LOCAL CONTENT CERTIFICATION

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LOCAL CONTENT CERTIFICATION HOUSTON SEMINAR
December 06, 2011
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Brazilian Local Content Seminar
Agenda 800 - 900 AM Registration/Breakfast 9
00 - 1130 AM Presentation 1130 - 1230
PM Question and Answers 1230 - 200
PM Closing Remarks and Lunch
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Brazilian Oil Gas Market
Highlights

• Brazil is the 7th largest oil consumer in the
  world and ranks the 41st in natural gas
  consumption.
• Solid regulations environment
• Successful strong concession agreements
• Pre-salt fields
• More than 70 active operators
• More than 3500 blocks offered 730 concession
  agreements
• Lots of gaps (technology, HR, infrastructure,
  etc)

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Demand for Petroleum
Source Strategic Plan of Petrobras
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Demand for Petroleum
Source Strategic Plan of Petrobras
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Strategic Plan of Investments (Results of Bid
Rounds)
Source ANP (2011)
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Strategic Plan of Investments (Petrobras Plan
for 2010-2014)
Source Strategic Plan of Petrobras
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Strategic Plan of Investments (Major Oil
Projects)
Source Strategic Plan Petrobras
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Strategic Plan of Investments (Pre-Salt Province)
Pre-Salt Province
Source Strategic Plan Petrobras
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Strategic Plan of Investments
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Strategic Plan of Investments (Declared
Investments Oct. 2011-US)
Source ANP (Oct. 2011)
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Local Content Purpose
The purpose of the local content (LC)
requirement is to increase, on a competitive
base, the share of the domestic manufacturers and
service firms in the chain of suppliers for
petroleum and natural gas. This policy foster
growth of segments of domestic manufacturing
companies, technological development of the
country, training of local human resources and
generates jobs and income.
Source ANP
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Context of the Government Policy
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Local Content Concept
What is Local Content?
"Local Content is the ratio of the value
to goods produced and services rendered in the
country to perform the contract and the total
value of goods and services used for this
purpose.


(Law Project
5938/2009 Contrato de Partilha de Produção)
(Law 12.351/2010 - Production Sharing Contract)
Brazilian Cost of Goods and Services
X 100
LC
Sales Price of Goods and Services
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Legal Framework
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Local Content on Bid Rounds
Bids 1 to 6 LC Calculation By Declaration
From Bid 7 LC Calculation By 3rd part
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Local Content on Bid 7 to 10 ( of Limits
Minimum and Maximum)
BLOCK LOCATION EXPLORATION PHASE EXPLORATION PHASE DEVELOPMENT PHASE DEVELOPMENT PHASE
BLOCK LOCATION Minimum Maximum Minimum Maximum
DEEP WATER P 400m 37 55 55 65
SHALLOW WATER 100m P lt 400m 37 55 55 65
SHALLOW WATER Plt 100m 51 60 63 70
ONSHORE 70 80 77 85
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Local Content on Bid 7 to 10 (Limits Minimum
and Maximum)
Global Local Content (By System)
Local Content By Item
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Local Content Commitments on Concession
Agreements
Source ANP Presentation
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Certifications Performed (Oct. 2011)
6524
Issued by ABSG 2636
Source ANP
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Scope Concession Contracts
Exploration Phase Production Phase Production Phase
Exploration Phase Stages Stages
Exploration Phase Development Production
NOT SUBJECT TO LC CERTIFICATION
SUBJECT TO LOCAL CONTENT
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Concession Contracts (Contractual Requirements)
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Concession Contracts (Contractual
Requirements)
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Range - Areas of Activity
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ANP Regulations
Note The Regulations can be found on the website
of the ANP (www.anp.gov.br) by clicking Local
Content on the right-hand side menu.
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ANP Regulation 36(Purpose and Application)

• Applicable to the Concession contracts signed by
  ANP with the concessionaries effective from the
  7th round on.
• Effective as of Sept. 11, 2008.
• Contracts signed BEFORE Sept. 11,2008 that have
  any type of change in price, term, or scope,
  under the way of a contractual addition dated
  after Sept. 11, 2008 shall be certified, provided
  there the concessionary needs to prove that there
  has been local investments.
• ? Supply scope involving goods and services,
  defined by service order or similar document,
  issued after Sept. 11, 2008, shall be certified,
  even if the associated mixed contract (umbrella)
  have been made effective before Sept. 11, 2008.

