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Brazilian Local Content Regulation for Oil & Gas Industry and Petrobras Local Content Policy

October, 2013

Brazilian Local Content Regulation

Local Content in Petrobras

Content

Fines and Waivers

Certification Process

Calculation Methodology

Bidding Process

Brazilian Local Content Regulation Macro Process

Brazilian Local Content Regulation can be divided by the following process

• Minimum Local Content determined by ANP;

• Measurement of Local Content:

o 1st and 2nd Rounds: goods and services with Brazilian invoice accounts for LC = 100%; foreign invoice accounts for LC = 0%

o 3rd and 4th Rounds: Goods with LC > 60% and services with LC > 80% account for LC = 100%; otherwise, LC = 0%

• Proof of local content by Declaration of Origin and Invoice

• Minimum and Maximum Local Content ranges determined by ANP, according to phase and block type;

o Detailed requirements (by system, equipment and service) – Resolution ANP n. 39;

• Measurement of Local Content through the “Cartilha” (Booklet) and mandatory Local Content Certification by third part entity – Resolution ANP n. 19;

• Minimum Local Content determined by ANP, according to:

o phase (exploration / development)

o block type (deep water, shallow water, onshore);

• Measurement of Local Content:

o Goods with LC > 60% and services with LC > 80% account for LC = 100%; otherwise, LC = 0%

• Proof of local content by Declaration of Origin and Invoice;

Brazilian Local Content Regulation Requirement in the Concession - Agreement with ANP

1 2 3 4 5 8 ANP Oil Field Concession Bidding Rounds*

6 7

Before 1998 – Petrobras Monopoly 1998 – Round zero, no Local Content Commitment

0 10 9 1999 2005 2003

ANP – National Petroleum Agency (linked to Mines and Energy Ministry) ANP´s role – Regulate Brazilian Oil Industry, including

Managing Oil Field Bidding Rounds; Managing local content (minimum requirements, monitoring, auditing and penalties application)

(*) Assessment methodology Winner Bid = Max (0.4 x Minimum Exploratory Program) + (0.4

x Signing Bonus ) + (0.2 x Local Content offered)

11 2013 2000 2001 2002 2004 2006 2007 2008

The Government (Union) can sign two kinds of agreements: • Contract Petrobras (no bidding process), or • Conduct a bidding process, under the production sharing agreement and ensuring to

Petrobras the right to operate and at least 30% share in each block

Transfer of Rights (2010): The Union gave to Petrobras the right to operate up to 5.0 Bn boe at a cost of US$ 42.533 Bn (fields: Tupi Sul, Tupi NE, Florim, Peroba, Guara EAST, Franco and Iara) Petrobras Capitalization: Petrobras released 4 Bn of new stocks in Bovespa (São Paulo Stock

Exchance) increasing Company’s cash in US$ 69.97 Bn. New bidding process under the production sharing agreement is planned for the end of 2013

For Local Content purposes, applies the Resolution ANP n. 19 and n. 39, with specific local content targets determined by the Mines and Energy Ministry

Source: Petrobras Notícias (01/09/10), BBC notícias (01/09/10)

Brazilian Local Content Regulation Pre-Salt New Regulatory Framework

The New Regulatory Framework (2009) is applicable to Pre-Salt areas not granted during previous bid rounds and other areas considered strategic by the National Council of Energy Policy (CNPE)

The minimum local content requirements established in the Bid Rounds only apply to investments (capital expenditure) in Exploration and Development phases

Contract Commitment

Brazilian Local Content Regulation Requirement in the Concession - Agreement with ANP

Local content requirements

established in oil field concession contracts

for capital investments

There is no Local Content requirement imposed by ANP Oil Company declares target and proves rate achieved

Upstream Refining Gas & Power

Source: ANP

Resolution ANP n. 39 defines that Operators must report quarterly their investments in Exploration and Development phases in an itemized way.

