BRAZIL

Following more than three centuries under Portuguese rule, Brazil gained its independence in 1822, maintaining a monarchical system of government until the abolition of slavery in 1888 and the subsequent proclamation of a republic by the military in 1889. Brazilian coffee exporters politically dominated the country until populist leader Getulio VARGAS rose to power in 1930. By far the largest and most populous country in South America, Brazil underwent more than half a century of populist and military government until 1985, when the military regime peacefully ceded power to civilian rulers. Brazil continues to pursue industrial and agricultural growth and development of its interior. Exploiting vast natural resources and a large labour pool, it is today South America's leading economic power and a regional leader, one of the first in the area to begin an economic recovery. Highly unequal income distribution and crime remain pressing problems.

Business Environment
The Brazilian business environment is as rich and varied as the country itself. With a population of about 190 Million, a territory that can fit the whole USA (minus Alaska) and with Spanish, Portuguese, German, Italian and African influences, to name a few, you cannot expect anything less. In order to then break down this varied environment into bitesize chunks, we will make use of Michael Porters PEST model (namely Political/Legal, Economic, Social/Culture and Technological) to give you a broad overview of what you will come across in your dealings with Brazil.

PESTEL Analysis of Brazil

Political and Legal The Brazilian Federation is based on the indissoluble association of three autonomous political entities: the States, the Municipalities and the Federal District. A fourth entity originated in the aforementioned association: the Union. There is no hierarchy among the political entities. The Federation is set on six fundamental principles: sovereignty, citizenship, dignity of the people, social value of labour, freedom of enterprise, and political pluralism. During 2005 alone, 210,000 jobs were created in the tourism sector and in excess of $736 million was invested by the government in 2005 alone. The Brazilian government launched a National Tourism Plan in 2003, with clear objectives, many of which have already been surpassed as follows:

Generate 1,200,000 new jobs Receive 8 billion dollars in foreign currency Attract over 9 million foreign tourists per annum (in 2006 was almost 12 million) Increase the number of domestic travellers to 65 million per annum (in 2006 was over 84 million) Develop at least three quality resorts in every Brazilian state.

Legislative Bodies Federal: Chamber of Deputies (513 seats), Senate (81 seats) States: Unicameral legislatures in each state and in the Federal District. The presidential elections run every four years and the president can be elected for a maximum of two fouryear terms.

Legal System The Brazilian legal system is based on Civil Law tradition and the Federal Constitution, in force since October 5th, 1988, is the supreme rule of the country. The Constitution organizes the country as a Federal Republic, formed by the indissoluble union of the states and municipalities and of the Federal District. The 26 federate states have powers to adopt their own Constitutions and laws; their autonomy, however, is limited by the principles established in the Federal Constitution. Federal laws take precedence and are hierarchically superior to any state or municipal law. The federal government has the exclusive authority to legislate on civil, commercial, penal, procedural, labour, electoral, agrarian, maritime, aeronautical and space matters. Federal law also has the exclusive authority to rule on matters such as expropriation, energy, telecommunications, insurance, foreign trade, nationality and citizenship, among others. The federal government, the states and the Federal District (Brasilia) have concurrent authority to legislate on certain matters, like tax, financial, education, environment and the consumer. In these cases, the federal government provides the general guidelines, outlining main issues and rules, while the states and the Federal District is in charge of supplementary legislation according to their own specific needs, but always with due regard for the generic federal law prescriptions. The municipalitys legislative authority is restricted to matters of local interest and municipal taxes.

Besides the Federal Constitution, the main legal documents in Brazil are the Codes. The most important are the Civil Code, the Tax Code, the Penal Code and the Civil Procedure Code. The Civil Code comprises over 2000 articles regulating matters such as Obligations and Contracts, Businesses and Corporations, Real Estate and related property rights, and many others. The Tax Code defines the main Brazilian tax regulations, which are complemented by many Federal, State and Municipal laws. The Penal Code brings the definitions of conducts considered crimes and the punishments for anyone fitting the respective legal descriptions. Finally, the Civil Procedure Code regulates the due process of law.

Economy
Characterized by large and welldeveloped agricultural, mining, manufacturing, and service sectors, Brazils economy outweighs that of all other South American countries and Brazil is expanding its presence in world markets, where it is currently the 10th biggest economy in the world. It has weathered many storms, such as the military dictatorship 19641985, hyperinflation in the 1990s and it most recently came out of a very short lived recession (just two quarters). The recession has left its mark though and it is expected that Brazils economy will only fully recover in 2011. That said, there are still large investments being made by local/international companies and government, such as an estimated $ 112 billion worth of investment by Petrobras in the Oil & Gas sector by 2012, $ 300 billion investment by the government to modernize the road networks, power plants and ports and the World Cup in 2014 with the Olympics following in 2016. These and many more investments and proactive policy management by the government provides a relatively stable, growing platform for foreign investors for the coming years.

Statistics:
GDP (purchasing power parity): GDP real growth rate: $2.024 trillion (2009 est.) 0.1% (2009 est.)

