Supply Chain Opportunities within Petrobras - Feasibility Study

Supply Chain Opportunities within
Petrobras
Country, Industry, Market Overview and Supply Chain
Feasibility Study by Universal Consensus

By: Andreas Fried, M.Sc.,

About the Author: Andreas Fried is the Director of Business Development & Strategic Client
Services at Universal Consensus, LLC and Board Member of the Swedish American Chamber of
Commerce, San Diego.

Connect on LinkedIn: http://www.linkedin.com/in/andreasfried

August 29, 2011

info@universalconsensus.com
www.universalconsensus.com

© Universal Consensus 2011-2012

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Executive Summary
This document is a feasibility study of supply chain opportunities within Petrobras. The study
provides a background of Brazil, and a synopsis of the Brazilian oil market, Petrobras, and
Petrobras supply chain opportunities.

Petróleo Brasileiro S.A., better known as Petrobras (NYSE: PBR), is an oil giant, the largest company
in Latin America, and the 34th largest company in the world. Petrobras plans to spend $224.7 billion
in their supply chain from 2011-2015. The possibilities for entry into the Brazilian market, due to
this corporate monster’s resources, are astounding. Due to Brazilian bureaucracy and trade
regulations, the challenges of entering the Brazilian market are equally staggering without access to
the right deal and transition team.

Petrobras plans to double its proved reserves through 2020 and will by then be one of the largest
companies in the world. In order to achieve this, Petrobras needs massive investments in its supply
chain. Some estimates put the total required supply chain spending at $1 trillion.

Recent legislation requires Petrobras to have local content of up to 70% in their supply chain. As a
result, it is currently experiencing a severe supply chain bottleneck. We intend to relieve this
bottleneck by helping our American clients to take part in some of this $1 trillion need and at the
same time utilize this opportunity to satisfy a need for our clients to emerge in Brazil, to take their
place in one of the fastest growing economies in the world.

We have assembled a team of some of the most renowned international attorneys, bankers, tax
advisors, investment advisors, deal brokers, and cross cultural experts in the United States. Should
this feasibility study interest you, we would like to meet with you for a complimentary session to
give you the opportunity to ask questions and to further explore this opportunity.

The objectives of this feasibility study are to:

 Provide background information on Brazil, Petrobras and the Brazilian oil industry
 Identify general and projected oil industry supply chain problems.
 Outline Petrobras supply chain
 Identify current bottlenecks in Petrobras’ supply chain
 Describe opportunities for U.S. companies in Petrobras’ supply chain

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Table of Contents
Executive Summary ................................................................................................................................................................ 2
Brazil ............................................................................................................................................................................................. 8
Introduction .......................................................................................................................................................................... 8
Politics ..................................................................................................................................................................................... 8
Economy ................................................................................................................................................................................. 9
Brazil’s Industry, Resources, and Technology ...................................................................................................... 10
Doing Business in Brazil ................................................................................................................................................ 11
Challenges ....................................................................................................................................................................... 11
Distribution and Sales Channels ............................................................................................................................ 12
Selling in Brazil ............................................................................................................................................................. 12
Law 12.349 .................................................................................................................................................................... 13
Establishing Operations ............................................................................................................................................ 14
Getting Paid .................................................................................................................................................................... 14
2014 World Cup and 2016 Olympics........................................................................................................................ 14
Brazil’s Fuel and Energy Sector ....................................................................................................................................... 15
History ................................................................................................................................................................................... 15
Energy Reserves ................................................................................................................................................................ 16
State Owned Enterprises (SOE) .................................................................................................................................. 17
Government Policies........................................................................................................................................................ 18
Local Content Requirement - Prominp ............................................................................................................... 18
Exploration - Pre-salt Legislation.......................................................................................................................... 20
Industry Organizations................................................................................................................................................... 21
Brazil's National Petroleum Agency..................................................................................................................... 21
Brazil’s National Energy Council ........................................................................................................................... 21
Brazilian Petroleum Institute (IBP) ..................................................................................................................... 21
National Organization of the Oil Industry (ONIP) .......................................................................................... 21
Refining Capacity .............................................................................................................................................................. 22
Local Demand ..................................................................................................................................................................... 22
Petrobras in Brazil ................................................................................................................................................................ 24
Overview .............................................................................................................................................................................. 24

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Finances ................................................................................................................................................................................ 26
Financial Performance ............................................................................................................................................... 26
Management................................................................................................................................................................... 27
Reserves ............................................................................................................................................................................... 29
National Sentiment .......................................................................................................................................................... 30
Workforce ............................................................................................................................................................................ 30
Petrobras Internationally................................................................................................................................................... 31
International Operations ............................................................................................................................................... 31
South America ............................................................................................................................................................... 31
Africa ................................................................................................................................................................................. 31
China.................................................................................................................................................................................. 32
India................................................................................................................................................................................... 32
Petrobras’ Strategy 2011-2015 ....................................................................................................................................... 33
Overview .............................................................................................................................................................................. 33
Investments......................................................................................................................................................................... 35
Petrobras’ Supply Chain – Best Prospects................................................................................................................... 36
Background ......................................................................................................................................................................... 36
Demand ................................................................................................................................................................................. 36
Supply Chain Challenges ................................................................................................................................................ 36
Petrobras Supply Chain Challenges ...................................................................................................................... 37
Brazil Supply Chain Challenges .............................................................................................................................. 38
Infrastructure ..................................................................................................................................................................... 38
Transportation .............................................................................................................................................................. 39
Drilling & Exploration ..................................................................................................................................................... 40
New Rigs .......................................................................................................................................................................... 40
Drilling and Production Units ................................................................................................................................. 41
Critical Equipment Exploration and Prospecting ........................................................................................... 42
Critical Exploration & Prospecting Services: .................................................................................................... 43
Price and Delivery Terms ......................................................................................................................................... 44
Ships and Support Vessel .............................................................................................................................................. 45
Petrobras’ Fleet Modernization and Expansion Program – PROMEF I and II: ................................... 45

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Petrobras Maritime Market Trends ..................................................................................................................... 47
Recent Maritime Deals ............................................................................................................................................... 47
Unspecified Demand ................................................................................................................................................... 48
Supplier................................................................................................................................................................................. 49
Finance and Investments............................................................................................................................................... 49
Supply Chain Financing ............................................................................................................................................. 49
Risk and Diversification - Supply Chain Acquisitions ................................................................................... 50
Petrobras Finance Company – PICFCo ................................................................................................................ 50
Insurance.............................................................................................................................................................................. 51
Human Resources ............................................................................................................................................................. 51
Human Resource Demand ........................................................................................................................................ 52
Training............................................................................................................................................................................ 53
Worker Safety & Health............................................................................................................................................. 53
Procurement ....................................................................................................................................................................... 54
U.S.-Brazil Differences................................................................................................................................................ 54
Procurement Process ................................................................................................................................................. 54
Procurement Portal..................................................................................................................................................... 55
Local Content ................................................................................................................................................................. 55
Pipelines, Refining & Petrochemicals ....................................................................................................................... 56
Downstream Best Prospects: .................................................................................................................................. 56
Refining ............................................................................................................................................................................ 56
Petrochemicals.............................................................................................................................................................. 57
Biofuels............................................................................................................................................................................. 57
Pipelines .......................................................................................................................................................................... 57
Research & Development .............................................................................................................................................. 57
UFRJ Technology Park ............................................................................................................................................... 58
Supply Chain Material and Equipment Development ................................................................................... 58
Environmental Technology, Safety & Security ..................................................................................................... 59
Environmental Technology – Distribution ........................................................................................................ 59
Accident Prevention.................................................................................................................................................... 59
Distribution & Terminals............................................................................................................................................... 59

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O&G Terminals .............................................................................................................................................................. 59
Gas Station Network ................................................................................................................................................... 60
Sources ....................................................................................................................................................................................... 66
Disclaimer ................................................................................................................................................................................. 71

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Brazil
Introduction
Brazil, with more than 200 million people
and an area roughly the size of the U.S.,
underwent more than half a century of
populist and military government until
1985 when the military regime peacefully
yielded power to civilian rulers. Brazil was
plagued by high inflation in the early 1990s
but stricter financial policies and increased
wealth based on vast natural resources has
spurred Brazilian growth. Brazil also
escaped relatively unharmed from the
financial crisis. 1 A highly unequal income
distribution and a high crime rate as well as
a high taxation level (38% of GDP) and
significant bureaucracy remain pressing
problems.2 The challenges associated with
doing business in Brazil have kept many companies from entering the country. Subsequently, lack
of international competition now presents an excellent opportunity for U.S. companies to capitalize
on growth opportunities in Brazil and gain an early-mover advantage – with the right team in place
to make it happen.