Specific targets for each item are declared by Operators (after 7th Round, respecting minimum requirements determined by ANP) or determined by MME (Pre-Salt New Regulatory Framework)

Brazilian Local Content Regulation Detailed Local Content Requirements

Subsystem Item Subitem % LCI .1 Dri l l ing Rig Chartering 50I.2 Dri l l ing + Completion 49

I.2.1 Wel lhead 60I.2.2 Cas ing 50I.2.3 Production Tube 50I.2.4 Wel l equipment 50I.2.5 Dri l l 5

I.3 Auxi l iary Systems 40I.3.1 Electric System 60I.3.2 Automation System 60I.3.3 Telecommunication System 40I.3.4 Fisca l Measurement System 60I.3.5 Field Instrumentation 40

I.4 Logis tic Support 50I.5 Chris tmas Tree 70

I - Drilling, Assessment and

Completion

Subsystem Item Subitem % LCI I .1 Umbi l ica ls 55II.2 Mani folds 70II.3 Flexible Production/Injection Lines 56II.4 Rigid Production/Injection Lines 50II.5 Flowl ines 100II.6 Underwater Control System 0II .7 Bas ic Engineering 50II.8 Deta i led Engineering 95II.9 Management, Construction and Assembly 80

II – Production Collection System

Subsystem Item Subitem % LCI I I .1 Bas ic Engineering 65III .2 Deta i led Engineering 65III .3 Management, Construction and Assembly 65III .4 Hul l 70III .5 Jacket n/dIII .6 Naval Systems 65III .7 Simple Anchoring Systems 65III .8 Multiple Anchoring Systems 65III .9 Modules Integration 65III .10 Pre-Insta l lation and Hook-up of Anchoring Line 65III .11 Plants - Bas ic Engineering 65III .12 Plants - Deta i led Engineering 65III .13 Plants - Service Management 65III .14 Plants - Equipment and Materia ls 71

III .11.4.1 Pressure Vessels 85III .11.4.2 Forges 80III .11.4.3 Tanks 90III .11.4.4 Process Towers 85III .11.4.5 Cool ing Towers 85III .11.4.6 Heat Exchangers 15III .11.4.7 Pumps 70III .11.4.8 Steam Turbines 80III .11.4.9 Rotary Screw Air Compressors 70III .11.4.1 Al ternative Compressors 70III .11.4.11 Diesel Engines (up to 6 HP) 80III .11.4.12 Valves (Up to 24") 90III .11.4.13 Fi l ters 85III .11.4.14 Flare System 80III .11.4.15 Cathodic Protection 90III .11.4.16 Electric System 60III .11.4.17 Automation System 60III .11.4.18 Telecommunication System 40III .11.4.19 Fisca l Measurement System 60III .11.4.20 Field Instrumentation 40

III .15 Plants - Construction and Assembly 65

III - SPU

(example of LC targets) (example of LC targets)

Download the Resolution from ANP website

http://www.anp.gov.br/?dw=25368

Fines and Waivers



Bidding Process



• The “Cartilha” (booklet) is the official methodology for measuring local content, published by the ANP in 2007 – Resolution ANP n. 19;

• It aims to identify the added value of national components or manpower

that compose each:

• For the booklet, an item is not simply "national“, but has "x%" of Local

Content. Goods (%) = 1- cost of imported inputs x 100 selling price without taxes Services (%) = cost of local labor x 100 cost of total labor

*Source: Cartilha de Conteúdo Local - 2007

Brazilian Local Content Regulation Local Content Booklet (“Cartilha”) – Main Concept

Goods Services Goods for temporal use Systems

Pieces of Equipment Parts Raw Materials Chemicals

In-house labor Contracted labor Consultancy Services Software

Pieces of Equipment Boats and Ships Drilling Rigs Ground and Air Logistics

Combinations of goods, services and temporary goods in the same certification process

