The Brazilian Energy Sector

The Brazilian Energy Sector

September 2012

Table of Contents

12Oil & Gas Sector Overview: Perspectives and Challenges4.

5Power Sector Overview: Perspectives and Challenges3.

3Introduction: The Brazilian Energy Matrix2.

1Citi Brazil1.

1. Citi Brazil

$15.2 $14.6

$3.5$2.1 $1.3

$18.1

$3.8

$33.6

$11.4

DB CS JPM BNP BARC BAML MS GS

$1.5$1.3

$0.6$0.4 $0.3

$1.8

$0.7

$4.0

$0.8

CS JPM BNP MS BAML DB BARC GS

: The Largest Global Bank with a Commercial Platform in Brazil

Shareholders’ Equity in Brazil(US$ bn)

Assets in Brazil(US$ bn)

Key Citi Brazil Highlights

Present in Brazil for 97 years, with a unique breath of services and long-lasting commercial relationships.

Enhanced Investment Banking Capabilities�

Strong Financial Products Expertise�

Brazil + Global Distribution Network�

Relationship with Corporate Clients�

Strong brand among Brazilian customers�

Seasoned Personnel�Source: Brazilian Central Bank as of December 31, 2011.

1

Rank Bookrunner Volume ($bn) Share (%)

1 BofA Merril Lynch $26.9 58.8%

2 Credit Suisse $24.2 52.9%

3 Barclays $17.2 37.7%

4 $6.9 15.1%

5 JP Morgan $5.6 12.2%

6 UBS $5.0 11.0%

7 Societe Generale $4.8 10.5%

Rank Bookrunner Volume ($bn) Share (%)

1 BofA Merril Lynch $6.2 10.7%

2 $6.0 10.3%

3 Morgan Stanley $4.7 8.2%

4 Credit Suisse $4.7 8.2%

5 JP Morgan $2.5 4.2%

6 Goldman Sachs $1.7 3.0%

7 Deutsche Bank $0.2 0.5%

is a Leading Advisor and Underwriter in Brazil

Brazil Equity(2010-2012 YTD)

Citi continues to be a leading underwriter on several landmark equity transactions throughout Brazil, with a solid position amongst international banks.

Follow-OnJoint

Bookrunner

US$70 bn2010

Follow-OnJoint

Bookrunner

US$70 bn2010

Block TradeJoint Bookrunner

US$530 mm2011

Block TradeJoint Bookrunner

US$530 mm2011

IPOJoint

Bookrunner

Ongoing

IPOJoint

Bookrunner

Ongoing

Source: Bloomberg as of June 1st 2012.Note: League tables include only international banks.

