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The Brazilian Energy Market After the Pre-Salt Reforms

The Brazilian Energy Market After the Pre-Salt Reforms. March 2011. Spring 2011. Brazil. The Investment Case. Brazilian government began restructuring hydrocarbon industry in 1995

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The Brazilian Energy Market After the Pre-Salt Reforms

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  1. The Brazilian Energy Market After the Pre-Salt Reforms March 2011

  2. Spring 2011 Brazil

  3. The Investment Case • Brazilian government began restructuring hydrocarbon industry in 1995 • Today, National Petroleum Agency (ANP) is responsible for overseeing other industry activities and granting E&P rights in Brazil to private entities • E&P sector in Brazil has become characterized by: • Form of Contract: Majority of E&P activities in Brazil are governed by concession agreements with the state • Enforceability of Contracts: Brazilian government and ANP have shown commitment to protecting sanctity of contracts • Resource Potential: Vast areas yet to be explored • There are 29 sedimentary basins with oil and gas potential in the country (7.5M km2 – 10x the area of Texas) • So far, less than 5% of this area has been explored

  4. Steady reserve growth since the early 80’s ___________________________________ Source: BP Statistical Review of World Energy - 2010

  5. Consistent 10 year 6% CAGR of Production ___________________________________ Source: BP Statistical Review of World Energy - 2010

  6. Future 10 year 15% CAGR of Production 2009 oil reserves by country, including projected Brazilian reserves after adjusting for Campos and Pre-Salt discoveries Brazil’s historical oil production (mbbl/d) and potential production, assuming no development constraints ___________________________________ Source: BP Statistical Review and TPH Estimates

  7. The Service Sector • Demand for oil and gas field services in Brazil remains robust • Concessionaires operating in Brazil are required to utilize local content (suppliers) in execution of E&P activities • Foreign investors and companies have gained exposure to sector by investing in or acquiring Brazilian service firms • i.e. Temasek recently invested $400 MM in Odebrecht, the Brazilian engineering services provider • From the operator’s perspective • Combination of high demand for services and limited capacity of the local supply is source of concern • Especially in fabrication of Floating Production and Storage Offloading (FPSO’s) • Historically, Brazil has mixed track record in terms of delivering fabrication projects on time and on budget • Investors should scrutinize development plans of operating companies in order to identify oil field service supply factors that may disrupt future cash flows for planned projects

  8. Infrastructure • Energy infrastructure sector (i.e. pipeline and tankers) in Brazil is dominated by Transpetro, a subsidiary of Petrobras • Expanding pipelines to more effectively monetize onshore discoveries • Petrobras and its subsidiaries have been investing heavily in development of pipelines and other related gas transport infrastructure • In 2009, Transpetro started up the Urucu – Manaus gas pipeline • Opens access to Urucu gas field, considered to contain largest onshore deposit of natural gas in country • Pipeline could also be extended to Amazonian region, which has been largely underexplored • In March 2010, Petrobras inaugurated Southeast Northeast Integration Gas Pipeline (GASENE) • The 706 mmcf/d capacity pipeline was built by SINOPEC • Connects the country’s Southeastern gas producing region with the Northeast, which previously produced insufficient quantities of gas to meet local demand

  9. Brazilian Gas Market Supply & Demand Liquefied Natural Gas • Currently net importer of natural gas • Sustained increase in local demand has resulted in increased investment in domestic production capacity, pipeline capacity, regasification capacity, and increase in LNG shipments • Two floating regasification and storage units (FRSU) located at Pecem terminal in northeast and Guanabara Bay terminal in southeast • Both facilities operated by Petrobras • Combined capacity of 740 mmcf/d • Petrobras has entered into Joint Venture agreement with BG Group to conduct a front end engineering design study for development of floating LNG unit • In 2009 Brazil had 12.9 Tcf of gas in proved reserves(1) • Historically imported significant quantities of gas from Bolivia due to lack of domestic infrastructure • By end of 2009, Brazil’s local gas production was 1.2 bcf/d (primarily from offshore fields) • Country imported ~0.8bcf/d by pipeline from Bolivia and 34mmcf/d from Trinidad and Tobago and Nigeria (LNG) • Demand of 2.0 bcf/d largely driven by power generation and industrial applications • Increasing by 7.4% per year(2) • Petrobras’ planned production development should transform Brazil into net exporter • ___________________________________ • Oil and Gas Journal • EIA, International Energy Outlook, 2010

  10. Brazilian Gas Market Pricing • Pricing primarily influenced by Petrobras • Sole producer of natural gas until 2006 • October 2010: Petrobras announced it will start renegotiations for its 2011 supply contracts with Bolivia and expects future prices to be lower than current ones Policy: Federal Government Policy: State Government Natural gas exploration, production, importation and storage Transportation (carrier) City gat Distribution & Trading End-User ANP State Regulatory Agencies Shipper

  11. Major Brazilian Players 12

  12. Major Brazilian Players In Pre-Salt Area 13 ___________________________________ Source: Anadarko

  13. Recent Deal Activity • HRT IPO • In November HRT raised $1.54 billion • Majority of these funds were raised to execute Solimoes Basin exploration and development programs • Resource potential near 1.5 billion barrels of oil equivalent 14

  14. What is next for deal flow? A&D IPOs Capital Market Activity M&A Consolidation

  15. The Brazilian Petroleum and Gas Scenario

  16. The Brazilian Petroleum and Gas Evolution • Brazil currently has 17th largest reserves in world (recent discoveries can move Brazil to 10th position) • From 1997 to 2005, Brazilian petroleum industry grew 350% in terms of production

