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

Page 2 of 71

Universal Consensus
Universal Consensus is a provider of strategic international advisory and training services. Universal Consensus proprietary model, the Business Model of Intercultural Analysis (BMIA), was developed to drive significant business and organizational results. This model has been used to develop a quantifiable return on investment for clients who are struggling in the underdeveloped field of cross-cultural supply chain management, management consulting, and business development. Learn More: http://www.universalconsensus.com/ View Us on YouTube: http://www.youtube.com/universalconsensus Follow Us on Twitter: https://twitter.com/UnivConsensus Like Us on Facebook: http://www.facebook.com/Univconsensus

Page 3 of 71

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. Petrleo 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 monsters 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

Page 4 of 71

Table of Contents
Executive Summary ................................................................................................................................................................ 2 Brazil ............................................................................................................................................................................................. 8 Introduction .......................................................................................................................................................................... 8 Politics ..................................................................................................................................................................................... 8 Economy ................................................................................................................................................................................. 9 Brazils 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 Brazils 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 Brazils 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

Page 5 of 71 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

Page 6 of 71 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

Page 7 of 71 O&G Terminals .............................................................................................................................................................. 59 Gas Station Network ................................................................................................................................................... 60 Sources ....................................................................................................................................................................................... 66 Disclaimer ................................................................................................................................................................................. 71

Page 8 of 71

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 Cardosos administration is an example of the first group and Lula

https://www.cia.gov/library/publications/the-world-factbook/geos/br.html http://www.heritage.org/index/Country/Brazil 3 DOC: Country Guide Brazil 2011. 4 http://terramagazine.terra.com.br/interna/0,,OI4683023-EI6578,001 2

Page 9 of 71 da Silvas administration as an example of the second. The shift between right and left wing has often been cyclical. Socialist president Dilma Rousseff of the Workers Party (PT, Partido dos Trabalhadores), who took office on January 1, 2011, has indicated her intention to continue the former president Lula da Silvas 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 socialdemocratic 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 Rousseffs 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
Brazils 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

http://terramagazine.terra.com.br/interna/0,,OI4683023-EI6578,00PT+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

4

Page 10 of 71 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 worlds 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 worlds 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

Brazils 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

http://www.nationsencyclopedia.com/Americas/Brazil.html DOC: Country Guide Brazil 2011. 11 United Nations Conference on Trade and Development: World Investment Report 2011. 12 DOC: Country Guide Brazil 2011. 13 http://news.yahoo.com/political-scandals-economy-toll-brazils-rousseff-185854963.html 14 DOC: Country Guide Brazil 2011.
9 10

Page 11 of 71 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 16 DOC: Country Guide Brazil 2011. 18 DOC: Country Guide Brazil 2011. 19http://online.wsj.com/article/SB10001424053111904823804576504641852736916.html?KEYWORDS=b razil+paved+roads

Page 12 of 71
Starting a Business Procedures (number) 15 Time (days) 120 Cost (% of income per capita) 7.3 Paid-in Min. Capital (% of income per capita) 0.0 Dealing with Construction Permits Procedures (number) 18 Time (days) 411 Cost (% of income per capita) 46.6 Protecting Investors Extent of disclosure index (0-10) 6 Extent of director liability index (0-10) 7 Ease of shareholder suits index (0-10) 3 Strength of investor protection index (0-10) 5.3 Paying Taxes Payments (number per year) 10 Time (hours per year) 2600 Profit tax (%) 21.4 Labor tax and contributions (%) 40.9 Other taxes (%) 6.7 Total tax rate (% profit) 69.0 Trading Across Borders Documents to export (number) 8 Time to export (days) 13 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 Enforcing Contracts Procedures (number) 45 Time (days) 616 Cost (% of claim) 16.5

Registering Property Procedures (number) 14 Time (days) 42 Cost (% of property value) 2.7

Getting Credit Strength of legal rights index (0-10) 3 Depth of credit information index (0-6) 5 Public registry coverage (% of adults) 26.9 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 Brazils 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.

Page 13 of 71 are very important in Brazil because of the countrys 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 companys 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.

http://thebrazilbusiness.com/article/5-secrets-about-business-in-brazil DOC: Country Guide Brazil 2011. 23 http://thebrazilbusiness.com/article/5-secrets-about-business-in-brazil 24 DOC: Country Guide Brazil 2011.
21 22

Page 14 of 71

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 annimas" (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

DOC: Country Guide Brazil 2011. DOC: Country Guide Brazil 2011. 27 Petrobras Procurement Document: PROCEDIMENTO LICITATRIO: 270-9009/11 28 TozziniFreire Advogados: Investment Opportunities In Brazilian Infrastructure.
25 26

Page 15 of 71

Brazils 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 highpriced 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 oilworkers 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 suppliersdeals 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.

Page 16 of 71 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 Brazils energy supply. Brazil is also the worlds largest biofuels exporter and sugar-based ethanol makes up over 50% of Brazils 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/

Page 17 of 71

About 92 percent of Brazils oil production in 2010 originated from offshore fields, mostly at extreme depths. Petrobras oil and gas production accounts for nearly 95 percent of Brazils 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 Brazils 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 32

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

Page 18 of 71

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 currencys 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 Silvas 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 Norways 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

DOC: Country Guide Brazil 2011. Matt Mofett: How a Sleepy Oil Giant Became a World Player. Wall Street Journal 30 Aug 2007. 35 http://www.economist.com/node/16964094 36 http://www.prominp.com.br/ 37 Matt Mofett: How a Sleepy Oil Giant Became a World Player. Wall Street Journal 30 Aug 2007.
33 34

Page 19 of 71 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

http://www.upstreamonline.com/live/article272219.ece 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-dorig-hal-bhi-slb/
38 39

Page 20 of 71 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 ONIP CEO/President BNDES President IBP President MME Oil, Natural Gas and Renewable Fuels Secretariat MDIC Development, Industry and International Trade Secretariat BNDES - Director PETROBRAS Engineering Executive Manager PROMINP Executive Coordinator ONIP Director IBP Director Associations President / Director (ABCE, ABDIB, ABEMI, ABIMAQ, ABINEE, ABITAM SINAVAL e CNI)

Steering Committee

Oil, Natural Gas and Renewable Fuels Secretariat

Executive Committee
Executive Coordinator

Sectorial Committee
Exploration Maritime & Production Transportation G&P and Pipelines Downstream

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 42

http://www.prominp.com.br/ DOC: Country Guide Brazil 2011.

Page 21 of 71

Industry Organizations
Brazil's National Petroleum Agency
Brazil's National Petroleum Agency (Agncia Nacional do Petrleo, Gs Natural e Biocombustveis 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. ANPs role in regulatory oversight of local content in concession bids:

Brazils National Energy Council

The Brazilian National Council of Energy Policy (Conselho Nacional de Poltica Energtica - 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 Petrleo, Gs e Biocombustveis IBP) is a private non-profit funded in 1957 which currently has over 200 member companies. IBP is promoting the development of Brazils 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.

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

43 44

Page 22 of 71 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 cant keep pace. A major reason for Petrobras slow increase in production pace is the adverse impact of rising oil

http://www.onip.org.br/ http://www.downstreamtoday.com/news/article.aspx?a_id=25760 48 http://www.petrobras.com.br/pt/

46 47

Page 23 of 71 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 1000 Demand Supply

500
0 2006 2007 2008 2009 2010

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

49 50

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

Page 24 of 71

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

51 52

http://www.petrobras.com.br/pt/ Matt Mofett: How a Sleepy Oil Giant Became a World Player. Wall Street Journal 30 Aug 2007.

