Increasing Local Content Competetive Agenda for Offshore Oil and Gas Supply Chain in Brazil

8/12/2019 Increasing Local Content Competetive Agenda for Offshore Oil and Gas Supply Chain in Brazil

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Increasing Local Content

ompe ve agen a or o s oreoil and as su l chain in

BrazilBrazil Energy and Power

Houston

ugus ,

ONIP Organizao Nacional da Indstria do Petrleo


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Institutional Framework

ANP Study (1998);OSO (UK)

Norsok (Norway)

ONIP (1999)



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O N I PNational Organization of the Petroleum Industry

Governmental Agencies

Oil &Gas Companies Suppliers of Goods

and Services



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Members Local Industry

ABCE ABDIB ABEAM FENASEG

National Associations (16)

ABEMI ABESPETRO ABIMAQ CIESP

ABINEE ABITAM ABRAPET SEBRAE

ASSESPRO IBS SINAVAL SOBENA

CNI FIEB FIRJAN

FIESP FINDES FIEPE



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Members - Operators (demand)

PETROBRAS

IBP

g p

Amerada Hess

Ocean

Phillips

ChevronTexaco

Repsol

Shell

ExxonMobil

I iran a

Statoil

TotalFinaElf


Kerr Mc-Gee Wintershall


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Government

MDIC ES

ABDI MG

BNDES RN

FINEP SP



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Mission

o coopera e o max m ze oca con en n e raz an as ec or:

-

- assuring full and fair opportunities to the local industry.



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Infrastructure and Industrial Investments-

28Paper and Cellulose

33

60

18

Automotive

Railroads

Harbors

Total = R$ 990 billionOil and Gas = 38%

29

40

41

Eletronics

Petrochemicals

Steel

70

41

62

Telecommunications

Sanitation

Mining and Quarrying

378

139

0 50 100 150 200 250 300 350 400

Oil and Gas

Electricity


R billions


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Pre-Salt



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Evolution of Crude Oil Reserves

30,000

25,000 Lula, Iara and Guara (Pre Salt) ~12 billion

15,000

20,000

10,000

0

5,000


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source : ANP


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In that sense, Brazil(1)

arises in a privileged position - manyreserves are located in countries politically unstable or withconflicts

Situation of Major Reserves Countries

ReservesDistribution

6% Brazil(1)KazakhstanChinaOthers

3% 1%5%

7% OCDE MembersRussia

OPEC73%Stable democracy

Absence of external or internalarmed conflic tsSolid regulatory sector framework

ONIP Organizao Nacional da Indstria do Petrleo 11

Reserves

1) Brazil's reserves include pre-salt estimate (80 billion barrels)

Source: EIA, BP Statistical Review of World Energy June 2009, ANP, Petrobras business plan 2009-2013, Booz & Company Analysis

Foreign investment Conflict areas

Political instability


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The discovery of Petroleum in the North Sea was a discontinuityfor Norway and for the UK, but in a different context

Context

At the time of discovery of Petroleum in the North Sea in the late

60s, Norway: Had good macroeconomic conditions

Had a low unemployment rate (1-2%)Norway

FaroeIslands

NorwegianSea

Bet on the fact that oil is a national asset and should be

managed carefully so as not to unbalance the economy

Already had strong research institutes Wanted to use oil as a mechanism for developing a new Aberdeen

Stavanger

orway

industry

At the time of discovery of Petroleum in the North Sea in the late60s, the United Kingdom:

Presented deficit in the balance of payments and highUK

Denmark

NorthSea

It had two major global operators for Exploration and

Production, BP and Shell Did not expect the O&G industry could represent a significant

portion of its economy

Germany

Belgium

Netherlands UK


Discontinuity of state policies with alternating controlbetween Labor and Conservative parties

Sources: BNDES; MIT - LIS; Booz & Company Analyses


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Despite the differences, Norway and the UK have adoptedmechanisms focusing on the internationalization of the chain, theincreasing of local content, clustering and attracting global

orway n e ng om

At tracting foreign companieswith O&G know-how

Both countries have struggled to ensure the presence of the major international players in theircountries - eg. all major operators and integrators are present in both regions

Qualification of the localworkforce

Foundation of Universities (ex. University ofStavanger) e Centers of Research

Already had important petroleum engineeringcourses due to the presence of BP and Shell

Formation of an industry cluster Both countries formed an important cluster of O&G, which enabled the cooperation andcollaboration in Norway, and the mobility of the workforce in the UK