  17. Discoveries 1974 - 1983

  18. Discoveries/Deep Water 1984 - 2002

  19. Discoveries 2003 – 2006

  20. Discoveries 2006 - 2007

  21. Discoveries 2006 - 2007

  22. Pre-salt Prior to pre-salt discoveries, geological estimates suggested 55 billion barrels of reserves in Brazil Tupi reserve estimates are now approximately 5-8 billion barrels Updated reserves estimates are now approximately 100 billion barrels for pre-salt area (only)

  23. Brazil – Gulf of Mexico Size Comparison

  24. Pre-Salt Impact of Tupi discovery (November 2007) Removal of blocks from 9th Bid Round (one month later) Brazilian government begins to re-evaluate Brazilian petroleum licensing regime (i.e. concession model)

  25. ANP Concession Agreement • Non-negotiable • Must comply with requirements of Petroleum Law • Title to produced oil or natural gas is held by concessionaire (booking of reserves) • Exploration and production of oil and gas is carried out for concessionaire’s own account and risk • Sets forth obligations and liabilities of concessionaire • Minimum exploratory program

  26. ANP Concession Agreement (cont’d.) • Based on Brazilian legal framework • However, incorporates international practice and experience • But also reflect particulars of Brazilian oil and gas sector

  27. ANP Concession Agreement (cont’d.) • At end of concession, reversion of remaining located assets in any part of concession area • Definition of necessary measures for conservation of reserves and other natural resources, public safety, and environmental protection • Dispute Resolution • Mediation • Arbitration (ICC arbitration held in Rio) • Term of concession agreement is up to 34 years • Exploration – Up to 7 years • Production – 27 years

  28. Proposed Changes President Lula announced in August 2009 proposals for major changes to Brazil's petroleum regime Bills were submitted to Brazilian Congress

  29. Proposed Changes • Law # 12,304/10 - Incorporation of Empresa Brasileira de Administração de Petróleo e Gás Natural S.A. – Pré Sal Petróleo S.A. (PPSA), a state owned oil company charged with managing Brazilian government's interests in PSAs • Law # 12,276/10 - Assignment by Brazilian Government to Petrobras of certain pre-salt acreage • Law # 12,351/10 - Production sharing agreements (PSAs) for the pre-salt area and other strategic areas replace the existing concession regime. • Also amends the Petroleum Law and establishes social fund to manage Federal Government revenues derived from PSAs.

  30. Law # 12,304/10 Incorporation of Empresa Brasileira de Administração de Petróleo e Gás Natural S.A. – Pré Sal Petróleo S.A. (PPSA) Law establishes mandate of Directors, quorum for Board approval, compensated for 4 years for “quarantine,” creation of a Advisory Board for financial issues, and release of financial statements on the web at end of every fiscal year

  31. Law # 12,276/10Assignment by Brazilian Government to Petrobras of Pre-Salt Acreage Contract assignment to be reviewed by National Council of Energy Policy (CNPE) Up to 5% of royalties will be divided between States and Municipalities Mutual Privatization Funds may subscribe to shares of stated controlled companies and ANP will review activities of Petrobras including unitization with other companies in pre-salt areas Legal challenge to new division of royalties

  32. Law # 12,351/10PSAs for pre-salt and other strategic areas • Amends Petroleum Law and establishes social fund to manage Federal Government revenues from PSAs • Main changes: • Brazilian government (Ministry of Mines and Energy) will contract with interested parties under new PSAs • Petrobras will be operator of blocks • Parties will be selected by bid process (with best proposal for government’s take) • CNPE and Ministry of Mines and Energy will define bid process, oil marketing policy, minimum local content, approve bid terms, and form of PSA • ANP will draft bid terms, conduct bid process, and draft PSA

  33. Law # 12,351/10 cont’d. Bid terms will define blocks at issue, definition of key terms such as “cost of oil” and “excess oil,” local content requirements, formation of mandatory consortium, signing bonus, documents to be submitted by bidders and minimum investments and guarantees for bid Winning proposal will grant government the highest “excess oil” PPSA will be party of PSA (for management purposes) and will appoint chair and half of members of the operating committee PSA will be very similar to Concession Contract in format (payment of royalties, signing bonus, term, phases, etc.) Marketing of production will be done by PPSA or Petrobras

  34. Law # 12,351/10 cont’d. Creation of Social Fund for Investment in education, culture, sports, public health, science, technology, and environment Resources of Social Fund include part of signing bonus, royalties, crude oil sales revenue, and other revenues. The Social Fund resources will be invested in foreign assets New policy for small and medium size petroleum companies should be enacted (onshore activities)

  35. Petrobras Investments • Petrobras will invest US$ 174 billion until 2013 (3 year period) • Through 2020, US$ 111 billion will be invested in pre-salt area (by itself) • Petrobras will also procure 26 tankers, 28 drilling rigs, and 18 FPSOS during this period • Local content requirement is expected to increase to 95% in 2017. • Companies with established and deeper presence in Brazil will have a competitive advantage in terms of competing for Petrobras contracts • Also consider BNDES requirements

  36. Tim Sulser Tudor, Pickering, Holt & Co. Heritage Plaza1111 BagbyHouston, TX 77002 Tel: 713.333.7100 tsulser@tudorpickering.com For additional information, please contact: Larry B. Pascal Haynes and Boone, LLP 2323 Victory Ave., Suite 700 Dallas, TX 75219 Tel: 214.651.5652 Larry.pascal@haynesboone.com Luis Fernando Pacheco Veirano Advogados Av. Presidente Wilson, 231/21o. andarRio de Janeiro, Brazil 20030-021 Tel: (5521) 3824-4747  luis.pacheco@veirano.com.br

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