Page 25 of 71 A graphical presentation of Petrobras operations:

Petrobras in comparison with its competitors:53

53

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

Page 26 of 71 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 oilinfrastructure and logistics operations.54 Petrobras is extremely exposed to the development of the overall Brazil economy. The Brazil Real is the worlds 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 55

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

Page 27 of 71

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 - Jos 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.

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

56

Page 28 of 71 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):

Page 29 of 71
Executive Board (selection) Jos de Azevedo Title Chief Executive Officer, President, Member of the Executive Board, Director, Director of Petrobras Energa Participaciones SA and Director of Petrobras Energia SA Chief Financial Officer, Chief Investor Relations Officer, Member of Executive Board, Chief Executive Officer of PIFCos, Executive Manager of Corporate Finance of Petrobras and Director of PIFCos Chief Accountant Officer and Director of Petrobras International Finance Company Executive Manager of Corporate Finance, Chairman of PIFCo and Chief Executive Officer of PIFCo --------Primary Company Petrobras Age 62

Almir Barbassa Marcos Menezes Daniel de Oliveira Board of Directors (selection) Guido Mantega Fabio Barbosa Antonio Palocci Filho Jorge Johannpeter Francisco de Albuquerque Luciano Galvo Coutinho Ph.D. Sergio Quintella Mrcio Pereira Zimmermann

Petrobras Petrobras Petrobras Petrobras Banco ABN AMRO Real S.A. Petrobras Gerdau USA, Inc. Petrobras Banco Nacional de Desenvolvimento Economico e Social-BNDES Petrobras Centrais Electricas Brasileiras S.A.

63 59 59 62 56 51 73 74 65 76 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 companys dependence on its Brazilian operations. Other oil companies (e.g. Shell, Statoil, Anadarko, Chevron, OGX) will be investing $26 billion in Brazil from 2009 to 2013. A 2011 Booz Oil Reserves 2007 2008 2009 2010 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 Brazils oil and gas sector will reach US$400 35% 30% 13% South America 769 791 448 459 billion through 2020.58
North America 50 3% 36 -28% -43% 16 -56% 2% 19 19%

57 58

http://www.petrobras.com.br/ DOC: Country Guide Brazil 2011.

Page 30 of 71

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, Getlio Vargas, represented a triumph for a nationalist movement known as O Petrleo 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 worlds 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 profitsharing 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 60

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

Page 31 of 71

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 companys 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 worlds most expensive

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
61

Page 32 of 71 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 Indias largest oil fields.65

Petrobras international exploration sites.

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

Page 33 of 71

Petrobras Strategy 2011-2015

Overview
Petrobras 20112015 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 Petrobras will also upgrade a number of existing refineries and will build four new refineries, including the Rio petrochemical complex that alone constitutes an $8.5 billion investment. Total planned expenditures by 2014 in the entire downstream segment, including 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 $3.5 billion in that sub-sector through 2014. Petrobras supply chain is concentrated to the coast on the downstream side and especially to South-East Brazil.
Segment Exploration and Production Refining, Transportation and Marketing Gas & Power Petrochemicals Distribution Biofuels Corporate Overhead US$ billion 127.5 70.6 13.2 3.8 3.1 4.1 2.4 Share 57% 31% 6% 2% 1% 2% 1%

66

www.petrobras.com.br

Page 34 of 71 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

Page 35 of 71

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:

68

www.petrobras.com.br

Page 36 of 71

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 worlds 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 companys 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.

Page 37 of 71 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

Page 38 of 71

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.

Page 39 of 71

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 countrys 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

TozziniFreire Advogados: Investment Opportunities In Brazilian Infrastructure. http://www.wilsonsons.com.br/ 72 Petrobras: Sustainability Report 2010. 73 Heller Redo Barroso and Marcos Macedo: Brazilian basics.
70 71

Page 40 of 71

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 So 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:

74

Heller Redo Barroso and Marcos Macedo: Brazilian basics.

Page 41 of 71 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:

Page 42 of 71

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

Page 43 of 71 Petrobras has quantified its need in terms of material and equipment:
Items Units of Structural Steel Air Coolers Mooring Cables Christmas Trees Safety boats Pumps Lifeboats Well Heads Compressors Fan Coils Heat Furnaces Heat Reformers Furnace Eletric Generator Crane Flexible Pipes Diesel Engines Eletric Motors Reactors Storage Tanks Process Towers Eletric Transformers Heat Exchangers Pipe lines Turbines Production Rigs Pressure Vessels Measurement Total Amount (2008-2015 ) t 1.252.000 un 721 km 2.726 un 3.930 un 334 un 10.264 un 1.978 un 3.657 un 969 un 2.818 un 252 un 8 un 439 un 220 m 7.2 un 717 un 17.035 un 317 un 2.824 un 732 un 1.236 un 5.913 t 1.542.266 un 441 un 36 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.

Page 44 of 71 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.

Page 45 of 71

Ships and Support Vessel

The sketch below outlines how the local content requirement can manifest itself in terms of shipbuilding.

Topside CL min = 60%

Hull Normally CL = 0% to 60%

Compression Module CL min = 75%

Power Generation Module CL min = 75% Turbo generators CL = 0%

Gas Compressors LC = 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 industrys global competitiveness. In total phase I and II will add 4 million deadweight tons (dwt) to the current fleets capacity. Four Promef vessels are scheduled for delivery in 2011.

76

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

Page 46 of 71 Phase II of the PROMEF calls for purchase of another 26 large vessels, including bunker, LPG and other vessels, for delivery by 2014. Additionally, under the Petrobras 3rd fleet renewal plan, the company will be contracting 146 platform supply and support vessels and boats.77 Breakdown of program per vessel type:

LEASED/ NEW VESSELS BEING LEASED TO BE CONTRACTED TOTAL Large Vessels (VLCC/Tankers) 26 44 70 Supply Vessels 24 122 146 FPSO/SS 6 8 14 Others (jack-ups, TLWP) 3 1 4 Total 59 175 234
This Gantt-chart outlines the proposed investment time-line:78
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

PROMEF I
26 vessels
SUEZMAX (10)

BP 2003 - 2007 BP 2004 - 2010 BP 2007- 2011

BP 2008 - 2012 BP 2009 - 2013

PRODUTOS CLAROS (4) GLP (3) PANAMAX (4)

PROMEF II
23 vessels

AFRAMAX (5) BUNKER (3)

PRODUTOS CLAROS - 45k (3) GASEIROS SR 2000 (2) PRODUTOS CLAROS 30k - Cl (3) GASEIROS P 4000 (3) PRODUTOS CLAROS 30k - E (2) SUEZMAX - DP (4) AFRAMAX - DP (3)

FREIGHT
19 vessels

Afretamento - GASEIRO (3) Afretamento - BUNKER (6)

Afretamento - PRODUTOS CLAROS (10)

EMB. APOIO
146 supply boats

Emb. Apoio - AHTS 18000 (46) Emb. Apoio - PSV 3000 (49) Emb. Apoio - AHTS 21000 (8) Emb. Apoio - OSRV (18) Emb. Apoio - PSV 4500 (15) Emb. Apoio - T 15000 (10)

BP Business Plan

77 78

Petrobras: Sustainability Report 2010. Petrobras: 2010 Business Plan.