Politics
Brazil is a federal republic with two Chambers. The President of Brazil is both head of
state and head of the government. The president is elected to a four-year term by the people. Brazil
has a multi-party system. Parties often fail to claim majority power without forming cross-party
coalitions. The next presidential and general election is in 2014.3

Brazilian politics is divided between internationalist liberals and statist nationalists. The first group
consists of politicians which argue that the internationalization of the economy is essential for the
development of the country, while the other group rely on interventionism, and protection of state
enterprises. Fernando Henrique Cardoso’s administration is an example of the first group and Lula

1 https://www.cia.gov/library/publications/the-world-factbook/geos/br.html
2 http://www.heritage.org/index/Country/Brazil
3 DOC: Country Guide Brazil 2011.
4 http://terramagazine.terra.com.br/interna/0,,OI4683023-EI6578,00-

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da Silva’s administration as an example of the second. The shift between right and left wing has
often been cyclical.

Socialist president Dilma Rousseff of the Worker’s Party (PT, Partido dos Trabalhadores), who took
office on January 1, 2011, has indicated her intention to continue the former president Lula da
Silva’s economic policies, including sound fiscal management, inflation control, and a floating
exchange rate. PT changed its political orientation (from a far-left socialist to a centre-left social-
democratic party) after Lula was elected.4 The main challenger to the ruling PT is the Brazilian
Social Democracy Party (PSDB). PSDB has also moved to a more centrist role in the last decades.5
Due to the fragmented landscape of Brazilian political parties like PSDB often form a collation with
a center-right-wing party, such as the Democrats (PFL).6

President Rousseff has failed in polls in mid-2011 and been forced to fire two ministers on charges
of corruption. Furthermore, defense minister Nelson Jobim was fired in August 2011 after
criticizing Rousseff’s cabinet and calling two female ministers “idiots”. An August poll showed
Rousseff having a 49% approval rating; Lula da Silva left office with an 83% approval rating.7 Lula
da Silva says he has no plans to run for office in 2014 and that he chosen his successor in Dilma
Rousseff.8

Economy
Brazil’s economy has historically been based on commodities exports of wood, livestock, sugar,
gold, rubber, and coffee. During 1968-1973 GDP
growth averaged more than 11% annually as
the country was rapidly being industrialized
and the economy diversified. The economy
cooled to an annual growth rate of 6% between
1974 and 1980, mainly because of increased
costs of
imported oil.

The Brazilian
economy has always been subject to high inflation. Even as
economic growth surged in the mid-1980s, triple-digit inflation
persisted. In 1990, recession hit and GDP fell by an
unprecedented 4%. In 1994 inflation peaked at 2,700%. That
year, the finance minister, Fernando Henrique Cardoso (later

4 http://terramagazine.terra.com.br/interna/0,,OI4683023-EI6578,00-
PT+ainda+e+esquerda+no+Brasil+analisa+sociologo.html
5 http://www.psdb.org.br/
6 http://www.dem.org.br/
7 http://www.wsvn.com/news/articles/world/21005028113348/
8 http://www.reuters.com/article/2010/02/19/brazil-lula-idUSN1910259620100219

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president – see oil and gas sector history section), introduced a new currency, the Real, and a new
economic plan called the Real Plan. The plan featured privatization of state-owned industries,
lowering of tariffs, and counter inflation-measures. Inflation dropped to 6.9% by 1997, and has
since remained in single digits.9

Brazil boosted 2010 growth of 7.5%. The 2011-2015 forecasts are 4% to 5% annual growth. The
economy is the world’s eighth-largest and is expected to rise to fifth within a few years. Surging
exports, increased consumer spending and social programs have fueled the economy. As millions
have been lifted from poverty and GDP per capita has risen, domestic consumption has become a
major growth driver. Rising wages and high commodities prices combined with a laxer fiscal policy
has pushed inflation above 6%.10

Since domestic savings are not sufficient to sustain long-term high growth rates, Brazil must
continue to attract FDI, especially as the government plans to invest billions of dollars in the energy
and infrastructure sectors over the next few years. The U.S. is the main foreign direct investor in the
Brazilian economy. FDI in the Brazilian economy grew 85% annually in 2009-2010. This made
Brazil leapfrog from 15th to 5th place in terms of the world’s FDI-recipients.11

President Rousseff will continue to make economic growth and low inflation top priorities. Interest
rates remain among the highest in the world in a bid to cool inflation. To increase exports, the
government is seeking access to foreign markets through trade negotiations and increased export
promotion as well as measures to promote exports and local content requirements.12 No major
initiatives are underway to deal with stifling trade rules and bureaucracy. As mentioned, Rousseff
has spent her first year in office having to handle three major corruption scandals in her cabinet
with two more scandals underway. Rousseff has been tougher on graft than her predecessor, Lula
da Silva.13

Brazil’s Industry, Resources, and Technology
Brazil's economy is based on industries such as automobiles and parts, machinery and equipment,
textiles, shoes, cement, computers, aircraft, and consumer durables. Brazil continues to be a major
world supplier of commodities and natural resources. Brazil also has a diverse and sophisticated
services industry, including developed telecommunications, banking, energy, commerce, and
software sectors. The largest financial firms are Brazilian (and the two largest banks are
government-owned), but U.S. firms have an important share of the market.14

9 http://www.nationsencyclopedia.com/Americas/Brazil.html
11 United Nations Conference on Trade and Development: World Investment Report 2011.
13 http://news.yahoo.com/political-scandals-economy-toll-brazils-rousseff-185854963.html

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The Brazilian railroad industry was privatized and an effort is in place to deal similarly with a
deteriorating national highway system (Brazil has half the mileage of paved roads of the U.K.
despite being the size of the U.S).15 New opportunities are also expected to arise with the opening of
the Brazilian civil airports to private management and investment. 16

Doing Business in Brazil
Challenges
There are a number of challenges in the Brazilian market, including uneven income distribution,
below average public education, high market power concentration, and an informal economy as
well as numerous burdensome fees, rules and regulations, especially for trade and customs. As
always, you need intimate knowledge of the local environment and culture, including the implicit
costs of doing business (referred to as the “Custo Brasil”). Implicit costs are often related to
distribution, government procedures, employee benefits, and environmental laws.18 The Universal
Consensus team has been developed, in part, to advice on these issues.

Distribution channels are fragmented; it is estimated that a container in Rio sits four time as long on
the wharf as a container in Rotterdam due to logistics
bottlenecks. 19 In addition the trade barriers are
significant and the legal system has a lengthy process
for enforcing IP-rights and commercial law. Heavy taxes
increase consumer prices up to 100%, while
bureaucratic procedures and onerous product licensing
also raise costs. The World Bank ranks Brazil 127 out of
183 economies in the world in terms of ease of doing
business. The challenges have kept many companies
from entering the country. Subsequently, lack of international competition now presents an
excellent opportunity for first-mover advantage by U.S. companies.

