Ian WilkinsonMeet the GlobalScot

7th March 2011

Ian Wilkinson - introduction

Geologist with PhD from UCWales

26 years in the industry – overseas project/company start-ups• 3 years UK-US• 2 years Venezuela• 8 years Soviet Union / Russia• 13 years Brazil

Entrepenneur – started first company in 1987Principal firms - JEBCO Seismic

Ten-to-ten GroupPetrolink

Diverse direct experience - drilling, seismic, IT, scanning & DC, HSE, training, 3D modelling, fabrication.

Ian Wilkinson – Brazil track record

1997 - started the setup of JEBCO Seismic Brasil Ltda

2000 – set up EIC Trade Association in Brazil and assumed directorship

2001 – sold JEBCO to Petrolink

2000-2008 Inside and outside EIC assisted directly in 40 UK oil & gas start ups in Brazil

2008-present focussed on IT/drilling sector with Petrolink. Assisting companies where possible – including as a Global Scot

Brazil experience – company setup, tax, contracts, Petrobras CRCC, importation, labour, visas, fabrication, local content, property

Petrolink Services - snapshot

Set up in Aberdeen 1990 – telecoms and data distribution of drilling data

1990-2005 Gradual international expansion and focus on IT – international benchmark for drill-data interchange between operators and partners (DDS).

2006 – Released real-time data system PowerStream2011 – 200+ employees spread over *** countries. Largest

independent provider of realtime services worldwide. Still in hands of the original owners. Now expanding in realtime integration and logging application development. – PetroVault,

Heavy focus on R&D and “seat of the pants” self-financed expansion. Principal clients – Exxon, BG, Aramco, Pemex, Petrobras, Total…..

Brazil company – ISO9001, CRCC, 99.6% local content

Petrolink Services - snapshot

Globalscot NetworkGlobalscot Network

• Set Get you up the learning curve quicker and cheaper.

• Provide you with insights, assistance and guidance.

• Help you to determine if your business is likely to be successful in the target market.

• Help your company to get started and become established in the new location.

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Oil and gas business in Brazil

market

tax

Petrobrassupplier approval

import

language

visas

Cultural issues

local content

competition

costs

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Market

E&P Market

Petrobras, Shell, BP, Chevron, BG, Statoil, OGX, Anadarko, Repsol, ENI, Maersk, Exxon, El Paso, Sonangol, ONGC, Perenco,

Subsea Spenders

Petrobras, Shell, Statoil, Chevron

Development

Petrobras, Shell (Parque das Conchas), BP (Devon-Polvo),Chevron (Frade), El Paso (Camarupim, Pinauna), Statoil (Peregrino)

Discoveries

Petrobras, Repsol, BP, Anadarko, El Paso, Shell, OGX

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E & P market

Drilling

58 floaters (46 for Petrobras) currently operating

32 on order (as well as the Petrobras 28 “local” rigs in bidding) – “Sete Brasil” formed

As many as 14 to start operations in 2011

Vessel Operators: Petrobras, Daimond, Transocean, Noble, Pride, Brasdril (Diamond), Queiroz Galvao, Seadrill, Dolphin, Sevan, Petroserv, Odebrecht

Subsea

Big spending hike since 2010 – impact of pre-salt

Over 1000 wet trees to be ordered 2011

Business in the hands of local subsidiaries of all the principal international subsea contractors

Diamond 15Transocean 12Pride 8Delba 6Noble 6Queiroz Galvao 6Scahin 5Seadrill 4Odebrecht 3Petroserv 3Etesco 2Sevan 2Dolphin 1

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E & P market

Production Units – current operations

80 fixed platforms, 38 floating (19 FPSOs, 17 semisubs)

Vessel operators: SBM, MODEC, Prosafe, Sevan, Saipem, Petrojarl, BWO, Maersk, Petroserv

Maintenance contractors: Engevix, PCP, Imitame, UTC, IESA, Wood Group

Production Units – new build

7 FPSOs

2 semisubs

1 TLWP

E & P market

2010

Cidade de Santos FPSO Uruguai-Tambua MODEC

Direct to gasline Canapu Petrobras

Dynamic Producer FPSO Guara TLD PetroServ

Capixaba FPSO Baleis Franca-Cachalote SBM

Cidade de Angra FPSO Tupi MODEC

P-57 FPSO Jubarte Petrobras

2011

PMXL-1 semiaub Mexilhao Petrobras

Cidade Rio das Ostras FPSO Aruana Petrojarl

Cidade Sao Vicente FPSO Tupi NE BWO

Peregrino FPSO+2 plats Peregrino (Statoil) Maersk

P-56 semisub Marlim Sul III Angra for Petrobras

2 more presalts TLDs Petrobras

E & P market

2012

Espadarte FPSO upgrade Baleia Azul Keppel (for SBM)

