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

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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.

Petróleo 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 monster’s 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

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Table of Contents Executive Summary ................................................................................................................................................................ 2

Brazil ............................................................................................................................................................................................. 8

Introduction .......................................................................................................................................................................... 8

Politics ..................................................................................................................................................................................... 8

Economy ................................................................................................................................................................................. 9

Brazil’s 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

Brazil’s 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

Brazil’s 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

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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

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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

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O&G Terminals .............................................................................................................................................................. 59

Gas Station Network ................................................................................................................................................... 60

Sources ....................................................................................................................................................................................... 66

Disclaimer ................................................................................................................................................................................. 71

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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 Cardoso’s administration is an example of the first group and Lula

1 https://www.cia.gov/library/publications/the-world-factbook/geos/br.html 2 http://www.heritage.org/index/Country/Brazil 3 DOC: Country Guide Brazil 2011. 4 http://terramagazine.terra.com.br/interna/0,,OI4683023-EI6578,00-

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da Silva’s administration as an example of the second. The shift between right and left wing has

often been cyclical.

Socialist president Dilma Rousseff of the Worker’s Party (PT, Partido dos Trabalhadores), who took

office on January 1, 2011, has indicated her intention to continue the former president Lula da

Silva’s 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 social-

democratic 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 Rousseff’s 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 Brazil’s 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

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

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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 world’s 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 world’s 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

Brazil’s 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

9 http://www.nationsencyclopedia.com/Americas/Brazil.html 10 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.

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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=brazil+paved+roads 16 DOC: Country Guide Brazil 2011. 18 DOC: Country Guide Brazil 2011. 19http://online.wsj.com/article/SB10001424053111904823804576504641852736916.html?KEYWORDS=brazil+paved+roads

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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 Brazil’s 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.

Starting a Business Protecting Investors

Procedures (number) 15

Time (days) 120

Cost (% of income per capita) 7.3

Paid-in Min. Capital (% of income per capita) 0.0

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

Dealing with Construction Permits Paying Taxes

Procedures (number) 18

Time (days) 411

Cost (% of income per capita) 46.6

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

Registering Property Trading Across Borders

Procedures (number) 14

Time (days) 42

Cost (% of property value) 2.7

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

Getting Credit Enforcing Contracts

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

Procedures (number) 45

Time (days) 616

Cost (% of claim) 16.5

Closing a Business

Recovery rate (cents on the dollar) 17.1

Time (years) 4.0

Cost (% of estate) 12

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are very important in Brazil because of the country’s 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 company’s 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.

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

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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 anônimas" (≈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

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

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Brazil’s 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 high-

priced 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 oil-

workers 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 suppliers-

deals 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.

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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

Brazil’s energy supply. Brazil is also the world’s largest biofuels exporter and sugar-based ethanol

makes up over 50% of Brazil’s 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/

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About 92 percent of Brazil’s oil production in 2010 originated from offshore fields, mostly at

extreme depths. Petrobras’ oil and gas production accounts for nearly 95 percent of Brazil’s 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 Brazil’s

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 http://www.petrobras.com.br/pt/ and http://www.anp.gov.br/ 32 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

currency’s 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 Silva’s 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 Norway’s 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

33 DOC: Country Guide Brazil 2011. 34 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.

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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

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

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

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 http://www.prominp.com.br/ 42 DOC: Country Guide Brazil 2011.

SteeringCommittee

Oil, Natural Gas and Renewable Fuels Secretariat

Executive

Committee

Executive Coordinator

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)

Sectorial CommitteeExploration

& Production

G&P and

PipelinesDownstream

Maritime

Transportation

P&G IND

Environment Thematic Committee

Technology Thematic Committee

Page 21 of 71

Industry Organizations

Brazil's National Petroleum Agency Brazil's National Petroleum Agency (Agência Nacional do Petróleo, Gás Natural e Biocombustíveis –

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.

ANP’s role in regulatory oversight of local content in concession bids:

Brazil’s National Energy Council The Brazilian National Council of Energy Policy (Conselho Nacional de Política Energética - 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 Petróleo, Gás e

Biocombustíveis – IBP) is a private non-profit funded in 1957 which currently has over 200

member companies. IBP is promoting the development of Brazil’s 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.