15

http://online.wsj.com/article/SB10001424053111904823804576504641852736916.html?KEYWORDS=bra
zil+paved+roads
19http://online.wsj.com/article/SB10001424053111904823804576504641852736916.html?KEYWORDS=b

razil+paved+roads

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Starting a Business Protecting Investors
Procedures (number) 15 Extent of disclosure index (0-10) 6
Time (days) 120 Extent of director liability index (0-10) 7
Cost (% of income per capita) 7.3 Ease of shareholder suits index (0-10) 3
Paid-in Min. Capital (% of income per capita) 0.0 Strength of investor protection index (0-10) 5.3
Dealing with Construction Permits Paying Taxes
Procedures (number) 18 Payments (number per year) 10
Time (days) 411 Time (hours per year) 2600
Cost (% of income per capita) 46.6 Profit tax (%) 21.4
Labor tax and contributions (%) 40.9
Other taxes (%) 6.7
Total tax rate (% profit) 69.0
Registering Property Trading Across Borders
Procedures (number) 14 Documents to export (number) 8
Time (days) 42 Time to export (days) 13
Cost (% of property value) 2.7 Cost to export (US$ per container) 1,790
Documents to import (number) 7
Time to import (days) 17
Cost to import (US$ per container) 1,730
Getting Credit Enforcing Contracts
Strength of legal rights index (0-10) 3 Procedures (number) 45
Depth of credit information index (0-6) 5 Time (days) 616
Public registry coverage (% of adults) 26.9 Cost (% of claim) 16.5
Private bureau coverage (% of adults) 53.5
Closing a Business
Recovery rate (cents on the dollar) 17.1
Time (years) 4.0
Cost (% of estate) 12

Administrative measures; the resources required or quality rating.

Distribution and Sales Channels
Brazilian importers generally do not maintain inventory of capital equipment, spare parts, or raw
materials, partly because of high import and storage costs. Bonded warehouses are a way to
circumvent this. The importer or the distributor is responsible for support and after sales services
in accordance with Brazil’s consumer protection law.20

Selling in Brazil
Price and payment terms are the most important sales factors. To be competitive, U.S. companies
should adapt their products to local technical requirements and local culture. Emphasizing product
quality, customer service, and warranty terms are key factors for U.S. companies. Payment terms

20 MOITI: Doing Business in Brazil.

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are very important in Brazil because of the country’s high interest rates. In fact, it is not unusual for
a local company to select a U.S. supplier with higher prices but better finance terms.

Import-related costs are generally high because of import duties and taxes; an on-the-ground
presence in Brazil is preferable. In addition, Brazilian buyers prefer to purchase from companies
with a local presence as they believe that this will be a guarantee for high quality in after-sales and
support activities.21

Advance descriptions of U.S. suppliers' capabilities can prove influential in winning a contract, even
when they are provided before the exact terms of an investment plan are defined or the project's
specifications are completed. Such a proposal should include financing, engineering, and equipment
presentations.22

Brazilians are a friendly people and they may soon take on more of the persona of a friend than a
business contact. You may be entrusted with confidential information significantly soon than you
would in the United States. This is especially true when meeting with junior management or other
stakeholders that are not necessarily decision-makers.23

The selling factors listed above are merely a selection of important considerations related to doing
business in Brazil; Universal Consensus and our team can give you the full scope.

Law 12.349
Law 12.349, enacted in December 2010, provides preferential treatment for domestic suppliers
over foreign firms in public procurement, even if the Brazilian company’s prices are up to 25%
higher. The preference applies to government procurement at all levels. As a consequence, U.S.
companies may find it preferable to be associated with a local firm or have local presence.
Government procurement of foreign telecommunications and IT is exempt from Law 12.349.24

Law 12.349 was enacted as a response to several factors which have been unfavorable for
Brazilian-made products. The Brazilian Real has appreciated nearly 50% against the dollar in
recent years which has pushed domestic labor costs (and subsequent payroll tax costs) significantly
higher. As a result, the government in early August unveiled a plan to further support local products
through temporary tax cuts (for example on skilled services payroll-taxes) and increased local
public spending. The move comes after recent data for industrial production in Brazil showed
significant problems for local manufacturers.

21 http://thebrazilbusiness.com/article/5-secrets-about-business-in-brazil
23 http://thebrazilbusiness.com/article/5-secrets-about-business-in-brazil

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Establishing Operations
It takes an average of 15 procedures and 120 days to start a new business. The annual
administrative burden to a medium-size business of tax payments in Brazil is an average of 2,600
hours versus 199 hours in the OECD high-income economies. Taxes on commercial and financial
transactions are particularly burdensome, and businesses complain that these taxes hinder the
international competitiveness of Brazilian products.

Joint ventures are very common in Brazil, particularly as a way for foreign firms to compete for
government contracts or in heavily regulated industry sectors, such as telecommunications and
energy. Usually joint ventures are established through "sociedades anônimas" (≈corporation) or
"limitadas" (≈LP). Licensing agreements are also common in Brazil.

We have a strong and experienced team to introduce our clients to key stakeholders and steer clear
of market entry pitfalls that will substantially ease the market entry process and reduce market
entry risk.

Getting Paid
In Brazil, accounts can only be kept in local currency (Brazilian Real, R$).25 Given high interest rates
and intermediary spreads, Brazilian buyers are likely to push for open account or cash up front.26
Petrobras often has 5-day payment terms for their customers.27

2014 World Cup and 2016 Olympics
You cannot do business in Brazil in the coming years without considering the opportunities
presented by the upcoming World Cup in 2014 (nationwide) and Olympic Games (in Rio de Janeiro)
in 2016. Brazil will host several international sporting events leading up to the games, including the
2011 World Military Games, the 2011-2012 Pan-American Maccabi Games, and the 2013
Confederations Cup.

The Government of Brazil expects to invest $106 billion in Game preparations. Opportunities
include construction of new hotels, the renewal of stadiums, the expansion and modernization of
subways and airports, the construction of new roads, the construction of rapid transit rail lines and
the revitalization of ports. Improvements in sanitation, power, telecommunications, hospitals and
public security will also be necessary.28

27 Petrobras Procurement Document: PROCEDIMENTO LICITATÓRIO: 270-9009/11
28 TozziniFreire Advogados: Investment Opportunities In Brazilian Infrastructure.

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Brazil’s Fuel and Energy Sector
History
The Government of Brazil undertook an ambitious program to reduce dependence on imported oil.
In the mid-1980s, imports accounted for more than 70% of Brazil's oil and derivatives needs; the
net figure is now close to zero.

In the 1980s and part of the 1990s, the government set artificially low prices for Petrobras' gasoline
and other products to try to cool the sky-high four-digit inflation that then ravaged Brazil. The
policy starved Petrobras of investment capital. When oil prices rose, Petrobras was selling high-
priced imported oil at a loss.

80% of Brazil's oil is offshore; Petrobras consequently began adapting land rigs for offshore
conditions. Despite the company's technical competence, its management was provincial and
sometimes undermined by politicians. The board consisted of Petrobras' top executives, and the
company's monopoly on Brazilian territory relieved it of the need to raise efficiency. The company's
international trading arm was grossly inefficient.

