt discoveries,
the debate and efforts for the
development of the industry
intensified. The need for technological
advances, strengthening the domestic
industry with the development of
the supply chain and training of
human resources became essential
matters for the countrys growth. The
already existing local content policies
were ratified for the exploration and
development of the Pre-salt layer,
averaging 65% for equipment and
services from domestic suppliers.

The Brazilian Oil & Gas Industry 3

 Technological development
In order to improve the competitiveness of the Brazilian
supply chain and support the requirements for local
content, the Federal Government, together with the State
Government of Rio de Janeiro, announced incentive
measures for companies that place their research and
development centers in the Technological Park of Ilha do
Fundo - Rio de Janeiro. Located in an university region
and near the Petrobras Research Center (CENPES),
the Technological Park has already received more
than US$260 million in investment and houses the
development centers of companies such as Schlumberger,
FMC Technologies, Baker Hughes, Halliburton, Tenaris
Confab, Usiminas, GE, EMC2, Chemtech and BG Group.
The Technological Park will allow Brazil to become an
exporter of technology in addition to being an exporter of
oil and oil products.

Local content requirements

Local content requirements
Materials As with other countries with large natural reserves, Brasil
implemented a Local Content Policy in order to foster the
Equipment development of a strong and sustainable local supply chain.
Local content is measured based on the percentage of goods
Systems and services made in Brazil in relation to the total acquired
and subsystems during the performance of the exploration and production
development activities.
Services The objective of the local content requirement is to raise the
participation of the domestic goods and services industry in the
oil and natural gas supply chain on a competitive basis.

The Local Content policy began in the first bid round in 1999,
with the establishment of minimum and maximum percentages
in investment in the country. Despite the concerns over the
Growth of
increase in costs and potential delays in the development of
national
solutions and equipment in Brazil, the policy is having an
industry
impact in certain sectors. An example of this is the water-oil
submarine separator (SSAO) with production capacity of 18
thousand barrels a day. Produced to operate together with the
Petrobras P-37 platform, it has 75% local content.
Techonology
development The Brazilian Local Content Policy is supported by the Program
for the Mobilization of the National Industry of Oil and
Natural Gas (PROMINP), led by Petrobras and the National
Development Bank (BNDES), with the participation of industry
associations. The Federal Government estimates that US$ 400
Training of
billion will be invested in equipment and services, expansion
local human
and maintenance of the production until 2020. Together
resource
with the renewal of the supply chain is the widening of the
contribution of the Oil & Gas industry to the Brazilian GDP,
which currently is around 12% and is expected to be 20% in
2020, according to industry experts.
Generation
of jobs and
income

Source: ANP

4 PwC
 Shipping
Platform Drilling rigs Oil tankers

48 Today 57 Today 55 Today

68 65 65 US$ 400 billion

How many How many How many
more are more are more are
needed needed needed will be invested
and consumed
Challenge: Challenge: Challenge: in equipment
Only 3 out of 13 categories Perform the drilling of wells Brazilian shipyards will have and services of
of equipment and services in the seabed. In the pre-salt, dikes with capacity to
necessary to build a the drilling column achieves simultaneously build 5 hulls. expansion and
platform have enough hiring 7000m length The annual demand for vessels
availability in the country will require the simultaneous maintence of the
construction of 9 hulls,
achieving 18 in the peak year production in the
following years

Manpower
In addition to the challenges of the Local Content Policy, the current record low
unemployment rate in the country poses a further challenge to industry. The Oil & Gas
sector currently employs 450 thousand professionals, and this number should increase
to 2 million in 2020. The National Program of Professional Qualification (PNQP) offers
courses of basic, medium, technical and superior levels, in more than 175 professional
categories linked to industry activities. However PROMINP has identified significant lack
of professionals in areas of distinct complexity, from basic engineers for the construction
of equipment and its operation to inspection professionals, including welders, mechanical,
coppersmiths and painters. Also, in accordance with the National Council of Immigration,
there is a deficit of almost 1000 officers for the merchant marine. This characteristic of
the Brazilian scenario is a sensitive issue in the strategy of companies that need to fight
for talent and/or widen the participation of expatriates in their operations, with their
inherent higher costs.

Regulatory framework
In relation to the regulatory framework in force in the country, the exploration of
hydrocarbons is made under the concession model, based on the Oil Law of 1997. However,
the exploration and development of the Pre-salt will be made under a Production Sharing
Agreement (PSA) system, where costs are first recovered and then the Oil & Gas is
divided among the operators and the Federal Government. Also, in accordance with the
legislation, Petrobras will always be the operator for areas in the Pre-salt.

