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LOCAL CONTENT CERTIFICATION HOUSTON SEMINAR. December 06, 2011. Brazilian Local Content Seminar:. Agenda: 8:00 - 9:00 AM Registration/Breakfast 9:00 - 11:30 AM Presentation 11:30 - 12:30 PM Question and Answers 12:30 - 2:00 PM Closing Remarks and Lunch. Brazilian Oil & Gas Market:.

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slide1

LOCAL CONTENT CERTIFICATION

HOUSTON SEMINAR

December 06, 2011

brazilian local content seminar
Brazilian Local Content Seminar:

Agenda:

8:00 - 9:00 AM Registration/Breakfast

9:00 - 11:30 AM Presentation

11:30 - 12:30 PM Question and Answers

12:30 - 2:00 PM Closing Remarks and Lunch

brazilian oil gas market
Brazilian Oil & Gas Market:
  • 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)

Highlights:

slide4

Total Oil Consumption by Country (mmbo/d)

20.7

7.9

  • Brazil is world’s eighth-largest oil consumer

Total Oil Consumption mb/d (index)

160

World

OECD

Brazil

150

140

  • Brazil oil consumption growing at 2.4% per year.
  • OECD oil consumption growing at 1% per year.

130

120

110

100

2002

2003

2005

2007

2001

2004

2006

2000

1998

1999

1990

1991

1992

1993

1994

1995

1996

1997

Demand for Petroleum:

Source: Strategic Plan of Petrobras

4

slide5

Demand for Petroleum:

Source: Strategic Plan of Petrobras

slide6

Strategic Plan of Investments:

(Results of Bid Rounds)

Source: ANP (2011)

6

slide7

Strategic Plan of Investments:

(Petrobras Plan for 2010-2014)

Source: Strategic Plan of Petrobras

7

slide8

Strategic Plan of Investments:

(Major Oil Projects)

Source: Strategic Plan Petrobras

8

slide9

Strategic Plan of Investments:

(Pre-Salt Province)

Pre-Salt Province

Source: Strategic Plan Petrobras

9

slide11

Strategic Plan of Investments:

(Declared Investments Oct. 2011-US$)

Source: ANP (Oct. 2011)

11

slide12

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

12

slide13

Participation of Brazilian Industry Sector

PROMOTION

  • Brazilian Training and Technology Development
  • Income generation and employment in Brazil

Context of the Government Policy:

13

slide14

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

14

slide15

1997

1995

Constitutional Amendment n.º 9

Flexibilization of Petrobras monopoly

Law of Petroleum 9.478/97

“End of Petrobras monopoly”

  • 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;

Legal Framework:

15

slide16

Local Content on Bid Rounds:

Bids 1 to 6: LC Calculation By Declaration

From Bid 7: LC Calculation By 3rd part

16

slide17

Local Content on Bid 7 to 10:

(% of Limits Minimum and Maximum)

17

slide18

Local Content on Bid 7 to 10:

(Limits % Minimum and Maximum)

Global Local

Content

(By System)

Local Content

By Item

18

slide20

Certifications Performed (Oct. 2011):

6524

Issued by ABSG

2636

Source: ANP

20

slide21

Scope – Concession Contracts:

NOT SUBJECT TO LC

CERTIFICATION

SUBJECT TO

LOCAL CONTENT

21

slide25

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.

25

slide26

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.

26

slide27

For Goods stocked

before Sept, 11, 2008

% LC is set by customer

statement only.

Sept, 11, 2008

Concessionaire

Stock

Used on

the project

Local Content

Statement.

ANP

Investment

Report

ANP Regulation # 36:(Purpose and Application)

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

27

slide28

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.

28

slide29

Certification Activities/Concepts:

Certification

Authority

Trimestral Certification Report

Auditing

Certificates

Certification Contract

ANP

Certificates

Trim. Invest. Report

Certification Contract

Contract of Concession

Oil & Gas

Company

SUPPLIER

Contract of Supply

Invoices & Certificates

29

slide30

Invoice

Copy of

Certificate

Statement of

“no changed”

+

+

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

30

slide31

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 accompaniedby the corresponding local content certificate for each item.

COMMERCIAL TRANSACTION = INVOICE + LC CERTIFICATE

31

slide32

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%

32

slide33

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 countrywill 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.

33

slide34

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

0%

Local content

34

slide35

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

35

slide36

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

Outside Brazil

Brazil

36

slide37

Certification Activities/Concepts :(Local Indirect Expenses and Costs)

  • How to deal with LocalOverhead Costsassociated 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”.

37

slide38

Certification Activities/Concepts :(Local Indirect Expenses and Costs - Example)

+

+

=

Example:

+

+

=

Total NC = 700 + 50

%LC=

=

X 100

75,0 %

SP = 1000

38

slide39

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.

39

slide40

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 bemeasured 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.

40

slide41

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.

41

slide42

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 < 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 < 84

42

slide43

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.

43

slide44

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

44

slide45

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

45

slide46

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.

46

slide48

Local Content Calculation–Example 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

48

slide51

Local Content Calculation–Example 1:

National Cost (Nc) = R$ 254.719.000,00

Foreign Cost (Fc) = R$ 177.500.000,00

Sales Price (Sp) = R$ 560.000.000,00

51

slide52

Foreing Cost (Fc)

X 100

%CLa

=

1 -

Sales Price (Sp)

R$ 177.500.000,00

68,3%

=

X 100

1 -

%CLa

=

R$ 560.000.000,00

Local Content Calculation–Example 1:

52

slide53

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%

Service´s Value = 180 x 72.222,00

= R$ 13.000.000,00

Foreing Cost =

R$ 4.121.000,00

53

slide54

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

=

82,2%

X 100

1 -

%CL

=

R$ 35.000.000,00

54

slide55

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%

55

slide56

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%

56

slide57

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

57

slide58

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.

58

slide59

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

59

slide60

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

60

slide61

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 O&G production, refinery and mining.
  • There is the risk of the supplier does not reach the compromisedLClevel. 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.

61

slide62

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

62

slide63

Contacts in Brazil:

Contacts in Houston:

Eugenio Singer

esinger@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

Henrique Paula

hpaula@absconsulting.com

Ph: 281 673-2864 / 713 859-9682

Greg Jandjel

gJandjel@absconsulting.com

Ph: 281 673-2781 / 832 969-6767

www.absconsulting.com

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