IPOJoint

Bookrunner

US$1.7 bn2012

IPOJoint

Bookrunner

US$1.7 bn2012

Follow-OnJoint Bookrunner

US$356 mm2009


US$356 mm2009

Follow-OnJoint

Bookrunner

US$4.9 bn2010

Follow-OnJoint

Bookrunner

US$4.9 bn2010


US$232 mm2009


US$232 mm2009


US$224 mm2009


US$224 mm2009

Follow-OnJoint

Bookrunner

US$686 mm2010

Follow-OnJoint

Bookrunner

US$686 mm2010


US$376 mm2009


US$376 mm2009


US$890 mm2009


US$890 mm2009

ETFJoint

Bookrunner

Ongoing

ETFJoint

Bookrunner

Ongoing

IPOJoint

Bookrunner

US$1.5 bn2010

IPOJoint

Bookrunner

US$1.5 bn2010


US$350 mm2009


US$350 mm2009

Follow-OnJoint

Bookrunner

Ongoing

Follow-OnJoint

Bookrunner

Ongoing

Advisor on the sale of PU unit

to

US$340 mmJuly 2011

Advisor on the acquisition of

US$2.3 bnJanuary 2012


US$330 mmApril 2011

Advisor on its sale to

US$327 mmAugust 2011

Advisor on the sale of the remaining 49.9% stake to

US$6.8 bnOngoing

Advisor on the acquisition of a 5.6% stake in

US$2.0 bnMarch 2012

Advisor to HRT Participações in the sale of E&P

assets in Namibia

Ongoing

Advisor on the acquisition of a 50.5% stake in

US$2.6 bnAugust 2011

Advisor on the acquisition of a 60% stake in

US$1.8 bnApril 2012

Advisor on the Tender Offer for the remaining 67% stake in

US$5.4 bnOngoing

Advisor on the sale of Shopping JardimSul and landbanks

to

US$272 mm November 2011

Ongoing

Advisor to Vale in the sale of its oil & gas E&P assets in

Brazil

US$2.6 bnFebruary 2012

Advisor to the Consortium on the privatization

of Brasília Airport


assets in LatAmfrom

US$4.5bnJanuary 2011

Advisor on the primary sale of a

30% stake in Galp

US$4.8 bnNovember 2011

Brazil M&A(2010-2012 YTD)

2

2. Introduction: The Brazilian Energy Matrix

15.1

7.3

5.9

3.6

2.8

2.5

2.4

2.2

1.9

1.7

USA

China

Japan

Germany

France

Brazil

UK

Italy

Russia

Canada

Brazil: Solid Macroeconomics Largest Economies by GDP, 2011(Nominal GDP in US$ tn)

Source: Brazilian Central Bank and IMF.

Brazilian GDP(US$ bn, % p.a.)

$1,089 $1,366$1,653 $1,622

$2,474$2,815

$3,203$3,009$2,567

$2,142

3.9%6.1% 5.2% 7.6%

2.7% 3.0% 4.5% 4.3% 4.2%

(0.3%)

2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E

Nominal GDP (US$bn) GDP (Real Change p.a., in %)

UnitedStates

China Japan Germany France Brazil UnitedKingdom

Italy

Russia

Interest Rates & Inflation(Avg, %)

4.2% 3.6%5.7% 4.9% 5.0%

6.6%

4.9%

15.3%

12.0% 12.4%

10.1%11.7%

9.8%

7.5%

2006 2007 2008 2009 2010 2011 2012E

Inflation (IPCA) Interest rate (Selic, year average)

3

Hydro14%

Vegetable Coal & Wood10%

Sugar Cane18%

Other Renew ables3%

Nuclear1%Mineral Coal

5%Natural Gas

10%

Petroleum Based39%

The Brazilian Energy Matrix: Renewable as Nowhere Else

2010

2020

Over 45% of all energy consumed in Brazil comes from renewable sources, versus an average of 13% in developed

countries

�

Renewable sources account for over 80% of electricity

generation, while global average is under 20%

�

Renewables:45%

Hydro13%

Vegetable Coal & Wood8%

Sugar Cane22%

Other Renew ables4%

Petroleum Based32%

Natural Gas14%

Mineral Coal6%

Nuclear1%

Renewables:47%

Source: Brazilian Ministry of Mines and Energy.4

3. Power Sector Overview: Perspectives and Challenges

Significant Potential for Electricity Demand…Electrical Consumption p/ Capita vs. GDP p/ Capita(KWh, US)

Source: IEA 2009: Key World Energy Statistics.

(1) GDP per Capita in US$ covnerted through Purchase Power Parity as of 2000. Data pertains to the year 2007 for all countries except for Brazil.

USA

Canada

UK

Japan

Germany

France

Italy

Spain

Greece

Portugal

Argentina

Brazil 2020

Russia

Chile

Brazil 2010

China

India

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000

US$/hab/year

KW

h/ha

b/ye

ar

Effect of electrically intensive (Aluminum)

Brazil’s per capita electricity consumption is expected to reach 3.5MWh by 2020 from

2.4MWh today�

USA

Canada

5

…Fueled by Brazil’s Regional DevelopmentForecasted Energy Demand by Region(Avg. GW)

+4.2%

+5.0%

+3.8%

+9.7%

Power demand is expected to grow 4.6% p.a. between 2011

and 2016�

While the Southeast and Midwest account for over 60%

of consumption, it is the developing regions (N and NE)

that grow at a faster pace

�

Yearly capacity expansions of 6,2 GW will be required to

supply to this additional demand�

36.9 38.3 40.2 41.9 43.6 45.3

9.810.1

10.510.9

11.311.88.4

8.89.2

9.710.2

10.7

4.14.3

5.15.9

6.26.5

59.261.5

65.068.4

71.374.3

2011 2012 2013 2014 2015 2016

Southeast / Mid West South Northeast North

CAGR: 4.6% CAGR

Source: EPE. 6

Expected Growth in Installed Capacity…

Government sponsored oversupply to maintain

competitive prices�

Contracting energy in reserve auctions to provide further

system stability�

Complexity of large projects being developed could result in

delays�

Oversupply assumes contracted projects coming online within

expected timeframe�

Source: Company Presentations and Wall Street Research.