In 1995 Petrobras was in a state of total disorder. Newly elected president Fernando
Henrique Cardoso wanted to shake the company up. This resulted in the powerful oil-
workers union challenging him with a national strike. But the strike backfired and
public opinion swung against the status quo at Petrobras. Mr. Cardoso called his
policy for Petrobras "flexibilization." Cardoso wasn't willing to privatize Petrobras
fully, but he used market forces, like a stock flotation and foreign competition, to
make Petrobras behave more like a private company. New top management renegotiated suppliers-
deals and started an
incentive-based bonus
system for managers
and cleaned up the
books by
acknowledging billions
of dollars in pension
and health liabilities. A
2000 NYSE listing
helped improve
governance and force
further transparency.29

29 Matt Mofett: How a Sleepy Oil Giant Became a World Player. Wall Street Journal 30 Aug 2007.

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Three key milestones in Petrobras’ history are:

 1953: Petrobras monopoly introduced.
 1995: End of monopoly.
 1997: The “Petroleum Investment Law”, which established a regulatory framework that
liberalized the oil industry.30

Energy Reserves
In 2008, Brazil announced the discovery of the Tupi and Carioca oil fields off the coast of Rio de
Janeiro. Output from the existing Campos Basin and the discovery of the new fields will make Brazil
a significant oil exporter by 2015. Hydropower currently accounts for 77,000 megawatts (69%) of
Brazil’s energy supply. Brazil is also the world’s largest biofuels exporter and sugar-based ethanol
makes up over 50% of Brazil’s vehicle fuel usage.

O&G fields along the Brazilian coast.

Brazil as a whole could have a potential of 60 billion barrels of crude oil according to a July 2011
estimate, up somewhat from previous forecasts. The new estimate would take the reserve gross
value to $5.4 trillion at $90/barrel. Furthermore, Petrobras will reach its target of 2.1 million
barrels a day of average oil production in Brazil for 2011. Petrobras plans to triple production to 6
million barrels a day by 2020.

30 http://www.petrobras.com.br/pt/

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About 92 percent of Brazil’s oil production in 2010 originated from offshore fields, mostly at
extreme depths. Petrobras’ oil and gas production accounts for nearly 95 percent of Brazil’s total
production.

In 2010, Brazil exported 230,492,050 barrels
of oil (or, approximately 631,485 bpd). During
the same period, Brazil refined about 1.9
million bpd, 338,763 bpd of which were light
oil imported to mix with Brazil’s
predominantly heavy crude.31

State Owned Enterprises (SOE)
Three-quarters of the world's reserves are now in the hands of national oil companies; the top
publicly owned international oil companies have direct access to only about 5% of the world's oil
reserves, with an additional 30% theoretically open through joint ventures.

Petrobras "learned over the last 10 years to think on its feet like an international oil company but
still retained the strengths and advantages of a national company," says Richard D. Taylor,
president of BP's Brazilian operations. Petrobras officials argue that the company's dual identity —
part embodiment of Brazilian nationalism, part Wall Street growth play — is an asset. "We view
ourselves a having the best of both worlds," says financial director Almir Guilherme Barbassa.32

31 http://www.petrobras.com.br/pt/ and http://www.anp.gov.br/
32 Jenik Radon and Julius Thaler: Resolving conflicts of interest in state-owned enterprises. UNESCO.

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Government Policies
Brazilian oil industry contractors are often traditional engineering/construction/service
companies, some of which have been nurtured under years of protective national development
policies. The main goals of Brazilian federal policies have been safety and sustainability, domestic
economic growth, and low levels of inflation.33

Much of the groundwork for the Petrobras’ transformation was laid under the centrist government
of Fernando Henrique Cardoso, who left office at the beginning of 2003. His successors the leftists
Lula da Silva and Dilma Rousseff have injecting a tint of politics in the company's management.34

The Brazilian government wants to avoid inflow of foreign investment that inflate the domestic
currency’s value but bring little local technological or infrastructure development to Brazil. This is a
chief reason why local content requirements have been implemented.

Petrosal
Lula da Silva’s government created a new public company, dubbed Petrosal by the media, which will
own and influence the concession bidding process. The yet not fully implemented new regulatory
framework would demand that Petrosal be given Board positions in new concession consortiums,
to act as the Brazilian government representative. Petrosal would own the concessions and sell the
concession rights in order to build wealth. The wealth would be used to operate Petrosal as a
sovereign wealth fund, much like Norway’s Petoro AS. The future of Petrosal is very much in limbo;
several international investors in Petrobras have indicated they will litigate the commencement of
Petrosal.35

Local Content Requirement - Prominp
Mr. da Silva initiated the requirement that Petrobras buy more Brazilian-made equipment in order
to stimulate domestic industries. Prominp – the Mobilization Program of the National Oil and
Natural Gas is the program (coordinated by the Ministry of Mines and Energy) that governs and
promotes local content requirements.36 After a couple of largely Brazilian-made rigs came in
substantially over budget during the 2000s, analysts have questioned the local content policy. The
local content policy has been one of the reasons why Petrobras’ stock performance has been
abysmal the last few years.37

The local content requirement can vary and is subject to regulatory oversight and instructions from
the National Petroleum Agency and the National Organization of the Oil Industry. Petrobras is
expected to be fined by the government in September 2011 as the company has failed to fully

35 http://www.economist.com/node/16964094
36 http://www.prominp.com.br/

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adhere to local content requirements.38 In general, the local content requirement is that up to 70%
of supply chain activities must be Brazilian (performed by company incorporated in Brazil).

The government has indicated that national content requirements in exploration and production
(E&P) will rise to around 90% for pre-salt fields. Companies will have to establish significant local
presence, in particular equipment suppliers (topsides, pipes, risers, drilling packages, power
packages for offshore units), who will likely need to build production facilities in Brazil.39

As mentioned, what constitutes local content and what the requirements are varies, and is often
specified in each individual contract. But a company is deemed to be a ‘Brazilian company’ for local
content purposes if it is incorporated in Brazil. Regulators will also verify that the company is
Brazilian in the normal sense of the word (Brazilian employees and assets). Companies also need to
get a certification of local content from ONIP, the industry organization. ONIP and ANP simplified
the certification process in 2011. Fines are proportional to the missing local content investment.
Regulatory requirements are mostly governed by Resolution ANP No. 36, issued in 2007.

Prominp plan to increase local content. The plan includes incentives for new international entrants.

The local content requirement is in effect for current tenders of 19 oil rigs that have to be
completed in Brazilian shipyards. Petrobras withdrew the tender, as it did recently with a request
for new ships. Petrobras has decided to re-tender for the construction of the new rigs in order to
drive down the price.40

38 http://www.upstreamonline.com/live/article272219.ece
39 Heller Redo Barroso and Marcos Macedo: Brazilian basics.
40 http://247wallst.com/2011/07/23/stunning-petrobras-spending-224-7-billion-on-offshore-oil-pbr-ne-do-

rig-hal-bhi-slb/

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Petrobras is involved within the Prominp program, as can be seen in the governance structure
below. The Prominp governance structure:41

MME – Minister
MDIC – Minister
PETROBRAS – President and Services Director
Steering ONIP – CEO/President
BNDES – President
Committee IBP – President

MME – Oil, Natural Gas and Renewable Fuels Secretariat
Oil, Natural Gas and
MDIC – Development, Industry and International Trade
Renewable Fuels Secretariat Secretariat
BNDES - Director
Executive PETROBRAS – Engineering Executive Manager
PROMINP – Executive Coordinator
Committee ONIP – Director
IBP – Director
Executive Coordinator Associations – President / Director (ABCE, ABDIB,
ABEMI, ABIMAQ, ABINEE, ABITAM
SINAVAL e CNI)

Sectorial Committee
Exploration Maritime G&P and
Downstream
& Production Transportation Pipelines
Environment Thematic Committee
P&G IND
Technology Thematic Committee

Exploration - Pre-salt Legislation
In 2010 Brazil abandoned its previous concession model for a production sharing model for the
pre-salt fields. Tendered pre-salt reserves will belong to the Brazilian government (Petrosal) and
those future pre-salt fields and areas judged strategic for the Brazilian government will be ruled
through production sharing agreements (PSAs). Petrobras will hold at least 30 percent equity in
each oil block.

