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The Brazilian Energy Sector by David Panico, Managing Director, Investment Banking, Citi. Presentation featured at the 2nd International Conference: Brazil: A pathway into the future from the Emerging Markets Institute at Cornell University's Samuel Curtis Johnson Graduate School of Management and Better Brazil
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The Brazilian Energy Sector
September 2012
Table of Contents
12Oil & Gas Sector Overview: Perspectives and Challenges4.
5Power Sector Overview: Perspectives and Challenges3.
3Introduction: The Brazilian Energy Matrix2.
1Citi Brazil1.
1. Citi Brazil
$15.2 $14.6
$3.5$2.1 $1.3
$18.1
$3.8
$33.6
$11.4
DB CS JPM BNP BARC BAML MS GS
$1.5$1.3
$0.6$0.4 $0.3
$1.8
$0.7
$4.0
$0.8
CS JPM BNP MS BAML DB BARC GS
: The Largest Global Bank with a Commercial Platform in Brazil
Shareholders’ Equity in Brazil(US$ bn)
Assets in Brazil(US$ bn)
Key Citi Brazil Highlights
Present in Brazil for 97 years, with a unique breath of services and long-lasting commercial relationships.
Enhanced Investment Banking Capabilities�
Strong Financial Products Expertise�
Brazil + Global Distribution Network�
Relationship with Corporate Clients�
Strong brand among Brazilian customers�
Seasoned Personnel�Source: Brazilian Central Bank as of December 31, 2011.
1
Rank Bookrunner Volume ($bn) Share (%)
1 BofA Merril Lynch $26.9 58.8%
2 Credit Suisse $24.2 52.9%
3 Barclays $17.2 37.7%
4 $6.9 15.1%
5 JP Morgan $5.6 12.2%
6 UBS $5.0 11.0%
7 Societe Generale $4.8 10.5%
Rank Bookrunner Volume ($bn) Share (%)
1 BofA Merril Lynch $6.2 10.7%
2 $6.0 10.3%
3 Morgan Stanley $4.7 8.2%
4 Credit Suisse $4.7 8.2%
5 JP Morgan $2.5 4.2%
6 Goldman Sachs $1.7 3.0%
7 Deutsche Bank $0.2 0.5%
is a Leading Advisor and Underwriter in Brazil
Brazil Equity(2010-2012 YTD)
Citi continues to be a leading underwriter on several landmark equity transactions throughout Brazil, with a solid position amongst international banks.
Follow-OnJoint
Bookrunner
US$70 bn2010
Follow-OnJoint
Bookrunner
US$70 bn2010
Block TradeJoint Bookrunner
US$530 mm2011
Block TradeJoint Bookrunner
US$530 mm2011
IPOJoint
Bookrunner
Ongoing
IPOJoint
Bookrunner
Ongoing
Source: Bloomberg as of June 1st 2012.Note: League tables include only international banks.
IPOJoint
Bookrunner
US$1.7 bn2012
IPOJoint
Bookrunner
US$1.7 bn2012
Follow-OnJoint Bookrunner
US$356 mm2009
Follow-OnJoint Bookrunner
US$356 mm2009
Follow-OnJoint
Bookrunner
US$4.9 bn2010
Follow-OnJoint
Bookrunner
US$4.9 bn2010
Follow-OnJoint Bookrunner
US$232 mm2009
Follow-OnJoint Bookrunner
US$232 mm2009
Follow-OnJoint Bookrunner
US$224 mm2009
Follow-OnJoint Bookrunner
US$224 mm2009
Follow-OnJoint
Bookrunner
US$686 mm2010
Follow-OnJoint
Bookrunner
US$686 mm2010
Follow-OnJoint Bookrunner
US$376 mm2009
Follow-OnJoint Bookrunner
US$376 mm2009
Follow-OnJoint Bookrunner
US$890 mm2009
Follow-OnJoint Bookrunner
US$890 mm2009
ETFJoint
Bookrunner
Ongoing
ETFJoint
Bookrunner
Ongoing
IPOJoint
Bookrunner