Excel tool

Ferramenta para Cálculo do Conteúdo Local de Bens

Cliente

Fornecedor

Bem

Identificação (código do material)

Quantidade

Valor FOB unitário

(moeda de origem)

Valor FOB Total

(moeda de origem)

Valor CIF unitário

(moeda de origem)

Valor CIF total (moeda de origem)

MoedaValor CIF unitário

(R$)

Imposto de Importação

(R$)

Valor CIF + I.Importação

unitário(R$)


total (R$)

Preço de aquisição unitário s/IPI e s/ICMS

(R$)

Preço de aquisição

total s/IPI e s/ICMS

(R$)

Fornecedor Fabricante DOCUMENTO (DI/NF)

( a ) ( b ) ( c ) ( d ) ( e ) ( f ) ( g ) ( h ) ( i ) ( j ) ( k ) ( l ) ( m ) ( n ) ( o ) ( p )

Diretamente pelo Comprador

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - 1

Diretamente pelo Fabricante

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - 1

1

LEGENDA

Conteúdo Local

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL

PREÇO DO BEM COMPLETO, SEM IPI E ICMS

VALOR DO IPI

VALOR DO ICMS

-

VALOR TOTAL DOS COMPONENTES IMPORTADOS (R$)

0,00%

PREÇO TOTAL DE VENDA DO BEM (valor da NF)

CONTEÚDO LOCAL % (CLb)

Informações sobre produtos, quantidades, preços, fornecedores, fabricantes e tipos de documentos.

Resultados decorrentes das fórmulas encontradas na planilha. Não pode ser digitado (cálculo automático).

Data da emissão da Nota Fiscal de venda

Principal moeda de origem

Taxa de conversão para R$

COMPONENTES

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL

Adicionar Componente:Diretamente pelo Fabricante

Adicionar Componente:Diretamente pelo Comprador

Adicionar Componente:3os Mercado Interno

Adicionar Componente:3os e incorporados a itens

Adicionar Componente:Componentes Nacionais

SALVAR Adicionar Moeda(s)

Ver Resultado

Ferramenta para Cálculo do Conteúdo Local de Equipamentos

Cliente

Fornecedor

Bem

0

0

Data da emissão da Nota Fiscal 01/01/1904

Principal moeda de origem 0

Taxa de conversão para R$ 0,00000

VALOR DO IPI -

0

VALOR DO ICMS -

PREÇO DO BEM COMPLETO, SEM IPI E ICMS -

VALOR TOTAL DOS COMPONENTES IMPORTADOS (R$) -

CONTEÚDO LOCAL % (CLb) 0,00%

VOLTAR

Brazilian Local Content Regulation Local Content Booklet (“Cartilha”) – Calculation Tool

There are different spreadsheets that, once filled, automatically calculate local content of goods, goods for temporal use, services, systems and sub systems

• For goods (CLb), the spreadsheet should be filled with components’ cost data, divided into national and imported components. Imported components should be divided into categories: purchased directly by the buyer (client), by the manufacturer (supplier), or by third parties;

• For goods for temporal use (CLa), the local content should be calculated by multiplying the local content of goods (CLb) by the contract total value;

• For services (CLs), the spreadsheet should be filled with the contracts in Brazilian currency (R$) and contracts in foreign currency;

• For systems and sub systems, the spreadsheet should gather all the pieces of equipment, materials and services with their respective local content values (calculated with CLb, CLa or CLs formulas);

Ferramenta para Cálculo do Conteúdo Local de Equipamentos

Cliente

Fornecedor

Bem

0

0

Data da emissão da Nota Fiscal 01/01/1904

Principal moeda de origem 0

Taxa de conversão para R$ 0,00000

VALOR DO IPI -

0

VALOR DO ICMS -

PREÇO DO BEM COMPLETO, SEM IPI E ICMS -

VALOR TOTAL DOS COMPONENTES IMPORTADOS (R$) -

CONTEÚDO LOCAL % (CLb) 0,00%

VOLTAR

Download spreadsheets from ANP website

Input spreadsheet: cost components

Output spreadsheet: Calculated Local Content

Ferramenta para Cálculo do Conteúdo Local de Bens

Cliente

Fornecedor

Bem


Quantidade

Valor FOB unitário

(moeda de origem)

