Perspectives on doing oil and gas business in Brazil Rio Oil & Gas 2010 IAN WILKINSON Director

1. Perspectives on doing oil and gas business in Brazil Rio Oil & Gas 2010 IAN WILKINSON Director PETROLINK SERVIÇOS LTDA 1

2. Perspectives on doing oil and gas business in Brazil IAN WILKINSON Director PETROLINK SERVIÇOS LTDA Secure data distribution for E&P – managing and tracking data between operators, partners and contractors ISO9001:2008 certified Petrobras approved supplier Petrobras contractor since 2001 Certified 99,6% local content Currently on 15 rigs in Brazil, 170 worldwide Specialists in witsml solutions

3. Perspectives on doing oil and gas business in Brazil • Typical challenges facing UK companies coming to Brazil • Language issues • Physical distance - personal contact with Brazilian customers • Brazilian local content levels • Petrobras supplier approval and contracting bureaucracy • Customs and import complexities • Visa necessities for UK personnel • Taxation traps • Competition from local suppliers • Overall sales and administration cost of establishing a business or developing the market for products in Brazil 3

4. Perspectives on doing oil and gas business in Brazil • Challenges • LANGUAGE • Portuguese is the preferred language for all activities, except technical. • English is widely understood, but an inability to sell and build client relationships in Portuguese will have a significant impact on your rate of penetration into the local market • Countering this, the ability to communicate in English is a major benefit when dealing with technical and purchasing teams headed by ex-pats. • It is vitally important to have access to Brazilian Portuguese speakers in any serious attempt to do business in Brazil, whether they be agents, employees or venture partners 4

5. Perspectives on doing oil and gas business in Brazil • Challenges • CONTACT WITH CUSTOMERS • Similar to many Latin cultures, Brazilian business draws heavily on personal relationships. • Incoming UK companies do not have the inherited family and career contacts in the market that local suppliers benefit from • Increasing travel costs means that giving the Brazilian market enough personal attention by UK sales staff is increasingly costly • Nothing happens quickly in Brazil. If your company is not regularly presenting to clients in Brazil, the likelyhood of quick sales and growth diminishes drastically • A good agent, partner or local employee is almost impossible to do without 5

6. Perspectives on doing oil and gas business in Brazil • Challenges • BRAZILIAN LOCAL CONTENT • Most major offshore exploration and production developments come with a local content percentage stipulation, both for equipment and services. • Important that companies investigate local assembly and fabrication options early • Important that a means of invoicing in locally in R$ is established • Tax pressures suggest that registering a local subsidiary or JV is often the best route • Unlikely that local fabrication will be cheaper – but some services may be able to recruit local staff with lower wages than UK – but remember high taxes+benefits on salaries • Information (in Portuguese) on local content certification can be found on the ANP website: www.anp.gov.br 6

7. Perspectives on doing oil and gas business in Brazil Challenges BRAZILIAN LOCAL CONTENT 7

8. Perspectives on doing oil and gas business in Brazil • Challenges • PETROBRAS SUPPLIER APPROVAL • Petrobras supplier approval, formerly relatively straightforward, is now a web-based process, with new areas – such as policies on social responsibility, sustainable development etc. applicable to some types of company. • This change accompanies a tightening up of qualification procedures and (in many cases) a ongoing re-classification of supply categories. • The core documentation requested is normally not much more than you are used to in approvals from IOCs: legal; financial; technical & HSE - with a few twists • Approval is SLOW. Rarely less than 6 months and often taking more than a year, requiring repeated re-validation of documents – but stick with it! • But….. 8

9. Perspectives on doing oil and gas business in Brazil • Challenges • PETROBRAS SUPPLIER APPROVAL • Petrobras supplier approval is not needed for many categories of goods and services. • Sales to contractors by non-approved suppliers remain common. In this case, contractors approved supplier procedures are applied • Agents, or local associations, can help by coordinating the approved supplier process locally, but the forms still need to be filled in! • If only to provide “insurance” it is wise to get your firm on the Master Vendor List • Be warned, once qualified, you will be exposed to the Petrobras bidding process, which is either electronic bidding through “petronect” or by traditional means. Either way, that process is also complex and is a major impediment to business in Brazil for UK firms without much local support. 9