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ANP Regulation 36(Purpose and Application)

• ? Goods stocked at the Concessionaire before
  Sept. 11, 2008 are not required to be certified.

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Certification Activities/Concepts

• A Services contract between the Contracting
  entity and the Certification entity shall be
  signed.
• Up to 30 days after the execution of above
  mentioned contract, the Certification entity
  shall inform to ANP the relevant information
  regarding what type of activity the goods, or the
  good for transient use, or the service, relate
  to.
• In order to perform its work, the certification
  entity must have access to all information
  necessary to the conduction and conclusion of the
  work.
• Totally imported items, without any local
  content, will not be certified.
• In case the supply has partial shipments, a
  global Certificate can be issued at the end of
  the supply.

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Certification Activities/Concepts
Certification Authority
Trimestral Certification Report
Auditing
Certificates
Certification Contract
ANP
Certificates
Trim. Invest. Report
Certification Contract
Contract of Concession
SUPPLIER
Oil Gas Company
Contract of Supply
Invoices Certificates
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Certification Activities/Concepts

• For all standard serial item, and as long as
  there has not been any change in its
  specifications, composition or production
  process, and provided its local content
  certificate has not suffered changes of more than
  10 (up or down), the original certification can
  be accepted during a maximum of a 4 year period.
• NOTE
• In this case the supplier must attach to each
  new invoice a copy of the original local content
  certificate, together with an statement that
  there has been no change on the product (good or
  service) since its original certification.

CL VARIATION LESS THAN 10 ORIGINAL
CERTIFICATE VALID FOR 4 ANOS
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Certification Activities/Concepts

• The supplier can hire the certification of its
  products, regardless of to what concessionary
  will it be supplied. At the moment of delivery of
  the goods the supplier shall handle the invoice,
  together with the Certificate.
• In case of transfer of the good, goods for
  transient use or services, the certificate must
  be equally issued, and the local content
  indicator of the aforementioned goods will be
  transferred and used on the new concessionary
  local content account.
• All fiscal documents related to a commercial
  transaction, except those related to partial
  shipments, that are subject to local content
  certification, must be accompanied by the
  corresponding local content certificate for each
  item.

COMMERCIAL TRANSACTION INVOICE LC CERTIFICATE
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Certification Activities/Concepts

• Goods or Services with LC equal or less than 10
  will be considered as totally imported, i.e.,
  with LC equal to ZERO. An exception is made for
  seismic data acquisition, leasing of drill ships
  for offshore projects and acquisition of bits.
• Costs related to air tickets, lodging, food and
  similar, resulting from foreign labor (without
  permanent visa), are to be considered null in
  regards to measuring the LC, even when paid by
  companies located in Brazil.
• Local Labor It is the labor proceeding from the
  employment of Brazilian citizens or foreigners
  with a permanent visa, hired on the service
  provider establishment , or in its
  sub-contractors, all duly inscribed at the
  Brazilian Register of Companies (CNPJ).

If LC 10, then it will be 0
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Certification Activities/Concepts

• Goods manufactured abroad and later on
  nacionalized, will be considered imported for the
  purpose of LC. The criteria of origin takes
  place, and the LC Book has to be considered.
• A good manufactured in Brazil and later exported,
  when imported back to the country will only be
  considered applicable for LC purposes if it was
  certified before being exported. In case of goods
  for transient use, it is also necessary for the
  service provider to have CNPJ. On the contrary,
  the LC will be considered ZERO.
• In case of Repetro fictitious exportation of
  goods manufactured in Brasil with later temporary
  admission (for example, leasing), the LC will be
  considered null.