0.9

4.6

4.8

4.2

3.3

1.2

1.7

2.2

2.2

3.4

0.1

0.259.5

63.7

71.4

75.4

77.6

81

59.2

61.6

65.0

68.5

71.3

74.3

2011 2012 2013 2014 2015 2016

Spare Capacity Reserve Energy Supply Demand

Supply & Demand Balance(Avg. GW)

7

Installed Capacity / Potential

(GW)

Key Themes

Hydro

79.1 /

260(1)

▲Competitive implementation and operating costs

▲Clean energy

▼Environmental / social licensing

▼Uncontrollable source (climate dependent)

▼Difficulties to develop unexplored potential

Thermal

22.7

▲ Not dependent on climate

▼ Environmental issues

▼ Natural gas supply restrictions

▼ Higher cost of certain sources (diesel, heavy fuel oil)

Renewables

SHP: 4.1 / 18

Wind: 1.7 / 143

Biomass: 9.8 / 13.5(2)

▲ Clean energy

▲ Large unexplored potential

▲ Increased competitiveness due to local supply of equipment (particularly in wind)

▲ Government Subsidies

▼ Dependent on climate (SHPs – Rainfall / Wind – Seasonality of generation)

▼ Current energy price levels are not competitive for some sources

…Focused on Alternative Renewables

Renew ables8%

Thermal14%

Nuclear2%

Hydro76%

Renew ables16%

Thermal15%

Nuclear2%

Hydro67%

Breakdown of Capacity By Source(% of total MW)

2010

2020

Sources: ANEEL, CRESESB/CEPEL, CENBIO, CPFL.(1) Estimated totality of hydropower potential, including small hydropower plants (SHPs)(2) Estimated potential of generation from sugarcane biomass8

Gas-Fired

Hydro

Wind

BiomassSmall Hydro

$0

$30

$60

$90

$120

$150

2009 2010 2011

0.1%1.3%

98.6%

Auctions(1)

Alternative Energy Has Competitive Prices…

Source: CCE, Citi estimates and Wall Street Research.(1) Considers new energy (LEN), reserve energy (LER) and alternative energy (LFA) auctions(2) Excluding Belo Monte Plant

51%

12%

2%

35%

2.6 GW

0.8 GW

9%

40%

11%

40%

2.3 GW

Assured Energy per Source (avg. GW)

Price Evolution(R$/ MWh)

Auctions have been adding significant capacity to the Brazil’s generation supply base, most notably in the thermal and renewable sectors.

(11%)

(22%)

R$145.66

R$101.34

2009

2010

2011

51%

40%

9%

9

…Which Have Been a Governmental ConcernIncreasing Government intervention is changing he structure of the power sector, and will demand strong efforts towards efficiency gains to maintain attractive levels of return.

Distribution

Generation

Transmission

B Concession Renewal

A Tariff Reviews Changes Impacts

• Regulatory WACC reduction from 9.95% to 7.15%

• X-Factor

• No capital remuneration in tariffs (cost-based model)

• Segment becomes regulated upon renewal (optional)

• Reduction of regulatory charges

▼ Reduction of ~20% in regulated power prices(1)

▼ Increase in consumption could surpass projected demand

▼ Reduced competitiveness of free market

▼ Pressure for efficiency gains

▼ Lower margins / dividends

▼ Single digit returns on new projects

▼ Lower cash flow for companies which choose to renew, hindering their ability to invest in new projects

• No reimbursements for assets built before 1999

• Cost-based model

(1) Estimated joint impact of regulatory changes and generation / transmission costs