Additionally, Petrobras will be the operator in all future oil fields. In specific cases, as decided by
the Brazilian National Energy Council, Petrobras may be called upon to explore selected pre-salt oil
fields without a tender process. 29 percent of the pre-salt area has been auctioned off through the
previous concession regime. The new PSA legislation will regulate the remaining 71 percent of the
pre-salt fields. Consortiums will share the produced oil with the Brazilian government and will pay
royalties. The new government company, Petrosal, will most likely demand Board seat in any PSA
consortium.42

41 http://www.prominp.com.br/

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Industry Organizations
Brazil's National Petroleum Agency
Brazil's National Petroleum Agency (Agência Nacional do Petróleo, Gás Natural e Biocombustíveis –
ANP) is the main oil industry regulatory body. It is a federal government agency linked to
the Ministry of Mines and Energy.43 ANP monitors and audit contractual local content requirements.
ANP’s role in regulatory oversight of local content in concession bids:

Brazil’s National Energy Council
The Brazilian National Council of Energy Policy (Conselho Nacional de Política Energética - CNPE) is
the governmental organ responsible for developing energy policies. CNPE is formed by state
government representatives, experts in energy, non-governmental organizations and seven
ministers.44

Brazilian Petroleum Institute (IBP)
The Brazilian Petroleum, Gas and Biofuels Institute (Instituto Brasileiro de Petróleo, Gás e
Biocombustíveis – IBP) is a private non-profit funded in 1957 which currently has over 200
member companies. IBP is promoting the development of Brazil’s petroleum industry aimed at an
industry competitive, sustainable, ethical and socially responsible.45

National Organization of the Oil Industry (ONIP)
ONIP supports the development of a favorable environment for new investments and operations in
the Brazilian petroleum sector to promote the increase of local content on a competitive basis.

43 http://www.anp.gov.br/
44 http://www.planalto.gov.br/ccivil_03/Leis/L9478.htm
45 http://www.ibp.org.br/

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ONIP, a private non-profit established in 1999, serves as a forum for all the companies and
government agencies involved in the oil & gas sector in Brazil.46

Refining Capacity
Brazil has become increasingly dependent on imports
of refined oil products over the past few years.
Petrobras said earlier in 2011 that they are nearing
peak refinery capacity. Increased production of crude
will magnify the problem. Petrobras’ CEO
Gabrielli said it would be “suicide” not to invest in
refining capacity.

As of 2010, Brazil's refining capacity was 1.9 million
barrels per day of crude oil. Capacity is due to rise to
3.6 million barrels per day by 2015. Current crude oil
output is above 2.18 million barrels per day.
Petrobras has $40 billion allocated for the
development of refineries through 2014.47

Local Demand
As more than
95% of
Petrobras’
reserves are in
Brazil and only
a fraction is
being exported,
the company is
extremely
dependent on
local demand
conditions.48

Increase in local demand will be Petrobras’ main demand driver. Petrobras said a few weeks ago
that petroleum import will have to rise to satisfy local demand as Petrobras can’t keep pace. A
major reason for Petrobras’ slow increase in production pace is the adverse impact of rising oil

46 http://www.onip.org.br/
47 http://www.downstreamtoday.com/news/article.aspx?a_id=25760

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prices on local refining costs. Higher pump prices could help to curb demand, but the government is
worried about the impact they would have on inflation.49

Local demand in relation to supply (thousand barrels per day):50

3000

2500

2000

1500 Demand
Supply
1000

500

0
2006 2007 2008 2009 2010

Bottleneck Sectors
This chart outlines Brazilian O&G industry bottlenecks identified by ANP:

49 http://www.guardian.co.uk/business/feedarticle/9774984
50 http://www.eia.gov/

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Petrobras in Brazil
Overview
Petrobras is a publicly-held energy company headquartered in downtown Rio de Janeiro. Petrobras
is the third biggest energy company in the world in terms of market value and in terms of proven
oil reserves. The company has 80,500 holding company employees and more than 200,000 people
working for contracted companies. Like most oil companies, Petrobras operates an integrated
business model. The company also operates in the natural gas, energy and biofuels segments.
Petrobras’ specialty is in ultra deep water oil and gas exploration. The Brazilian government is the
majority owner of Petrobras.51

Petrobras’ ownership distribution.

A decade ago, state-controlled Petrobras was such an industry laggard that it earned the
nickname Petrosaurus. Workers were 25% less productive than the industry average, and Brazil
depended on imports for nearly half its oil. Petrobras' board consisted solely of company insiders.
But introducing an independent Board of Directors and opening up the Brazilian oil market to
private competition forced Petrobras to become more productive.

Today, Petrobras boasts more crude reserves than Chevron and lower costs of finding oil than
Exxon Mobil. A threefold increase in research and development spending 2001-2006 helped
Petrobras to develop cutting-edge technology that has helped double its production over the past
decade and increased its reserves by 50 percent. 52


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A graphical presentation of Petrobras operations:

Petrobras in comparison with its competitors:53


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Annualized revenue growth comparison 2004-2009:

Finances
Financial Performance
Q1 2011 net profit was up 41% from Q1 2010, mainly due to 7% domestic demand increase. The
increase would have been far bigger if gasoline prices were not influenced by the Brazilian
government. The government is constraining domestic fuel prices to combat inflation.

Petrobras leverage level (17%) is substantially
lower than their 35% leverage target, indicating
Petrobras can loan to fund growth. Petrobras
increased investment 7% in 2010, primarily to
boost production and enhance Brazilian oil-
infrastructure and logistics operations.54

Petrobras is extremely exposed to the
development of the overall Brazil economy. The
Brazil Real is the world’s most overvalued in terms
of purchasing power parity, valued 52% above
fair value. If GDP/capita is considered, the Real is
valued 150% higher than the U.S.-dollar.55

The vast majority of Petrobras’ reserves are in
Brazil and South America. International reserves
fluctuate significantly due to their small relative
size. Many analysts have criticized the company's
heavy investment in local refining capacities, which they say doesn't generate enough return for the
company. The major growth prospects outside Brazil are in Africa.

54 Petrobras: Q1 2011 Quarterly Report.
55 http://www.economist.com/blogs/dailychart/2011/07/big-mac-index

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Management
Chairman - Brazilian Finance Minister Guido Mantega

Guido Mantega is a Brazilian economist, politician and currently Brazil's Finance Minister. He has
long been associated with the left wing Workers' Party and was a key
member in the successful presidential campaign of the party's founder and
leader, Lula da Silva. A long-time advocate of more development spending
in Brazil, Mantega has presided over the country's rapid economic rebound
from a global financial crisis.

Recently there has been a heated debate in Brazil involving Guido Mantega as Petrobras’ Board
twice rejected investment plans from the company. Brazil's government - which is Petrobras'
leading shareholder - wanted the company to rein in spending to take some of the heat out of
inflation. The plan approved in late July 2011 somewhat kept the lid on spending.56

CEO - José Sergio Gabrielli de Azevedo

Sergio Gabrielli was CFO and head of IR at Petrobras for 3 years before taking over as CEO in 2005.
Mr. Gabrielli is a professor in economics. He has written several articles and
books on productive restructuring, labor markets, macroeconomics and
regional development. He got his PhD from Boston University in 1987.
During 2000-2011 he was a visiting scholar at the London School of
Economics. Mr. Gabarielli is a frequent guest-speaker at renowned business
schools. He has often encouraged use of new technology and has put that
notion into practice as CEO. He has also stressed importance of developing
international trade links with competitors to form win-win situations.

Corporate Governance

Petrobras has adopted U.S. accounting standards and faces scrutiny from analysts as one of the
most widely traded overseas issues on the NYSE. Under the company's two-tier stock structure, the
federal government maintains a slight majority of voting shares, but almost 75% of overall equity is
now in the hands of outside shareholders.

