1. LOCAL CONTENT CERTIFICATION HOUSTON SEMINAR December 06, 2011

2. Brazilian Local Content Seminar: Agenda: 8:00 - 9:00 AMRegistration/Breakfast 9:00 - 11:30 AMPresentation 11:30 - 12:30 PMQuestion and Answers 12:30 - 2:00 PMClosing Remarks and Lunch

3. 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)

4. 4 Demand for Petroleum: Total Oil Consumption by Country (mmbo/d) Total Oil Consumption mb/d (index) Brazil is world’s eighth-largest oil consumer Brazil oil consumption growing at 2.4% per year. OECD oil consumption growing at 1% per year. 100 110 120 130 140 150 160 1990 19911992 1993 19941995 1996 1997 19981999 2000 2001 2002 2003 2004 2005 2006 2007 WorldOECDBrazil 20.7 7.9 Source: Strategic Plan of Petrobras

5. 5 Demand for Petroleum: Source: Strategic Plan of Petrobras

6. 6 Strategic Plan of Investments: (Results of Bid Rounds) Source: ANP (2011)

7. 7 Strategic Plan of Investments: (Petrobras Plan for 2010-2014) Source: Strategic Plan of Petrobras

8. 8 Strategic Plan of Investments: (Major Oil Projects) Source: Strategic Plan Petrobras

9. 9 Strategic Plan of Investments: (Pre-Salt Province) Pre-Salt Province Source: Strategic Plan Petrobras

10. 10 Strategic Plan of Investments:

11. 11 Strategic Plan of Investments: (Declared Investments Oct. 2011-US$) Source: ANP (Oct. 2011)

12. 12 Local Content Purpose: Source: ANP “ 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.”

13. 13 Participation of Brazilian Industry Sector Brazilian Training and Technology Development Income generation and employment in Brazil PROMOTION Context of the Government Policy:

14. 14 Local Content Concept : What is Local Content? Brazilian Cost of Goods and Services Sales Price of Goods and Services %LC = X 100 "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)

15. 15 Legal Framework: Constitutional Amendment n.º 9 Flexibilization of Petrobras monopoly Constitutional Amendment n.º 9 Flexibilization of Petrobras monopoly Law of Petroleum 9.478/97 “End of Petrobras monopoly” Law of Petroleum 9.478/97 “End of Petrobras monopoly” 1995 1997 ■ Principles and objectives of the National Energy Policy; ■ National Energy Policy Council (CNPE); ■ Creation of the ANP - National Petroleum Agency; ■ Establishment of concessions rules; ■ Establishment of bidding rounds; ■ Definition of government participation; ■ Definition of round ZERO for Petrobras;

16. 16 Local Content on Bid Rounds: Bids 1 to 6: LC Calculation By DeclarationFrom Bid 7: LC Calculation By 3rd part

17. 17 Local Content on Bid 7 to 10: (% of Limits Minimum and Maximum) BLOCK LOCATION EXPLORATION PHASEDEVELOPMENT PHASE Minimum %Maximum %Minimum %Maximum % DEEP WATER P ≥ 400m 3755 65 SHALLOW WATER 100m ≤ P < 400m 3755 65 SHALLOW WATER P< 100m 51606370 ONSHORE70807785

18. 18 Local Content on Bid 7 to 10: (Limits % Minimum and Maximum) Global Local Content (By System) Local Content By Item

19. 19 Local Content Commitments on Concession Agreements: Source: ANP Presentation

20. 20 Certifications Performed (Oct. 2011): Source: ANP 6524 Issued by ABSG 2636

21. 21 Scope – Concession Contracts: Exploration Phase Production Phase Stages DevelopmentProduction SUBJECT TO LOCAL CONTENT NOT SUBJECT TO LC CERTIFICATION

22. 22 Concession Contracts: (Contractual Requirements)

23. 23 Concession Contracts: (Contractual Requirements)

24. 24 Range - Areas of Activity:

25. 25 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.

26. 26 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.