Page 47 of 71

Petrobras Maritime Market Trends

In July 2011, Keppel Offshore & Marine Ltd (through its Brazilian subsidiary KSM Brasil) became the first shipbuilder to commission a vessel in Brazil under the new business model of pre-emptive construction of a PSV in anticipation of demand. Completed PSVs will be offered for bare-boat charter or sale upon completion.79 As tenders will all contain gradually increasing minimum local content requirements that can go as high as 95% in 2017, more and more companies have start looking out for local partnerships, areas to establish new facilities and operational bases. Many international suppliers have enrolled as supplier with Petrobras. Starting with eight floating production, storage and offloading (FPSO), Petrobras has begun to break up orders and service contracts in smaller components, emphasizing details and standardization. This is done in order to reduce prices of equipment, and at the same time allow for the gradual escalation of local content requirement in Petrobras projects.

Recent Maritime Deals

Petrobras has sourced several previous ships from Norwegian manufacturers. The Scandinavians have experience with deep-sea drilling. Havila Shipping and Solstad Offshore have both been awarded PSV-contracts in the past few years. After the 2010 Rio Oil & Gas Expo, 55 Norwegian firms were offered contracts with Petrobras. Ulstein Design & Solutions has signed two ship design contracts with the Brazilian Shipyard Alianca S.A for the building of two ULSTEIN PX105 large platform supply vessels for the Brazilian shipowner CBO. Petrobras is increasingly looking to larger vessels due to the distance to pre-salt rigs. The vessels are to be leased to Petrobras on an 8-year contract.80 In June 2011, Petrobras awarded GE Oil & Gas a four-year service agreement to deliver repairs, maintenance and retrofits on Petrobras fleet of subsea equipment installed in the Campos Basin. The contract is worth $200 million.81 Petrobras signed a $3.5 billion deal with Brazilian engineering company Engevix to build eight production vessels, starting in early 2011. Engevix Engenharia SA will build eight floating production, storage and offloading vessels at a site in the southern Brazilian state of Rio Grande do Sul. The vessels will be standardized. This will permit faster construction, economies of scale and reductions in cost.82

http://www.marinelink.com/news/shipbuilding-brazilian339305.aspx http://www.ulsteingroup.com/kunder/ulstein/cms66.nsf/pages/newslista.htm# 81 http://www.genewscenter.com/Press-Releases/GE-Oil-Gas-Awarded-160-Million-Petrobras-Contractsfor-P-58-and-P-62-Floating-Production-Units-in-Brazil-295d.aspx 82 http://www.epcengineer.com/news/post/1127/brazils-petrobras-partners-sign-35-billion-oil-platformdeal

79 80

Page 48 of 71 Sete (Seven) Brasil is the newest Petrobras offspring. The new private company was launched in early 2011 to administer the 28 drill ships that Petrobras will order. The tender process for the first seven orders was won by EAS shipyard, located in Recife, Northeast Brazil. The total price for these seven drillers adds up to $4.637 billion, pegging each driller at $662 million. The drillers are scheduled to start operations by 2015.83 BMT Scientific Marine Services (BMT) was contracted in August 2011 on a five year deal by Petrobras to provide support maintenance and repair for the Cascade and Chinook Free Standing Hybrid Riser Tower (FSHR) Monitoring System.84 Rolls-Royce, the global power systems company, has won an order to design and equip two UT 735 SE offshore supply vessels to be leased by Petrobras. The order is worth 15 million to Rolls-Royce. The contract includes vessel design and an integrated Rolls-Royce equipment system including propulsion, deck machinery, bulk handling and vessel control systems. The vessels will be carrying fluids and solid cargo to and from offshore oil and gas platforms. This is the second order from Petrobras in the summer of 2011. Petrobras now has four Rolls-Royce designed offshore vessels on order, all of which will be built by Estaleiro Ilha S.A in Brazil.85 Hamworthy Oil & Gas Systems was awarded a major contract in August 2011 by Brazilian shipyard Estaleiro Promar SA for the design and supply of cargo handling systems for eight liquefied petroleum gas (LPG) carriers destined for operation by Transpetro, a subsidiary of Petrobras. Hamworthy Oil & Gas Systems has released plans for a new dedicated service centre in Brazil.86

Unspecified Demand
Although not specified as a bottleneck by Petrobras, there are strong reasons to suspect that all sorts of support and service activates related to the maritime segment will be in-demand as well. One reason for this is fairly obvious. Petrobras needs to have up to 70% Brazilian content in its supply chain. Petrobras plan to massively expand its supply chain. Most O&G supply chain products and services are highly specialized. Consequently, the current level of domestic highly specialized O&G supply chain goods and services should be fairly equally distributed among different supply chain activities, otherwise certain sectors or providers would have significant overcapacity for no good reason. As a result, there is a major need of across-the-board supply chain goods and services in Brazil. Unspecified demand in the maritime segment which could be suitable for U.S. companies to provide includes:

http://news.seadiscovery.com/post/2011/02/11/Sete-Brasil-and-the-Petrobras-Local-DrillshipProgram.aspx 84 http://www.marinelink.com/news/petrobras-cascade-chinook339994.aspx 85 http://www.marinelink.com/news/rollsroyce-brazilian340146.aspx 86 http://www.marinelink.com/news/hamworthy-service-center340052.aspx

83

Page 49 of 71 Satellite communication Advanced Project and Program Management Automation and hardware/software services Logistics optimization services Security technology

In construction and design, Brazils supply chain companies in general have a need for international services in lean designs, system reliability, and supplier co-ordination and supplier development.87

Supplier
Multinationals such as FMC Energy, Cooper Cameron, Marine/Oceaneering, National Oilwell Varco (NOV), Weatherford, GE Vetco Grey, ABB, Aker Kvaerner and B.J. Services, among several others, have plants and service facilities in Brazil and hold a significant market share in their respective sub sectors.88

Finance and Investments

In 2009, China extended a $10 billion credit line to Petrobras to develop off-shore oil resources that will be repaid through the export of oil, effectively making China Brazils first client for its pre-salt oil. In 2009, the U.S. Ex-Im Bank issued a $2 billion preliminary commitment to Petrobras that will facilitate exporting U.S. oil and gas equipment and services to Brazil. In 2010, the total volume of loans Petrobras granted to its customers in Brazil and abroad was more than $37 billion.89

Supply Chain Financing

In November 2010 Petrobras secured $1.8 billion in financing by major national banks to boost Petrobras supply chain. The $1.8 billion in financing for the Petrobras supply chain, which has never occurred before, will be undertaken by the largest banks operating in Brazil, through the Progress Program (Programa Progredir). The program was launched in mid-June 2011. The banks involved in the financing operation are Bradesco, Banco do Brasil, Santander, Caixa Economica, HSBC and Ita. The targets are the 34 thousand direct suppliers and 216 thousand indirect suppliers for Petrobras. The program will have invested some $224 billion by 2014. The program is operated through the Progredir Portal, in which Petrobras suppliers are registered. 90

Sofia Villagarcia and Francisco Cardoso: New Supply Chain Network In Brazils Construction Industry. University of California, Berkeley, CA.
87

DOC: Country Guide Brazil 2011. Petrobras: Sustainability Report 2010. 90 http://www.folhadacidade.inf.br/ler.asp?cod_materia=3029
88 89