56http://www.fazenda.gov.br/portugues/institucional/guido_mantega.asp and
http://www.ft.com/cms/s/0/9fa5bd4a-cb2e-11df-95c0-00144feab49a.html

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The corporate structure (chart below) is a mix of functional and geographical departments with
elements of matrix structure.

The Company is composed of a Board of Directors and Management Committees, of an Executive
Board of Directors, an Audit Committee, Internal Auditor, a Business Committee, and of
Management Committees.

The Board of Directors is an autonomous body. It consists of nine members, elected in an Ordinary
General Meeting for a one-year term, with reelection being allowed. The Executive Board (chart
below):

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Executive Board (selection) Title Primary Company Age
Chief Executive Officer, President, Member of the Executive Board, Director,
José de Azevedo Director of Petrobras Energía Participaciones SA and Director of Petrobras Petrobras 62
Energia SA
Chief Financial Officer, Chief Investor Relations Officer, Member of Executive
Almir Barbassa Board, Chief Executive Officer of PIFCos, Executive Manager of Corporate Petrobras 63
Finance of Petrobras and Director of PIFCos
Chief Accountant Officer and Director of Petrobras International Finance
Marcos Menezes Petrobras 59
Company
Executive Manager of Corporate Finance, Chairman of PIFCo and Chief Executive
Daniel de Oliveira Petrobras 59
Officer of PIFCo
Board of Directors (selection)
Guido Mantega -- Petrobras 62
Fabio Barbosa -- Banco ABN AMRO Real S.A. 56
Antonio Palocci Filho -- Petrobras 51
Jorge Johannpeter -- Gerdau USA, Inc. 73
Francisco de Albuquerque -- Petrobras 74
Luciano Galvão Coutinho Ph.D. -- Banco Nacional de Desenvolvimento Economico e Social-BNDES 65
Sergio Quintella -- Petrobras 76
Márcio Pereira Zimmermann -- Centrais Electricas Brasileiras S.A. 55

The Executive Board of Directors undertakes the Company's business, pursuant to the mission,
goals, strategies, and guidelines established by the Board of Directors. It comprises of a chairman
and six directors elected by the Board of Directors, with three-year terms, reelection being
permitted, and may be dismissed at any time. Among the members of the Executive Board, only the
president is a member of the Board of Directors without, however, presiding over the body.

There are two more strategic committees. The Business Committee acts as a forum for the
integration of relevant and strategic issues aimed to promote the alignment between business
development, company management and the strategic plan guidelines. It acts as a support
mechanism for the senior management in its decision-making processes. The Management
Committees are forums where the topics to be presented to the Business Committee can be refined
and detailed. They coordinate in an integrated and complementary manner with the Business
Committee, with the other Management Committees, and with the Board of Directors'
Committees.57

Reserves
The graphic below shows current Petrobras reserves and annual changes (split per region). 95% of
Petrobras’ reserves are in Brazil, which highlights the company’s dependence on its Brazilian
operations. Other oil companies (e.g. Shell, Statoil, Anadarko, Chevron, OGX) will be investing $26
Oil Reserves 2007 2008 2009 2010 billion in Brazil from 2009 to 2013. A 2011 Booz
Brazil 10,819 10,274 11,563 12,138 and Company study predicts that total
-5% 13% 5%
expenditure (investment and operation) in
Africa 66 89 116 132
35% 30% 13% Brazil’s oil and gas sector will reach US$400
South America 769 791 448 459 billion through 2020.58
3% -43% 2%
North America 50 36 16 19
-28% -56% 19%

57 http://www.petrobras.com.br/

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National Sentiment
The history of Petrobras has been marked by a strong connection with its country of origin. The
creation of Petrobras in 1953, by the then President of Brazil, Getúlio Vargas, represented a
triumph for a nationalist movement known as O Petróleo é Nosso (The Petroleum is Ours). In 2009,
for the third consecutive year, Petrobras was the company with the best reputation in Brazil
according to Global RepTrak Pulse.59

Workforce
Petrobras have more than 80,000 employees on staff. Working for the oil-giant is seen as
prestigious in Brazil. Petrobras employees are renowned for their technological skills and have set
a number of world records, including, at one point, the record for the world’s deepest exploration
well. Since the early 90s, one percent of Petrobras gross receipts have been earmarked for R&D.

In early July 2011, Petrobras employees voted on a strike-initiative in order to pressure Petrobras
into increased workforce revenue-sharing. Strikes are common during annual wage and profit-
sharing negotiations but aren't likely to affect the company's output or profit. The last major strike
in 2009 lasted five days and had only a minor impact on production. 60

59 Alexandre Chequer: Pre-salt past, present and future. T&B Petroleum #27.
60 http://online.wsj.com/article/BT-CO-20110628-712359.html

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Petrobras Internationally

International Operations
Petrobras holds more than 100 production licenses in 27 countries in
Latin America (Argentina and Venezuela), Gulf of Mexico, and Africa
(Angola, Nigeria, Tanzania, Libya). The Bolivia pipeline strengthened
gas business in Latin America. Argentina has become the second most
important market for Petrobras following the Perez Companc
acquisition in 2002. Overseas refining capacity has gone from zero
barrels in 2000 to 126.2 thousand barrels of oil per day in 2007.61

South America
From 1985 on, Petrobras shifted its focus from overseas operations in favor of neighboring South
American countries, entering Colombia (1985), Ecuador (1987) and Argentina (1989).

It was the prospect of an end to the State monopoly over the exploitation of Brazilian reserves that
spurred Petrobras to look for new business opportunities abroad. The idea was to reduce risks by
diversifying assets and markets. This new stage of internationalization for Petrobras also coincided
with the acceleration of South American economic integration brought about by the trade union
Mercosur.

Bolivia, Ecuador and Venezuela have been troublesome markets for Petrobras. In the first two,
Petrobras is at the heart of conflicts involving ownership of assets, tax burden on underground
mineral resources and social and environmental damages entailed by oil and gas exploitation.
Bolivia finally nationalized its oil industry. In Venezuela, even without the onset of actual open
conflicts, Petrobras´ investments have been affected by nationalist measures that have been
reducing the company´s profit margins and general presence in the country.62

Africa
Petrobras is also looking increasingly towards Africa. Africa has 13% of the world's oil reserves.
Deepwater fields off the coast of West Africa host some of the largest and most prolific oil and gas
fields discovered over the past two decades. Furthermore, East Africa alone has reserves worth $7.3
trillion. Libya and Nigeria are the traditional African oil exporters but Angola, Chad and Equatorial
Guinea are net oil exporters. The oil boom in Angola has made Luanda the world’s most expensive

61 Andrea Goldstein: The Emergence of Multilatinas - The Petrobras Experience. UNIVERSIA BUSINESS REVIEW
(2010).
62 http://noticias.uol.com.br/economia/ultnot/efe/2006/05/02/ult1767u66304.jhtm

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city to live in and the country (which is also former Portuguese colony) is expected to be one of the
fastest growing in the world.

The salt layer, a geological formation off the coast of Africa and Brazil, makes extraction in both
these regions very similar and very challenging (i.e. also expensive). The oil and natural gas lie
below an approximately 2000 m deep layer of salt, itself below an approximately 2000 m deep
layer of rock under 2000-3000 m of the Atlantic. Petrobras’ experience from Atlantic pre-salt
drilling gives it a major competitive advantage in West Africa.63

China
Petrobras in 2009 signed contracts with China. One deal is with the Chinese Development Bank,
which is a clear financial agreement in which the CDB will lend $10 billion with a payback time of
10 years. Another agreement was also signed with SINOPEC and it involves the possibility of joint
ventures and evaluation of different opportunities in exploration in blocks in the northern part of
Brazil; blocks outside of Brazil; and with possibilities in petrochemicals, refining, and logistics.64

India
Petrobras has been in India since 2007 and has minority stakes in some major fields. Petrobras was
in discussions with Indian conglomerate Reliance Industries a few years ago to form a partnership
in petrochemicals, but nothing came of that. Instead Reliance signed a partnership deal with BP.
The British company will get a 75% stake in some of India’s largest oil fields.65

Petrobras’ international exploration sites.