27. 27 ANP Regulation # 36: (Purpose and Application) Goods stocked at the Concessionaire before Sept. 11, 2008 are not required to be certified. Concessionaire Local Content Statement. Stock Used on the project Investment Report ANP Sept, 11, 2008 For Goods stocked before Sept, 11, 2008 % LC is set by customer statement only.

28. 28 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.

29. 29 Certification Activities/Concepts: ANP Certification Authority SUPPLIER Oil & Gas Company Auditing Trimestral Certification Report Trim. Invest. Report Contract of Concession Certificates Certificatio n Contract Certificates Certification Contract Contract of Supply Invoices & Certificates

30. 30 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 Invoice Copy of Certificate Statement of “no changed” + +

31. 31 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

32. 32 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%

33. 33 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.

34. 34 Certification Activities/Concepts: Brazil Manufacture Company Owner - Foreign Country Operation In Brazil Manufacture of good Local Content Certificate Good Company with CNPJ Local Content Company without CNPJ Local content Yes Exported Yes 0% Imported

35. 35 Outside Brazil Client “B” (Supplier) Main Contract Brazilian Subcontractor (Shipyard) Certification Company LC Certification Contract - YES Manufactured Contract Certification Contract - Not Possible Client “A” (Owner) Certification Activities/Concepts : (Good for Transiente Use) Brazil Yes

36. 36 Certification Activities/Concepts : (Exported and Imported Equipment) BrazilOutside Brazil LC = 100% Sales Price = R$ 50.000,00 LC = R$ 50.000,00 Exported with LC Certificate + + Imported Total Sales Price = R$ 265.000,00 LC = 18,86% Local Content = R$ 50.000,00 Imported Part = R$ 215.000,00

37. 37 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”.

38. 38 = National Cost Imported Cost Contract Difference ++ %LC= Total NC = 700 + 50 SP = 1000 75,0 % SP = 1000 NC = 700 Example: IC = 250 CD = 50 = + + = Sales Price Certification Activities/Concepts : (Local Indirect Expenses and Costs - Example) X 100

39. 39 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.

40. 40 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. Don´t need to open the Good and certify the components/items.

41. 41 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.

42. 42 Certification Activities/Methodology : (Common Nomenclature Of Mercosul – NCM) NCM ≥ 84 NCM < 84 All the goods, equipment or parts whose NCM ≥ 84 must have their LC Certified. For goods, equipment or parts whose NCM < 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%.

43. 43 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.

44. 44 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

45. 45 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

46. 46 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 E&P activity area; zzzzzzzzzzzzzz: CNPJ number of the company for which the product was certified; www: sequential number of the certificate.

47. 47 Local Content Calculation: (Example 1 - Good For Transient Use)

48. 48 Local Content Calculation–Example 1: (Breakdown of Items) SYSTEM SUBSYSTEMS + ITEMS Drill Ship Unit Engine BOP Azimuth Thruster Hull, Structural parts and Integatrion + + + Derrick Processing Module & Mud Module + Components Services Expenses + +

49. 49 Local Content Calculation–Example 1: MEASUREMENT ITEMORIGEN NATIONAL COST (R$) FOREIGN COST (R$) 1.0 Engine 1.1 Goods/Components PartsImported0,0065.000.000,00 1.2 ServicesImported0,00 1.3 ExpensesNacional15.500,000,00 2.0 BOP 2.1 Goods/Components PartsImported0,0045.000.000,00 2.2 ServicesImported0,00 2.3 ExpensesNacional6.500,000,00 3.0 Processing & Mud Modules 3.1 Goods/Components PartsImp./Nacional44.500.000,007.500.000,00 3.2 ServicesNacional11.125.000,000,00 3.3 ExpensesNacional450.000,000,00 4.0 Riser Pipe 4.1 Goods/Components PartsImp./Nacional5.600.000,002.500.000,00 4.2 ServicesNacional1.680.000,000,00 4.3 ExpensesNacional250.000,000,00

