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June 2010

Pre-Salt: Capitalizing on Growth Opportunities Giovani Loss Thursday, June 17th, 2010 2010 Brazil Oil & Gas Seminar Brazilian-American Chamber of Commerce, Inc. June 2010. Agenda Brazil – Offshore E&P Brazil – Pre-Salt Brazil – Developments in the Oil & Gas Regulatory Framework

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June 2010

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  1. Pre-Salt: Capitalizing on GrowthOpportunitiesGiovani LossThursday, June 17th, 2010 2010 Brazil Oil & Gas SeminarBrazilian-American Chamber of Commerce, Inc. June 2010

  2. Agenda • Brazil – Offshore E&P • Brazil – Pre-Salt • Brazil – Developments in the Oil & Gas Regulatory Framework • Brazil – Current Status of the Industry and Investment Opportunities

  3. Brazil - Offshore E&P Offshore E&P Industry Nowadays, nearly 30 per cent of the world's oil production comes from offshore targets Deep and ultra-deep offshore exploration - 75% of the economically producible volumes of oil and gas identified since 2003 The world's best deepwater prospects are in the Gulf of Mexico, West Africa and Brazil (the “Golden Triangle”) Significant developments also occur in North Africa (Libya, Egypt and Algeria) and Asia (India and Indonesia)

  4. Brazil – Offshore E&P Why Brazil is a leader in Offshore E&P? Big coast + Surveys undertaken in the 1960s - the Amazon basin did not hold big oil reserves PB started investing in offshore technology in the 1960s PB to invest USD 4 billion in offshore R&D through 2013 PB operates 22% of global deepwater production and 18% of all operating vessels Floating Production Systems operators (all contracted): 1 – PB – 45 FPSs 2 – Statoil – 15 FPSs 3 – Shell – 15 FPSs

  5. INDEX Brazil – Offshore E&P Brazil – Pre-Salt Brazil – Developments in the Oil & Gas Regulatory Framework Brazil – Current Status of the Industry and Investment Opportunities

  6. Brazil – Pre-Salt What is the Brazilian Pre-Salt area? Reserves of up to 100 billion barrels High quality light oil 200 to 300 km from the coast 5 to 8 km below the sea bottom Water depths over 2 km Total area: 112,000 km2 Total area under concession: 41,000 km2 (28%)

  7. Brazil – Pre-Salt Technological Challenges Long distance to the coast Floating Production Units and tankers anchoring in ultradeep water Deviation of wells in the salt zone Presence of CO2 (corrosive) Connections with risers under high pressure Gas pipeline larger than 18” in water depth of 2,200 m

  8. Brazil – Pre-Salt Financial Challenges Exploration of Pre-Salt requires massive investments from E&P Companies and Service Providers USD 600 billion over the next 30 years Petrobras to invest USD 174 billion through 2013 Brazil to produce 3.4 million barrels per day by 2020

  9. Brazil – Pre-Salt Commercial and Legal Challenges Sharing of infrastructure required (complex legal structures – multiple consortiums involved) Local content (currently around 75% - required in contract) Lack of equipments and experienced humam resources (long term contract – strong default clauses) Financing products to be developed (guarantees) New technology to be developed (submarine and subsea – strong patent control) Natural Gas: Shale Gas (FLNG)

  10. Brazil – Pre-Salt O&G is the fastest growing industry in Brazil 1997 – 2.8% GDP 2008 – 10% GDP Number of O&G Service Providers in Brazil 2000 – 210 companies 2008 – 1761 companies 2020 – Expected 20% GDP for oil & gas industry Brazil expected to become 6th largest oil producer in the World by 2030

  11. INDEX Brazil – Offshore E&P Brazil – Pre-Salt Brazil – Developments in the Oil & Gas Regulatory Framework Brazil – Current Status of the Industry and Investment Opportunities

  12. Brazil – Developments New Regulatory Framework: Natural Gas Natural Gas Law issued on March 2009 Decree regulating the industry to be issued in 2010 Oil Pre-Salt Bills under Discussion – Approved in Senate Rules should remain the same for areas that are not considered part of the Pre-Salt or strategic