US$1.5 bn2010
IPOJoint
Bookrunner
US$1.5 bn2010
Follow-OnJoint Bookrunner
US$350 mm2009
Follow-OnJoint Bookrunner
US$350 mm2009
Follow-OnJoint
Bookrunner
Ongoing
Follow-OnJoint
Bookrunner
Ongoing
Advisor on the sale of PU unit
to
US$340 mmJuly 2011
Advisor on the acquisition of
US$2.3 bnJanuary 2012
Advisor on the acquisition of
US$330 mmApril 2011
Advisor on its sale to
US$327 mmAugust 2011
Advisor on the sale of the remaining 49.9% stake to
US$6.8 bnOngoing
Advisor on the acquisition of a 5.6% stake in
US$2.0 bnMarch 2012
Advisor to HRT Participações in the sale of E&P
assets in Namibia
Ongoing
Advisor on the acquisition of a 50.5% stake in
US$2.6 bnAugust 2011
Advisor on the acquisition of a 60% stake in
US$1.8 bnApril 2012
Advisor on the Tender Offer for the remaining 67% stake in
US$5.4 bnOngoing
Advisor on the sale of Shopping JardimSul and landbanks
to
US$272 mm November 2011
Ongoing
Advisor to Vale in the sale of its oil & gas E&P assets in
Brazil
US$2.6 bnFebruary 2012
Advisor to the Consortium on the privatization
of Brasília Airport
Advisor on the acquisition of
assets in LatAmfrom
US$4.5bnJanuary 2011
Advisor on the primary sale of a
30% stake in Galp
US$4.8 bnNovember 2011
Brazil M&A(2010-2012 YTD)
2
2. Introduction: The Brazilian Energy Matrix
15.1
7.3
5.9
3.6
2.8
2.5
2.4
2.2
1.9
1.7
USA
China
Japan
Germany
France
Brazil
UK
Italy
Russia
Canada
Brazil: Solid Macroeconomics Largest Economies by GDP, 2011(Nominal GDP in US$ tn)
Source: Brazilian Central Bank and IMF.
Brazilian GDP(US$ bn, % p.a.)
$1,089 $1,366$1,653 $1,622
$2,474$2,815
$3,203$3,009$2,567
$2,142
3.9%6.1% 5.2% 7.6%
2.7% 3.0% 4.5% 4.3% 4.2%
(0.3%)
2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E
Nominal GDP (US$bn) GDP (Real Change p.a., in %)
UnitedStates
China Japan Germany France Brazil UnitedKingdom
Italy
Russia
Interest Rates & Inflation(Avg, %)
4.2% 3.6%5.7% 4.9% 5.0%
6.6%
4.9%
15.3%
12.0% 12.4%
10.1%11.7%
9.8%
7.5%
2006 2007 2008 2009 2010 2011 2012E
Inflation (IPCA) Interest rate (Selic, year average)
3
Hydro14%
Vegetable Coal & Wood10%
Sugar Cane18%
Other Renew ables3%
Nuclear1%Mineral Coal
5%Natural Gas
10%
Petroleum Based39%
The Brazilian Energy Matrix: Renewable as Nowhere Else
2010
2020
Over 45% of all energy consumed in Brazil comes from renewable sources, versus an average of 13% in developed
countries
�
Renewable sources account for over 80% of electricity
generation, while global average is under 20%
�
Renewables:45%
Hydro13%
Vegetable Coal & Wood8%
Sugar Cane22%
Other Renew ables4%
Petroleum Based32%
Natural Gas14%
Mineral Coal6%
Nuclear1%
Renewables:47%
Source: Brazilian Ministry of Mines and Energy.4
3. Power Sector Overview: Perspectives and Challenges
Significant Potential for Electricity Demand…Electrical Consumption p/ Capita vs. GDP p/ Capita(KWh, US)
Source: IEA 2009: Key World Energy Statistics.
(1) GDP per Capita in US$ covnerted through Purchase Power Parity as of 2000. Data pertains to the year 2007 for all countries except for Brazil.