▼ Pressure for efficiency gains

▲ M&A potential - Synergies

10

13%

12%

9%

9%

7%

6%

6%

5%

5%

5%

4%

4%

3%

3%

2%

6%

46%

18%

17%

5%

4%

2%

2%

2%

4%

33%

6%

6%

5%

4%

4%

2%

2%

2%

1%

1%

1%

1%

1%

30%

Competitive LandscapeGeneration119.989 MW

Distribution68 mm customers

78% State Owned22% Private



Source: Aneel, EPE, Wall Street Research.(1) Includes Chesf, Furnas, Eletronorte, Eletronuclear, Itaipu & Amazonas Energia

(1)

Others Others Others

TransmissionR$12.7 bn Annual RAP

(1)

(1)

InternationalPlayers

11

4. Oil & Gas Sector Overview: Perspectives and Challenges

15

15

17

19

20

22

23

29

39

44

48

51

53

68

69

112

134

136

145

176

311

312

335

Azerbaijan

Brazil

Egypt

Norw ay

Malaysia

Australia

Indonesia

China

Algeria

Canada

Turmenistan

Kazakhstan

Libya

Nigeria

USA

Kw ait

Iraq

UAE

Brazil (Post Tupi)

Qatar

Saudi Arabia

Iran

Russia

Brazil to Become a Top O&G PlayerPre-Salt: a Structural ChangeWorldwide Oil and Gas Reserves (bn boe)

~9.7xAdding pre-salt discoveries

Source: ODS-Petrodata, Riglogix, Wall Street Research, BP Statistical Review of World Energy (2010) and Petrobras’s filings.

In the past 5 years, over 50% of oil discoveries were in deep waters.Brazil represents 63% of such discoveries

�

Forecasts suggest that, with the development of recent finds, Brazil will be the non-OPEC country with greatest increase in production by 2030

�

At current production rates, proven reserves would last for around 19 years�

12

1.82.0 2.1 2.1

2.5

2.8

3.5

3.8

4.4

4.9

5.5

5.96.1

2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

O&G Production Should Outpace Global ProducersBrazil Oil Production (MBbl/d)

Source: Wall Street Research.

Brazil is expected to produce 6.1 MBbl/dofby 2020, of which 4.2 MBbl/dof will come from Petrobras

�

With increase in production, Brazil has become self-sufficient and is now a net exporter of oil

�

Additional production will come from deep exploration, in which Petrobras has an acknowledged expertise, being the leading offshore operator measured by production and number of offshore facilities

�CAGR: 5.0%

CAGR: 12.6%

13

Brazil: Oil and Natural Gas Reserves are concentrated in RJ

6.2%

82.8%

9.5%

0.7%

0.4%

0.3%28,467 mm boe

8.2%

59.2%

0.6%

7.4%

11.1%

10.3%

852,147 mm m³

AM NE ES RJ SP S

AM

BA

CERN

SEAL

SPRJ

ES

PR

SC

Natural Gas Reserves Oil Reserves

Source: ANP.

Total: Total:

14

(5)%

(3)%

(1)%

1%

3%

5%

7%

9%

(2)% 0% 2% 4% 6% 8% 10% 12% 14% 16%

Saudi Arabia

Japan

Canada

China

USA

South Korea

Brazil

India

Russia

Germany

Brazil: On Track to Become a Major Consumer of Oil

Source: BP Statistical Review and World Bank.

Annual GDP growth 2005–2011

10 Largest Consumers of Oil in 2011(Bubble sizes represent amount of Oil consumed in 2011)

Ann

ual g

row

th in

dem

and

for

Oil

2005

–201

1

Bubble sizes represent ammount of Oil consumed in 2011

The expansion of the middle class, increased credit availability, and record auto sales in recent years drive rapid increases in fuel demand

�

Gasoline and diesel demand have grown at an average pace of 15.9% and 6.3%, respectively, in the last 3 years

�

Between 2011-2020, demand for oil subproducts are expected to grow 4.5% p.a.

�

India

China

15

8%

92%

Petrobras Dominates the Brazilian O&G Market

46,96036,870

14,369 14,131 13,051 7,616 7,954 5,078 4,794

1,736,454

2%

98%

93%

7%

E&P Market Share(% production, boe/d)

Refinement(% of installed capacity, m³ p/day)

Biodiesel(% of installed capacity, m³)

2.7 2.21.1

0.3

326.4

556,679 518,400450,000 434,462

378,000343,800

296,640 286,920237,600 216,000

Source: Wall Street Research, IBP and ANP.