Valor FOB Total

(moeda de origem)

Valor CIF unitário

(moeda de origem)



(R$)


(R$)


unitário(R$)


total (R$)


(R$)



(R$)




- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - 1


- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - 1

1

LEGENDA

Conteúdo Local

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL


VALOR DO IPI

VALOR DO ICMS

-


0,00%








COMPONENTES

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL







Ver Resultado

http://www.anp.gov.br/?pg=24415

Brazilian Local Content Regulation Local Content Booklet (“Cartilha”) – Application – Example #1

ILLUSTRATIVE

Example: how to calculate the local content of a Good (Process Tower)

400

Components / Raw Materials

150

Indirect

Costs

100

50

Profit

80

Taxes

Foreign content National content

100

600

Final Price

Out of LC calculation

CLb = 1- cost imported inputs x 100 = 1- 100 x 100 = 85.71% selling price without taxes 780 - 80

80

3 2 1

5 4

Carbon Steel

Special Steel

Carbon Steel

Carbon Steel

Carbon Steel

100

100

100

100

100

500

150

50 80

780

Process Tower

Note: Local content calculation is done considering all the components of the equipment

Construction and Assembly

Management Calotte Hull Nozzle Internal Base

Calottte 1

Internal 4

Nozzle 3

Hull 2

Base 5 Ferramenta para Cálculo do Conteúdo Local de Bens

Cliente

Fornecedor

Bem


Quantidade

Valor FOB unitário

(moeda de origem)

Valor FOB Total

(moeda de origem)

Valor CIF unitário

(moeda de origem)



(R$)


(R$)


unitário(R$)


total (R$)


(R$)



(R$)




- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - 1


- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - -

- - - - - - - - - - 1

1

LEGENDA

Conteúdo Local

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL


VALOR DO IPI

VALOR DO ICMS

-


0,00%








COMPONENTES

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL

NÃO APLICÁVEL







Ver Resultado

Brazilian Local Content Regulation Local Content Booklet (“Cartilha”) – Application – Example #2

ILLUSTRATIVE

Example of how to calculate the local content of a System

Technical Assistance (US $)

Inspection and Certification (BRL R$)

Modules Assembly (BRL R$)

Foreign content National content

600

900

Services (CLs)

80

260

Goods* (CLb)

200

960

1,160

Total Cost

100

* Taxes already deducted

%LC = cost of local labor x 100 = cost of total labor

CLs

= 160 x 100 = 61.5% 260

CLb

%LC= 1- cost imported inputs x100 selling price w/o txs

= 1- 100 x 100 = 88.9% 900

Process Tower Drum

Water Separator

80 100

80 120

=88,9% x 900 + 61,5%x260

= 48%

Fines and Waivers



Bidding Process



ILLUSTRATIVE

Local Content Certificate LC Documentation needed:

List of raw materials (components) or service contracts Raw materials invoices Raw materials certificates

Brazilian Local Content Regulation Certification across the Supply Chain

Issued by a third party entity (certifier authorized by ANP)

Issued to a good / service and not to a supplier

Goods: valid for four years, since there is no change in specification, method of production or composition

Services: should be issued quarterly

Not necessary for components, parts and raw materials (invoice and provenance are enough)

Supplier 1

Supplier 2

Supplier n

EPC

Supplier 1

Supplier 2

Supplier 3

Supplier 1

O&G Operator

INV LC

INV LC

INV LC

INV LC

INV LC INV LC

INV LC

INV LC

INV LC

QLCR QIR

LC

QIR INV Quarterly Investment Report

QLCR Quarterly Local Content Report

Local Content Certificate

Good/Service Invoce

Goods and Services providers Shipyard /

Assembler / Integrator Oil Company National

Petroleum Agency

The certification process shall occur through the whole supply chain in order to effectively support Oil Companies Quarterly Local Content Reports to ANP

1st tier 2nd tier

Request for accreditation; Confidentiality agreement;

Technical Director’s CV.