43 http://www.anp.gov.br/ 44 http://www.planalto.gov.br/ccivil_03/Leis/L9478.htm 45 http://www.ibp.org.br/

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 can’t keep pace. A

major reason for Petrobras’ slow increase in production pace is the adverse impact of rising oil

46 http://www.onip.org.br/ 47 http://www.downstreamtoday.com/news/article.aspx?a_id=25760 48 http://www.petrobras.com.br/pt/

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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

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

49 http://www.guardian.co.uk/business/feedarticle/9774984 50 http://www.eia.gov/

0

500

1000

1500

2000

2500

3000

2006 2007 2008 2009 2010

Demand

Supply

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 http://www.petrobras.com.br/pt/ 52 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 oil-

infrastructure and logistics operations.54

Petrobras is extremely exposed to the

development of the overall Brazil economy. The

Brazil Real is the world’s 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 Petrobras: Q1 2011 Quarterly Report. 55 http://www.economist.com/blogs/dailychart/2011/07/big-mac-index

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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 - José 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.

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

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

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 company’s 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

and Company study predicts that total

expenditure (investment and operation) in

Brazil’s oil and gas sector will reach US$400

billion through 2020.58

57 http://www.petrobras.com.br/ 58 DOC: Country Guide Brazil 2011.

Executive Board (selection) Title Primary Company Age

José de Azevedo

Chief Executive Officer, President, Member of the Executive Board, Director,

Director of Petrobras Energía Participaciones SA and Director of Petrobras

Energia SA

Petrobras 62

Almir Barbassa

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

Petrobras 63

Marcos MenezesChief Accountant Officer and Director of Petrobras International Finance

CompanyPetrobras 59

Daniel de OliveiraExecutive Manager of Corporate Finance, Chairman of PIFCo and Chief Executive

Officer of PIFCoPetrobras 59

Board of Directors (selection)

Guido Mantega -- Petrobras 62

Fabio Barbosa -- Banco ABN AMRO Real S.A. 56

Antonio Palocci Filho -- Petrobras 51

Jorge Johannpeter -- Gerdau USA, Inc. 73

Francisco de Albuquerque -- Petrobras 74

Luciano Galvão Coutinho Ph.D. -- Banco Nacional de Desenvolvimento Economico e Social-BNDES 65

Sergio Quintella -- Petrobras 76

Márcio Pereira Zimmermann -- Centrais Electricas Brasileiras S.A. 55

Oil Reserves 2007 2008 2009 2010

Brazil 10,819 10,274 11,563 12,138

-5% 13% 5%

Africa 66 89 116 132

35% 30% 13%

South America 769 791 448 459

3% -43% 2%

North America 50 36 16 19

-28% -56% 19%

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, Getúlio Vargas, represented a

triumph for a nationalist movement known as O Petróleo é 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 world’s 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 profit-

sharing 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 Alexandre Chequer: Pre-salt past, present and future. T&B Petroleum #27. 60 http://online.wsj.com/article/BT-CO-20110628-712359.html

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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 company´s 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 world’s most expensive

61 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

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 India’s largest oil fields.65

Petrobras’ international exploration sites.

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

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Petrobras’ Strategy 2011-2015

Overview Petrobras’ 2011-

2015 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.

66 www.petrobras.com.br

Segment US$ billion Share

Exploration and Production 127.5 57%

Refining, Transportation and Marketing 70.6 31%

Gas & Power 13.2 6%

Petrochemicals 3.8 2%

Distribution 3.1 1%

Biofuels 4.1 2%

Corporate Overhead 2.4 1%

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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 world’s 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

company’s 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.

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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

country’s 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

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

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 São 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:

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.

Items Units of Measurement Total Amount (2008-2015 )

Structural Steel t 1.252.000

Air Coolers un 721

Mooring Cables km 2.726

Christmas Trees un 3.930

Safety boats un 334

Pumps un 10.264

Lifeboats un 1.978

Well Heads un 3.657

Compressors un 969

Fan Coils un 2.818

Heat Furnaces un 252

Heat Reformers Furnace un 8

Eletric Generator un 439

Crane un 220

Flexible Pipes m 7.2

Diesel Engines un 717

Eletric Motors un 17.035

Reactors un 317

Storage Tanks un 2.824

Process Towers un 732

Eletric Transformers un 1.236

Heat Exchangers un 5.913

Pipe lines t 1.542.266

Turbines un 441

Production Rigs un 36

Pressure Vessels un 4.829

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 ship-

building.

