Rio oil and gas 2010 commercial aspects

1 - Classification: Internal 2010-09-20

Incentives and Challenges toNew Players in the Brazilian Concession Regime

A View on Commercial Aspects


Introduction and Background

• Favourable conditions in the O&G sector brought a new economic and fiscal dimension to the industry in Brazil after the liberalization in late 1990’s

• As a result of the massive investments along the last decade the International Oil Companies (IOC) production in Brazil is expected to reach 300Kbpd in 2012 and 600Kbpd in 2016

• This first decade of investments in Brazil was noticeable by challenges and opportunities faced by IOCs in the development of their operations

Expected Production 2016

0

50

100

150

200

250

300

BG

Che

vron

Stat

oil

Gal

pE

nerg

ia

Rep

sol

YPF Sh

ell

El P

aso

ON

GC

Expected Production 2012

0

20

40

60

80

100

Stat

oil

Shel

l

Che

vron

El P

aso

BG

Gal

pE

nerg

ia

Rep

sol

YPF

ON

GC

Source: WoodMackenzie


Brazilian Concession Regime: Incentive

• Transparency in process has helped to pave the way

• Almost Annual bid rounds keeping the country on the agenda of E&P investors

• Clear process and way through

• Only small changes in Concession Agreements

− Mainly in Local Content

Source: ANP


Brazilian Concession Regime: Incentive

• Local content (LC) effort to build up a network of suppliers and to add value to country’s natural resource aims to repeat Norway’s and the US history of success

• However some sectors in Brazil are still doing the technological catch-up to be able to supply on competitive price and timeline the heated demand from the O&G sector

− The key is to balance the LC requirements with the temporary lack of capacity and spot market from local suppliers to provide critical components/systems

• Brazilian suppliers closing the gap through associations with world suppliers

− Also direct investment in the country

• Statoil collaborate to close such gaps with several initiatives with local suppliers through R&D programs


Fiscal system: Challenges & Opportunities

• Stable and transparent government take (GT) framework

− Classical Royalty-Tax regime

− Overall government take competitive

− Ownership of hydrocarbons after government take payments

− However the average GT accounts for approximately one-third of the overall taxation on a typical offshore project in Brazil

• Complex fiscal system

− Taxes on operations

− Tax burden also on investments through indirect taxes

• Often calculated in a gross-up method

− Three levels of taxation: Federal, State & municipal

• Many “ancillary” fiscal elements, primary and secondary obligations



• Complex fiscal system (cont.)

− Tax burden varying according to geographical location; product or service type and origin of supplier – thus very project specific

CAPEX

Goods Services

Local Foreign

REPETRONo REPETRO

Local ForeignREPETRONo REPETRO

PIS/COFINSISS

WHTCIDEPIS/COFINSISS

PIS/COFINSICMS Reduced Rate

IIIPIPIS/COFINSICMS Full rate

PIS/COFINSICMS Reduced

IPIPIS/COFINSICMS Full rate

Source:Deloitte



• Level of indirect taxes may restrain Brazilian suppliers to compete equally with foreign suppliers

− Productivity is key for Brazilian suppliers to compete on a global basis

• Results from cash flow models based on a typical Capex split for shallow waters development shows a total increase in Capex and Opex due to indirect taxes

− Including the effect of Repetro regime

• To reduce the tax burden on investments, specific temporary exemptions have been introduced in the industry in Brazil as an incentive

− Repetro Regime

− Temporary Admission Regimes

Capex Opex Assets (Goods) 18.3% 12,6% Services 8,4% 9,8% 26,7% 22,4%



• Repetro

− Introduces suspension of federal taxes applicable to the importation of goods used in Oil & Gas E&P activities

− Effectiveness is very project specific

− Impact on assets, therefore limited in production (Opex) phase

• Requires a specific commercial structure

− Asset owner must belong to an overseas company

− Requires a tight control and administration

− Requires financial guarantees

− Temporary importation by operators only


Commercial Structures

• Commercial Structure (cont.)

− Requires a structure under which concessionaire has to sign rental agreements with asset owner located abroad

− Payment of rentals abroad are subject to Transfer Price rules

• Combination and selection of tax structure and rental payments can create or destroy value to the project

Rental Contracts

Brazilian

Entity

Asset Owner

Rental Fees

Brazil Overseas



• No specific GAAP or fiscal system for Oil & Gas industry in Brazil

− No specific fiscal and accounting treatment (specially depreciation) for E&P

− Tax credits often difficult to obtain given the nature of the system was designed most for manufacturing industry


Challenges in Infrastructure and Commercialization

• On a overall perspective the geographical extent of pipeline network is still limited considering the size of the country

− Open access rules in place

• Access to pipeline infrastrucuture dependant on partnerships with major player

− Limited by geographical location specially for gas markets

− Sizeable crude pipeline infrastructure offshore Campos basin

• Amount of crude tanker-loaded to shore still relevant

• Local market virtually a monopsony for crude

− IOCs idetifying crude exports as the most profitable option

− Optimum value can be achieved by trading own crude

• Restrictions may apply depending on Transfer Price method selected


Challenges in Infrastructure and Commercialization

• Exporting Crude allowed by regulatory agency authorization

− Indication of technical information for each crude shipment

• Brazilian tax/customs authorities also ‘formalistic’ in the process of crude export

− Exports directly from FPSO without custom clearance are alllowed, however authorizations are always granted on a provisional basis

Application for Simplified Customs Procedure

Deliver required Documents

Closest custom office to the crude oil export floating

unit.

Latest by 5th day of each month:

-Initial stock;- Daily production;

- Domestic and Export (DDE #) quantities;-Final stock.

Latest by 25th day of each month:-Vessels;

- Cargo capacity;-Country destination;

-Estimated dates.

Company / Consortium


Closing Remarks

• Concession Regime with attractive terms

• Complex regime with taxes on investments and three levels of taxation

• Regime incentives (Repetro and Temporary Admission Regimes) bring incentives to the table, however

− Commercial/Tax structure with implications on remmitances of funds abroad and a balanced contractual strategy

− Requirements of tight administrative control on Repetro items

• Crude marketing limited by one buyer in local market

− Exports procedures requires a thourghtfull follow-up

− Specific rules to follow with customs/tax authorities, ANP, ANTAQ and Navy


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Rio oil and gas 2010 commercial aspects

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