Page 50 of 71 The goal of Programa Progredir is to preferentially benefit the small and medium size companies that supply equipment and materials to Petrobras direct suppliers. These small and medium companies have difficulty in obtaining credit in the market and they are vital as they will supply the majority of the Brazilian oil & gas industry for the next four years. The program uses Petrobras superior investment grade credit rating to the benefit of program participants. Subcontractors supplying the companies direct suppliers will be allowed to present their contracts as guarantee to the banks. Small and medium size supply chain companies would otherwise struggle to secure the needed financing, in many cases resulting in delays in production and delivery of products and also in lost business opportunities for both suppliers and Petrobras. The program is an important step made by Petrobras in order to boost its equipment supply chain, which is mostly composed of national companies, but increasingly includes Brazilian subsidiaries of foreign owned companies.91

Risk and Diversification - Supply Chain Acquisitions

Petrobras needs to diversify its operations to reduce country risk. Furthermore, if Petrobras expands U.S. operations it would be able to generate further dollar profit to offset exchange rate risks and also build a stronger U.S.-credit rating.92 Petrobras currently has one refinery, a trading desk, and exploration operations in Texas.93

Petrobras Finance Company PICFCo

Petrobras has its own finance company called PIFCo, incorporated on the Cayman Islands. Petrobras created PICFCo in 1997 in order for the company to facilitate oil sales, purchases and financing with third-parties. PIFCo also leases equipment from outside Brazil to Petrobras. PIFCo handles 95% of all of Petrobras oil trading. Being Cayman Island based, PIFCo also brings substantial tax benefits to Petrobras.94 This may seem counterintuitive (that a government owned company sets up foreign operations to evade paying Brazilian tax) but it highlights the previously mentioned duality of Petrobras.

http://www.lngworldnews.com/brazil-petrobras-releases-supply-chain-finance-program/ Andrea Goldstein: The Emergence of Multilatinas - The Petrobras Experience. UNIVERSIA BUSINESS REVIEW (2010). 93 www.petrobras.com.br 94 PIFCo: Investor Prospect (2011).
91 92

Page 51 of 71

Insurance
Brazil's Itau Unibanco, Spain's Mapfre and Germany's Allianz made the top proposal to insure Petrobras operations and are current co-insurers on the 2010 policy valued at between $80 billion and $90 billion. The bidding process involved three separate tenders: platforms and refineries; airport cargo for BR Distribuidora; and imports, exports and all Petrobras cargo transportation.95 Reinsurance industry representatives have expressed concern over regulatory changes that took effect in early 2011. The changes prohibit insurers from placing more than 20% of their reinsurance business with reinsurers with which they are affiliated and require 40 percent of reinsurance business to be placed with Brazilian reinsurers.96

Human Resources
As mentioned before, Brazils and Petrobras activities are heavily concentrated in the South-East region of Brazil. The majority of Petrobras employees are in the holding company. The employee data below is year-end 2008 (the most current available):

Petrobras workforce is divided into the following work systems:

http://www.advfn.com/nyse/StockNews.asp?stocknews=PBR&article=42016864&headline=brazils-itaumapfre-alliance-top-petrobras-insurance-bid-estado 96 DOC: Country Guide Brazil 2011.

95

Page 52 of 71

Human Resource Demand

One key to Petrobras' success is technology. Throughout its history, Petrobras has expanded its activities through development of its own technology. Petrobras cooperates with the Brazilian government in order to have enough educated workers to choose from. As shown by the graph below, construction and assembly are the most labor intense operations and therefore have the highest labor demand.
PROFESSIONALS REQUIRED FOR O&G PORTFOLIO IMPLEMENTATION

175 PROFESSIONALS CATEGORIES

112.625 Qualified professionals
42
5%

ENGINEERING

CIVIL CONSTRUCTION

7
13%

CONSTRUCTION & ASSEMBLY

98
75%

OPERATIONS MAINTENAINCE

31
6%

5.967
13
49%

15.020
7
100%

84.576
BASIC 20
64%

7.062
15
45%

HIGH SCHOOL
2.927

BASIC
15.020

54.476

BASIC

HIGH SCHOOL
19.386

27
23%

3.200

TECHNICIAN
460

3
8%

TECHNICIAN
2.196

2
3%

HIGH SCHOOL
3.542

10
50%

GRADUATE
2.580

26
43%

INSPECTORS
4.228

30
5%

TECHNICIAN
320

6
5%

GRADUATE
4.290

19
5%

Per investment sector human resource demand over time:

120.000

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Business Plan 2008 2012

28 Drilling Rigs

100.000
146 Supply Boats
New Stationary Production Units

PROMEF II

80.000
Freight 19 vessels

Refinery Premium II
Refinery Premium I

60.000

40.000

20.000

0 0

Page 53 of 71

Training
The company is able to draw on some of the best minds in Brazil, both in its in-house research laboratories and in its collaborations with Brazilian universities. During the mid-2000s Petrobras signed new partnerships with universities at a rate of one per business day. Local content requirements may necessitate local partnerships or joint ventures, training and development of local suppliers and sub-contractors, and the establishment of local training centers. Work can either be transferred to regional or local offices or by local partnering. Around 4%, or just above 3,000 employees, are participants in a Petrobras training program. The cycle for internal training (right): U.S. companies have excellent opportunities to develop training in any supply chain aspect for the Brazilian market. If a U.S. company deliver highly specialized or customized training, not currently available in the Brazilian market, the local content requirement can be circumvented.
1st CYCLE

2nd CYCLE

3rd CYCLE

4th CYCLE
Actual date

COURSES

COURSES

COURSES

COURSES

Sep.06 to Jun.07

Jul.07 to Mar.08

Apr.08 to Nov.08

Dec.08 to Jun.09

10.880 people

24.003 people

22.208 people

39.827 people

Following seats will be offered on 2nd Phase of Professional Qualification Plan

PROFESSIONAL QUALIFICATION PLAN TARGETS IN 3 THREE YEARS

Budget
People to be qualified Location Amount of Courses

US$ 150 millions 112.625 professionals 17 States / 34 Cities 953 6.328 71 73.620

Amount of Classes Educational institutions involved

Total people trained / in training (as of Sep/2009)

Worker Safety & Health

Petrobras external communication put high emphasis on CSR and supply chain safety and health. CSR-focus is on ethical and transparent management of business and activities, and its relations with all stakeholders, promoting human rights and citizenship, respecting human and cultural diversity, not allowing discrimination, degrading labor, child labor and slave labor, contributing to sustainable development and reduction in social inequality. Petrobras has over 1,000 employees working with external communication.97 There may be demand for highly specialized services in this area, but in general Petrobras themselves is an industry leader in CSR and workers safety and health.

97

Petrobras: Social Responsibility in the chain of suppliers of Petrobras.

Page 54 of 71

Procurement
U.S.-Brazil Differences
A Petrobras study found that, in general, U.S. O&G supply-chain companies are better prepared in procurement acquisitions and tactics procedures (supply chain, TCO, MSA, DA, negotiations) while Brazilian buyers (i.e. Petrobras) were better prepared in terms of technical specifications matters when compared to U.S. buyers. In addition, U.S. material is cheap and services expensive, whereas in Brazil, material is expensive and the labor cost is low. There are also substantial legal and cultural differences that impact procurement.98 Universal Consensus has customized solution to handle these problems.