Evaluation Criteria: Legal;

Technical; Financial.

Registration for specific knowledge area (21 areas)

Documentation: ANP Resolution

nº 37/2007

Current scenario of certifiers ( June 2013 )

Knowledge Area # of Certifiers Geology and Geophysics 13 Drilling Rig 17 Operational and Logistical Support 17 Drilling, Completion and Well Evaluation 14 Basic and Detailed Engineering 19 Management, Construction, Installation and Commissioning 21 Electrical and Control Systems, Instrumentation and Measurement 16 Telecommunication Systems 14 Pipelines, Gas Pipelines and Storage Tanks 16 Transfer Pumps 16 Compression Units 17 Electricity Generation Units 18 Steam Generation and Injection Units 13 Water Treatment and Injection Units 11

Subsea Equipments and Control: rigid and flexible lines, umbilical and manifolds 14

Monobuoys and Frame of Buoys 15 Oil Processing and Treatment System 11 Gas Processing and Treatment System 10 Shipbuilding (hull, turret, mooring and marine systems) 17 Operational Safety 16 Civil Construction and Utilities 18

1

3

4

2

Certifiers Accreditation Process

Brazilian Local Content Regulation Certifiers Accreditation

http://www.anp.gov.br/?dw=25357

Fines and Waivers



Bidding Process



ILLUSTRATIVE

Bidding Round

3 and 4

(2000 – 2002)

1 and 2

(1998 – 1999)

5 and 6

(2003 – 2004)

7, 9 ,10 and 11

(2005 – 2013)

Transfer of Rights

(2010)

200% 50% to 200% 20% to 50% 60% to 100% Fine (%)

Note: fine is calculated over the Non Realized Local Content (difference between the LC contracted and realized)

Case 1 If 0 < NR(%) < 65%, then Fine = 60% x LC NR Case 2 If NR(%) ≥ 65%, then Fine = (1.143 X NR – 14.285)% x LC NR

Value Contracted: R$ 1,000 mi LC Contracted: 80% = R$ 800 mi

Fine Calculation Example

Case 1 • LC realized: 70% • NR (%) = (80%-70%)/80% = 12.5% • LC NR (R$) = R$ 800 mi x 12.5% = R$ 100 mi • Fine = 60% of R$ 100 mi = R$ 60 mi

Case 2 • LC realized: 20% • LC NR (%) = (80%-20%)/80% = 75% • LC NR (R$) = R$ 800 mi x 75% = R$ 600 mi • Fine = [(1.143 x 75) – 14.285]% x R$ 600 mi = R$ 428.64

mi LC NR = LC not realized NR(%) = (%LC contracted - % LC realized) / % LC contracted

Brazilian Local Content Regulation Fine Calculation after 7th Bid

0 20 40 60 80 1000

40

60

Mul

ta,

M(%

)

% do Conteúdo Local Não Realizado - NR(%)

20

80

100

0 20 40 60 80 1000

4040

6060

Mul

ta,

M(%

)

% do Conteúdo Local Não Realizado - NR(%)

2020

8080

100

Fine

, F(%

)

% of Non Realized LC, NR(%)

Case 1 Case 2

If local suppliers prices are excessively higher than international suppliers

Source: ANP

Notes:

• The criteria could be subjective and the granting of the waiver depends on the evaluation of the ANP

• If granted, the waiver applies only for a specific item, remaining mandatory to comply with the overall percentage of LC