Internationalization of the localchain With the presence of foreign companies, local firms were forced to reach levels of globalcompetitiveness - access to world markets through operators and service providers


content

Companies that had high local content were benefited by bid rounds for new fields


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In Korea, government actions focused on basic industrydevelopment on a global scaleMajor Government Action

Behavioralchanges

, ,discipline within government agencies (eg.: currently, Korea is one of countries that

invests most in education in the world, ~15% of public spendingIncreaseddevelopment

Change of focus from light industries (consumer goods) to heavy industries andchemicalsFocus on the development of large national groups (Chaebols) to gain productionscale and worldwide competitiveness

Capability

development

Incentives for JV formation between Chaebols and international companie s (eg.:Japanese Nippon Steel) obliging know-how transfer Investments in universities and research center having strong ties to industry (eg.:Korea Institute of Science and Technology, Pohang University of Science andTechnolo

Heavy and Chemical Industries

Steel Mill

Naval

Financingfacilities

Public financing at low interest rates, special depreciation on tax deductable terms

Competitive Limit the number of competitors in certain segments through licensing

Chemical

Machines

Electrical equipmentene s Government and country demands aimed at local companies

Supplyassurance

Setting up a large national steelyards (POSCO) to ensure supply to other industries

Electronics


Exportfacilities

Use of diplomacy (mainly with the US and Japan) for commercial agreementsExchange rate devaluation


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In Brazil, Offshore production growth will be high - evenconsidering only the fields already granted

5,15,6

ro uc on re- a e s(Million Barrels/Day)

1,8

ro uc on(Million Barrels/Day)

0,40,6 0,8 1,10,4

1,01,5

1,8

0,10,32,9

3,5

4,4

2,40 1

1,5

1,0

0,5

0,6

,, ,

2,7 2,8 2,72,82,2 2,5

,

0,10,7

,

0,4

0,10,1

0,10,3

1,01,2

Post-salt and onshore- PetrobrasPost-salt and onshore - Other PlayersTendered Pre-salt

2014 2016 2020201820122010

PetrobrasOther Players


1) Tendered pres-salt fieldsSource: Petrobras business plan 2009-2013 (2009); Booz & Company Analysis


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Projected Investments 2011 2015

Total investment to reach :

US$ 260 billion

(Petrobras + other concessionaries)

ONIP Organizao Nacional da Indstria do PetrleoONIP Organizao Nacional da Indstria do Petrleo


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Purchase of new equipment

materialsrequested-

This list does not exhaust

all equipment andmaterials demand


Source: PETROBRAS


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The demand for goods and services will be around $ 400 billion by2020 - sufficient scale to develop a robust local supply chain ofgoods and services

Ex enditures and Investments in the E&P Sector 400

312231

155324

255

(US$ bn 2009) Total Expenditure(Investment andOperating expenses)CumulativeInvestment

10,9 9,8

8630

191129

7125

33,80,530,1

0,5

33,60,630,3

0,525,1

SectorsConsolidatedInvestments

3,8 4,2 4,7 5,3 5,7 6,0

5,3 6,8 9,5 10,1 9,4 10,2

6,0, ,

14,5

,

2,7 1,01,0

2020

2,4,

2018

2,3,

2016

2,1,

2014

1,95,

2012

1,7,

2010

1,5,

2008

Driller constructionConstruction of Productive unitsConstruction of Petroleum Vessels and Supporting Boats


Note: Includes drillers and production units already rentedSource: Petrobras business plan 2009-2013 (2009); PROMINP; Clippings; Booz & Company Analysis

e s m cxp ora on an va ua onro uc on eve opmen


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The P-ZZ (1) vendor list confirms it and indicates the national chaingrowth potential about 40% of the equipment groups have notbeen considered as local suppliers

286

Companies in Vendor List P-ZZNumber of Companies

112

Type of GroupsSuppliersNumber of Groups % EstimatedValue

Only ForeignCompanies38%

Turbo generators; CentrifugalCompressors; Flare; Sulfate RemovalUnit; Gas Motors; Gas ReciprocalCompressors

42-46%

111Predominance of Foreign Companies37%

Centrifugal Air Compressors; ControlValves; Diesel Motors; Flow Instruments;Positioning Systems (POS);Synchronized Motors and Generators

48-52%

Only NationalCompanies

Predominance of NationalCompanies

7%

18% Automation and Control systems;Centrifugal Pumps; VAC equipment

Heat Exchangers; Screw Type AirCom ressors; Rotar Pum s

3-5%

1-2%


1) Recent platformSource: Booz & Company Analysis

Other countriesBrazil


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According to suppliers, structural factors are the mainimpediments to the sector competitiveness - operators also point toother high impact issues

