Rio oil and gas 2010 commercial aspects
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1 - Classification: Internal 2010-09-20
Incentives and Challenges toNew Players in the Brazilian Concession Regime
A View on Commercial Aspects
2 - Classification: Internal 2010-09-20
Introduction and Background
• Favourable conditions in the O&G sector brought a new economic and fiscal dimension to the industry in Brazil after the liberalization in late 1990’s
• As a result of the massive investments along the last decade the International Oil Companies (IOC) production in Brazil is expected to reach 300Kbpd in 2012 and 600Kbpd in 2016
• This first decade of investments in Brazil was noticeable by challenges and opportunities faced by IOCs in the development of their operations
Expected Production 2016
0
50
100
150
200
250
300
BG
Che
vron
Stat
oil
Gal
pE
nerg
ia
Rep
sol
YPF Sh
ell
El P
aso
ON
GC
Expected Production 2012
0
20
40
60
80
100
Stat
oil
Shel
l
Che
vron
El P
aso
BG
Gal
pE
nerg
ia
Rep
sol
YPF
ON
GC
Source: WoodMackenzie
3 - Classification: Internal 2010-09-20
Brazilian Concession Regime: Incentive
• Transparency in process has helped to pave the way
• Almost Annual bid rounds keeping the country on the agenda of E&P investors
• Clear process and way through
• Only small changes in Concession Agreements
− Mainly in Local Content
Source: ANP
4 - Classification: Internal 2010-09-20
Brazilian Concession Regime: Incentive
• Local content (LC) effort to build up a network of suppliers and to add value to country’s natural resource aims to repeat Norway’s and the US history of success
• However some sectors in Brazil are still doing the technological catch-up to be able to supply on competitive price and timeline the heated demand from the O&G sector
− The key is to balance the LC requirements with the temporary lack of capacity and spot market from local suppliers to provide critical components/systems
• Brazilian suppliers closing the gap through associations with world suppliers
− Also direct investment in the country
• Statoil collaborate to close such gaps with several initiatives with local suppliers through R&D programs
5 - Classification: Internal 2010-09-20
Fiscal system: Challenges & Opportunities
• Stable and transparent government take (GT) framework
− Classical Royalty-Tax regime
− Overall government take competitive
− Ownership of hydrocarbons after government take payments
− However the average GT accounts for approximately one-third of the overall taxation on a typical offshore project in Brazil
• Complex fiscal system
− Taxes on operations
− Tax burden also on investments through indirect taxes
• Often calculated in a gross-up method
− Three levels of taxation: Federal, State & municipal
• Many “ancillary” fiscal elements, primary and secondary obligations
6 - Classification: Internal 2010-09-20
Fiscal system: Challenges & Opportunities
• Complex fiscal system (cont.)
− Tax burden varying according to geographical location; product or service type and origin of supplier – thus very project specific
CAPEX
Goods Services
Local Foreign
REPETRONo REPETRO
Local ForeignREPETRONo REPETRO
PIS/COFINSISS
WHTCIDEPIS/COFINSISS
PIS/COFINSICMS Reduced Rate
IIIPIPIS/COFINSICMS Full rate
PIS/COFINSICMS Reduced
IPIPIS/COFINSICMS Full rate
Source:Deloitte
7 - Classification: Internal 2010-09-20
Fiscal system: Challenges & Opportunities
• Level of indirect taxes may restrain Brazilian suppliers to compete equally with foreign suppliers
− Productivity is key for Brazilian suppliers to compete on a global basis
• Results from cash flow models based on a typical Capex split for shallow waters development shows a total increase in Capex and Opex due to indirect taxes
− Including the effect of Repetro regime
• To reduce the tax burden on investments, specific temporary exemptions have been introduced in the industry in Brazil as an incentive
− Repetro Regime
− Temporary Admission Regimes
Capex Opex Assets (Goods) 18.3% 12,6% Services 8,4% 9,8% 26,7% 22,4%
8 - Classification: Internal 2010-09-20
Fiscal system: Challenges & Opportunities
• Repetro
− Introduces suspension of federal taxes applicable to the importation of goods used in Oil & Gas E&P activities
− Effectiveness is very project specific
− Impact on assets, therefore limited in production (Opex) phase
• Requires a specific commercial structure
− Asset owner must belong to an overseas company
− Requires a tight control and administration
− Requires financial guarantees
− Temporary importation by operators only
9 - Classification: Internal 2010-09-20
Commercial Structures
• Commercial Structure (cont.)
− Requires a structure under which concessionaire has to sign rental agreements with asset owner located abroad
− Payment of rentals abroad are subject to Transfer Price rules
• Combination and selection of tax structure and rental payments can create or destroy value to the project
Rental Contracts
Brazilian
Entity
Asset Owner
Rental Fees
Brazil Overseas
10 - Classification: Internal 2010-09-20
Fiscal system: Challenges & Opportunities
• No specific GAAP or fiscal system for Oil & Gas industry in Brazil
− No specific fiscal and accounting treatment (specially depreciation) for E&P
− Tax credits often difficult to obtain given the nature of the system was designed most for manufacturing industry
11 - Classification: Internal 2010-09-20
Challenges in Infrastructure and Commercialization
• On a overall perspective the geographical extent of pipeline network is still limited considering the size of the country
− Open access rules in place
• Access to pipeline infrastrucuture dependant on partnerships with major player
− Limited by geographical location specially for gas markets
− Sizeable crude pipeline infrastructure offshore Campos basin
• Amount of crude tanker-loaded to shore still relevant
• Local market virtually a monopsony for crude
− IOCs idetifying crude exports as the most profitable option
− Optimum value can be achieved by trading own crude
• Restrictions may apply depending on Transfer Price method selected
12 - Classification: Internal 2010-09-20
Challenges in Infrastructure and Commercialization
• Exporting Crude allowed by regulatory agency authorization
− Indication of technical information for each crude shipment
• Brazilian tax/customs authorities also ‘formalistic’ in the process of crude export
− Exports directly from FPSO without custom clearance are alllowed, however authorizations are always granted on a provisional basis
Application for Simplified Customs Procedure
Deliver required Documents
Closest custom office to the crude oil export floating
unit.
Latest by 5th day of each month:
-Initial stock;- Daily production;
- Domestic and Export (DDE #) quantities;-Final stock.
Latest by 25th day of each month:-Vessels;
- Cargo capacity;-Country destination;
-Estimated dates.
Company / Consortium
13 - Classification: Internal 2010-09-20
Closing Remarks
• Concession Regime with attractive terms
• Complex regime with taxes on investments and three levels of taxation
• Regime incentives (Repetro and Temporary Admission Regimes) bring incentives to the table, however
− Commercial/Tax structure with implications on remmitances of funds abroad and a balanced contractual strategy
− Requirements of tight administrative control on Repetro items
• Crude marketing limited by one buyer in local market
− Exports procedures requires a thourghtfull follow-up
− Specific rules to follow with customs/tax authorities, ANP, ANTAQ and Navy
14 - Classification: Internal 2010-09-20
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