USA
Canada
UK
Japan
Germany
France
Italy
Spain
Greece
Portugal
Argentina
Brazil 2020
Russia
Chile
Brazil 2010
China
India
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000
US$/hab/year
KW
h/ha
b/ye
ar
Effect of electrically intensive (Aluminum)
Brazil’s per capita electricity consumption is expected to reach 3.5MWh by 2020 from
2.4MWh today�
USA
Canada
5
…Fueled by Brazil’s Regional DevelopmentForecasted Energy Demand by Region(Avg. GW)
+4.2%
+5.0%
+3.8%
+9.7%
Power demand is expected to grow 4.6% p.a. between 2011
and 2016�
While the Southeast and Midwest account for over 60%
of consumption, it is the developing regions (N and NE)
that grow at a faster pace
�
Yearly capacity expansions of 6,2 GW will be required to
supply to this additional demand�
36.9 38.3 40.2 41.9 43.6 45.3
9.810.1
10.510.9
11.311.88.4
8.89.2
9.710.2
10.7
4.14.3
5.15.9
6.26.5
59.261.5
65.068.4
71.374.3
2011 2012 2013 2014 2015 2016
Southeast / Mid West South Northeast North
CAGR: 4.6% CAGR
Source: EPE. 6
Expected Growth in Installed Capacity…
Government sponsored oversupply to maintain
competitive prices�
Contracting energy in reserve auctions to provide further
system stability�
Complexity of large projects being developed could result in
delays�
Oversupply assumes contracted projects coming online within
expected timeframe�
Source: Company Presentations and Wall Street Research.
0.9
4.6
4.8
4.2
3.3
1.2
1.7
2.2
2.2
3.4
0.1
0.259.5
63.7
71.4
75.4
77.6
81
59.2
61.6
65.0
68.5
71.3
74.3
2011 2012 2013 2014 2015 2016
Spare Capacity Reserve Energy Supply Demand
Supply & Demand Balance(Avg. GW)
7
Installed Capacity / Potential
(GW)
Key Themes
Hydro
79.1 /
260(1)
▲Competitive implementation and operating costs
▲Clean energy
▼Environmental / social licensing
▼Uncontrollable source (climate dependent)
▼Difficulties to develop unexplored potential
Thermal
22.7
▲ Not dependent on climate
▼ Environmental issues
▼ Natural gas supply restrictions
▼ Higher cost of certain sources (diesel, heavy fuel oil)
Renewables
SHP: 4.1 / 18
Wind: 1.7 / 143
Biomass: 9.8 / 13.5(2)
▲ Clean energy
▲ Large unexplored potential
▲ Increased competitiveness due to local supply of equipment (particularly in wind)
▲ Government Subsidies
▼ Dependent on climate (SHPs – Rainfall / Wind – Seasonality of generation)
▼ Current energy price levels are not competitive for some sources
…Focused on Alternative Renewables
Renew ables8%
Thermal14%
Nuclear2%
Hydro76%
Renew ables16%
Thermal15%
Nuclear2%
Hydro67%
Breakdown of Capacity By Source(% of total MW)
2010
2020
Sources: ANEEL, CRESESB/CEPEL, CENBIO, CPFL.(1) Estimated totality of hydropower potential, including small hydropower plants (SHPs)(2) Estimated potential of generation from sugarcane biomass8
Gas-Fired
Hydro
Wind
BiomassSmall Hydro
$0
$30
$60
$90
$120
$150
2009 2010 2011
0.1%1.3%
98.6%
Auctions(1)
Alternative Energy Has Competitive Prices…
Source: CCE, Citi estimates and Wall Street Research.(1) Considers new energy (LEN), reserve energy (LER) and alternative energy (LFA) auctions(2) Excluding Belo Monte Plant
51%
12%
2%
35%
2.6 GW
0.8 GW
9%
40%
11%
40%
2.3 GW
Assured Energy per Source (avg. GW)
Price Evolution(R$/ MWh)
Auctions have been adding significant capacity to the Brazil’s generation supply base, most notably in the thermal and renewable sectors.
(11%)
(22%)
R$145.66
R$101.34
2009
2010
2011
51%
40%
9%
9
…Which Have Been a Governmental ConcernIncreasing Government intervention is changing he structure of the power sector, and will demand strong efforts towards efficiency gains to maintain attractive levels of return.
