Brazil Upstream Fiscal and Regulatory Guide

1. Table of Contents

1. Table of Contents 1

1.1. List of Tables 3

1.2. List of Figures 4

2. Executive Summary 5

2.1. Regime Overview ─ Concession Agreements 6

2.2. Regime Overview – Production Sharing Agreements 7

2.3. Timeline 8

3. State Take Assessment 9

4. Key Fiscal Terms – Concession Agreement 10

4.1. Royalties, Bonuses and Fees 10

4.1.1. Signature Bonus 10

4.1.2. Royalty 11

4.1.3. Rental Fees 13

4.1.4. Landowner Fees 14

4.1.5. Special Participation Fee 15

4.2. Direct Taxation 18

4.2.1. IRPJ and CSLL 18

4.2.2. Deductions and Depreciation 18

4.2.3. Withholding Tax 19

4.2.4. Capital Gains Tax 19

4.3. Indirect Taxation 20

4.3.1. COFINS and PIS/PASEP 20

4.3.2. Customs and Excise Duties (II, IPI, and AFRMM) 20

4.3.3. Goods and Services Tax (ICMS & ISS) 20

4.3.4. Contributions for Intervention in the Economic Domain (CIDE) 21

4.4. Tax Incentives 21

4.4.1. Regional Income Tax Reductions 21

4.4.2. REPETRO 21

4.5. Research, Development, and Innovation Expenditure 22

4.6. Rio de Janeiro State Environmental Levy (Suspended) 23

4.7. License Terms 23

4.7.1. Duration and Relinquishments 23

4.7.2. Work Obligation 23

5. Key Fiscal Terms – Production Sharing Agreement 24

5.1. Royalties, Bonuses, and Fees 24

5.1.1. Signature Bonus 24

5.1.2. Royalty 25

5.2. Cost Recovery 25

5.2.1. Limit on Recovery 25

5.2.2. Recoverable Costs 25

5.3. Profit Sharing 26

5.4. Taxation 29

5.5. Research, Development, and Innovation Expenditure 29

5.6. Petrobras Participation 29

5.7. License Terms – Production Sharing Rounds 30

5.7.1. Duration 30

5.7.2. Work Obligation 30

6. Regulation and Licensing 32

6.1. Legal Framework 32

6.1.1. Governing Law 32

6.1.2. Contract Type 33

6.1.3. Title to Hydrocarbons 33

6.1.4. Oil Export 33

6.2. Institutional Framework 34

6.2.1. Licensing Authority 34

6.2.2. Regulatory Agency 34

6.2.3. National Oil Company 35

6.3. Licensing Process 35

6.3.1. Concession Rounds 35

6.3.2. Production Sharing Agreements Rounds 36

6.3.3. Permanent Offer 37

6.3.4. Transfer of Rights 37

6.4. Local Content 38

6.4.1. 14th, 15th, and 16th Concession Rounds 39

6.4.2. 7th-13th Concession Rounds 40

6.4.3. 5th and 6th Concession Rounds 48

6.4.4. 1st-4th Concession Rounds 49

6.4.5. 1st PSA Round 49

6.4.6. 2nd and 3rd PSA Rounds 50

6.4.7. 4th PSA Round 50

6.4.8. 5th PSA Round 50

6.4.9. 6th PSA Round 51

6.4.10. Transfer of Rights Round 52

7. Appendix 53

7.1. References 53

7.2. Contact Us 57

7.3. Disclaimer 57

1.1. List of Tables

Table 1: Regime Overview 5

Table 2: Brazil, Key Events Since Year 2000 8

Table 3: Brazil, Concession Agreements, 15th Round Winning Signature Bonus Bid (BRL), 2018 10

Table 4: Brazil, Concession Agreements, Average Winning Signature Bonus Bid (BRL) by Concession Round 11

Table 5: Brazil, Concession Agreement, 16th Concession Round, Royalty Rates (%) 12