Brazilian Local Content Regulation Exception Criteria (“Waiver”)

There are three possible causes of exception in minimum requirement of Local Content according to specific conditions of local market

Price Delivery Time New Technology

If delivery time of local suppliers is higher than

international suppliers and that could compromise the

first oil date

If the purcharse reffers to a new techonology not

provided or not available when the bidding round

occurred

Brazilian Local Content Regulation

Local Content in Petrobras

Content

Petrobras Local Content Policy December 22nd, 2011

The projects and acquisitions for Petrobras must support the challenges of Company’s Strategic Plan and therefore maximize local content based on competitive and sustainable

basis, accelerating the development of markets where it operates, guided by ethics and generating continued innovation.

Uniform criteria for measuring and requiring local content in Petrobras acquisitions.

Ensure adherence to capital discipline, assuring the competitiveness of procurement and reducing financial and logistical risks in implementation and operation of projects.

Capital Discipline

Execute procurement in a coordinated manner for the items of common use. Integration of Supply

Local Content Standardization in

Petrobras

Encourage the development of local markets in a sustainable manner. Local Suppliers

Prioritize supplies with local engineering development. National Engineering

Encourage the development of the local market to overcome technology gaps. Technology Gaps

DRI

VERS

Local content requirements

established in oil field concession contracts

There is no Local Content requirement Oil Company declares target and proves rate achieved

Petrobras Local Content Policy determines that all business areas must achieve minimum local content on its activities (capital and operational expenditure)

Upstream Refining Gas & Power

Local content requirements set by Petrobras according to the list of goods and services demanded by capital projects and local industry capacity to provide them

ANP with O&G Operators Petrobras with Suppliers

Cont

ratu

al O

blig

atio

n Petrobras Local Content Policy Petrobras requirements in Goods and Services acquisitions

Definition of Local Content targets based on the complete list of goods and services for each project

Cartilha (Local Content Booklet) methodology

Use of historic certificates, suppliers declarations of origin and industry studies

Estimate of Local Content focusing on competitive price, delivery time and quality.

Upstream: ANP Requirement

Downstream and Gas & Power: Global Local Content by project

Tracking and Monitoring of Local Content through S-Curve

Certification Requirement

Contractual Penalties

Petr

obra

s Ro

le

Local Content Planning Inclusion of Local Content contractual clauses with certificate requirement

Measuring, Monitoring, and Certification of Local Content

EPC

Suppliers

Petrobras Local Content Management Planning and Monitoring Local Content

ILLUSTRATIVE

Petrobras Order

Third Party Order

Supply

LC

INV

Local Content Certificate

Good/Service Invoice

Chartering Contract

EPC Contract

Goods/Services Supply Contract

Labels

Petrobras Contracting Strategies

Petrobras Contracting Strategies Own and Chartered Units

There are different relationships between Petrobras, Shipowners, EPC and Suppliers

Critical items (eg. offshore cranes, compressors, turbogenerators), are usually contracted directly by Petrobras (in single contract or in batch)

Own Units

Multiple EPC contractors combined among contracts for hull construction / conversion, modules construction and topside integration

Chartered Units

Sete Brasil

Shipowner Drilling Rig

Drilling Rig

Petrobras EPC Supplier INV LC INV LC

LC INV

Shipyard / Assembler / Integrator

Supplier Petrobras

Goods and Services providers

Oil Company

Critical items

INV LC

Supplier EPC


FPSO

INV LC INV LC Petrobras

Charterer

Shipowner FPSO FPSO Petrobras EPC Supplier

INV LC INV LC


LC INV

Drilling Rig construction contracts are done between Sete Brasil and EPC

Petrobras signed long term contract for drilling rigs chartering with Sete Brasil

Usually unique unit chartering contracts with local content requirement

Charterers tend to perform their construction, but can sub-contract

Petrobras follows-up FPSO and require local content certification at the end of the construction phase

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