Pre-Salt: Capitalizing on Growth Opportunities Giovani Loss Thursday, June 17th, 2010 2010 Brazil Oil & Gas Seminar Brazilian-American Chamber of Commerce,

Pre-Salt: Capitalizing on Growth

Opportunities Giovani Loss

Thursday, June 17th, 2010 2010 Brazil Oil & Gas Seminar

Brazilian-American Chamber of Commerce, Inc.

June 2010

Agenda

1. Brazil – Offshore E&P

2. Brazil – Pre-Salt

3. Brazil – Developments in the Oil & Gas Regulatory Framework

4. Brazil – Current Status of the Industry and Investment Opportunities

Brazil - Offshore E&P

• Offshore E&P Industry

Nowadays, nearly 30 per cent of the world's oil production comes from offshore targets

Deep and ultra-deep offshore exploration - 75% of the economically producible volumes of oil and gas identified since 2003

The world's best deepwater prospects are in the Gulf of Mexico, West Africa and Brazil (the “Golden Triangle”)

Significant developments also occur in North Africa (Libya, Egypt and Algeria) and Asia (India and Indonesia)

Brazil – Offshore E&P

• Why Brazil is a leader in Offshore E&P?

Big coast + Surveys undertaken in the 1960s - the Amazon basin did not hold big oil reserves

PB started investing in offshore technology in the 1960s

PB to invest USD 4 billion in offshore R&D through 2013

PB operates 22% of global deepwater production and 18% of all operating vessels

Floating Production Systems operators (all contracted):

1 – PB – 45 FPSs

2 – Statoil – 15 FPSs

3 – Shell – 15 FPSs

INDEX





Brazil – Pre-Salt

• What is the Brazilian Pre-Salt area?

Reserves of up to 100 billion barrels

High quality light oil

200 to 300 km from the coast

5 to 8 km below the sea bottom

Water depths over 2 km

Total area: 112,000 km2

Total area under concession: 41,000 km2 (28%)

Brazil – Pre-Salt

• Technological Challenges

Long distance to the coast

Floating Production Units and tankers anchoring in ultradeep water

Deviation of wells in the salt zone

Presence of CO2 (corrosive)

Connections with risers under high pressure

Gas pipeline larger than 18” in water depth of 2,200 m

Brazil – Pre-Salt

• Financial Challenges

Exploration of Pre-Salt requires massive investments from E&P Companies and Service Providers

USD 600 billion over the next 30 years

Petrobras to invest USD 174 billion through 2013

Brazil to produce 3.4 million barrels per day by 2020

Brazil – Pre-Salt

• Commercial and Legal Challenges

Sharing of infrastructure required (complex legal structures – multiple consortiums involved)

Local content (currently around 75% - required in contract)

Lack of equipments and experienced humam resources (long term contract – strong default clauses)

Financing products to be developed (guarantees)

New technology to be developed (submarine and subsea – strong patent control)

Natural Gas: Shale Gas (FLNG)

Brazil – Pre-Salt

• O&G is the fastest growing industry in Brazil

1997 – 2.8% GDP

2008 – 10% GDP

• Number of O&G Service Providers in Brazil

2000 – 210 companies

2008 – 1761 companies

2020 – Expected 20% GDP for oil & gas industry

Brazil expected to become 6th largest oil producer in the World by 2030

INDEX





Brazil – Developments

• New Regulatory Framework:

Natural Gas

Natural Gas Law issued on March 2009

Decree regulating the industry to be issued in 2010

Oil

Pre-Salt Bills under Discussion – Approved in Senate

Rules should remain the same for areas that are not considered part of the Pre-Salt or strategic


• Natural Gas Law:

Creates a bid system for natural gas projects

allocates government funds to support certain projects

establishing stronger competition rules regarding open access to existing pipelines.

• Natural Gas Decree: secondary markets, criteria for public tenders, curtailment of supply and reversion of assets


• Pre-Salt Bills - Basics:

PSA Regime for the Pre-Salt area and other strategic areas

Petrobras as sole operator (minimum of 30% stake in all Pre-Salt fields), except in the case of unitization, which may be negotiated

Assignment of oil and gas rights in the adjacent areas with capital injection into Petrobras (almost a concession regime)

Creation of PetroSal and Oil Fund

PetroSal will participate in the operating committee, electing half of its members, including its chair


• Main Brazilian Government Objectives:

Increase control over production

Increase control over commercialization

Increase government take

Enforce local content rules

Avoid Dutch disease


• PSA Regime:

Applied in many large oil producting countries, such as Angola, China, India, Lybia and Nigeria

Will not increase control over production – production program is established during development phase, changes may reduce performance of the project

Will increase control only over commercialization of the Government share of the oil

May not increase government take as expected: costs with management of PetroSal should be very high


• Petrobras Sole Operator:

Government apointing operador is not so uncommon, some countries that apply this rule are: Nigeria and Norway

May result in inefficiencies as operator can’t be removed

May reduce government take: companies may apply a discount rate to investments in the Pre-Salt considering bureaucracy

Will reduce incentives for other companies to invest in natural gas transportation


• Assignment of oil and gas rights in the adjacent areas:

Capitalization will provide cash for Petrobras to invest

Vested rights under concession contracts will be respected

Assignment is similar to Concession - No economic imbalance between companies under different regimes

Faster unitization process - as Petrobras is operator in most licensed areas, less issues to be negotiated


• PetroSal:

PSA requires the creation of a 100% National Oil Company

Government final word over operations is not so uncommon, some countries that apply this rule are: China and Indonesia

Investors may apply a discount rate, as PetroSal control over operations may bring inefficiencies

INDEX





Brazil – Status & Opportunities

• Current Status of the Pre-Salt Industry:

Technical Status:

Use of current existing technology

Starting studies on new technologies

Pilot production to bring cash flow and to test technology

Commercial Status:

E&P Players looking for financing alternatives (M&A, IPO, but not to project finance yet)

Service Providers looking for finance alternatives and to invest in new technologies (M&A, IPO, Project Finance, FDIC, FIP)

Increase on local content driven by Petrobras


• Opportunities for E&P Companies:

Areas under concession contract available for farm-in because companies may need cash (Devon Deal and Peregrino Deal)

There are non Pre-Salt areas and non-strategic areas that may be available for investment under the concession regime in the near future – 11th Bid Round to happen in 2010

PSA with private investors should be the most applicable regime, because Petrobras needs financings


• Opportunities for Service Providers: Development of fields will require highly qualified

suppliers

Local Content rules will require investments to be made in Brazil

Government of Brazil should develop incentives for service providers (BNDES, tax breaks, labor incentives, FDIC, FIP) Ex. fund for 28 rigs.

No matter what will be the regime the acquisition of goods and services should grow considerably


• Opportunities for other Players:

Banks to finance big service providers contracting with Petrobras (rig, FPSO and corporate finance)

Banks to finance operations after Pilot projects (lower technical risk, cash flow)

Banks to finance development of service providers industry in Brazil - FDIC and FIP

Private Equity funds to invest in service providers and use exit strategy (bring them to public market or sell)

THANK YOU!

Giovani Loss

[email protected]

Presidente Wilson 231, 4th floor

Rio de Janeiro, RJ, Brazil

Documents

Pre-Salt: Capitalizing on Growth Opportunities Giovani Loss Thursday, June 17th, 2010 2010 Brazil Oil & Gas Seminar Brazilian-American Chamber of Commerce,