P-55 semisub Roncador III PE&RS (for Petrobras)

Cidade de Sao Paulo FPSO Guara Angra for MODEC

Cidade de Itajai FPSO Tiro-Sidon Jurong (for Petrojarl)

4 presalt TLDs Petrobras

2013

P-61 TLWP Papa Terra Angra (for Keppel)

P-63 FPSO Papa Terra Rio Grade (for QUIP)

TBD FPSO Aruana TBD

Cidade de Paraty FPSO Tupi NE Angra (for SBM)

3 presalt TLDs

2014

P-58 FPSO Whale Park Rio Grande (for QG-CC)

P-62 FPSO Roncador IV Ipojuca PE (for QG-CC)

TBD FPSO Guiama TBD

Petrobras

Petrobras Upstream

National Oil Production 1.972 million bbl/d (Dec 2009)

National Gas Production 49.548 million m3/d (Dec 2009)

Oil reserves 11.19 billion bbl (2009)

Gas reserves 335 billion m3 (2009)

Lift costs US$ 9.02 /bbl (Q3 2009)

Exploration acreage 150,000 km2

Investment plan 2009-13 US$ 175 billion

2010 investment US$ 45 billion

Production platforms 112 (78 fixed, 34 floating)

Offshore drill rigs (floaters) 46

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OGX

OGX

Launched with US$1.3 billion capital in 2007

Public offering 2008 raised R$6.7 billion

Now have 10 drilling rigs active on 29 exploration blocks

Almost 100% success rate for first 24 wells

US$3 billion spend on drilling 2010-13 (79 wells), internally funded

Estimate first production end 2011

Forecast production 1.3 million bbl/d by 2019

48 production units over next 10 years

Supported by EBX (shipbuilding), OSX (Services) and LLX (logistics)

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IOCs

Shell

R$6 billion invested in E&P up to 2010

Production from Parque das Conchas and Bijipura-Salema fields (FPSOs)

Ongoing development BS-4

Participation in 15 exploration blocks, 7 offshore.

BP (Devon)

Production from Polvo field

Participation in 10 exploration blocks

Discoveries – Xerelete, Wahoo, Itaipu

El Paso

Share of gas production from Camarupim

Good acreage in shallow water Camamu-Almeida Basin, including Pinauna field

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Anadarko

Wahoo discovery

Exploration acreage position with BP

Exxon

Operate the BM-S-22 presalt block in Santos – 3 dry holes

BG

Partners to Petrobras in Santos presalt

Operate 4 blocks but drilling disappointing to date

Chevron

Production from Frade field

Development in BS-4 with Shell and Papa Terra and Maromba with Petrobras

Statoil

Peregrino field development.

IOCs

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Language

LANGUAGE

• Portuguese is the preferred language for all activities, except technical.

• English is widely understood, but an inability to sell and build client relationships in Portuguese will have a significant impact on your rate of penetration into the local market

• Countering this, the ability to communicate in English is a major benefit when dealing with technical and purchasing teams headed by ex-pats.

It is vitally important to have access to Brazilian Portuguese speakers in any serious attempt to do business in Brazil, whether they be agents, employees or venture partners

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CONTACT WITH CUSTOMERS • Similar to many Latin cultures, Brazilian business draws heavily on personal relationships. • Incoming UK companies do not have the inherited family and career contacts in the market that local suppliers benefit from• Increasing travel costs means that giving the Brazilian market enough personal attention by UK sales staff is increasingly costly• Nothing happens quickly in Brazil. If your company is not regularly presenting to clients in Brazil, the likelyhood of quick sales and growth diminishes drasticallyA good agent, partner or local employee is almost impossible to do without

KEEP THE CONTACT GOING• Don’t leave it all to your agent – someone else will take his attention• Brazilians need to feel they are taken seriously – listen to them• Things are different in Brazil – remember that

Cultural Issues

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Most major offshore exploration and production developments come with a local content percentage stipulation, both for equipment and services.