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 industry’s global competitiveness. In total phase I and II will add 4

million deadweight tons (dwt) to the current fleet’s capacity. Four Promef vessels are scheduled for

delivery in 2011.

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

Topside

CL min = 60%

Power Generation Module

CL min = 75%

Turbo generators

CL = 0%

Compression Module

CL min = 75%

Gas Compressors

LC = 0%

Hull

Normally CL = 0% to 60%

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:

This Gantt-chart outlines the proposed investment time-line:78

77 Petrobras: Sustainability Report 2010. 78 Petrobras: 2010 Business Plan.

LEASED/

BEING LEASED

NEW VESSELS

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

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

SUEZMAX (10)

PRODUTOS CLAROS (4)

GLP (3)

PANAMAX (4)

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)

Afretamento - GASEIRO (3)

Afretamento - BUNKER (6)

Afretamento - PRODUTOS CLAROS (10)

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)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

SUEZMAX (10)

PRODUTOS CLAROS (4)

GLP (3)

PANAMAX (4)

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)

Afretamento - GASEIRO (3)

Afretamento - BUNKER (6)

Afretamento - PRODUTOS CLAROS (10)

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)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

SUEZMAX (10)

PRODUTOS CLAROS (4)

GLP (3)

PANAMAX (4)

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)

Afretamento - GASEIRO (3)

Afretamento - BUNKER (6)

Afretamento - PRODUTOS CLAROS (10)

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)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

SUEZMAX (10)

PRODUTOS CLAROS (4)

GLP (3)

PANAMAX (4)

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)

Afretamento - GASEIRO (3)

Afretamento - BUNKER (6)

Afretamento - PRODUTOS CLAROS (10)

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)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

SUEZMAX (10)

PRODUTOS CLAROS (4)

GLP (3)

PANAMAX (4)

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)

Afretamento - GASEIRO (3)

Afretamento - BUNKER (6)

Afretamento - PRODUTOS CLAROS (10)

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)

PROMEF I26 vessels

PROMEF II23 vessels

FREIGHT19 vessels

EMB. APOIO146 supply boats

BP 2004 - 2010

BP 2007- 2011

BP 2008 - 2012

BP 2003 - 2007

BP 2009 - 2013

BP – 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 ship-

owner 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

79 http://www.marinelink.com/news/shipbuilding-brazilian339305.aspx 80 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-Contracts-for-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-platform-deal

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:

83 http://news.seadiscovery.com/post/2011/02/11/Sete-Brasil-and-the-Petrobras-Local-Drillship-Program.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

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, Brazil’s 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 Brazil’s 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 Itaú. 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

87 Sofia Villagarcia and Francisco Cardoso: New Supply Chain Network In Brazil’s Construction Industry.

University of California, Berkeley, CA.

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

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.

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

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, Brazil’s 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:

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

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.

Per investment sector human resource demand over time:

PROFESSIONALS REQUIRED FOR O&G PORTFOLIO IMPLEMENTATION

175 PROFESSIONALS CATEGORIES

112.625

Qualified professionals

ENGINEERING42

5%

5.967

CONSTRUCTION &

ASSEMBLY

98

75%

84.576

GRADUATE26

43%2.580

HIGH SCHOOL13

49%

2.927HIGH SCHOOL

27

23%19.386

BASIC20

64%54.476

INSPECTORS30

5%4.228

CIVIL

CONSTRUCTION

7

13%

15.020

BASIC7

100%15.020

OPERATIONS

MAINTENAINCE

31

6%

7.062

BASIC15

45%3.200

HIGH SCHOOL10

50%3.542

GRADUATE19

4.2905%

TECHNICIAN2

3%2.196

TECHNICIAN 3

8%460

TECHNICIAN6

5%320

0

20.000

40.000

60.000

80.000

100.000

120.000

0

20.000

40.000

60.000

80.000

100.000

120.0002007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Freight 19 vessels

Refinery Premium II

28 Drilling Rigs

146 Supply Boats

New Stationary Production Units

PROMEF II

Business Plan 2008 – 2012

Refinery Premium I

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.