Procurement Process
The Brazilian government has put in place a bidding vehicle to govern Petrobras procurement process. The bidding process can be circumvented if Petrobras can show (to the regulatory body) that the need is dire, or that a potential supplier offers something so unique that a bidding process is unnecessary. Bidding Procedure The bidding process includes the following steps: a) Presentation of documentation; b) Opening of electronic trading; c) Verification of compliance and compatibility of each proposal with the Notice requirements, promoting the declassification of proposals nonconforming and incompatible; d) Classification of proposals; e) Analysis of the documentation submitted, as per item companies winners; f) Notification by the Committee on Disposal of the outcome of the bidding winners of the auction; g) Resolution of authority as the result of the ratification of the bidding; The proposals will be presented in the form of electronic auction portal. No previous dealings or other offers will be considered in the process. Materials Requirements These are the major requirements to consider when bidding for materials contracts: 1. 2. 3. 4. References (Previous Sales, Reference Letters); Facilities for Technical Assistance (Automation Systems, Rotating Machinery, etc); Mandatory Product Certification (API, ASME, ...); Other Specific Requirements.

98

Petrobras: Logistics/Procurement differences between the US and Brazil from a Petrobras perspective.

Page 55 of 71 Services Requirements These are the major requirements to consider when bidding for services contracts: 1. 2. 3. 4. Sales and References (List of Services Provided continuity and Reference Letters); List of Equipment relating to services provided; Main personnel curricula vitae; Other specific requirements.

Procurement Portal
All suppliers to Petrobras have to be registered in Petrobras supplier-database. This database now contains 45,000+ suppliers and handles 40,000+ users around the world. Petrobras has been using this business platform since 2002 (revamped by SAP in 2005). The portal streamlines the procurement processes and is used for activities ranging from requests for quotations and submitting proposals to the management of contracts and order management.

Local Content
Local content commitment enacted by ANP is one of the judgment criteria applied in evaluating RFQ offers. In presenting their offers, bidders indicate a specific percentage of local content, which is turned into a number of points used to rank bidders offers along with other parameters.99 As outlined in the regulations chapter, for exploration concessions, a new model was developed by ANP in 2009 in which Petrosal will maintain the interest of the Union (Brazil) and companies will have to set up consortiums with Petrobras and Petrosal.100 Even though the local content requirement is primarily politically motivated and forced upon Petrobras, the company recognizes the benefits of increased Petrobras influence (on suppliers) and the consequent ability to improve efficiency among local suppliers (as opposed to foreign ones). Ronaldo M.L. Martins, Relationship Manager for Materials at Petrobras Procurement Department also underscore that after sales are faster and friendlier [with local companies] when compared with the foreign companies.101

Heller Redo Barroso and Marcos Macedo: Brazilian basics. ANP: The new regulatory framework for the pre-salt areas. 101 http://www.petrobras.com.br/pt/
99 100

Page 56 of 71

Pipelines, Refining & Petrochemicals

The downstream best prospects identified by Petrobras: HCC Reactors Boiler works with special alloys (reactors, towers, pressure vessels) Boilers Heat exchangers working with H2S traces (ASTM A 387 degree 11) API pumps Basic design services Thermal power project design

Refining
Petrobras needs to expand its refining business in order to meet soaring domestic demand for finished products and maintain its market share. Petrobras CEO Jose Sergio Gabrielli believes that over the long run, Petrobras' investment in refining - and indeed the company's integrated business model - will generate higher returns for investors. This assumes that the upstream segment would drive growth at times of higher crude prices while the downstream business could provide returns when crude prices fall. The question is if crude prices will come down enough in the near future to justify the economics of heavy investment in the refining sector. Nevertheless, Petrobras will continue to face pressure to ensure local demand is met.102 For the downstream sector, Petrobras plans to expand and modernize its refining capacity and become the third-largest refiner in the world. Petrobras plans to invest over $43 billion in various projects, including: (i) Premium Refinery I in the State of Maranho, which has a capacity of 600,000 bpd, (ii) Premium II Refinery in the State of Cear, with a capacity of 300,000 bdp, and (iii) Abreu e Lima Refinery in the State of Pernambuco, and (iv) the petrochemical complex of COMPERJ in State of Rio de Janeiro. The Abreu e Lima Refinery was originally planned as a joint venture between Petrobras and state-run Venezuelan PdVSA, but PdVSA backed out in the beginning of August leaving Petrobras with an $15 billion additional investment.103

Refining output divided per product.

http://www.eia.gov/cabs/brazil/Full.html http://www.foxbusiness.com/industries/2011/07/21/brazil-petrobras-to-tackle-refinery-projectwithout-pdvsa-report/
102 103

Page 57 of 71

Petrochemicals
There has been a continuous consolidation in the Brazil petrochemicals industry in the late 2000s. Petrobras acquired the Ipiranga Group (major lubricant company) in 2007 in a $4 billion deal that was one of the major acquisitions in Brazilian history.104 Petrobras began construction on a new Rio de Janeiro Petrochemical Complex (COMPERJ) in 2008, an approximately $8.4-billion project that marks the Brazilian company's return to the petrochemical sector. The plant is scheduled to go online in 2013 and will have a processing capacity of 150,000 barrels per day of heavy oil.105

Biofuels
Petroleo and five partners agreed in 2010 to create a new company that will invest $3.61 billion to build a pipeline and waterway system to transport ethanol from Brazil's sugarcane heartlands to local markets and for export. Petrobras, Cosan SA Industria e Comercio, Copersucar SA and Odebrecht Transport Participacoes SA each will hold 20% stakes in the new company, Logum Logistica SA. Camargo Correa Oleo e Gas SA and Uniduto Logistica SA will hold 10% each. Logum Logistica will set up a multimodal transport and storage and shipping terminal system that will extend over some 1,300 kilometers, linking the main ethanol-producing regions. Upon completion, expected by 2020, the project will have an installed transport capacity of up to 21 million cubic meters per year of ethanol.106

Pipelines
The gas pipeline network operated by the Petrobras subsidiary Transpetro continues to grow. In 2010, it reached 7,193 km, a more than 30% increase from 2009. The just mentioned Multimodal Logistics System for Ethanol, foresees adjustments and improvements to existing Petrobras facilities and the construction of new pipelines, terminals, barges/pushers, collecting centers and intermediate pumping stations. Pipelines are schedules for construction in 2011-2012.107

Research & Development

Petrobras R&D expenditures are similar to those of BP and Shell and well in excess of those of Exxon, Chevron, ConocoPhillips and Total. Petrobras had been granted 172 U.S. patents up until 2008, in comparison with PetroChinas 9 U.S. patents. Brazil is a leader in science and technology in South America and a global leader in some fields, such as biofuels, agricultural research, deep-sea oil production, and remote sensing. The Brazilian government and major corporations seek to develop an environment that is more supportive of

http://www.prnewswire.com/news-releases/kline-analysts-ipiranga-acquisition-to-help-petrobrasdominate-latin-american-lubes-market-52175812.html 105 http://www.downstreamtoday.com/projects/Project.aspx?project_id=147 106 http://www.epcengineer.com/news/post/3831/brazil-petrobras-partners-agree-to-invest-brl6-billionin-ethanol-duct-system 107 Petrobras: Sustainability Report 2010.
104

Page 58 of 71 innovation. The extent of bilateral U.S.-Brazil scientific and technological cooperation is expanding and prospective areas in which to expand include advanced materials, telecommunications, energy transmission, and energy efficiency.108

UFRJ Technology Park

Siemens announced in June 2011 that it plans to invest around $150 million in Brazil for O&G research, mostly within the UFRJ (Federal University of Rio de Janeiro) technology park. The UFRJ Technology Park is already a hub for research centers related to the O&G industry and considered the leading South American research center, harboring Petrobras, Schlumberger, Baker Hughes and Halliburton (construction on the Halliburton site commenced a few days ago).109 Siemens sees Brazil as the new frontier for energy business. In order to adapt to Brazilian laws, Siemens is already making a big effort to increase the national content in its manufacturing plants in Brazil, they also hope that the increase in national content will help them in securing orders for equipment to be used in the development of Brazils pre-salt fields. Siemenss Technology Center will occupy an area of 4 thousand square meters and employ around 800 engineers and technicians. Although the centers main target will be in developing offshore and subsea technology, it will also be dedicated to research in different forms of renewable energy and software development in cooperation with various UFRJ technology laboratories. Two other international companies have also secured locations at the UFRJ Technology Park, which will now have its 350 thousand square meter area fully occupied. These companies are the BG Group, specialized in segments of the O&G industry, and U.S based EMC which specializes in information technology.110

Supply Chain Material and Equipment Development

Petrobras will focus supply chain technological development on the following areas: Submarine sensor for measuring oil and grease degree in water; Signal optical cable for well temperature and pressure monitoring; Submarine optical connectors; Intelligent sensor network for natural gas flow measurement; Internal for piping in the radiation zone of industrial furnaces; Co-generation system using biomass as fuel; Submarine sphere valves; Monitored cathodic protection system for pipelines.