Anything since round 7 had VERY HIGH bids on Local Content

Local content – GOODS

• All local costs and mark-up count as LC – bill and profit locally and you get LC

• Any local fabrication or local parts will help – but assess costs

Local content – SERVICES

• Only labour costs considered – cost of international labour/total labour cost

Local content is audited by ANP approved auditors. Billing has to be local. Anything less than 10% LC is = 0%.Information on local content certification can be found on the ANP website: www.anp.gov.br

Local Content

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Local Content

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Petrobras supplier approval is a web-based process – presenting data on technical, financial, legal, HSE, social responsibility

Nothing special, but requires time and effort to do (bureaucratic) and you must have a local legal representative.

SLOW! Petrobras have thousands of companies in backlog. Assessment can take 6 months. You need a “champion” inside Petrobras to push your cause and get it to the top of the pile.

Note:• Petrobras supplier approval is not needed for many categories of goods and services.• Sales to contractors by non-approved suppliers remains common. In this case, contractors approved supplier procedures are applied

Petrobras supplier approval

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• Brazil is notorious for difficulties and delays in importing goods • Goods attract IPI tax, ICMS tax and Import Duty. • Customs delays are the norm (but vary by location) & storage charges are high• Temporary tax-free import (under REPETRO) is complex to administer. Standard temporary import may be easier – especially for your client• Consider bonded warehousing and the use of favourable import regimes and locations (eg Vitoria FUNDAP). • Consider a local Trading Co. They handle the paperwork and assume risks.• Always get the documentation right before shipping (try to pre-clear)• Running stock in bonded facilities is feasible for some businesses where premium prices for rapid delivery apply

Thorough research of importation alternatives is crucial. Your customs agent must be selected carefullyCurrent favourable exchange rates make imported UK goods very competitive.

Customs and Import

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Visas are essential for any UK worker going into Brazil. There is a certain amount of time, paperwork and inconvenience in the UK or US involved in successful issue of visas.• Contract a visa specialist “despachante” as this is a constantly changing area and professional assistance (in all its forms) is needed. • Cost around $1200 per visa (working visas, technical visas or crew visas) valid for 1+1 years. Always based on contracts, either with client or between local subsidiary and parent company. An INPI registered technical services contract can serve as the basis for visas for multiple employees or multiple client jobs• Emergency temporary working visas are can be issued with 2-3 days lead time• Currently, working visas are taking 4-6 weeks for approval

Note that vigilance at the airports is always high and entry is regularly refused

Visas

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Tax planning must be the cornerstone of your strategy for Brazil. The tax regime as a whole in Brazil is high – but good planning will bring corporate income tax to levels lower than those in the UK

Goods - sales taxes – ICMS 18%, IPI (varies) 5%

Services - ISS 5% (or less in some municipalities or concessions)

Also “turnover” taxes PIS+COFINS 4.65% of gross (3.65% for PPR**)

Basic profit tax is 15%, with additional 9% social tax, plus additional 10% on income of over R$240k p/a – ie 34% total

Direct payments abroad attract 25% witholding tax

Company dividends are not taxed, even if remitted abroad

**Service companies can opt for PPR presumed profit regime, where taxes are paid on an assumed profit equivalent to 30% of billed value.

Tax

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Due in part to Petrobras’ effort to professionalise their supply chain, local competition is now strong – if not always competitive quality of goods or service, they normally are competitive on price.

Local companies always have the major advantage of knowing how to work with the contracting and bidding system, and know how to “handle” corruption as it arises. Recognize that corruption does exist in Brazil, though you may not always encounter it. This needs to be recognized from the outset.

Local labour taxes, labour law regulations, high wages (driven by a shortage of suitably trained personnel) and a strong R$ make local labour expensive in the offshore environment compared to expats.Likewise locally manufactured goods are often unable to compete on price with imported goods of equivalent quality.

The expansion of the sector means that there is almost always room for new suppliers – but displacing long term Petrobras suppliers is difficult.

Competition

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• Brazil is not a cheap country. Most things now cost more in Brazil than in UK

• Expensive logistics and high cost of qualified labour have particular impact

• Business in Brazil also demands higher levels of administration effort than is normal in most markets. Company administration, accounts-tax administration, currency movements, stock administration and payroll administration all consume large amounts of time and cost.

• It often takes much longer to break into the market in Brazil than in other countries – which means start-up in Brazil is costlier than in other markets.

• Be aware of this long lead time, and the costs involved.

Reducing this lead time using a well planned local partnership or by contracting a good agent, is clearly a strong strategy

Experience shows that major investment, without first securing contracts, is often a risky strategy.

Costs

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