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Opportunities in the Oil & Gas Market in Brazil Opportunities in the Oil & Gas Market in Brazil Some Legal AspectSome Legal Aspect

Vera Dantas Aberdeen 15 March 2012

Pre-salt areaPre-salt area

 

 

SOURCE: Revista Brasileira de Tecnologia e Negócios de Petróleo, Gás, Petroquímica, Química Fina e Biocombustíveis. Ano X jul./ago 2008 n. 61. p. 30.

“Its remarkable offshore oil bonanza could do Brazil a lot of good. But getting the most out of it will not be easy.” 5 Nov 2012

PRESENTATION TOPICSPRESENTATION TOPICS

1. Petrobras Investments

2. Oil & Gas Sector in Brazil - Legal Framework

3. Local Content Requirements

4. Establishing a presence in Brazil

5. Petrobras

1. Petrobras Investments

Petrobras Investment Plan, as announced last December:

Petrobras will invest circa of US$ 224.7 billion until 2015;

Internal demand in ten years could reach 3.3 million of barrels per day;

Target : 6 million barrels per day by 2020; 2012 budget : R$ 77.9 billion (approximately £ 27.5

billion) to be invested in Brazil : Upstream: 65% for development of production and 18% for exploration;

Petrobras Investments – cont.

Downstream:17% for infra-structure – refining, transport and commercialization (including four new refineries in Pernambuco, Maranhão, Ceará and Rio Grande do Norte).

Source : Valor Econômico, 19 December 2011

On 7 March 2012, 2:07 PM , O Estado de São Paulo:

“Petrobras already has the funds for investments in 2012 – Graça guarantees. Objective is that the company invests US$ 50 billion this year, compared to US$ 40 bilhões last year.”

Impact of such investments will be felt in the whole chain of suppliers of equipment and services that form the Oil Industry.

Petrobras Investments – cont.

2. Oil & Gas Sector in Brazil – Legal Framework

Petrobras was created in 1953 as a State company and has maintained the exclusive control of all oil industry activities until 1995, when its monopoly came to an end - Constitutional Amendment number 9.

Oil & Gas Sector in Brazil – Legal Framework - cont.

Ownership of natural resources has been retained by constitutional provision; likewise, monopoly of Exploration & Production remained of the State, but the Brazilian Oil and Gas Law (number 9478, of 6 August 1997) allowed private companies to exercise exploration activities.

With pre-salt discoveries, the legal framework has changed again with Law 12351, of 22 December 2010.

Legal Framework – before the pre-salt reserves discoveries: concession agreements Law 9478 of 6 August 1997 :

Created the NATIONAL COUNCIL OF ENERGY POLICY (“CNPE”) and the NATIONAL AGENCY OF PETROLEUM, NATURAL GAS AND BIOFUELS (“ANP”*), the industry’s regulator and supervisor.

Sets forth the applicable rules for the exploration and production of oil.

Private companies allowed to exercise activities of exploration and production of oil through concession agreements, preceded by invitations to bid.

(*) renamed as such by Law 11097/2005

Legal Framework – before the pre-salt reserve discoveries : concession agreements – cont.

ANP is responsible for issuing tenders to grant concessions.

Concessionaires are entitled to ownership of all oil produced subject to taxes; government had signature bonus, royalties (10% to 5% - the latter where extreme conditions applied), etc.

Bidders have to meet legal, technical and financial requirements.

Exploration blocks were defined by ANP.

After the Pre-Salt reserves discoveries: Law 12351 of 22 December 2010 – the Production Sharing Agreement (PSA) New regulatory structure : Exploration and production of oil : activity will be

exercised, through concession, authorization or under the production sharing regime (Article 5 of Law 9478, as modified in December 2010).

Now the CNPE defines the blocks that will be offered under the concession or the production sharing regime (Article 2, VIII) – before, it was the ANP.

Likewise, it decides which blocks will be contracted directly with Petrobras under a PSA and which blocks will go to auctions, also under a PSA. The ANP suggests, the Council decides.

New Rules – Law 12351/2010 – cont.

Production Sharing Agreements : between the State and Petrobras (no tender) or between the State, Petrobras and the Oil Company, preceded by tender (auction type).

ANP still responsible for issuing invitations to bid both for the exploration and production of oil under a) PSAs (Article 11, III); and under b) concessions agreements (Article 8, IV and 36).

ANP still supervises (directly or indirectly with Brazilian States or other, as foreseen in Law 8078/1990) the oil industry activities (VII).

Petrobras is the Operator. Where an oil company is allowed to bid for an exploration

block and wins the bid: consortium agreement between Petrobras, the bid winner and the Pre-Sal State company.

If hired directly, or if it wins the bid, Petrobras will enter into a consortium agreement with the Pre-Sal State company (Pré-Sal Petróleo S.A. – PPSA, controlled by the Brazilian Government).

Foreign company must undertake, when participating of the invitation to bid, that it will create a Brazilian company if it wins – same rule, as before (Article 17, IV).

New Rules – Law 12351/2010 – cont.

“Its remarkable offshore oil bonanza could do Brazil a lot of good. But getting the most out of it will not be easy.”

But it is never too easy, is it ?

3. Local Content Requirements

Local Content Requirements – cont.

The local content requirement is present both in the concession and in the PSA regimes as well as in the downstream contracts with Petrobras.