Additional Facto rs from Direct Customers

Supply uncertaintiesHigh Taxation 76%

Key Challenges for Brazilian Companies(% of O&G Suppliers)

Risk excessive pricing

High Capital Cost 40%

Qualified Labor 55%

-

Culture of "negotiation pricingTechnology Access /

Leading Equipment29%

Business Bureaucracy 35%

Size - raw materials purchase throughdistributors and lack of scaleCredit/Assurance Access 28%

Raw Materials Local Cost 26%


Source: Quantitative and Qualitative Research, Booz & Company Analysis


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The local interest rate is still among the world's highest ones andthe difference to the final borrower (spread) is big

8,75%Reference Interest Rate Estimative of Interest Impact on Price

SIMULATION12.5 %

5,31%3,25%

2,00%1,00%

. .

4,8%

Difference Impact on Interest(% Final Price)

Highestdifference

BrazilChinaIndiaSouthKorea

EUUK

,

USA

,

Japan

,

Industry Funding Cost Working Capital Lar e Industr Mid-size Industr

0,9%

,

1,5%Lowestdifference

11,5%

16,0%

8,8%

(% a.a.)Premises

Variable ScenarioMinimumScenarioMaximum

Mid-size IndustryWorking Capital

7,6%11,5%

Large IndustryWorking Capital

SELIC

Production time 6 months 9 months

Income tax and CSSL 34%


1) Average Working Capital, November 2009 in BrazilNote: Interest Rates, January 2010Source: Global Economics Research - Trading Economics; Balance Sheet Analysis; Booz & Company Analysis

companies 4% a.a. 3% a.a.


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high tax burden

Tax Burden in the Main Power Commodities (1)(%)

43%45% Brazil has high tax burden on the mainpower commodities

24%20%

In some cases, taxes account for almosthalf of the raw material total cost

The high taxes of these commoditiesdirectly impact the chain competitiveness,increasing both production and logisticcosts

GasolineDieselNatural GasPower


1) SP BasisSource: ANP, ANEEL; Acende Brasil Study


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The comparison with developed countries shows in China anadvantage in feedstock/raw material and labor costs

Butterf ly Valve 4 (1) Composit ion o f Cost Dif ference Imported .

18

4239

13131310 Capital Cost

Business Expenses

Taxes358

.National

N/A-76%

-67%

51

9

124

Inputs & Components

Labor 5 -71%

-52%

21

17946100

9

Raw Material

3

-68%

TaxesNon

Capital CostBusinessExpenses (2)

Labor Inputs &Components

RawMaterial

MarginChinaPrice

8

55 Margin

BrazilPrice

54 -86%


1) Butterfly valve, iron-nodular body, cf8m steel plate, epdm seal2) Selling, general and administrative expenses, including logistics cost and depreciationNote: Exchange @ R$1,80 per dollar Source: Field Research, ABIMAQ, Interviews, Booz & Company Analysis


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The comparison with developed countries shows in Norway, a bigdifference in scale/technological capacity and in capital cost/ taxes

Imported

vs. Brazil vs. Norway

Business ExpensesCapital CostTaxes

118

126

555

4-7443

1001

N/A-83%

-31%

National

37

Labor 30 +30%

28

24

Raw Material

Inputs & Components

23

-26%

-25%

Margin

BrazilPrice

14

TaxesNon

Recoverable

Capital CostBusinessExpenses (1)

Labor Inputs &Components

RawMaterial

MarginNorwayPrice

11 -20%


1) Selling, general and administrative expenses, including logistics cost and depreciationNote: Exchange @ R$1,80 per dollar Source: Field Research, ABIMAQ, Interviews, Booz & Company Analysis


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As a result, the segments were categorized into three groups

Targeting Matrix fo r Development of Offshore Segment

High

g m e n

t Individual segments thatoffer high benefits with a

low / medium cost

Segments that indiv iduallyhave a cost-benefit balanc e a

Drilling Services

Shipyards

EPC/IntegratorsServices and Completion equipment

Automation, Measurement and Control Electrical Systems

e n t o

f t h e

S e

Logistic SupportTurbo Generators Systems

Basic Engineering

Rig Operation

Subsea Equipment

Heat Exchan er

Tubes and Pipes

t h e

D e v e

l o p

SeismicCompressorsDrills Pumps

Valves

High LowLow G

a i n s o n

Segments that Individuallyhave high cos ts for limited

benefits


Source: Corporate balance sheets, interviews, Booz & Companyanalysis

Local decision

Foreign Subsidiary


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The competitiveness agenda is composed of policies andinstruments for chain development