50. 50 Local Content Calculation–Example 1: MEASUREMENT ITEMORIGEN NATIONAL COST (R$) FOREIGN COST (R$) 5.0 Derrick 5.1 Goods/Components PartsImp./Nacional45.000.000,0015.000.000,00 5.2 ServicesNacional13.500.000,000,00 5.3 ExpensesNacional125.500,000,00 6.0 Azimuth Thruster 6.1 Goods/Components PartsImported0,0035.000.000,00 6.2 ServicesImported0,00 6.3 ExpensesNacional6.500,000,00 7.0 Knuckle Crane 7.1 Goods/Components PartsImported0,007.500.000,00 7.2 ServicesNacional350.000,000,00 7.3 ExpensesNacional50.000,000,00 8.0 Hull & Structural Items 8.1 Goods/Components PartsNacional65.600.000,000,00 8.2 ServicesNacional19.680.000,000,00 8.3 ExpensesNacional250.000,000,00

51. 51 Local Content Calculation–Example 1: MEASUREMENT ITEMORIGEN NATIONAL COST (R$) FOREIGN COST (R$) 9.0 Integration 9.1 Goods/Components PartsNacional35.600.000,000,00 9.2 ServicesNacional10.680.000,000,00 9.3 ExpensesNacional250.000,000,00 10.0 TOTAL COST 10.1 Goods/Components Parts 196.300.000,00177.500.000,00 10.2 Services 57.015.000,000,00 10.3 Expenses 1.404.000,000,00 National Cost (Nc) = R$ 254.719.000,00 Foreign Cost (Fc) = R$ 177.500.000,00 Sales Price (Sp) = R$ 560.000.000,00

52. 52 Local Content Calculation–Example 1: %CLa=1 - Foreing Cost (Fc) Sales Price (Sp) X 100 %CLa= 1 - R$ 177.500.000,00 R$ 560.000.000,00 X 100 = 68,3%

53. 53 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 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 Utilization= 180 days Service´s Value = 180 x 72.222,00 = R$ 13.000.000,00 CL = 68,30% National Cost = R$ 8.879.000,00 Foreing Cost = R$ 4.121.000,00 Local Content Calculation: (Example 2 – Charter Contract)

54. 54 Local Content Calculation: (Example 2 – Charter Contract) Sales Price (Sp) = R$ 35.000.000,00 %CL=1 - Foreing Cost (Fc) Sales Price (Sp) X 100 %CL= 1 - R$ 4.121.000,00 R$ 35.000.000,00 X 100 =82,2%

55. 55 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 0,00 CHEMICAL AND LUBRIFICANTS 1.500.000,00 0,00 SPARE PARTS 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%

56. 56 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% Penalty (M)= 60%

57. 57 Penalty (Example): Local Investment not Realized (INR):INR Amount of Penalty (VM):VM Conclusion: The amount of fine (penalty) is US$ 12 Million, equivalent to 12% of the total amount invested in the contract. VM = M x INR = 60% x US$ 20 Million = US$ 12 Million INR = ∆CL x IT = 20% x US$ 100 Million = US$ 20 Million

58. 58 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.

59. 59 Local Content Challenges: (Local Content Regulation by ANP: 11th Bid Round & Pre-Salt Bid Round) Source: ANP 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.

60. 60 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 O&G 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

61. 61 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 O&G 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, supllier´s position in the market may also be affected. Brazilian Local Content Tendency: (Opportunities & Risks)

62. 62 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

63. 63 Eugenio Singer esinger@absconsulting.com@absconsulting.com Tel. 021-3232.1730 / 91829026 Alcides Costa acosta@absconsulting.com Tel. 021-3232.1758 / 9912.9694 Thereza Moreira tmoreira@absconsulting.com Tel.021-3232.1706 Contato@absconsulting.com Tel. 021-3232.1700 www.absconsulting.com.br Contacts in Brazil:Contacts in Houston: Henrique Paula hpaula@absconsulting.com@absconsulting.com Ph: 281 673-2864 / 713 859-9682 Greg Jandjel gJandjel@absconsulting.com Ph: 281 673-2781 / 832 969-6767 www.absconsulting.com