The Brazilian Oil & Gas Industry 5

 Characteristics of the tax systems

Concession Production Sharing Services

The State or other competent authority grants
exclusive E&P rights for an area contracted with
an oil company.
The oil company owns all production and
assumes al the risk involved with the
granted area.
The State may establish minimum domestic
supply requirements.
The State invests no capital in the project.
Cash flow to the State comes from payment of
taxes and royalties.
Under a production sharing system, the State
and a contracted company share the oil and
natural gas extracted from a specific area.
The costs of exploration, development and
production cost in oil and royalties are
deducted from the total oil produced.
Costs are recovered from the Cost Oil, which
in general leaves a fixed portion of production,
called Profit Oil.
Profit Oil is divided between the State and
the operation either in a fixed proportion or a
variable proportion based on the volume and
price of crude oil.
The oil company pays all exploration and
development costs.
The oil company is compensated for these
expenses through a discount on the purchase
of crude oil, cash payment or a percentage of
production.
The State appropriates all the production,
although the operating company must be
remunerated for the services rendered.

Brazil, USA, United Arab Emirates and China, Russia, Angola, Colombia, Indonesia,
Venezuela, Iran, Kuwait and Algeria
Canada Oman, Kazakhstan, Nigeria and India

ANP - The National Regulatory Agency of Petroleum, Natural

Gas and Biofuels

ANP

Regulates Oversees Hires

Establishes rules through Industry activities are Promotes bidding

ordinances, normative regulated directly or through processes and enters into
instructions and resolutions. agreements with other contracts on behalf of the
government organs. Federal Government with
concessionaires.

The ANP is the regulatory body for activities that integrate the oil, natural gas
and biofuels industry in Brazil. It reports to the Ministry of Mines and Energy.
As a federal autarchy responsible for implementing the national policy for
these sectors, ANP focuses on guaranteeing the fuel supply and protecting
consumers interests.

6 PwC
Local funding options

To support the local industry development, the Brazilian Government,

through the BNDES - National Bank for Social and Economic
Development, and Petrobras offers several funding sources:

Brasil Maior Plan

Launched in August 2011 by the Brazilian Government, with
approximately US$ 70 billion in credit for investment, this plan addresses
the industrial, technological and foreign trade policies in order to sustain
economic growth in the current adverse context, focused on innovation
and intensification of the Brazilian industrial sector.

The Brazilian Oil & Gas Industry 7

 BNDES Funding options
BNDES O&G Structuring
A credit line originated in the Brasil
Maior Plan in order to create and expand
the productive capacity of suppliers of
goods and services related to Oil and
Natural Gas, to support the merger and
acquisition of companies, optimization
and upgrading of industrial units as well as
the search technology abroad; to support
improvement of tools that empower
businesses, expanding their market share;
and to support the technological nature of
the investments necessary to absorb the
results of research and development or
innovation.
BNDES Proengenharia
Supports engineering projects in the
sectors of Capital Goods, Defense,
Automotive, Aviation, Aerospace, Nuclear,
Oil & Gas, Chemical and Petrochemical
and their supply chains, to stimulate the
improvement of competencies and the
technical knowledge in the country.
FINAME Program
Financing of parts and components,
including electronic, locally manufactured,
provided by manufacturers registered with
the BNDES, for incorporation in machinery
and equipment in the production stage.

BNDES PSI - Investment Support Progressive Nationalization Plan (PNP)

Program
A credit line created during the Brasil
Maior Plan to stimulate the production,
acquisition and export of capital goods and
technological innovation.
BNDES FINEM
A credit line to support projects of
development and production of oil fields,
as well as marginal and mature fields, and
installation, expansion and modernization
of refineries.
Plan which provides funding to
manufacturers of products with reduced
local content. There is a requirement to
gradually increase the local content in
order to reach these percentages within a
specified period. Products can be submitted
to the PNP if they present minimum local
content percentage of 40%, with the
commitment to reach the necessary 60%
within 3 years.

Progredir
Launched in June 2011, the Progredir Financing Program allows companies within the
Petrobras supply chain and its subsidiaries to obtain loans from accredited banks, using the
supply contracts signed with Petrobras as guarantees. Requests for funding are submitted
through the Progredir Gateway to all of the participating banks, implying an increase in
competition between banks. This factor, coupled with the transparency of information and
security, has the effect of reducing the financial costs to the supplier. The cost reductions in
the borrowings range from 20% to 50%.

8 PwC
Investments

Petrobras Business Plan

Petrobras has recently announced the 2013-2017 Business &
Management Plan (2013-17 BMP), with expected investments of
US$ 237 billion, maintaining the same level of investments as the
2012-2016 BMP.