63 Africa Research Bulletin: AFRICA – BRAZIL Preparing for Deeper Involvement.
64 http://cigienergyblueprint.wordpress.com/2009/08/13/petrobras-ceo-gabrielli-on-brazil-energy-
outlook-the-deal-with-china-biofuels-and-more/
65 www.petrobras.com.br

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Petrobras’ Strategy 2011-2015
Overview
Petrobras’ 2011-
2015 business plan
was released in
July 2011.
Petrobras plans to
double its proved
reserves until
2020. Between
2010 and 2015,
Petrobras will
spend $224 billion
(or $ 44.8 billion
per year), which
represents a 28.4
percent increase over its spending in its previous five-year business plan. 95% of investment
($213.5 billion) will go to activities in Brazil and 5% ($11.2 billion) to foreign operations, involving
688 projects in all, 57% of which have already been authorized for execution and implementation.
The new business plan calls for 16 floating production and offloading platforms and/or modules
and 28 offshore drilling rigs, which are currently being re-tendered. Petrobras has the highest
growth rate target of the industry as shown in the chart above.66

Segment Petrobras will also upgrade a number of existing
US$ billion Share
Exploration and Production refineries and will build four new refineries, including
127.5 57%
Refining, Transportation and Marketing 70.6 31%
Gas & Power the Rio petrochemical complex that alone constitutes
13.2 6%
Petrochemicals
Distribution
an $8.5 billion investment. Total planned expenditures
3.8
3.1
2%
1%
Biofuels by 2014 in the entire downstream segment, including
4.1 2%
Corporate Overhead 2.4 1%
gas pipelines and oil, bio-fuels, and gas terminals, will
be $73.6 billion. The petrochemicals subsector will be the third in terms of total planned
investment of $ 17.8 billion. Petrobras plans to increase its production of ethanol and biodiesel by
investing $3.5 billion in that sub-sector through 2014. Petrobras’ supply chain is concentrated to
the coast on the downstream side and especially to South-East Brazil.


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Petrobras’ estimate is that the Brazilian economy will grow 3.8% annually, which will stimulate
domestic energy demand. July gasoline price in Brazil (at the pump) was $232 per barrel. For
Petrobras, current breakeven costs on its deepwater offshore crude region are at $45 per barrel
and should fall.67

Corporate goals were defined to minimize the potential environmental impacts of activities, ensure
safety in processes and protect the health of the labor force, achieving levels of excellence in the oil
and gas industry and contributing to the sustainability of operations.

In the human resources area, Petrobras’ main initiatives are aimed at attracting and retaining
skilled labor, training and development, career plans and knowledge management. Petrobras’ labor
force will increase from 80,500 employees now to 103,030 in 2015. New executive management
positions are being created to focus on project execution and management, aiming at higher
efficiency, improvements in processes and tracking of critical resources. The area of HRM and
Brazilian content was listed as major challenges in the previous 5-year plan.

The Company sees the development of the Brazilian supply chain and the establishment of foreign
companies in the local market in a positive light, not only due to the positive externalities created
by geographic proximity and the development of technological partnerships, but also because of the
diversification in
base of suppliers. In
order to encourage
this development,
the company will
seek to consolidate
its demands and
conduct long-term
contracting with
increasing local
content
requirements;
implement initiatives
to increase the
participation of
domestic
subcontractors; support the development of innovative Brazilian companies; add suppliers outside
of the current supply chain; support supply-chain personnel training programs; and expand use of
the Progredir program, which aims at improving suppliers’ access to credit.

67 http://www.guardian.co.uk/business/feedarticle/9774984

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Investments
Petrobras made an effort to address private investors' concerns by spending more in its updated
2011-2015 business plan on exploration and production (E&P) and less on refining and marketing.
Under the plan, E&P spending will rise from $118.8 billion in the 2010-2014 plan, 53% of overall
spending, to $127.5 billion, 57% of total investment. Meanwhile, spending on refining,
transportation and marketing will fall from $73.6 billion, equivalent to 33% of spending, to $70.6
billion, or 31%.68

Petrobras’ previous business plan for 2009-2013 outlined and tracked the development of actual
capital expenditures over time in greater details:


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Petrobras’ Supply Chain – Best Prospects
Background
Petrobras has significant problems satisfying its supply chain needs. Petrobras’ huge supply chain
demand would have been difficult to satisfy under normal circumstances, but with the added
requirement of local content, it gets even tougher. The local content requirement has forced
Petrobras to actively reach out to both local and international supply chain suppliers in order to
convince them to increase supply chain capacity in Brazil. Petrobras’ supplier credit program,
Programa Progredir, is a great example of an effort to boost domestic supply capacity. Petrobras
also frequently entertains international supplier delegations so as to persuade them to enter the
Brazilian market.

Petrobras is adding to its net reserves in a time when global supermajors have problems with
shrinking net reserves. Petrobras has also positioned itself as a key player in other developing
markets such as India and Africa. With most of the world’s untapped oil reserves in deep-sea
territory, the Brazilian company has a superb advantage in its technological knowhow in deep-sea
exploration and drilling. Soaring global oil prices and increased global oil demand in conjunction
with shrinking onshore reserves will be further beneficial for Petrobras over time.

Petrobras will continue to be in a tug o’ war with the Brazilian government over the speed of the
company’s expansion. Influential factors will be the rate of inflation in Brazil, the strength of the
Real, and the global and domestic supply chain situation.

Demand
Petrobras aims to double its proven reserves and will invest heavily to reach that target. On the
shopping list are: 550 generators, 550 derricks, 350 turbines, 700,000 ton of structural steel for
platform hulls, 550 Christmas trees, 500 wellheads, 80,000 pumps, 18,000 storage tanks, and 4,000
km of flexible lines. The list goes on with 55,000 more items, of which drilling packages and FPSO
packages, subsea equipment and compressors are considered to be the most critical.

Moreover, rigs will be chartered and serviced; primarily drill ships and semi-submersibles. 200
support vessels (especially pipe layers, AHTSs, PSVs, tug and tow boats, and line handlers) and 18
FPSOs will be commissioned. Petrobras will also upgrade its tanker fleet.

Supply Chain Challenges
There are tremendous opportunities for already installed companies and newcomers in the
Brazilian oil & gas supply chain due to the scale provided by Petrobras’ upstream portfolio. In order
to carry out such a portfolio, Petrobras is looking to establish stable long term business
relationships with all available companies that are willing to invest in Brazil.

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The supply chain for Petrobras involves more than 1,300 items, reaching considerable volumes.
Some examples of materials required from the supply chain are: 8 million screws, 15,6 million bolts,
9,6 thousand electrical motors, 478 million kilos of wires, 34,3 million liters of paint, 54 million
kilos of steel rods and 32 million meters of electric cables.69

Petrobras Supply Chain Challenges
Petrobras identifies their main supply chain challenges as:

 Need for equipment
 Need for skilled labor
 Procurement cost inflation

Petrobras strategies to combat these supply chain challenges are to have an aggressive bidding
program for rigs, support vessels and anchor handlers. The focus has mainly been on building new
units, but vessels are often contracted on a build-lease basis. Petrobras also favors long-term
contract with service providers. This is partially a consequence of the challenges associated with
Petrobras’ deep-sea fields; long-term contracts favor long-term joint technical development. The
long-term approach also helps facilitate another of Petrobras’ supply chain strategies, supporting
the expansion of suppliers’ installed capacity in Brazil. Finally, Petrobras has implemented
extensive training programs for Petrobras employees and supply chain contractors to mitigate
current human resource shortages.