Distribution
Generation
Transmission
B Concession Renewal
A Tariff Reviews Changes Impacts
• Regulatory WACC reduction from 9.95% to 7.15%
• X-Factor
• No capital remuneration in tariffs (cost-based model)
• Segment becomes regulated upon renewal (optional)
• Reduction of regulatory charges
▼ Reduction of ~20% in regulated power prices(1)
▼ Increase in consumption could surpass projected demand
▼ Reduced competitiveness of free market
▼ Pressure for efficiency gains
▼ Lower margins / dividends
▼ Single digit returns on new projects
▼ Lower cash flow for companies which choose to renew, hindering their ability to invest in new projects
• No reimbursements for assets built before 1999
• Cost-based model
(1) Estimated joint impact of regulatory changes and generation / transmission costs
▼ Pressure for efficiency gains
▲ M&A potential - Synergies
10
13%
12%
9%
9%
7%
6%
6%
5%
5%
5%
4%
4%
3%
3%
2%
6%
46%
18%
17%
5%
4%
2%
2%
2%
4%
33%
6%
6%
5%
4%
4%
2%
2%
2%
1%
1%
1%
1%
1%
30%
Competitive LandscapeGeneration119.989 MW
Distribution68 mm customers
78% State Owned22% Private
68% State Owned32% Private
33% State Owned67% Private
Source: Aneel, EPE, Wall Street Research.(1) Includes Chesf, Furnas, Eletronorte, Eletronuclear, Itaipu & Amazonas Energia
(1)
Others Others Others
TransmissionR$12.7 bn Annual RAP
(1)
(1)
InternationalPlayers
11
4. Oil & Gas Sector Overview: Perspectives and Challenges
15
15
17
19
20
22
23
29
39
44
48
51
53
68
69
112
134
136
145
176
311
312
335
Azerbaijan
Brazil
Egypt
Norw ay
Malaysia
Australia
Indonesia
China
Algeria
Canada
Turmenistan
Kazakhstan
Libya
Nigeria
USA
Kw ait
Iraq
UAE
Brazil (Post Tupi)
Qatar
Saudi Arabia
Iran
Russia
Brazil to Become a Top O&G PlayerPre-Salt: a Structural ChangeWorldwide Oil and Gas Reserves (bn boe)
~9.7xAdding pre-salt discoveries
Source: ODS-Petrodata, Riglogix, Wall Street Research, BP Statistical Review of World Energy (2010) and Petrobras’s filings.
In the past 5 years, over 50% of oil discoveries were in deep waters.Brazil represents 63% of such discoveries
�
Forecasts suggest that, with the development of recent finds, Brazil will be the non-OPEC country with greatest increase in production by 2030
�
At current production rates, proven reserves would last for around 19 years�
12
1.82.0 2.1 2.1
2.5
2.8
3.5
3.8
4.4
4.9
5.5
5.96.1
2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
O&G Production Should Outpace Global ProducersBrazil Oil Production (MBbl/d)
Source: Wall Street Research.
Brazil is expected to produce 6.1 MBbl/dofby 2020, of which 4.2 MBbl/dof will come from Petrobras
�
With increase in production, Brazil has become self-sufficient and is now a net exporter of oil
�
Additional production will come from deep exploration, in which Petrobras has an acknowledged expertise, being the leading offshore operator measured by production and number of offshore facilities
�CAGR: 5.0%
CAGR: 12.6%
13
Brazil: Oil and Natural Gas Reserves are concentrated in RJ
6.2%
82.8%
9.5%
0.7%
0.4%
0.3%28,467 mm boe
8.2%
59.2%
0.6%
7.4%
11.1%
10.3%
852,147 mm m³
AM NE ES RJ SP S
AM
BA
CERN
SEAL
SPRJ
ES
PR
SC
Natural Gas Reserves Oil Reserves
Source: ANP.
Total: Total:
14
(5)%
(3)%
(1)%
1%
3%
5%
7%
9%
(2)% 0% 2% 4% 6% 8% 10% 12% 14% 16%
Saudi Arabia
Japan
Canada
China
USA
South Korea
Brazil
India
Russia
Germany
Brazil: On Track to Become a Major Consumer of Oil
Source: BP Statistical Review and World Bank.
Annual GDP growth 2005–2011
10 Largest Consumers of Oil in 2011(Bubble sizes represent amount of Oil consumed in 2011)
Ann
ual g
row
th in
dem
and
for
Oil
2005
–201
1
Bubble sizes represent ammount of Oil consumed in 2011
The expansion of the middle class, increased credit availability, and record auto sales in recent years drive rapid increases in fuel demand
�
Gasoline and diesel demand have grown at an average pace of 15.9% and 6.3%, respectively, in the last 3 years
�
Between 2011-2020, demand for oil subproducts are expected to grow 4.5% p.a.
�
India
China
15
8%
92%
Petrobras Dominates the Brazilian O&G Market
46,96036,870
14,369 14,131 13,051 7,616 7,954 5,078 4,794
1,736,454
2%
98%
93%
7%
E&P Market Share(% production, boe/d)
Refinement(% of installed capacity, m³ p/day)
Biodiesel(% of installed capacity, m³)
2.7 2.21.1
0.3
326.4
556,679 518,400450,000 434,462
378,000343,800
296,640 286,920237,600 216,000
Source: Wall Street Research, IBP and ANP.
