November 2019

Local Content in Brazil: Lessons Learned

2019 Local Content Conference & Exhibition

Takoradi, Ghana

November 20-22th, 2019

Luiz Henrique de Oliveira Bispo

Superintendent of Local Content

Exploration and Production Scenario in Brazil

OnshoreConventional

Offshore Onshore Pre-SaltConventional

Offshore

Pre-SaltPolygon

5.0 million km2 – onshore

2.5 million km2 – offshore

7.5 million km2 Concession

• 420 fields

• 288 blocks

Production Sharing

• 5 fields

• 13 blocks

Three different E&P environments

Less than 5%of the sedimentary areas are

contracted

97 Groups

• 47 Brazilian

• 50 foreign

Cessão Onerosa• 10 fields

Average oil production per well

Onshore

Pre-Salt

Conventional Offshore

Three Different E&P Environments

East Margin adjacent to the pre-salt region and Equatorial

Margin, including new frontier areas and a significant

number of large mature fields.

Mature Basins and New Frontier Basins (mostly gas

prone). Potential for unconventional to be unleashed.

One of the World´s hottest oil play, home to the largest

offshore oil discoveries in the last decade.

55%

37%

8%

December 2018

85 wells

17,655 bpd

628 wells

1,650 bpd

6,683 wells

16 bpd

➢Major Operators

➢Exploration Specialists

➢Mature Field Players

Small and mid -

sized Companies0302➢Supermajors

➢Major Operators01

Pre-Salt Conventional Offshore

Onshore

Supported by Oilfield Service Companies, Suppliers and Financial Institutions!

Attract Suitable Players

Home to the largest offshore oil

discoveries in the last decade

The next bidding rounds will offer blocks with

potential for giant discoveries in the pre-salt

Proved reserves

~8 billion barrels of oil

Pre

-Sal

t p

rod

uct

ion

gro

ws

shar

ply

in t

he

sho

rt t

erm

Conventional Offshore

Goal: to increase

explorationactivities in the East

and Equatorial

Margins.

Current RF

Final RF

,

Onshore

Goal: to revitalize activities in onshore fields, by attracting

mature field players

Brazil has potential to significantly increase its onshore

production in short/medium term

Oil

Gas

Onshore Production (2018)

111Thousand bbl/d

22Million m³/d

Production Perspective

In 2018, 67,000 wells were drilled onshore

around the world

Only 128 wells were drilled onshore in

Brazil

,

0

500000

1000000

1500000

2000000

2500000

3000000

Bar

rels

of

Oil

per

day

Average Production

Brazil Pre-Salt Post-Salt Offshore Onshore

34%

Production

3.7 Million

Pre-Salt

61%

Conventional Offshore

31%

Onshore

7%

Oil

2.93 Million bpd

Gas

128 Million m³/d

boe/d

September, 2019

9th largest producer in the world in 2018

The largest producer of crude oil in the whole South American region September, 2019

190%(2014/2018)

(2014/2018)

34%(2014/2018)

15%(2014/2018)

Local Content

• Reduces attractiveness for bidding

• Delays on E&P projects

• Compliance costs

• Suppliers’ competitiveness

• Long-term E&P income appropriation

• Industrial development

• Human resources capacitation

COST BENEFIT

Is it Worth it

• E&P contracts

• Commitments

• Percentage of local content

• Goods and services

• Exploration and Development of productionactivities

• Sanctions

How to

• Establishes mandatory minimum percentages, preference for

hiring Brazilian suppliers, and reporting obligation to ANPContractual Commitment

• Evidence and timelines for verifying Local Content commitmentsLocal Content Verification

• Defines the rules for Local Content Overflow TransferLocal Content Surplus

• Presents the methodology for calculating the penalty associated

with non-compliance with the contractual commitment

Penalty for non-

compliance

How to

Timeline

4 Groups ofitems

Global level + 90 specific items

Third party certification + Local Content Primer

40% onbid score

15% weight on bidscore

Bonuses for specificitems

Self-declaratory

20% on bid score

Timeline

SupplierOil

companyThird party

certifier

LC Reports

Certificate of local content(percentage based on

production inputs)

Certificate of local content

Invoice

Certify products Sell products

ANP

E&P Contract Clauses + ANP rules

How to

• Requirements at global level

Example: Round 13

• Itens and subitens commitments

Example: Round 13

Incentives to high offers

• Average commitments of winning offers

25%

42%

28%

39%

79%

86%

74%

69%

79%

62%

73% 73%

27%

48%

40%

54%

86%89%

81%77%

84%

76%

84%80%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Exploration Development

Bidding Round Results

Source: ALMEIDA, E.; LOSEKANN, L; PRADE, Y.; BOTELHO, F. e NUNES, L. (2016). Custos e Competitividade do E&P No Brasil.

E&P investment

0 10 20 30 40 50

2013

2000

US$ billion

• High oil prices

• Pre-salt

• Previous bidding rounds

Scenario

Source: Prominp

Participation of national industry in the

O&G sector

0 20 40 60 80

2010

2003

%

• Additional value of US$ 21.5 billion worth of goods and services

• Generation of more than 875 thousand jobs

Results

Shipyards and FPSO modules building and integration

Subsea

Success Cases

*TC 030.511/2015-1

117Waiver requestsbetween 2011

and 2015

1/3Inspections

resulted in fines

R$ 456,5 MM

Fines applied

25Fines applied

US$ 25 BPotencial fines

(TCU*)• Suppliers

• Rising prices

• Longer delivery times

• Operators

• Gaming

• Inaction

However...

Blocks Definition Exploration

ContractSignature

Discovery

Discovery Evaluation

Declaration ofCommerciality

Development Production

Decommissioning

Abandonment

Exploration Phase Production Phase

Some Lessons Learned

Local Content requirementsLocal Contentrequirements

End of Development

• Geology

• Exchange rate

• Oil prices

• Technology

• Domestic supply chain

• Human resources

New Local Content

20222016 2017 2018 2019 2020 2021

ExplorationOnshore: 50%

Offshore: 18%

Development

Onshore: 50%

Offshore

Wells 25%

Subsea 40%

Platform 25%

✓ No waivers and no longer LC as bidding factor

New Local Content

OnshoreExploration 50%

Development 50%

Offshore

Exploration 18%

Development

Well construction 25%

Subsea systems 40%

Platform: engineering 40%

Platform: equipments 40%

Platform: construction, integration andinstallation

40%

Ongoing contractsConcluded phases

(under study)

Conduct adjustment agreement

• Replace fines with new LC commitments

• Examples: Goods for exportation oradditional seismic data acquisition

Contract amendment: new rules

New Local Content: Dealing with the past

Impact of New Rules

Impact of New Rules

✓ Flexibility arose by moving from specific LC requirements for each component of investment in E&Pphases to general commitments in each phase;

✓ Possibility to account LC in projects mixing national and global components regardless the location of assembling;

✓ Boosts importance of agreements and cooperation between local and global suppliers;

✓ Already under practice, according to supply contracts in progress.

Impact of New Rules: Flexibility

Future

Future

Certification Reporting MonitoringSimplification

andIncentives

Some more lessons learned

• Make it simple

• Monitor since the beginning

• Deal with R&D

Local ContentInformation

Local Content Information

Local Content Information

Local Content Information

National Agency of Petroleum, Natural Gas and Biofuels – ANP

Av. Rio Branco, 65 – Downtown – Rio de Janeiro – Brazil12º ao 22º floor

Tel: +55 (21) 2112-8550

www.anp.gov.br