Policies for the Development of the Offshore Goods and Services ChainCompetitiveness Agenda

Vectors

1 2

Stimulate the formation of

Generating and disseminatingknowledge and innovation

throughout the chain

Increase productivity andimprove processes for local

production

Knowledge and

Productivity

Productive and43

technological excellencecenters within the

production clusters

Strengthen industrial activitiesin 3-5 productive clusters

Simplify and increase Encoura e local decision Attract technology and

Technological Arrangements

Strengthening5 6 7

Ensure tax isonomy between Establish funding conditionsand guarantees Access raw materials

and infrastructure in

ylocal content policies and global focus

vinternational companies

ocaBusiness

Competitive8 9 10

Actions - "What are the pil lars that make policies tangible?" - What To Do

internat ionally compet it ive compet it ive condit ions


Mechanisms - "Which are the tools to implement those policies?" - How To Do

Governance - "Who is responsible for defining and driving these policies?" - Who Should Do It


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The offshore chain as a whole engages in Brazil (2009) ~ 75,000direct jobs and over 350,000 related sectors and income effect

Current Scenario Offshore Sector Supply Supply Chain

a n r vers rec upp ers e a e ec ors ncome- ec

Drivers

Almost its total revenue isintented to the O&G

General equipment, pipes,integrators, etc.

Relevant share of its

Indirect sectors: primary(e.g., steel, forging,

foundry, components) orsu ort e. ., telecom,

Income effect:expenditures from the

income generatedthrou hout the chaino s ore sec or

Strong foreign presence inof wells and seismicservices

revenue s a oca e ooffshore segment

High import level

hotel)

Delivery to multiplesectors, includingoffshore

m p

l o y m e n t

( 0 0 0 )

EPC: 25 thousandOthers: 15 thousandTotal: 40 thousand

equipment and pipes -20-25 milOthers: 10 thousandTotal: 30-35

Total: 32-36thousand

Total: 310-330thousand

Chain Total 410-420 thousand


Source: ABIMAQ, ABINEE, Petrobras, PROMINP, ABRASEG, Sinaval, ABIFA, SINDIFORJA, IBS, Sector players, Field research, IBGE, BNDES, Booz & Company Analysis

Ethousand


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In the desired view is expected to add between 1,7 and 2.1 millionjobs in Brazil

2.110 - 2.500Number of Employment in the Chain in 2020

(Th. Jobs)

140 - 170

Organic inc rease in Demandwith Constant Participation

The Chain Increases its Exportswith the Greater Companies

940 - 1.150

1.700 - 2.080

410 - 420

620 - 760

National Industry increasesits Participation in the

captured Value

Desired VisionIncrease in ExportsChange in theIncreasingCurrent


supply ParticipationLocal Demand

Source: Petrobras Investment Plan, Chain Companies Website, studies and sector reports, Booz & Company Analysis


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Local Content Policies

c a o c es

1. ANP rules for the bidding rounds;2. PETROBRAS requirements;

3. BNDES criterion



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Local Content Policies - PETROBRAS requirements

Round zero

ops e

CL min = 60%

Normally CL = 0% to 60%

Power Generation ModuleCL min = 75%

CL min = 75%Gas Compressors

LC = 0%


ur o genera orsCL = 0%


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Measuring Local Content

u e o r g n -

The 60% criterion;

Methodology established by ONIP

Contract with Petrobras on : P-51, P-52, P-53, P-54 e PRA1; Refiningprojects

Value added concept.

1 - imported = % of local content (excludes taxes)contract total



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Opportunities for Cooperation

Technology;

Increase in local installed capacity;

Joint agreements for packages.



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In conclusion

Brazil offers a very attractive investment portfolio, with no parallel in the world considering the sametimeframe

Local content policies are expected to play an increasingly important role

Pre-salt represents an unique opportunity for the consolidation of an entire supply chain

However, Brazil is in a challenging position higher costs than other emerging countries and lowerproductivity than developed countries due to limited scale and technological gap

,over 2 million jobs by 2020

If there is no significant improvements in the levels of competitiveness, only a part of this potential willbe achieved

Do your market research and consider greenfield projects and local partnership as a way ofaccessin the Brazilian market



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Thank You

Bruno Musso

[email protected]

(21) 2563-4615


Documents

Increasing Local Content Competetive Agenda for Offshore Oil and Gas Supply Chain in Brazil