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Certification Activities/Concepts
Brazil Manufacture Company
Owner - Foreign Country
Operation In Brazil
Imported
Company with CNPJ
Manufacture of good
Good
Local Content
Yes
Imported
Local Content Certificate
Exported
Company without CNPJ
Yes
Local content
0
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Certification Activities/Concepts (Good for
Transiente Use)


Outside Brazil
Main Contract
Client B (Supplier)
Client A (Owner)
Manufactured Contract
Brazilian Subcontractor (Shipyard)
Certification Contract - Not Possible
LC Certification Contract - YES
Brazil
Certification Company
Yes
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Certification Activities/Concepts (Exported and
Imported Equipment)


LC 100 Sales Price R
50.000,00 LC R 50.000,00
Exported

with LC Certificate

LC 18,86 Local Content R 50.000,00 Imported
Part R 215.000,00
Imported
Total Sales Price R 265.000,00
Brazil
Outside Brazil
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Certification Activities/Concepts (Local
Indirect Expenses and Costs)

• How to deal with Local Overhead Costs associated
  with Administrative Support, and areas such as
  Finance, HR, Legal?
• How shall Local Licences such as IBAMA, ANP,
  CREA, etc., be considered ?
• How shall Local Expenditures with utilities such
  as water, light, telephone, etc. be considered ?
• How shall Local Expenses related to penalties be
  considered ?
• How shall Local Expenses associated with
  consulting in general, such as in finance, as
  well as expenses related to the judicial systems,
  such as processing fees ?
• How shall other Local Indirect Costs be
  considered?

Local Indirect Local Costs and Expenses will be
Considered as a Contract Difference.
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Certification Activities/Concepts (Local
Indirect Expenses and Costs - Example)
Imported Cost
Contract Difference
National Cost


Sales Price

Example
CD 50

IC 250

NC 700

SP 1000
Total NC 700 50
LC

75,0
X 100
SP 1000
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Certification Activities/Concepts

• The Anticipated Certification (without contract)
  is only possible when the object of certification
  is a Good. This concept of anticipated
  certification can not be applied to SERVICES.
• The issue of a Certificate for SERVICES is only
  possible under a contract between the service
  provider and its client, and there will be the
  need to issue one certificate for each service,
  even if the scope of the service is the same.
• The certification concept is valid for products,
  not for companies.
• The certification entities shall keep permanent
  records of all certificates issued. Each
  certificate and related documents that are part
  of the certification scope shall remain available
  for auditing for a period of 5 year.

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Certification Activities/Concepts

• Computers, monitors, notebooks, servers, and
  other information technology goods that can be
  used on services not exclusive or not predominant
  of the Oil Gas industry will be measured by the
  simplified criteria, i. e., the origin of the
  GOOD is to be checked against the purchasing
  invoice documentation.
• Goods used for logistic services, such as
  vehicles, trucks, boats, helicopters, airplanes,
  cranes, winches, hoists, etc. that can be said
  to be of non exclusive or non predominant use on
  the Oil Gas industry, will have its LC
  evaluation done via the simplified method, i. e.,
  the procedure of the GOOD shall be checked
  against the purchasing invoice documentation.
  This way the measurement of the components of the
  GOOD will not be required.

Dont need to open the Good and certify the
components/items.
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Certification Activities/Audits

• The Certification entity is the sole responsible
  for the local content certificate information.
  Once issued, in no instance it will loose its
  validity for the purpose of local content
  assessment, except in proven cases of deceit or
  fraud.
• Criteria and procedure for the auditing of the
  certifying entities approved by ANP are set on
  Regulation 8/2007 from ANP. The audits will be
  performed in the following instances
• When there is denunciation of irregularities.
• In order to verify the fulfilment of the Warning
  term
• In all contracts finalized by a certification
  entity that has been suspended
• At any time, under a Beginning of Audit
  Notification.
• Notes
• (1) The certification entity is obliged to make
  available all the documentation defined on the
  work scope,
• as indicated on the Beginning of
  Audit Notification.
• (2) During the course of an audit, if the
  auditors believe it pertinent the in loco
  verification of any
• document, process, third party
  procedure, or even a raw material, component,
  part, equipment,
• machine or services, the
  Certification entity shall make these items
  available under a 10 days warning.