It is policy of the Brazilian Government. Concession system Local Content is imposed in the concession

agreement executed between ANP and the concessionaire, who must observe a minimum percentage of participation of Brazilian companies in the supply of equipment and services under the agreement.

Local Content – cont.

This percentage is determined in the invitation to bid and detailed in the concession agreement.

The clause in the agreement states that the concessionaires must give preference to Brazilian suppliers whenever their services or products present conditions of price, term and quality which are equivalent to those of other suppliers invited to quote.

Local Content – cont.

PSA system

The CNPE will decide on the applicable local content requirements (upon suggestions received from the Ministry of Mines and Energy of Brazil – Article 10, III, e) from the new law).

The minimum local content requirements will be specified in the invitation to bid and in the model of agreement attached to it (Article 15, VIII of Law 12351/2010).

Local Content – cont.

In the first rounds, the local content percentages offered by the bidders were taken into consideration for the effects of punctuation of the offers for acquisition of the blocks.

As of the 5th bidding round, local content percentage has reached approximately 80% in the exploration phase and 85% in the development phase.

As of the Seventh Round, there were more specific requirements and a Booklet of Local Content was published.

Local Content – cont.

In 2007 ANP created a system for the certification of Local Content .

The accredited entities measure and inform ANP the local content of goods and services hired by the concessionaires of the activities of Exploration & Production (we had no company operating under a PSA at time of writing).

ANP has four Regulations that deal with the matter.

Local Content – Petrobras

Presently, the Local Content requirement is only regulated in the upstream sector, in the concession agreements and PSAs (new law is clear about it) and in the Local Content Certification System.

However, Petrobras, in spite of the lack of regulation of local content for the downstream segment, has been asking for the clause. The majority of contracts of construction of refinery for example include specific clauses of minimum Local Content, to be reached by the Contracted Parties.

4. Establishing a presence in Brazil

Preliminary Considerations Setting up your own Company

Establishing a presence in Brazil Preliminary considerations

Memoranda of understanding are binding in Brazil

Defaults of obligations under a proposal will be subject to indemnification of losses and damages under the general rules of the Civil Code, to which one should add court fees and legal costs.

Term Sheet must be cautiously drafted by experienced lawyers, in order not to create a binding obligation between them.

Which Type of Company?

Most frequently used company structures:

"Sociedade Anônima" (S.A.) and

"Sociedade Empresária Limitada" (“Limitada”)

in both cases the participants have limited liability.

Setting up your own company; joint ventures

Decision process – of relevance if the investor is a minority shareholder

(a) in a Limitada – the social contract and the 75% vote rule

Decisions must be taken by majority of votes, except for the cases of alteration of the social contract or merger, consolidation or winding up of the company, in which cases it must be taken by at least 75% of the votes representing the social capital.

Be careful with quotaholders agreement!

Decision process – of relevance if the investor is a minority shareholder

(b) in a S.A. – Shareholders Agreement

General rule applying to S.A.s : decisions are taken by the majority of voting shareholders.

Obligations set forth in a Shareholders Agreement can be subject to specific performance. Under its umbrella, important matters can be decided : quorum for strategic decisions; management mechanisms; board of directors may be integrated by foreign individual; corporate governance policies; right of first refusal; tag along; etc.

If despite Local Content requirements there is no local presence...

Services Agreement: Tax – payable at remittance Services – 25% income tax Royalties – 25% (15% income tax + 10% CIDE)

Agreement to state clearly which party is to be responsible for that payment.

Compared to taxation of a Brazilian company…

Basic rate of income tax on corporate profits (including capital gains), as adjusted for tax purposes, is 15%, with an additional surtax of 10% on taxable profits exceeding R$ 240,000 (approximately £ 84,000) per annum.

Social Contribution on profits is 9% of taxable profits.

Top tax rate on profits is therefore 34%. There is no withholding tax on distribution of

dividends.

5. PETROBRAS

Petrobras is subject to the Simplified Bidding Process (Procedimento Licitatório Simplificado da Petrobras) established by Decree number 2745, of 24 August 1998.

Electronic procurement is widely used : Petronect.

Bidders must be registered with the system in order to receive bidding notices.

PETROBRAS – cont.

Legal Representative in the country is required (power of attorney) by law.

Commercial Representative is normally required by Petrobras.

Normally agreements are not “negotiable”. In case of doubts or comments, these must be

presented in writing before the bid takes place.

Clauses in the agreement will deal with issues of liability.

PETROBRAS – cont.

Product and service suppliers are liable, independently of fault, for damages caused to consumers by defect in the product or in the rendering of services (Protection of Consumers Code).

Civil Code :damages due to the creditor shall comprise what the creditor has effectively lost and the “reasonable” lost profits (Article 402); damages only include “effective losses” (actually suffered) and “lost profits arising directly and immediately” from the inexecution of the obligation (Article 403).

PETROBRAS – cont.

Documents issued or signed out of Brazil (such as POA or Commercial Representation Agreement required by Petrobras) must follow the rules of notarization and legalization at the Brazilian Consulate.

Instruments executed in a foreign language must be translated into Portuguese by sworn translators in Brazil for use in Brazil.

Thank you.Thank you.NORONHA ADVOGADOS, LondonNORONHA ADVOGADOS, London

Vera DantasVera Dantas

Phone: (20) 7581-5040 Facsimile: (20) 7581-8002

vmd@noronhaadvogados.com.brwww.noronhaadvogados.com.brwww.noronhaadvogados.com.br