DOC: Country Guide Brazil 2011. http://www.sourcingbrazil.com/halliburton-begins-work-on-research-center-at-rios-ufrj-technologypark/ 110 http://news.seadiscovery.com/post/2011/07/13/Siemens-Eyeing-Brazilian-OG.aspx

108 109

Page 59 of 71

Environmental Technology, Safety & Security

Even though Petrobras puts emphasis on environmental technology and safety, the opportunities are not as plentiful as one would think. This is largely due to the fact that Brazil and Petrobras have a long-stemming culture of excellence and experience in these fields, and are not in any dire need of outside assistance.111 There are opportunities for the sophisticated U.S. security industry.

Environmental Technology Distribution

Petrobras Distribuidora, Petrobras service network company, is developing partnerships for the implementation of thermal energy and natural gas to supply electricity to corporate and industry customers. Petrobras Distribuidora also has programs for clients seeking to optimize the use of Petrobras products, focusing on the aspects of energy economy, environmental protection and industrial safety.112

Accident Prevention
Petrobras puts great emphasis on operational safety and has 14 large vessels dedicated solely to responding to environmental emergencies.113

Distribution & Terminals

O&G Terminals
Petrobras announced in July 2011 the construction of a Bahia LNG Terminal (TRBA), which will have a capacity of 14 million cubic meters per day. As part of the Growth Acceleration Program (GAP), the work is slated to begin in March 2012 and to be completed in August 2013. An investment worth $476 million, the project will create 850 direct and 2,400 indirect jobs and have 80% local content (nationalization index). Brazil currently has LNG terminals in Pecm, with a capacity of 7 million cubic meters per day, and in the Guanabara Bay, with capacity of 14 million cubic meters per day. From September 2013, when the TRBA is expected to go online, Brazil will have a capacity of 35 million cubic meters per day, a volume greater than the 31 million cubic meters of natural gas imported from Bolivia per day. 114 Petrobras also intends to build a terminal for docking LNG tankers in order to be able to export LNG. A fourth LNG terminal is also being studied.115 Petrobras established three design proposals in July 2011 for floating liquefied natural gas terminals that could help deliver the fuel from oil fields far offshore. The proposals were opened

Petrobras: Sustainability Report 2010. http://www.br.com.br/wps/portal/ 113 Petrobras: Sustainability Report 2010. 114 http://www.maritimeandenergy.com/tekst/8458/Petrobras-install-the-Bahia-RegasificationTerminal.aspx 115 Heller Redo Barroso and Marcos Macedo: Brazilian basics.
111 112

Page 60 of 71 August 25, with an ultimate selection of the winning design expected October 31 2011. The three bids were from a consortium of Technip, Modec and JGC; SBM and Chiyoda; and Saipem. Floating LNG plants serve as an alternative to conventional submarine pipelines.116 Transpetro also invested to expand its terminals. At the Guamar Terminal, the onshore infrastructure was enhanced to receive oil products coming from the Potiguar Refinery. The offshore infrastructure will also be enhanced, with investments of $262.5 million.117

Gas Station Network

Petrobras service station network consists of over 7,000 stations, owned by Petrobras Distribuidora, a Petrobras publicly traded subsidiary operating under the brand name BR. 118 This Petrobras controlled network, mostly concentrated to the populous Southeast Brazil, represented 38.6% of the Brazilian service station market in 2009. The company will invest the equivalent of $4.2 billion to expand its market share to 40.0% in 2014. Petrobras Distribuidora had a 30% market share in 2004 and had less than 500 service stations in 2001.119

http://www.fnno.com/story/news-corner/331-petrobras-has-floating-terminal-proposals-pbr-newscorner 117 Petrobras: Sustainability Report 2010. 118 http://www.bnamericas.com/company-profile/en/Petrobras_Distribuidora_S,A,-BR_Distribuidora 119 http://www.br.com.br/wps/portal/
116

Page 61 of 71

Information Technology
The Brazilian Market
Brazil is also one of the largest emerging economy IT-markets. It represents 47% of Latin Americas IT-service market and is valued at $23 billion annually.120 IT end-user spending in Brazil is expected to grow to $134 billion in 2014. The largest share of spending will be on telecom equipment, representing 72% of the market, followed by IT-services at 13.3%, and computer hardware at 11.9%.121 Total IT-services export from the U.S. to Latin America is twice the size of IT-services export to Africa and the Middle East combined and roughly the size of IT-services export to the U.S. largest trading partner, Canada. 122 Banking industry services is considered the best segment for growth in the Brazilian IT-sector. But there is public concern that the lack of skilled ITprofessionals in Brazil will slow the entire Brazilian economy.123 There have been somewhat of a boom in recent years in the Brazilian IT-sector. Cap Gemini made a major acquisition with a 55% stake in CPM Braxis, the leading IT-services provider with over 5,000 employees. Several international IT-companies have used acquisitions as a way of entering the local market.124 The major opportunities in the Brazilian IT-market for U.S. companies are in business automation and secure data backup/recovery. Due to increased regulatory requirements, data back-up is especially in-demand. The majority of the small and medium-sized businesses have deployed a SAN (Storage Area Network) or NAS (Network Attached Storage) solution. IBM is the market leader in IT-services with 39% of the local market share (in 2008); some other companies competing with IBM are HP, EMC, Hitachi, Network Appliance, Storagetek and Sun.125 Brazils recent lowering of a payroll tax included IT-professionals as one of the professions. This is a welcomed move as between 15-50% of the Brazilian IT-workforce is estimated to work in the informal sector. 126 The biggest bottleneck in the Brazilian IT-sector is finding qualified professionals. The shortage is 70,000 people in 2011 and it is in-line to reach 200,000 at the end of 2013. Gartner identifies the Brazilian labor force as flexible, creative and with diversified skills, providing attractive resources to the offshore sector.