Olfar

16

Major Investments In The Sector

Bio-Fuels1%

Gas & Energy6%

Dow nstream & Logistics30%

E&P56%

Others7%

US$236.5 bn

Source: Petrobras.

Between 2012 – 2016 Petrobras will invest US$236.5 bn in all areas of production and refinement of O&G; this presents an outstanding opportunity for all sectors related to the O&G industry.

�

Investment breakdown until 2016(%)

17

E&P: Complex Offshore Exploration Brings Challenges

Production Development

69%

Exploration19%

Infrastructure and Support

12%

The exploration of offshore reserves so far from the shore poses many challenges, namely in logistics, which will demand heavy investments

�

Local content requirements imposed by the government could cause delays and cost overruns

�

Focus on pre-salt discoveries resulted in lack of maintenance investments in existing fields, which led to production drops

�

Royalties imbroglio has hindered new bidding rounds by ANP�

US$131.6 bn


Source: Petrobras.

18

Others

Logistics for Oil8%

Quality & Conversion

21%

Improvement17%

Refining Capacity Expansion

44%

Downstream: Much Needed Modernization to Take Place

Current installed capacity is outdated (last refinery built in the 80’s)�

Refineries have low complexity indexes and cannot efficiently process heavy crudes�

Fast growing demand, coupled with lack of investments in additional supply, has made Brazil become an importer

�

Government intervention in pricing policy has negative impacts on returns and cash flows.

�

Petrobras’ investment plan foresees additional capacity of 1.4 Mbbl/d, reaching 3.4 Mbbl/d by 2020.

�

US$71.6 bn


Source: Petrobras.

19

Gas & Energy: Logistics is the Bottleneck

Despite substantial natural gas reserves, production has grown at a slow pace due to the lack of investments in logistics

�

Natural gas accounted for only 9% of energy consumption in 2011, versus 51% in Argentina

�

Petrobras controls most of the country’s reserves, is responsible for the majority of production and imports, controls the national transmission network, and holds stakes in 2/3 of state-owned natural gas companies

�

The company’s investment plans foresees relevant expansions, reaching 3.4 bcf/d of production by 2020

�

US$13.5 bn


Others15%

Expansion - Electric Energy

Generation12%

Expansion - Natural Gas

Logistics17%

Expansion - Regassif ication

14%

Expansion - Gas Chemical

42%

Source: Petrobras.

20

Biofuels: Promise for the Future

Brazil’s leading role as a producer of ethanol from sugarcane places it as the 2nd

largest producer of biofuels behind the US�

The country also stands out in biodiesel and is expected to become the largest producer in 2012. It is currently the largest consumer in the world.

�

The country benefits from favorable climate, availability of arable land, and efficient technology for crop cultivation

�

Mandatory biofuel blends in gasoline and diesel are important drivers of expected growth in upcoming years

�

US$2.5 bn


Biodiesel11%

Ethanol73%

Corporate0.4%

Agricultural Supply16%

Source: Petrobras.

21

Extensive Government Presence in O&G

Local Content (%)

The Brazilian Government plays a significant role in the local O&G industry, both in terms of legislation and through the control of Petrobras.

Source: ANP and Wall Street Research

Local Content Requirement laws stipulate that a min imum percentage of equipment and services contracted by an operator must be

supplied by local companies

82%

92%

2004 2011

55%

62%

2004 2011

70%90%

2004 2011

E&

PS

uppl

yG

as &

E

nerg

y

+20 p.p.

+10 p.p.

+7 p.p.

A Fixed Fuel Prices

B Pre-Salt Operation

C Transfer of Rights

• Government policy regulates downstream prices

• Despite recent readjustments (after 6 years), there is still a 21% deficit to import prices

• Proposed legislation foresees product sharing contracts, by which Petrobras would hold a minimum of 30% of any new pre-salt reservoirs

• Petrobras would also be the sole operator of PSAs

Other Policies & Legislation

• Agreement made with Petrobras by which the Government assigned the right to explore pre-salt areas subject to a maximum production of 5,000 Mboe for US$ 42.5 bn.

• Subsequent price and volume revision could trigger value adjustments

Local Content Requirement

22

The Brazilian Energy Sector

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