  13. Brazil – Developments Natural Gas Law: Creates a bid system for natural gas projects allocates government funds to support certain projects establishing stronger competition rules regarding open access to existing pipelines. Natural Gas Decree: secondary markets, criteria for public tenders, curtailment of supply and reversion of assets

  14. Brazil – Developments • Pre-Salt Bills - Basics: • PSA Regime for the Pre-Salt area and other strategic areas • Petrobras as sole operator (minimum of 30% stake in all Pre-Salt fields), except in the case of unitization, which may be negotiated • Assignment of oil and gas rights in the adjacent areas with capital injection into Petrobras (almost a concession regime) • Creation of PetroSal and Oil Fund • PetroSal will participate in the operating committee, electing half of its members, including its chair

  15. Brazil – Developments Main Brazilian Government Objectives: Increase control over production Increase control over commercialization Increase government take Enforce local content rules Avoid Dutch disease

  16. Brazil – Developments PSA Regime: Applied in many large oil producting countries, such as Angola, China, India, Lybia and Nigeria Will not increase control over production – production program is established during development phase, changes may reduce performance of the project Will increase control only over commercialization of the Government share of the oil May not increase government take as expected: costs with management of PetroSal should be very high

  17. Brazil – Developments Petrobras Sole Operator: Government apointing operador is not so uncommon, some countries that apply this rule are: Nigeria and Norway May result in inefficiencies as operator can’t be removed May reduce government take: companies may apply a discount rate to investments in the Pre-Salt considering bureaucracy Will reduce incentives for other companies to invest in natural gas transportation

  18. Brazil – Developments • Assignment of oil and gas rights in the adjacent areas: • Capitalization will provide cash for Petrobras to invest • Vested rights under concession contracts will be respected • Assignment is similar to Concession - No economic imbalance between companies under different regimes • Faster unitization process - as Petrobras is operator in most licensed areas, less issues to be negotiated

  19. Brazil – Developments PetroSal: PSA requires the creation of a 100% National Oil Company Government final word over operations is not so uncommon, some countries that apply this rule are: China and Indonesia Investors may apply a discount rate, as PetroSal control over operations may bring inefficiencies

  20. INDEX Brazil – Offshore E&P Brazil – Pre-Salt Brazil – Developments in the Oil & Gas Regulatory Framework Brazil – Current Status of the Industry and Investment Opportunities

  21. Brazil – Status & Opportunities Current Status of the Pre-Salt Industry: Technical Status: Use of current existing technology Starting studies on new technologies Pilot production to bring cash flow and to test technology Commercial Status: E&P Players looking for financing alternatives (M&A, IPO, but not to project finance yet) Service Providers looking for finance alternatives and to invest in new technologies (M&A, IPO, Project Finance, FDIC, FIP) Increase on local content driven by Petrobras

  22. Brazil – Status & Opportunities Opportunities for E&P Companies: Areas under concession contract available for farm-in because companies may need cash (Devon Deal and Peregrino Deal) There are non Pre-Salt areas and non-strategic areas that may be available for investment under the concession regime in the near future – 11th Bid Round to happen in 2010 PSA with private investors should be the most applicable regime, because Petrobras needs financings

  23. Brazil – Status & Opportunities Opportunities for Service Providers: Development of fields will require highly qualified suppliers Local Content rules will require investments to be made in Brazil Government of Brazil should develop incentives for service providers (BNDES, tax breaks, labor incentives, FDIC, FIP) Ex. fund for 28 rigs. No matter what will be the regime the acquisition of goods and services should grow considerably

  24. Brazil – Status & Opportunities Opportunities for other Players: Banks to finance big service providers contracting with Petrobras (rig, FPSO and corporate finance) Banks to finance operations after Pilot projects (lower technical risk, cash flow) Banks to finance development of service providers industry in Brazil - FDIC and FIP Private Equity funds to invest in service providers and use exit strategy (bring them to public market or sell)

  25. THANK YOU! Giovani Loss giovaniloss@mattosfilho.com.br Presidente Wilson 231, 4th floor Rio de Janeiro, RJ, Brazil

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