120 121 122

Gartner: IT Services Market Metrics Worldwide Forecast, Q2 2010 DOC: Commercial Guide Brazil 2011.

http://web.ita.doc.gov/ITI/itiHome.nsf/fe50f6398501af6f85256dc500700ade/fccf98cac631be1985257574 00590bfa?OpenDocument 123 http://itdecs.com/2011/04/if-brasscom-says-jump-will-you-jump/ 124 http://www.capgemini.com/news-and-events/news/capgemini-acquires-a-55-stake-in-cpm-braxis-theleading-brazilian-it-services-player/ 125 MOITI: Brazil Telecom/IT Industry (2008) 126 Roberto Dias Duarte: Big Brother Fiscal, o Brasil na Era do Conhecimento (2009)

Page 62 of 71 Professionals from countries such as the U.S., the U.K., Spain, Italy, Portugal, Chile and Argentina are awaiting necessary entry visas. Visa-requests for IT-professionals rose from 115 in 2009 to over 400 in 2010.127 7,500 U.S. citizens were granted work visas in Brazil in 2010.128 For hardware producers, there are tax incentives for local production and high taxes on import. Companies with production in Brazil include Aiox Brazil, Compalead, Envision, Island Service, Itautec Philco, LG, Leadership, Motorola, Positive, Samsung, Sanmina, Semp Toshiba, Foxconn and Tycoon. The Brazilian government is actively trying to get more component manufacturers to Brazil and most recently efforts have been focused on getting touch-screen production to Brazil.129 For it services, the major companies in Brazil are (in relative global size):

http://itdecs.com/2011/02/shortage-of-qualified-brazilian-it-staff-sparks-concerns/ http://www.bbc.co.uk/news/world-latin-america-12745667 129 http://crn.itweb.com.br/29418/o-brasil-pos-pc/

127 128

Page 63 of 71 Today, Brazil has the 8th largest internal market of IT-BPO in the world. The largest share of the ITBPO revenues are attributed to Application Development (73%), followed by Infrastructure Services (16%), Business Process Outsourcing (7%), and IT Consulting Services (4%). The local ITBPO market is forecasted to grow 12% in 2012.130 The Brazilian internet-company market is quite saturated and social media use is prolific.131 There are a number of technological parks in Brazil that harbor ITC companies as seen below.

Petrobras IT-operations
A Steering Committee at the Executive Management level makes all decisions regarding the course of the IT Department. The IT Department is housed under the Services Director. The Services area also includes Purchasing, Engineering and the Research Center. Though IT is not a core competency of Petrobras, they put a great deal of emphasis on using cutting edge technology and research to help decrease costs and increase revenue. They have also attained a certification as being ISO 9001 compliant.

130 131

http://www.apexbrasil.com.br/portal/publicacao/engine.wsp?tmp.area=509&tmp.texto=7139 http://itdecs.com/2011/09/entrepreneurship-in-brazil-still-a-lot-to-do/

Page 64 of 71 The technical areas under the IT Department include Excellence, Management, Services and Agility. They perform many activities such as high performance computing, research and implementation of new technology, software development and the creation of an E&P database model. They heavily fund efforts in IT Department including funding for a 3-D multimedia hub and virtual reality centers (VCR). With the VRCs, Petrobras is better able to quickly analyze data that in the past would have taken months to gather and investigate. Programs like this help to eliminate unnecessary drilling by optimizing the location of the drilling which saves millions of dollars per year. There are a large number of outsourced IT jobs when Petrobras was last polled (in 2003 they had a total of 1,915 consultants on board), while the actual number of full-time IT staff was only 735. These numbers fluctuate back and forth over the years depending on the type of work needed at the time. Petrobras has made an effort to develop partnerships with IT companies in order to make their work more effective and efficient though high oil revenues allow them a great deal of flexibility when it comes to cost controls. Among others, Petrobras enlists Tata Consultancy, one of the fastest growing IT-consultancies in Latin America with 7,000 employees in South America. 95% of Tata Consultancys employees in Latin America are made up of locals. Henry Manzano, Tatas CEO in Latin America: We bring people from Indian to train the local employees, and we also have people that have gone to India to train, and are now back working in Latin America.132 Petrobras is one of the top 25 firms in the world that most effectively use network technology. They use voice, data, text and video simultaneously on their corporate network providing employees with information technology and telecommunication services, such as Electronic Data Interchange (EDI), videoconferencing, Internet and intranet services. These services are available on offshore platforms through the use of Riverbeds Steelhead platforms, in operational units and company offices at home and abroad, saving in terms of cost and time and increasing production. For exploration, Petrobras makes new measurements each centimeter. Petrobras looks at 10 to 12 variables, such as temperature, pressure, and weight of rock and sediment. Stored in an Oracle database, the information is queried with analytics software from SAS Institute. It takes years to go from initial exploration to crude oil production and sales of finished gasoline, so companies have to model markets five, 10, 15 years out.133 ERP, mostly called SIGE - Sistemas Integrados de Gesto Empresarial - in Brazil, is critical to Petrobras operations. Petrobras currently use SAP as their ERP-system provider. Accenture helped implement and develop a SAP-based ERP-solution for Petrobras in the last decade. In view of

132

http://www.cio.com/article/375365/Gas_Prices_How_Oil_Companies_Use_Business_Intelligence_To_Maximi ze_Profits?page=2&taxonomyId=3002
133

http://www.cio.com/article/375365/Gas_Prices_How_Oil_Companies_Use_Business_Intelligence_To_Maximi ze_Profits?page=2&taxonomyId=3002

Page 65 of 71 Petrobras strategy of keeping costs down investments in IT will facilitate in increasing efficiency through automation, control and communication systems. ERP systems help monitor the performance of the entire supply chain. In terms of data security, Petrobras website was knocked offline by a Brazilian-based hacker attack in late June 2011134 and a few years ago several laptops with business-critical information was stolen from Petrobras.135

Petrobras Best Opportunities

Petrobras does not specify its need for specific IT-services publicly; they have an across the board supply chain IT-need. Consequently, the opportunities listed below are based on Universal Consensuss best estimates. Overall, the key factor is the local content requirement; having a presence in Brazil is imperative.

Upstream
This include ERP package implementations, enterprise asset management, data and information management, health-safety-environment solutions, plant automation and design, business intelligence and performance management, geographic information systems, and digital oil-field solutions are all services in the general supply chain that Petrobras is looking for. Furthermore, security and safety services are in demand as Brazil has the most highly regulated oil industry in the world. Key IT-capabilities would include information protection with restoration of application data, business resumption from catastrophic failure (disaster recovery), data leakage and intrusion detection and prevention (IT fraud-services). The midstream segment would consist mostly of pipeline and supply chain infrastructure monitoring and control systems.

Downstream
The downstream segment includes retail/e-commerce and payment automation, supply chain and storage systems, smart meters, information sharing, data analysis and data storage, human resources data and payroll systems, CRM, and inventory solutions.

134 135

http://www.cio.com/article/684936/Brazilian_Government_Energy_Company_Latest_LulzSec_Victims

http://www.cio.com/article/375365/Gas_Prices_How_Oil_Companies_Use_Business_Intelligence_To_Maximi ze_Profits?page=2&taxonomyId=3002

Page 66 of 71

Sources
Eric Anderson: Supply Chain Strategy in the Oil and Gas Sector. https://www.cia.gov/library/publications/the-world-factbook/geos/br.html http://www.heritage.org/index/Country/Brazil DOC: Country Guide Brazil 2011. http://terramagazine.terra.com.br/interna/0,,OI4683023-EI6578,00PT+ainda+e+esquerda+no+Brasil+analisa+sociologo.html http://www.psdb.org.br/ http://www.dem.org.br/ http://www.wsvn.com/news/articles/world/21005028113348/ http://www.reuters.com/article/2010/02/19/brazil-lula-idUSN1910259620100219 http://www.nationsencyclopedia.com/Americas/Brazil.html United Nations Conference on Trade and Development: World Investment Report 2011. http://news.yahoo.com/political-scandals-economy-toll-brazils-rousseff-185854963.html http://online.wsj.com/article/SB10001424053111904823804576504641852736916.html?KEYW ORDS=brazil+paved+roads http://online.wsj.com/article/SB10001424053111904823804576504641852736916.html?KEYW ORDS=brazil+paved+roads MOITI: Doing Business in Brazil. http://thebrazilbusiness.com/article/5-secrets-about-business-in-brazil http://thebrazilbusiness.com/article/5-secrets-about-business-in-brazil http://en.mercopress.com/2011/08/03/buy-brazil-act-and-super-real-are-here-to-stay-saysminister Petrobras Procurement Document: PROCEDIMENTO LICITATRIO: 270-9009/11 TozziniFreire Advogados: Investment Opportunities In Brazilian Infrastructure. Matt Mofett: How a Sleepy Oil Giant Became a World Player. Wall Street Journal 30 Aug 2007.