Olfar
16
Major Investments In The Sector
Bio-Fuels1%
Gas & Energy6%
Dow nstream & Logistics30%
E&P56%
Others7%
US$236.5 bn
Source: Petrobras.
Between 2012 – 2016 Petrobras will invest US$236.5 bn in all areas of production and refinement of O&G; this presents an outstanding opportunity for all sectors related to the O&G industry.
�
Investment breakdown until 2016(%)
17
E&P: Complex Offshore Exploration Brings Challenges
Production Development
69%
Exploration19%
Infrastructure and Support
12%
The exploration of offshore reserves so far from the shore poses many challenges, namely in logistics, which will demand heavy investments
�
Local content requirements imposed by the government could cause delays and cost overruns
�
Focus on pre-salt discoveries resulted in lack of maintenance investments in existing fields, which led to production drops
�
Royalties imbroglio has hindered new bidding rounds by ANP�
US$131.6 bn
Investment breakdown until 2016(%)
Source: Petrobras.
18
Others
Logistics for Oil8%
Quality & Conversion
21%
Improvement17%
Refining Capacity Expansion
44%
Downstream: Much Needed Modernization to Take Place
Current installed capacity is outdated (last refinery built in the 80’s)�
Refineries have low complexity indexes and cannot efficiently process heavy crudes�
Fast growing demand, coupled with lack of investments in additional supply, has made Brazil become an importer
�
Government intervention in pricing policy has negative impacts on returns and cash flows.
�
Petrobras’ investment plan foresees additional capacity of 1.4 Mbbl/d, reaching 3.4 Mbbl/d by 2020.
�
US$71.6 bn
Investment breakdown until 2016(%)
Source: Petrobras.
19
Gas & Energy: Logistics is the Bottleneck
Despite substantial natural gas reserves, production has grown at a slow pace due to the lack of investments in logistics
�
Natural gas accounted for only 9% of energy consumption in 2011, versus 51% in Argentina
�
Petrobras controls most of the country’s reserves, is responsible for the majority of production and imports, controls the national transmission network, and holds stakes in 2/3 of state-owned natural gas companies
�
The company’s investment plans foresees relevant expansions, reaching 3.4 bcf/d of production by 2020
�
US$13.5 bn
Investment breakdown until 2016(%)
Others15%
Expansion - Electric Energy
Generation12%
Expansion - Natural Gas
Logistics17%
Expansion - Regassif ication
14%
Expansion - Gas Chemical
42%
Source: Petrobras.
20
Biofuels: Promise for the Future
Brazil’s leading role as a producer of ethanol from sugarcane places it as the 2nd
largest producer of biofuels behind the US�
The country also stands out in biodiesel and is expected to become the largest producer in 2012. It is currently the largest consumer in the world.
�
The country benefits from favorable climate, availability of arable land, and efficient technology for crop cultivation
�
Mandatory biofuel blends in gasoline and diesel are important drivers of expected growth in upcoming years
�
US$2.5 bn
Investment breakdown until 2016(%)
Biodiesel11%
Ethanol73%
Corporate0.4%
Agricultural Supply16%
Source: Petrobras.
21
Extensive Government Presence in O&G
Local Content (%)
The Brazilian Government plays a significant role in the local O&G industry, both in terms of legislation and through the control of Petrobras.
Source: ANP and Wall Street Research
Local Content Requirement laws stipulate that a min imum percentage of equipment and services contracted by an operator must be
supplied by local companies
82%
92%
2004 2011
55%
62%
2004 2011
70%90%
2004 2011
E&
PS
uppl
yG
as &
E
nerg
y
+20 p.p.
+10 p.p.
+7 p.p.
A Fixed Fuel Prices
B Pre-Salt Operation
C Transfer of Rights
• Government policy regulates downstream prices
• Despite recent readjustments (after 6 years), there is still a 21% deficit to import prices
• Proposed legislation foresees product sharing contracts, by which Petrobras would hold a minimum of 30% of any new pre-salt reservoirs
• Petrobras would also be the sole operator of PSAs
Other Policies & Legislation
• Agreement made with Petrobras by which the Government assigned the right to explore pre-salt areas subject to a maximum production of 5,000 Mboe for US$ 42.5 bn.
• Subsequent price and volume revision could trigger value adjustments
Local Content Requirement
22