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Certification Activities/Methodology (Common
Nomenclature Of Mercosul NCM)
NCM 84
All the goods, equipment or parts whose NCM
84 must have their LC Certified.
For goods, equipment or parts whose NCM lt 84,
the LC is not required to be Certified. It will
be measured by a Simplified Method and the LC
will be 100 or 0.
NCM lt 84
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Certification Activities/Methodology (Local
Content of Goods - Clb)
Clb is the that corresponds to the ratio
between The difference between the Total Sales
Price (Vt) (excluding IPI and ICMS taxes) and the
value of its imported portion (Vi)
CLb (1- Vi / Vt) . 100, where Vi Vt Vn

• Vi Value of the Imported items (in R)
  including raw material and adding
• Components imported directly by the manufacturer
• Components imported directly by the buyer
• Components imported by third parties and
  purchased locally by the manufacturer or buyer
• Part of imported components purchased locally by
  the manufacturer or buyer.
• Vn Value of National components (in R) .
• Vt Sales Price of the Good (in R), excluding
  IPI and ICMS taxes.

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Certification Activities/Methodology (Local
Content of Goods for Transient Use - Cla)

• The Local Content of Goods for transient use
  (Cla) will be equivalent to the Local Content of
  the Good under consideration (Clb) provided the
  company performing the service is registered on
  the Brazilian Registar of Companies (CNPJ).
• The value of the National Content of this
  activity will be calculated using the CLb of
  the good applied to the Contract Value (VC)
• CLa Local Content of the good under transient
  use
• VC Value of the contract for the transient use
  of the good excluding IPI and ICMS taxes.

CLa() CLb ()
National Content Value CLb () x VC
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Certification Activities/Methodology (Local
Labor Utilization - ILs)

• of the Local Content of services, including
  software, will be measured thru
• the index of local labor utilization of the
  services (ILs). O (ILs) shall be
• applied to the value of the contracted services,
  excluding ISS tax.
• The ILs shall be calculated according to below
  formula, provided the
• company is register at the Brazilian Registar of
  Companies (CNPJ).
• CTM Total Cost of necessary or effectively used
  labor (excluding ISS Tax)
• CMN Total Cost of National necessary of
  effectively used labor (excluding
• ISS tax).

ILs () (CMN / CTM) x 100
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Certificate Template
The certificates are to be issued in Portuguese
language and shall be coded according to the
following rule xxx yy
zzzzzzzzzzzzzz www xxx ANP registration number
of the certification entity yy code of EP
activity area zzzzzzzzzzzzzz CNPJ number of the
company for which the product was certified www
sequential number of the certificate.
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Local Content Calculation (Example 1 - Good For
Transient Use)
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Local Content CalculationExample 1 (Breakdown
of Items)
SUBSYSTEMS
ITEMS
Engine