Page 67 of 71 http://www.petrobras.com.br/pt/ http://www.anp.gov.br/ Jenik Radon and Julius Thaler: Resolving conflicts of interest in state-owned enterprises. UNESCO. http://www.prominp.com.br/ http://www.upstreamonline.com/live/article272219.ece Heller Redo Barroso and Marcos Macedo: Brazilian basics. http://247wallst.com/2011/07/23/stunning-petrobras-spending-224-7-billion-on-offshore-oilpbr-ne-do-rig-hal-bhi-slb/ http://www.planalto.gov.br/ccivil_03/Leis/L9478.htm http://www.economist.com/node/16964094 http://www.ibp.org.br/ http://www.onip.org.br/ http://www.downstreamtoday.com/news/article.aspx?a_id=25760
1

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

http://www.guardian.co.uk/business/feedarticle/9774984 http://www.eia.gov/ Petrobras: Q1 2011 Quarterly Report. http://www.economist.com/blogs/dailychart/2011/07/big-mac-index http://www.fazenda.gov.br/portugues/institucional/guido_mantega.asp and http://www.ft.com/cms/s/0/9fa5bd4a-cb2e-11df-95c0-00144feab49a.html Alexandre Chequer: Pre-salt past, present and future. T&B Petroleum #27. http://online.wsj.com/article/BT-CO-20110628-712359.html Andrea Goldstein: The Emergence of Multilatinas - The Petrobras Experience. UNIVERSIA BUSINESS REVIEW (2010). http://noticias.uol.com.br/economia/ultnot/efe/2006/05/02/ult1767u66304.jhtm Africa Research Bulletin: AFRICA BRAZIL Preparing for Deeper Involvement.

Page 68 of 71 http://cigienergyblueprint.wordpress.com/2009/08/13/petrobras-ceo-gabrielli-on-brazil-energyoutlook-the-deal-with-china-biofuels-and-more/ http://www.guardian.co.uk/business/feedarticle/9774984 http://news.seadiscovery.com/?tag=/supply http://www.wilsonsons.com.br/ Petrobras: Sustainability Report 2010. Petrobras: Strategic Plan 2010-2014. http://www.bnamericas.com/news/oilandgas/Petrobras_to_lease_platform_supply_vessels http://www.marinelink.com/news/shipbuilding-brazilian339305.aspx http://www.ulsteingroup.com/kunder/ulstein/cms66.nsf/pages/newslista.htm# http://www.genewscenter.com/Press-Releases/GE-Oil-Gas-Awarded-160-Million-PetrobrasContracts-for-P-58-and-P-62-Floating-Production-Units-in-Brazil-295d.aspx http://www.epcengineer.com/news/post/1127/brazils-petrobras-partners-sign-35-billion-oilplatform-deal http://news.seadiscovery.com/post/2011/02/11/Sete-Brasil-and-the-Petrobras-Local-DrillshipProgram.aspx http://www.marinelink.com/news/petrobras-cascade-chinook339994.aspx http://www.marinelink.com/news/rollsroyce-brazilian340146.aspx http://www.marinelink.com/news/hamworthy-service-center340052.aspx http://www.folhadacidade.inf.br/ler.asp?cod_materia=3029 http://www.lngworldnews.com/brazil-petrobras-releases-supply-chain-finance-program/ Andrea Goldstein: The Emergence of Multilatinas - The Petrobras Experience. UNIVERSIA BUSINESS REVIEW (2010). PIFCo: Investor Prospect (2011). http://www.advfn.com/nyse/StockNews.asp?stocknews=PBR&article=42016864&headline=brazil s-itau-mapfre-alliance-top-petrobras-insurance-bid-estado Petrobras: Social Responsibility in the chain of suppliers of Petrobras.

Page 69 of 71 Petrobras: Logistics/Procurement differences between the US and Brazil from a Petrobras perspective. ANP: The new regulatory framework for the pre-salt areas. http://www.eia.gov/cabs/brazil/Full.html http://www.foxbusiness.com/industries/2011/07/21/brazil-petrobras-to-tackle-refinery-projectwithout-pdvsa-report/ http://www.prnewswire.com/news-releases/kline-analysts-ipiranga-acquisition-to-helppetrobras-dominate-latin-american-lubes-market-52175812.html http://www.downstreamtoday.com/projects/Project.aspx?project_id=147 http://www.epcengineer.com/news/post/3831/brazil-petrobras-partners-agree-to-invest-brl6billion-in-ethanol-duct-system http://www.sourcingbrazil.com/halliburton-begins-work-on-research-center-at-rios-ufrjtechnology-park/ http://news.seadiscovery.com/post/2011/07/13/Siemens-Eyeing-Brazilian-OG.aspx http://www.br.com.br/wps/portal/ http://www.maritimeandenergy.com/tekst/8458/Petrobras-install-the-Bahia-RegasificationTerminal.aspx http://www.fnno.com/story/news-corner/331-petrobras-has-floating-terminal-proposals-pbrnews-corner http://www.bnamericas.com/company-profile/en/Petrobras_Distribuidora_S,A,-BR_Distribuidora http://www.br.com.br/wps/portal/ Gartner: IT Services Market Metrics Worldwide Forecast, Q2 2010 http://web.ita.doc.gov/ITI/itiHome.nsf/fe50f6398501af6f85256dc500700ade/fccf98cac631be198 525757400590bfa?OpenDocument http://itdecs.com/2011/04/if-brasscom-says-jump-will-you-jump/ http://www.capgemini.com/news-and-events/news/capgemini-acquires-a-55-stake-in-cpmbraxis-the-leading-brazilian-it-services-player/ MOITI: Brazil Telecom/IT Industry (2008) Roberto Dias Duarte: Big Brother Fiscal, o Brasil na Era do Conhecimento (2009)

Page 70 of 71 http://itdecs.com/2011/02/shortage-of-qualified-brazilian-it-staff-sparks-concerns/ http://www.bbc.co.uk/news/world-latin-america-12745667 http://crn.itweb.com.br/29418/o-brasil-pos-pc/ http://www.apexbrasil.com.br/portal/publicacao/engine.wsp?tmp.area=509&tmp.texto=7139 http://itdecs.com/2011/09/entrepreneurship-in-brazil-still-a-lot-to-do/ http://www.cio.com/article/375365/Gas_Prices_How_Oil_Companies_Use_Business_Intelligence_T o_Maximize_Profits?page=2&taxonomyId=3002 http://www.cio.com/article/684936/Brazilian_Government_Energy_Company_Latest_LulzSec_Vict ims

Page 71 of 71

Disclaimer
This analysis is based on our independent assessment and is documented to the best of our ability on the date it was issues. It is provided as a useful aid for any collaboration, but it is not intended to be relied upon under any circumstances, without independent due diligence.