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 worker’s safety and

health.

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

PROFESSIONAL QUALIFICATION PLAN –TARGETS IN 3 THREE YEARS

Budget US$ 150 millions

People to be qualified 112.625 professionals

Location 17 States / 34 Cities

Amount of Courses 953

Amount of Classes 6.328

Educational institutions involved 71

Total people trained / in training (as of Sep/2009) 73.620

1st CYCLE 2nd CYCLE 3rd CYCLE 4th CYCLE

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

Actual date

Following

seats will be

offered on

2nd Phase of

Professional

Qualification

Plan

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. References (Previous Sales, Reference Letters);

2. Facilities for Technical Assistance (Automation Systems, Rotating Machinery, etc);

3. Mandatory Product Certification (API, ASME, ...);

4. 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. Sales and References (List of Services Provided –continuity and Reference Letters);

2. List of Equipment relating to services provided;

3. Main personnel curricula vitae;

4. 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

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

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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 Maranhão, which has a capacity of

600,000 bpd, (ii) Premium II Refinery in the State of Ceará, 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.

102 http://www.eia.gov/cabs/brazil/Full.html 103 http://www.foxbusiness.com/industries/2011/07/21/brazil-petrobras-to-tackle-refinery-project-without-pdvsa-report/

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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 PetroChina’s 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

104 http://www.prnewswire.com/news-releases/kline-analysts-ipiranga-acquisition-to-help-petrobras-dominate-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-billion-in-ethanol-duct-system 107 Petrobras: Sustainability Report 2010.

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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 Brazil´s pre-salt fields.

Siemens’s Technology Center will occupy an area of 4 thousand square meters and employ around

800 engineers and technicians. Although the center´s 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.

108 DOC: Country Guide Brazil 2011. 109 http://www.sourcingbrazil.com/halliburton-begins-work-on-research-center-at-rios-ufrj-technology-park/ 110 http://news.seadiscovery.com/post/2011/07/13/Siemens-Eyeing-Brazilian-OG.aspx

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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 Pecém, 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

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

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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 Guamaré 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

116 http://www.fnno.com/story/news-corner/331-petrobras-has-floating-terminal-proposals-pbr-news-corner 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/

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Information Technology

The Brazilian Market Brazil is also one of the largest emerging economy IT-markets. It represents 47% of Latin America’s

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 IT-

professionals 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

Brazil’s 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 Gartner: IT Services Market Metrics Worldwide Forecast, Q2 2010 121 DOC: Commercial Guide Brazil 2011. 122 http://web.ita.doc.gov/ITI/itiHome.nsf/fe50f6398501af6f85256dc500700ade/fccf98cac631be198525757400590bfa?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-the-leading-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)

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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):

127 http://itdecs.com/2011/02/shortage-of-qualified-brazilian-it-staff-sparks-concerns/ 128 http://www.bbc.co.uk/news/world-latin-america-12745667 129 http://crn.itweb.com.br/29418/o-brasil-pos-pc/

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Today, Brazil has the 8th largest internal market of IT-BPO in the world. The largest share of the IT-

BPO revenues are attributed to Application Development (73%), followed by Infrastructure

Services (16%), Business Process Outsourcing (7%), and IT Consulting Services (4%). The local IT-

BPO 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 http://www.apexbrasil.com.br/portal/publicacao/engine.wsp?tmp.area=509&tmp.texto=7139 131 http://itdecs.com/2011/09/entrepreneurship-in-brazil-still-a-lot-to-do/

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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 Consultancy’s employees in

Latin America are made up of locals. Henry Manzano, Tata’s 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 Riverbed’s 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 Gestão 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_Maximize_Profits?page=2&taxonomyId=3002 133 http://www.cio.com/article/375365/Gas_Prices_How_Oil_Companies_Use_Business_Intelligence_To_Maximize_Profits?page=2&taxonomyId=3002

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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

Consensus’s 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 http://www.cio.com/article/684936/Brazilian_Government_Energy_Company_Latest_LulzSec_Victims 135 http://www.cio.com/article/375365/Gas_Prices_How_Oil_Companies_Use_Business_Intelligence_To_Maximize_Profits?page=2&taxonomyId=3002

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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-cpm-

braxis-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.