November, 2009 Brazil’s new Oil & Gas Regulatory Framework The Pre-salt’s four Bills of Law Luiz Antonio Maia Espínola de Lemos

Informações Confidenciais de Propriedade de TozziniFreire Advogados Summary I.The world’s major legal-regulatory regimes II.Historical background of Brazilian regulatory framework III.Overview of the Bills of Law proposed by President Lula IV.Legal and economic constraints in the proposed regulatory framework V.Trends

I. The world’s major legal- regulatory regimes

Informações Confidenciais de Propriedade de TozziniFreire Advogados Main Characteristics of each regime  OC holds title over the hydrocarbons  State’s Remuneration by means of Tax + Royalties  Full risk of the OC  Government as regulator Concession  State is the original title holder over the production  Cost oil and profit oil  Full risk of the OC, with the recovery of the cost oil in the discovery  Government as regulator / NOC executes the PSA Production Sharing  State holds title over the production  NOC contracts and remunerates the OC for the operation  State’s risk  NOC executes the Services Agreement Services Agreements  State and OC both hold title over the production  State’s Remuneration by means of Tax + Royalties  Risk shared between the Government and the OC  Government as regulator / NOC with active participation in the Joint Venture Joint Venture

Informações Confidenciais de Propriedade de TozziniFreire Advogados Geographic Distribution of the different legal-regulatory regimes Brazil Mexico USA Norway Angola Nigeria Russian Federation Saudi Arabia Indonesia Venezuela Concession Joint Venture Mostly Concession / PSA Services PSA PSA/Services Multiple Adopted Regimes: Concession/PSA Abu Dhabi (United Arab Emirates) Source: Wood Mackenzie, Deutsche Bank, Bain & Company, TozziniFreire Advogados

II. Historical background of Brazilian regulatory framework

Informações Confidenciais de Propriedade de TozziniFreire Advogados Historical Background – From State Monopoly to the Pre-Salt Discoveries  Opening of the market to private OCs and establishment of the Concession regime  72 OCs operating in Brazil  Increase in the number of oil industry service providers (2000 – 210 / 2008 – 1761)  National oil production increased by more than 75%  Growth of 300% in the oil industry  Participation in GDP increased from 2.8% in 1997 to 10% in – 2009 Incredible progress of the Brazilian E&P Industry 1995 – Constitutional Amendment 1997 – Petroleum Law Flexibilization of the Monopoly Until 1995 Petrobras’ Full Monopoly Petrobras’ platform P-51 Source: Petrobras

Informações Confidenciais de Propriedade de TozziniFreire Advogados The New Regulatory Framework Background Discovery of potentially massive reserves in the pre-salt area Government creates a task force to issue recommendations for a new regulatory framework The President submits the Bills of Law to Congress  Suspension of the 8 th Bid round  pre-salt sites removed from the 9 th Bid round  T ask force recommends the adoption of PSAs, and drafts the four Bills of Law

Informações Confidenciais de Propriedade de TozziniFreire Advogados The Pre-salt area Oil Ocean 2 km Post-salt 2 km Salt 3 km Pre-salt 2 km Espírito Santo Basin Campos Basin Santos Basin Estimated reserves Tupi Field: 5 to 8 billion boe Iara Field: 3 to 4 billion boe Pre-salt area Brazil Source: Petrobras Source: Folha de São Paulo

Informações Confidenciais de Propriedade de TozziniFreire Advogados Brazilian pre-salt numbers Pre-salt area: around km 2 Area under concession: (28%) of which: with Petrobras partic. – km 2 (24%) without Petrobras partic. – km 2 (4%) Area not auctioned: km 2 (72%) Source: Petrobras

III. Overview of the Bills of Law proposed by President Lula

Informações Confidenciais de Propriedade de TozziniFreire Advogados The Pre-Salt Bills of Law Bill Number Scope 5941/09  Capitalization of Petrobras 5939/09  Creation of a State-Owned Company – Petro-Sal 5940/09  Creates the Social Fund 5938/09  Adoption of the Production Sharing Agreements

Informações Confidenciais de Propriedade de TozziniFreire Advogados New Brazilian Regulatory Framework Pre-salt and other Strategic areas Remaining areas Current Concession regime remains applicable Direct Assignment Production Sharing Agreement Up to 5 billion boe No changes shall be made in the areas already under Concession, even those included in the Pre-salt area 100% Direct Negotiation Bidding Process Min. 30% Max 70% Bid winners Source: Petrobras

Informações Confidenciais de Propriedade de TozziniFreire Advogados Federal Union subscribes shares equivalent to the Economical value of the oil reserves (first 5 billion BOE to be exploited) Bill of Law 5941/09 – Capitalization of Petrobras FEDERAL UNION Assignment of non auctioned pre-salt areas Payment (Federal Bonds) Petrobras Corporate Capital Increase PETROBRAS Payment in cash by interested minority stockholders DIRECT ASSIGNMENT

Informações Confidenciais de Propriedade de TozziniFreire Advogados Bill of Law 5939/09 – Creation of PETRO-SAL Public Company – Integrally owned by the Federal Union  Does not perform E&P activities  Does not take part in marketing activities  Does not make investments  Does not assume any risks PETRO-SAL  Manages the PSAs and hydrocarbons commercialization contracts in relation to the Government’s share of the Profit Oil