Components
BOP

SYSTEM

Services
Hull, Structural parts and Integatrion

Drill Ship Unit

Expenses
Derrick

Processing Module Mud Module

Azimuth Thruster
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Local Content CalculationExample 1
MEASUREMENT ITEM ORIGEN NATIONAL COST (R) FOREIGN COST (R)
1.0 Engine      
1.1 Goods/Components Parts Imported 0,00 65.000.000,00
1.2 Services Imported 0,00 0,00
1.3 Expenses Nacional 15.500,00 0,00
2.0 BOP      
2.1 Goods/Components Parts Imported 0,00 45.000.000,00
2.2 Services Imported 0,00 0,00
2.3 Expenses Nacional 6.500,00 0,00
3.0 Processing Mud Modules      
3.1 Goods/Components Parts Imp./Nacional 44.500.000,00 7.500.000,00
3.2 Services Nacional 11.125.000,00 0,00
3.3 Expenses Nacional 450.000,00 0,00
4.0 Riser Pipe      
4.1 Goods/Components Parts Imp./Nacional 5.600.000,00 2.500.000,00
4.2 Services Nacional 1.680.000,00 0,00
4.3 Expenses Nacional 250.000,00 0,00
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Local Content CalculationExample 1
MEASUREMENT ITEM ORIGEN NATIONAL COST (R) FOREIGN COST (R)
5.0 Derrick      
5.1 Goods/Components Parts Imp./Nacional 45.000.000,00 15.000.000,00
5.2 Services Nacional 13.500.000,00 0,00
5.3 Expenses Nacional 125.500,00 0,00
6.0 Azimuth Thruster      
6.1 Goods/Components Parts Imported 0,00 35.000.000,00
6.2 Services Imported 0,00 0,00
6.3 Expenses Nacional 6.500,00 0,00
7.0 Knuckle Crane      
7.1 Goods/Components Parts Imported 0,00 7.500.000,00
7.2 Services Nacional 350.000,00 0,00
7.3 Expenses Nacional 50.000,00 0,00
8.0 Hull Structural Items      
8.1 Goods/Components Parts Nacional 65.600.000,00 0,00
8.2 Services Nacional 19.680.000,00 0,00
8.3 Expenses Nacional 250.000,00 0,00
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Local Content CalculationExample 1
MEASUREMENT ITEM ORIGEN NATIONAL COST (R) FOREIGN COST (R)
9.0 Integration      
9.1 Goods/Components Parts Nacional 35.600.000,00 0,00
9.2 Services Nacional 10.680.000,00 0,00
9.3 Expenses Nacional 250.000,00 0,00
10.0 TOTAL COST      
10.1 Goods/Components Parts   196.300.000,00 177.500.000,00
10.2 Services   57.015.000,00 0,00
10.3 Expenses   1.404.000,00 0,00
National Cost (Nc) R 254.719.000,00
Foreign Cost (Fc) R 177.500.000,00
Sales Price (Sp) R 560.000.000,00
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Local Content CalculationExample 1
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Local Content Calculation (Example 2 Charter
Contract)
Drilling Ship (1) R 560 MM. Life Expectancy
(2) 25 years Year Rate R 26 MM Daily Rate
26 MM / 360 R 72.222,00
National Cost R 8.879.000,00
Utilization 180 days
CL 68,30
Services Value 180 x 72.222,00 R
13.000.000,00
Foreing Cost R 4.121.000,00
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Local Content Calculation (Example 2 Charter
Contract)
Sales Price (Sp) R 35.000.000,00
Foreing Cost (Fc)
X 100
CL

1 -
Sales Price (Sp)
R 4.121.000,00
X 100

82,2
1 -
CL

R 35.000.000,00
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Local Content Calculation(Example 3 - Charter
Contract with Services)
ITEMS
TOTAL COST WITHOUT TAXES
NATIONALCOST (BC)
FOREING COST (FC)
MAN POWER INCLUDING ENGINEERING AND ONSHORE
OPERATION SUPPORT (1)
2.013.058,00
198.852,00
1.814.206,00
DRILLING SHIP Charter Contract (2)
13.000.000,00
8.879.000,00
4.121.000,00
SUPPLY BOAT Charter Contract
5.250.000,00
1.575.000,00
3.675.000,00
SPECIAL TOLLS
1.750.000,00
0,00
1.750.000,00
CATERING
350.000,00
350.000,00
0,00
CHEMICAL AND LUBRIFICANTS
1.500.000,00
1.500.000,00
0,00
SPARE PARTS
550.000,00
550.000,00
0,00
TOTAL COST (1)
24.413.058,00
13.052.852,00
11.360.206,00
SALES PRICE (2)
38.500.000,00
 
 
CONTRACT DIFFERENCE (2) - (1)
 