The 2013-17 BMP is based on the following assumptions:

Maintaining the same production targets for oil & natural gas
production;

No additional projects, except those related to oil & natural gas

exploration and production in Brazil;

Incorporating the results of the structural support programs; and

Expanding the scope of the divestment program (PRODESIN).

The Brazilian oil exploratory campaign is among the worlds most

expensive projects in course, close to the Chinese high speed train
project (with investments of US$ 300 billion to build a 25,000 km
net speed rail network) and the construction of physical and sport
infrastructure for the Qatar 2020 FIFA Soccer World Cup (with
US$250 billion of investments).

Investments
Segments (US$ billions) %
Exploration & Production (E & P) 148 62%
Refining 65 27%
Gas 10 4%
International 5 2%
Biofuels 3 1%
Distribution 3 1%
ETM (Engineering, Technology and Materials) 2 1%
Other Areas 1 0,4%
Total 237 100%

The Brazilian Oil & Gas Industry 9

 How PwC can help
Regulatory aspects and tax issues
Regulatory changes and emerging
market trends have shifted the focus of
most tax and tax accounting functions
toward compliance-based activities,
such as improving financial statement
reporting and mitigating internal
control deficiencies.
Running an energy company today
means much more than managing
employees, operations and finances.
Todays energy executives must
address issues related to technology,
foreign policy, sustainability and
regulatory change, in addition to more
traditional focuses.
PwC tax professionals can assist
companies in determining what taxes
are imposed in Brazil, which activities
of your company are subject to the tax
requirements, and how to structure
the companys activities so as to
avoid unnecessary payment of taxes
or assist in complying with all filling
10 PwC
requirements. Due to the significant
differences in taxes and related rules,
which may be subject to different
interpretations, it may be possible
to minimize the overall tax burden
through proper planning.
The regulatory environment,
combined with a lack of proper tax
accounting regulation applicable
to the Oil & Gas industry in Brazil,
adds to the complex condition that
companies operating in the industry
face. In addition, such companies
are strongly supported by special
tax programs/incentives which may
reduce significantly their tax burden.
Therefore, in order to ensure
long-term success from a tax
standpoint, your company must
not only strategically plan the
tax initiatives but also must be
in compliance with the Brazilian
tax laws, regulations and filing
requirements.
Our solutions
Tax function review Tax strategy developments
Risk assessment mitigation
Process improvement and control reviews and recommendations
Enterprise risk management activities
Tax accounting and Tax accounting consulting and support
compliance services Tax provision services
Tax return review
Deferred tax analysis and other specialized tax accounting services
IFRS conversion and consulting services
Tax filing services and compliance
Indirect tax compliance
Tax advice and compliance for special tax programs available to
Oil & Gas companies
International International tax advice and tax planning strategies
tax services Tax support for leasing and charter transactions
Thin capitalization compliance
Due diligence
Tax advice on Contract Drafts
Transfer pricing studies
Import duties and customs support
Tax consulting for secondment of foreign personnel to work
temporarily in Brazil
Tax advisory on labor and social security issues
Individual tax advice and compliance
Corporate Tax assistance for setting up a legal entity in Brazil (i.e., formation
tax services procedures and schedules)

The Brazilian Oil & Gas Industry 11

 Skilled workforce
People & Change

Organization Our solutions

Organization design provides a rich description of how
Organization Diagnostic & Design
an organization actually works in practice, to support
delivery of strategic objectives. We work with our clients Governance and Management Modeling
to determine the optimal design for their business, taking Organization due diligence & Merger integration
into account the other fundamental building blocks of any assistance
organization - processes, systems and culture. Business synergy analysis
Right sizing

Talent Management Our solutions

Talent management focuses on the clients strategies to Workforce planning
attract, retain and develop the right people and get the best Talent Management Lifecycle
results from them. Performance Management
Employee Engagement
Learning & Development Strategies
Knowledge Management
Compensation strategy, design and risk assessment
HR Due diligence & Integration

HR Transform Our solutions

HR Transform helps companies to have the best HR function
operation to support their talent management strategy.
HR organizational and processes design
Alternative service delivery and sourcing solutions analysis
strategy, design and implementation
HR technology strategy, selection, optimization,
implementation and upgrade
HRO transition advisory
HR professionals capability & training

12 PwC
Change Our solutions
The purpose of the communications and change Change Readiness and Impact Assessment
management strategy is to develop the foundation for Leadership Alignment
change and an infrastructure for sustainability, develop Change Strategy & Planning
organizational leadership at multiple levels, guide Stakeholder Engagement
the implementation of communication and change
Communication Strategy & Planning
management solutions, providing a roadmap for major
Training Strategy & Planning
transformation within an organization.
Implementation support

The Brazilian Oil & Gas Industry 13

 Megaprojects have a significant impact on business
and inherent risks which can be mitigated from
the start, through implementation of control over
processes, monitoring of action plans and governance
of decision-making

Mergers and acquisitions/deals

Pre-salt creates huge opportunities, but it also creates massive challenges for suppliers in
the Brazilian Oil & Gas industry. So how are companies maximizing value in Brazil? PwC
offers a range of services required in this changing environment and offers the value of
broad global and Brazilian networks.