Informações Confidenciais de Propriedade de TozziniFreire Advogados Bill of Law 5938/09 – PSA – The division of cost oil and profit oil in Brazil Production Sharing Agreement in Brazil Cost Oil Royalties and, when in land, third parties’ participation Contracted Oil Companies Federal Union Special Participation (based on the production volume) Profit oil division Profit Oil

Informações Confidenciais de Propriedade de TozziniFreire Advogados Bill of Law 5938/09 – PSA – Brazilian key players PETROBRAS Production Sharing Main Players PETRO-SALANPOIL COMPANIES Operator in all PSA Blocks Minimum participation of 30% in all PSA Blocks May be directly contracted by the Government Participates in all PSA Blocks by means of Consortium Holds 50% of the seats in the Operation Committees Elects the OPCOM’s president, who has casting vote and veto powers Acts as the Government’s Regulating Body Analyses and approves Exploration and Development Plans Drafts the PSAs and Bid Tender Protocols Participation limited to 70% Participate solely as investors Innocuous Participation in OPCOM’s decisions

Informações Confidenciais de Propriedade de TozziniFreire Advogados Bill of Law 5938/09 – PSA – Unitization Issues Unitization Lacks Due Regulation WHICH RULES SHALL BE APPLICABLE FOR THE UNITIZED FIELD? Areas under PSA rules X Areas under Concession rules X Areas in the pre-salt area not currently under Concession nor PSA

Informações Confidenciais de Propriedade de TozziniFreire Advogados Bill of Law 5938/09 – PSA – 11 different Unitization Possibilities  Concession vs Concession Parties: Concessionaire A and Concessionaire B  PSA vs PSA Parties: PSA Contractor A and PSA Contractor B  Concession vs PSA Parties: Concessionaire and PSA Contractor  Concession vs Non-auctioned areas under Concession Parties: Concessionaire and Federal Union (represented by ANP)  PSA vs Non-auctioned areas under PSA Parties: PSA Contractor and Federal Union (represented by PETRO-SAL)  Concession vs Areas directly assigned to Petrobras Parties: Concessionaire and Petrobras  PSA vs Areas directly assigned to Petrobras Parties: PSA Contractor and Petrobras  Concession vs Non-auctioned areas under PSA Parties: Concessionaire and Federal Union (probably represented by PETRO-SAL)  PSA vs Non-auctioned areas under Concession Parties: PSA Contractor and Federal Union (represented by PETRO-SAL)  Non-auctioned areas under PSA vs Areas directly assigned to Petrobras Parties: Federal Union (represented by PETRO- SAL) and Petrobras  Non-auctioned areas under Concession vs Areas directly assigned to Petrobras Parties: Federal Union (represented by PETRO- SAL) and Petrobras

IV. Legal and economic constraints in the proposed regulatory framework

Informações Confidenciais de Propriedade de TozziniFreire Advogados Bill of Law 5938/09 – PSA – Constitutional Issues Mandatory Participation of Petrobras Direct Contracting of Petrobras PETROBRAS as Sole Operator Free initiative, free competition, isonomy, economicity, impersonality, duty to bid and e the free practice of economical activity General Natural Resources constitutional provision grants title over the production to the Producers Federal Union Holds Title Over The Production Unitization of Blocks Under Concession Legal Security, Vested Rights

Informações Confidenciais de Propriedade de TozziniFreire Advogados Main conflicts in the proposed Regulatory Framework Cost Oil In Brazil, rendering of services may be subject to taxation (e.g. ISS) Which operations shall be accounted? Cost-oil calculation needs detailed ruling. PSA tax implications in Brazil Corporate Governance - PETRO-SAL does not assume risks or make investments PETRO-SAL’s powers in the Operational Committee Unitization conflicts Unbalanced penalties Petrobras’ capitalization conflicts Assignment waiving bidding procedure; Federal Union, as majority shareholder, should decline to vote the appraisal report Bills of Law delegate some key aspects of the regulation to future Acts of the Executive

Informações Confidenciais de Propriedade de TozziniFreire Advogados Petrobras as PSA’s Sole Operator Integrated program for the acquisition of goods and services Standardization of the technical requirements for equipments and materials Only one Company for the acquisition of goods and services No competition impairs development and expertise exchange between IOCs PROS CONS Fields with smaller productivity may be left aside Constraints to the development of technology by the service providers Lack of attractiveness of the Brazilian PSA regime for IOCs and new Brazilian OCs

Informações Confidenciais de Propriedade de TozziniFreire Advogados Brazilian PSA Operational Committee PETRO-SAL PETRO-SAL (representing the Federal Union) and Bid Winners 50% of the seats Indicates the OpCom Chairman OPERATIONAL COMMITTEE Chairman Powers Casting vote Veto power  the deciding vote cast by the Chairman to resolve a tie  the power to cancel or deny a particular voting procedure

V. Trends

Informações Confidenciais de Propriedade de TozziniFreire Advogados Trends  Regardless of the regime adopted, the acquisition of goods and services should grow considerably; Huge Volume of investments Local Content will be crucial  Although the new regulatory framework does indirectly restrict foreign investments, there are still good opportunities for services providers;  The result of 2010’s elections may influence the outcome of the proposed regulatory framework Oil Industry representatives are attempting to improve the Bills of Law by furnishing political parties with information regarding the Oil Industry Trends  Even if approved in the Congress, the Bills of Law shall still be subject to a constitutional analysis by the Supreme Court