Table 6: Brazil, Concession Agreement, Reduced Royalty Rates (%), Selected Fields 12

Table 7: Brazil, Concession Agreements, Special Participation Rate: Onshore Areas, Rivers, Lakes, Fluvial or Lake Islands 15

Table 8: Brazil, Concession Agreements, Special Participation Rate: Continental Shelf – Water Depth ≤ 400m 16

Table 9: Brazil, Concession Agreements, Special Participation Rate: Continental Shelf – Water Depth > 400m 17

Table 10: Brazil, Production Sharing Agreement, PSA Rounds and Onerous Transfer, Signature Bonus Requirement (BRL) 24

Table 11: Brazil, PSA, 6th PSA and Transfer of Rights Rounds, Minimum Profit Oil Bid Percentage (%) 26

Table 12: Brazil, PSA, 2nd, 3rd, 4th, and 5th PSA Rounds, Minimum State Profit Share and Winning Share (%) 27

Table 13: Brazil, PSA, Government Share of Profit Oil, 1st PSA Round 28

Table 14: Brazil, PSA, Government Share of Profit Oil, 2nd , 3rd , 4th, and 5th PSA Rounds 28

Table 15: Brazil, Production Sharing Agreement, 2nd, 3rd, 4th, and 5th PSA Rounds, Petrobras Operatorship Election 29

Table 16: Brazil, Production Sharing Agreement, Exploration Period Duration (Years) 30

Table 17: Brazil, Production Sharing Agreement, Minimum Exploration Work Program 31

Table 18: Brazil, 16th Concession Round, Participation Fees (BRL) 36

Table 19: Brazil, 6th PSA Round, 2019, Participation Fee 36

Table 20: Brazil, Transfer of Rights Round, 2019, Capex, US$ Million 38

Table 21: Brazil, Transfer of Rights Round, 2019, Opex, US$ Million 38

Table 22: Brazil, Average Local Content (%), Rounds 1-7 and 9-15 39

Table 23: Brazil, 14th, 15th, and 16th Concession Rounds, Local Content Requirements (%) 40

Table 24: Brazil, Minimum and Maximum Overall Local Content (%), 7th-13th Concession Rounds 41

Table 25: Brazil, Minimum Local Content (%) of Items and Sub items, Offshore Blocks ≥ 100m, Rounds 7, 8, 9, 11, and 13 41

Table 26: Brazil, Minimum Local Content (%) of Items and Sub-Items, Offshore Blocks < 100m, Rounds 7, 8, 9, 11, and 13 44

Table 27: Brazil, Minimum Local Content (%) of Items and Sub-Items, Onshore Blocks, Rounds 7, 8, 9, 11, and 13 46

Table 28: Brazil, Minimum Local Content (%), 5th and 6th Concession Rounds 48

Table 29: Brazil, Local Content, Uplift Factors to Increase Percentage Share of Local Content, 1st-4th Concession Rounds 49

Table 30: Brazil, 1st PSA Round, Local Content Requirement (%) 49

Table 31: Brazil, 2nd and 3rd PSA Round, Minimum Local Content Requirement (%) 50

Table 32: Brazil, 4th PSA Round, Local Content Requirement (%) 50

Table 33: Brazil, 5th PSA Round, Minimum Local Content Requirement (%) 50

Table 34: Brazil, 6th PSA Round, Minimum Local Content Requirement (%) 51

Table 35: Brazil Transfer of Rights PSA Round, 2019, Local Content Requirement for Buzios, Itapu and Sepia Fields (%) 52

Table 36: References 53

1.2. List of Figures

Figure 1: Regime Flow Chart – Concession Agreement 6

Figure 2: Regime Flow Chart – Production Sharing Agreement 7

Figure 3: Brazil, Indicative NPV10/boe, IRR, State Take Comparison, and Price and Cost 50% Increase/Decrease, Regional 9

Figure 4: Brazil, Legal Framework 32

Figure 5: Brazil, Institutional Framework 34