Our solutions
Corporate Finance
Transaction Services
Pre-deal and Deal execution
Market review/screening
Business/asset valuation
Lead financial advisory and negotiation support
Project finance and Public Private Partnerships (PPPs)
Post-deal
Purchase Price Allocation (PPA)
Post-deal Integration
Vendor assistance
Buy-side financial, tax and labor due diligence
Tax planning and structuring

Capital projects and infrastructure

The main characteristics of the Oil & Gas Industry projects are the high investment volume
and the involvement of a number of suppliers for extended periods of time and different
work fronts, which significantly increase the complexity in managing these investments.
Itis essential that these projects are well managed so that they can be completed within the
projected schedule and budget.

Megaprojects have a significant impact on business and inherent risks which can be
mitigated from the start, through implementation of control over processes, monitoring of
action plans and governance of decision-making.

Our solutions
Principles of Capital investment planning
megaproject management Segmented approval process (decision gates)
Strategy and contracting plan
Risk management
Processes and management tools
Governance and control

14 PwC
Performance Improvement
The Oil & Gas Industry in Brazil is experiencing a time Our solutions
of great opportunities and investments but, at the same Strategy Strategic Planning
time, is facing the challenge of growing with efficient
Growth Strategy
processes, the best management practices, appropriate
Financial & Acquisition Strategy
and balanced controls and controlled costs.
Customer Strategy
How to grow fast without a loss of control over the Business & Technology Design
processes? How to generate accurate and timely Organizational Strategy
reporting? How to maintain agility and effectiveness in
Finance Finance Assessment & Visioning
the supply chain & logistics? How to attract and retain
the best professionals in the industry? How to align IT Operational Finance & Sourcing
strategy with the companys growth? These are some Performance Management
issues that are increasingly more common among top Treasury
management of the Oil & Gas Industry. Financial Risk & Cash Management
Operations Management and Process
PwC approach
Improvement
The Transform Framework is our global consistent and
Supply Chain Management
proven framework for delivering all aspects of a change
initiative (be they transformational or smaller in scale), Sourcing and Shared Services
from strategy through to implementation, which remain Cost Management.
sustainable long after implementation programs are Technology IT Strategy
completed. IT Architecture and Design
As it is fully tailored, the Transform Framework is Enterprise Applications
industry-independent and application-independent. Sourcing
Specific components for the Oil & Gas Industry can be Project Management
added for fully addressing the project requirements. IT Operations Management
People & Change Organizational Design
It is flexible in that only certain Phases may be used or
specific Tasks or Steps may be selected. It is also scalable, HR Strategies and Operational
in that for large-scale transformations each phase may Change Management
be undertaken by separate teams with appropriate skills Risk Risk Management
or, for smaller projects, one multi-skilled team may Governance and Compliance
undertake all of the tasks concurrently and some of the Program Design and
phases may also be collapsed into one another. Implementation
Forensic services Crisis Management
Business Recovery
Dispute Analysis
Investigations

The Brazilian Oil & Gas Industry 15

 Contacts

For further information, please contact:

Marcos Panassol Andr Castello Branco

marcos.panassol@br.pwc.com andre.castello@br.pwc.com
[55](21) 3232 6160 [55](21) 3232 6138

Joo Lins Ronaldo Valio

joao.lins@br.pwc.com ronaldo.valino@br.pwc.com
[55](11) 3674 3941 [55](21) 3232 6138

Cyro Cunha Felipe Gomes

cyro.cunha@br.pwc.com felipe.gomes@br.pwc.com
[55](21) 3232 6031 [55](21) 3232 6167

16 PwC
Follow us Twitter@PwCBrasil
facebook.com/PwCBrasil

2013 PricewaterhouseCoopers Brasil Ltda. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Brasil Ltda., which is a member firm of
PricewaterhouseCoopers, each member firm of which is a separate legal entity.
PwC refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC
network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients.
PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any
way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firms professional
judgment or bind another member firm or PwCIL in any way.