10. Perspectives on doing oil and gas business in Brazil • Challenges • PETROBRAS SUPPLIER APPROVAL 10

11. Perspectives on doing oil and gas business in Brazil • Challenges • CUSTOMS AND IMPORT • Brazil is notorious for difficulties and delays in importing goods • Goods attract IPI tax, ICMS tax and Import Duty. • Customs delays are the norm (but vary by location) & storage charges are high • Temporary tax-free import (under REPETRO) is complex to administer. Standard temporary import may be easier – especially for your client • Consider bonded warehousing and the use of favourable import regimes and locations (eg Vitoria FUNDAP) • Always get the documentation right before shipping (try to pre-clear) • If your goods have a Brazilian manufactured equivalent, and your customs agent cannot prove otherwise expect higher import duties • Running stock in bonded facilities is feasible for some businesses where premium prices for rapid delivery apply • Thorough research of importation alternatives is crucial. Your customs agent must be selected carefully • Ongoing favourable exchange rates make imported UK goods very competitive. 11

12. Perspectives on doing oil and gas business in Brazil • Challenges • VISA REQUIREMENTS • Visas are essential for any UK worker coming into Brazil. There is a certain amount of time, paperwork and inconvenience in the UK or US involved in successful issue of visas. • Visas will take about a month to be issued, when you need one in less time you will require “emergency” dispensation – so it is best to plan well ahead • Contract a visa specialist “despachante” as this is a constantly changing area and professional assistance (in all its forms) is needed. • Cost around $1000 per visa (working visas, technical visas or crew visas) valid up to 2 years. Always based on contracts, either with client or between local subsidiary and parent company. An INPI registered technical services contract can serve as the basis for visas for multiple employees or multiple client jobs • The number of visas being issued is significantly higher in 2010 than 2009, especially to the offshore sector – indicating a recognition of skills shortage • Note that vigilance at the airports is always high and entry is regularly refused 12

13. Perspectives on doing oil and gas business in Brazil Challenges TAXATION Tax planning must be the cornerstone of your strategy for Brazil. The tax regime as a whole in Brazil is high – but good planning will bring corporate income tax to levels lower than those in the UK Goods - sales taxes – ICMS 18%, IPI (varies) 5% Services - ISS 5% (or less in some municipalities or concessions) Also “turnover” taxes PIS+COFINS 4.65% of gross (3.65% for PPR**) Basic profit tax is 15%, with additional 9% social tax, plus additional 10% on income of over R$240k p/a – ie 34% total Direct payments abroad attract 25% witholding tax Company dividends are not taxed, even if remitted abroad **Service companies can opt for presumed profit regime, where taxes are paid on an assumed profit equivalent to 30% of billed value. 13

14. Perspectives on doing oil and gas business in Brazil • Challenges • LOCAL COMPETITION • Brazilian quality - Often, Brazilian firms are viewed as employing low-tech, high man-power solutions, with lower-than-UK levels of quality and training. However, pressure from purchasers like Petrobras have improved standards with insistence on ISO, HSE-MS and training. This is creating a more mature domestic service sector with quality-price-local content at the level that Petrobras is seeking. • Local knowledge – local companies always have the major advantage of knowing how to work with the contracting and bidding system, and know how to deal with corruption as it arises. Recognize that corruption does exist in Brazil. This needs to be recognized from the outset, and appropriate policies adopted. • Local labour taxes, labour regulations & high wages (driven by shortage of local trained personnel) & a strong R$ make locally supplied services expensive when compared to expats. • Likewise locally manufactured goods are often unable to compete on price with similar quality imports. 14

15. Perspectives on doing oil and gas business in Brazil • Challenges • COST OF DEVELOPING BUSINESS • Business in Brazil demands higher levels of administration effort than is normal in most markets. Company administration, accounts-tax administration, currency movements, stock administration and payroll administration all consume large amounts of time and cost. • It often takes much longer to break into the market in Brazil than in other countries, but once you are established as a supplier, Petrobras is a loyal customer, and typically prefers to renew trouble-free contracts. • Be aware of this long lead time to break-in, and the costs involved. • Reducing this lead time using a well planned local partnership or by contracting a good agent, is clearly a strong strategy • Experience shows that major investment, without first securing contracts, is often a risky strategy. 15

16. Perspectives on doing oil and gas business in Brazil CONTACT I am happy to hear from you and help answer any questions you may have ian.wilkinson@petrolink.com Petrolink Serviços Ltda Rua Voluntarios da Patria 45, Salas 407-408 Botafogo Rio de Janeiro Direct line 021-2226-6383 Cel 021-8106-0744 16