14.086.942,00
0,00
TOTAL FINAL COSTS
38.500.000,00
27.139.794,00
11.360.206,00
CONTEÚDO LOCAL CN / PV
70,49
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Penalty (Example)
Offered Local Content 60 Committed Total
Investment IT (Exploration Phase) R 100
million Committed National Investment 60 x R
100 million R 60 million Done Local Content
40 Local Content not met (NR ) 20,
equivalent to 33 of the committed rate of 60
33,33
33,33
 
Penalty (M) 60
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Penalty (Example)
Local Investment not Realized (INR) Amount of
Penalty (VM) Conclusion The amount of fine
(penalty) is US 12 Million, equivalent to 12 of
the total amount invested in the contract.
INR ?CL x IT 20 x US 100 Million US 20
Million
VM M x INR 60 x US 20 Million US 12
Million
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How to Implement a Sucessful LC Program

• Selecting and preparing staff and the internal
  organization for the Local Content rules (ANP)
• Implement a consistent training program with the
  Certification Authority assistance if necessary.
• Making Partnership and cooperation with local
  companies.
• Setting production units in Brazil.

• Increasing the participation of local labor
  on services.
• Obtaining local content certification on
  goods and services.
• Expand the dialog and interaction with the
  suppliers building a strong
• relationship capable of facing
  controversial issues.

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Local Content Challenges (Local Content
Regulation by ANP 11th Bid Round Pre-Salt Bid
Round)

• Simplification the table of commitments and
  offers of Local Content.
• Adjust the definitions of items of the Local
  Content commitments (Resolution Nº 39/2007 ANP).
• Simplify the procedures for Local Content
  Certification, giving focus on the relevant
  activities. (Resolution Nº 36/2007 ANP).

• Transparency of actions.
• Dialogue with the industry.
• Increase the volume of Local investments
  (certifications).
• Inform the market about certification process and
  its rules.

 
Source ANP
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Brazilian Local Content Tendency (Opportunities
Risks)

• Brazil is the biggest exploratory opportunity in
  the world.
• Brazilian petroleum sector is an extraordinary
  (worldwide) business opportunity for petroleum
  companies and for goods services suppliers.
• ANP will promote the 11º Bid Round in a short
  time.
• ANP is working to promote the 1st Bid Round
  focusing Pre-salt opportunities.

• The Brazilian policy for the OG sector aims to
  reach a strong degree of
• nationalization and boost the Brazilian
  industry.
• ? Current investments in the supply chain have
  sufficient magnitude to
• induce the local industry.

 
Source ANP
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Brazilian Local Content Tendency (Opportunities
Risks)

• According to Brazilian Policy foreign investments
  are welcome.
• Automobilist Industry is now required to attend
  as a Minimum 60 of Local Content.
• There is a tendency to have soon a minimum Local
  Content indice required for OG production,
  refinery and mining.
• There is the risk of the supplier does not reach
  the compromised LC level. In this case, a penalty
  may be applied.
• If the penalties happens in a systematic way,
  suplliers position in the market may also be
  affected.

 
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Local Content Around the World

• Angola
• Azerbaijão
• Brasil
• China
• Egito
• Guine Equatorial
• Inglaterra
• Irã
• Kazaquistão

• Líbia
• Malasia
• Nigéria
• Noruega
• Papua Nova Guiné
• Rússia
• Trinidad
• Venezuela
• Yemen

 
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Contacts in Brazil
Contacts in Houston
? Eugenio Singer esinger_at_absconsulting.com Tel.
021-3232.1730 / 91829026 ? Alcides
Costa acosta_at_absconsulting.com Tel.
021-3232.1758 / 9912.9694 ? Thereza Moreira
tmoreira_at_absconsulting.com
Tel.[phone] ? Contato_at_absconsulting.com Te
l. 021-3232.1700 ? www.absconsulting.com.br
? Henrique Paula hpaula_at_absconsulting.com Ph
281 673-2864 / 713 859-9682 ? Greg
Jandjel gJandjel_at_absconsulting.com Ph 281
673-2781 / 832 969-6767 ?
www.absconsulting.com
 
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