Petrobras supply chain sectors and challenges.

69 http://news.seadiscovery.com/?tag=/supply

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Petrobras supply chain sectors and challenges.

Brazil Supply Chain Challenges
Petrobras also consider the following the greatest supply chain challenges related to Brazil:

 Infrastructure Enhancement
 Critical Items Supply (imports)
 Drilling Equipment
 Dynamic Positioning and Propulsion Systems
 Steel Manufacturing Process and Supply
 Skilled Work Force for Construction and Operation
 Financeability

Infrastructure
One of Brazil's greatest challenges is its poor infrastructure. The rail network is smaller than that of
France, a country one-thirteenth Brazil's size. Brazilian maritime infrastructure is similarly
neglected; a shipping container spends 10 times as long sitting idle in the Brazilian port of Santos as
it does in Hamburg or in Rotterdam. A World Economic Forum survey ranked inadequate
infrastructure as the third-biggest problem for doing business in Brazil, after tax rates and
regulations.

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Transportation
In the transportation area, there is a great
effort by the government to change the
current matrix, which is composed mainly
by roads (60%) and railways (20%). The
participation of hydro and air transportation
in the matrix is almost nonexistent. Most of
the roads connecting the country have
precarious conditions and a significant
amount of cargo is transported in old trucks.
This situation is costly, presents important
limitations to the economy, and affects the
country’s international competitiveness.

According to ABDIB, the National Transportation and Logistics Plan estimates investments of $131
billion in the transportation sector from 2008
through 2023.70

More than 107,000 ships were berthed in Brazil
in 2010 and Brazil has more than 26 major ports
along its coast.71

Petrobras Transporte carried 48.9 million tons of
oil products on 52 vessels in 2010, nearly 15%
less than a year earlier.72

It is probable that every major shipyard in the
world will have significant operations in Brazil (in association with local major contractors) in
2015. Korean shipyards have been early entrants in Brazil.73

70 TozziniFreire Advogados: Investment Opportunities In Brazilian Infrastructure.
71 http://www.wilsonsons.com.br/
72 Petrobras: Sustainability Report 2010.

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Drilling & Exploration
2010 was a record year in terms of production for Petrobras. 6
platforms were connected to new wells. Several production
systems are scheduled to go on stream in 2011. For instance a
new fixed well at 170 m depth and a semi-submersible well and a
139 km long pipeline of the coast of São Paulo. 3 new platforms
will perform extended well tests in 2011. Petrobras grew it
reserves 8% in 2010. In 2010, 116 wells were drilled, 67 of which
onshore and 49 offshore.

Due to the lack of Brazilian installed capacity of international
petroleum industry companies, bidding and direct negotiation
invitations are currently going mostly to Brazilian contractors,
who in turn will procure technological partners, operators,
financial partners, and project managers globally. Most of these
Brazilian contractors are unfamiliar with the finer details of the
offshore petroleum industry and are not to well-versed in
offshore high-tech. Thus, Brazilian companies are quite
dependent on collaborations with international companies.74

New Rigs
E&P units put into production the last few years:


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Petrobras will have at least 63 operative rigs in 2013-2017:

Drilling and Production Units
Petrobras and other Brazilian companies need for drilling and production units:

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Critical Equipment Exploration and Prospecting
Petrobras considers the following critical equipment and services for exploration and drilling as
best prospects for foreign suppliers:

 Production pipelines alloy coatings
 Turbo compressors (6-10 Mw)
 Polyester mooring cables
 Mooring systems
 Drilling pipelines
 Electrical cables
 Control systems for well control
 Oil and gas metering systems
 Offshore drilling rigs
 Gravel packing
 Drill bits
 Steam generators (25-50 x 10 BTU/d)
 Special sphere subsea valves
 Subsea sensors for analysis of oil and grease traces in water
 Gas turbines
 Special steels (alloys, chrome, etc.) to support sub-salt corrosion, and H2S

Furthermore, Petrobras have identified the following in-demand equipment critical to avoid supply
chain bottlenecks:

 HCC Reactors (250-300 mm wall width 200kgf/cm2internal pressure)
 Boiler works with special alloys (reactors, towers and pressure vessels)
 Boilers (steam generators)
 High pressure heat exchangers with H2S traces
 Structured packing for process towers
 Moto-compressor and bare compressor
 Heavy engines
 Offshore and marine cranes
 Special submarine sphere valves
 Forged valves
 Basic and thermal design

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Petrobras has quantified its need in terms of material and equipment:

Items Units of Measurement Total Amount (2008-2015 )
Structural Steel t 1.252.000
Air Coolers un 721
Mooring Cables km 2.726
Christmas Trees un 3.930
Safety boats un 334
Pumps un 10.264
Lifeboats un 1.978
Well Heads un 3.657
Compressors un 969
Fan Coils un 2.818
Heat Furnaces un 252
Heat Reformers Furnace un 8
Eletric Generator un 439
Crane un 220
Flexible Pipes m 7.2
Diesel Engines un 717
Eletric Motors un 17.035
Reactors un 317
Storage Tanks un 2.824
Process Towers un 732
Eletric Transformers un 1.236
Heat Exchangers un 5.913
Pipe lines t 1.542.266
Turbines un 441
Production Rigs un 36
Pressure Vessels un 4.829

Critical Exploration & Prospecting Services:
Petrobras considers the following services the most vital for international providers to consider:

 Drilling
 Workover services
 Flexible lines and umbilical laying services
 Support to ROV vehicles
 Support to mooring activities
 Special vessels
 Subsea interconnection services
 Monitoring and inspection techniques for structural integrity of flexible risers75

75 Petrobras: Strategic Plan 2010-2014.

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Moreover, all sorts of service and repair services related to critical equipment will be in high
demand. Especially repair of large vessels (for which extended down-time is extremely costly and
distressing) is a priority to Petrobras. Previous ship repairs have often carried out in Middle
Eastern dry-docks.

Price and Delivery Terms
Petrobras view of the competitive landscape for Brazilian products versus international products:

This graph highlights what was mentioned before, that Brazilian products are expensive and that
great logistics (delivery terms, support etc.) and payment terms can be a critical competitive factor
for U.S. companies.

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Ships and Support Vessel
The sketch below outlines how the local content requirement can manifest itself in terms of ship-
building.

Topside
CL min = 60%

Hull
Normally CL = 0% to 60%

Compression Module
CL min = 75%
Power Generation Module
Gas Compressors
CL min = 75%
LC = 0%
Turbo generators
CL = 0%

Petrobras needs to almost double its current fleet of 250+ offshore supply vessels (OSV/PSV). The
new pre-salt fields require longer transportation and new and updated supply vessels. Petrobras
have moved more into lease agreements. One-day leases of PSVs often start at $10,000.76

Petrobras’ Fleet Modernization and Expansion Program – PROMEF I and II:
Under this program, Petrobras’ subsidiary Transpetro is ordering 26 large vessels to transport oil,
by-products and liquefied petroleum gas (LPG), for delivery by 2013. 18 vessels have already been
commissioned. Seven of these ships are state-of-the-art relievers to be built for the first time in
Brazil; three are to transport bunker oil; and eight are gas tankers to transport liquefied petroleum
gas (LPG). The other eight are currently in the bidding phase. The aim of the program is to increase
the Brazilian shipbuilding industry’s global competitiveness. In total phase I and II will add 4
million deadweight tons (dwt) to the current fleet’s capacity. Four Promef vessels are scheduled for
delivery in 2011.

76 http://www.bnamericas.com/news/oilandgas/Petrobras_to_lease_platform_supply_vessels

Supply Chain Opportunities within Petrobras - Feasibility Study

Supply Chain Opportunities within Petrobras - Feasibility Study

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