$2.022 trillion (2008 est.) 5.1% (2008) $1.924 trillion (2007 est.) 6.1% (2007) Note: data are in 2009 US dollars note: data are in 2009 US dollars GDP per capita (PPP): Unemployment rate: $10,200 (2009 est.) 7.4% (2009 est.) $10,300 (2008 est.) 7.9% (2008 est.) $9,900 (2007 est.) Inflation rate (consumer prices): 4.2% (2009 est.) 5.9% (2008) Agriculture products: Coffee, soybeans, wheat, rice, corn, sugarcane, cocoa, citrus; beef Industries: Textiles, shoes, chemicals, cement, lumber, iron ore, tin, steel, aircraft, motor vehicles and parts, other machinery and equipment. Exports: $158.9 billion (2009 est.) $197.9 billion (2008 est.) Exports commodities: Transport equipment, iron ore, soybeans, footwear, coffee, autos Exports partners: US 13.7%, Argentina 8.7%, China 8.1%, Netherlands 5.2%, Germany 4.4% (2008)

Imports: $136 billion (2009 est.) $173.1 billion (2008 est.)

Imports commodities: Machinery, electrical and transport equipment, chemical products, oil, automotive parts, electronics. Imports partners: US 14.9%, China 11.6%, Argentina 7.9%, Germany 7% (2008)

Social/Culture The modern Brazilian society cannot be reduced to a stereotype Latin American society; a wealthy landed elite versus masses of poor peasant and workers. In the twentieth century the system of social classes evolved from this Latin American stereotype system to a Brazilian system which consists of four social classes; the high class, the formally middle class, the informally middle class and the lower class. The high class people have more property and prestige. The middle class is divided into formally employed people, a technical work force based on knowledge and skills, and the informally employed people, self-employed businessmen who accounted nearly half of the economically active population. (Coutsoukis, 2004). The lower class lives below the income National poverty line and includes 21.5% of the countrys population. (United Nations Development Programme, 2008) In the Netherlands the GDP (PPP) per capita is divided more equal over society than in Brazil, the differences between rich and poor are smaller.

Ethnicity In the early sixteenth century, at the time of the first European contact, the original Amerindian population of Brazil range from 2 to 5 million. Portuguese were the first European immigrants who went to Brazil. During the colonial period, the Portuguese colonists imported hundreds of thousands of slaves form Africa for labour on the sugar of coffee plantations. When slavery became less feasible after 1850 Italian immigrants began replacing the slaves on coffee plantations, while primarily German immigrants established in parts of the south. Brazils racial mix was made more diverse with the arrival of Japanese and Middle Eastern immigrants in the early twentieth century. (Coutsoukis, 2004) All the racial and ethnic groups arrived in Brazil intermingled and intermarried. Many individuals are therefore, difficult to classify in racial terms. Discrimination is usually not explicit, but there is a very strong correlation between light colour and higher income, education and social status. Just a few blacks reach positions of wealth, prestige and power, except in the arts and sports. Inequality in Brazilian society had originally the Mediterranean double moral standard for men and women. Men were expected to demonstrate their masculinity, while proper women were supposed to remain virgins until marriage and to be faithful to their husbands. At the beginning of the twentieth century in Brazil women already were allowed open access to schools and employment, but they were not on equal foot with men in family affairs. Men were automatically heads of households and married women were legally subordinate to their husbands. Only in 1988 women became entirely equal to men for all legal purposes. Professions that traditionally were dominated by men, such as law, medicine, dentistry and engineering are becoming more balanced, if there are not already more women students than men. Nevertheless, there are still relatively few women in positions of power. They only have limited significance in high levels of federal government. The Gender empowerment measure (GEM) is 0,504 for Brazil, saying women have low political participation, economic participation and power over economic resources. The GEM of the Netherlands is 0,882, with a 5th place on the world ranking. (United Nations Development Programme, 2009)

Crime Brazil poses high rates of violent crimes, such as murders and robberies. The homicide rate in Brazil is very high with 25,2 homicide per 100,000 inhabitants. (Wikipedia, 2010) Most of these life threatening crimes can be traced back to the drugs trade of cocaine and to alcoholism. Brazil also poses carjacking, express kidnapping, trafficking, domestic abuse, slavery and internet hacking. A big problem is the human rights violations during capture and custody of suspects. But on the other hand, criminal charges have been described as extremely lax, allowing violation criminals an early return to society. The justice system is slow, mainly because of loopholes that allow for numerous appeals. It is said that a majority of crimes are not solved.

Health According to the Human Development Report Brazil is a high developed country. The human development index is a summary measure of human development which measures the average achievements in a country in three basic dimensions of human development; life expectancy, knowledge and GDP. For Brazil the HDI is 0,800, which makes Brazil only just a high developed country. The infant mortality rate (IMR) is a key indicator for the health situation of a country, because births are not affected by the populations age structure. For Brazil the infant mortality rate dropped from 95 in 1970 to 31 in 2005. (United Nations Development Programme, 2008) But still the IMR of Brazil is about 5 times higher than that of the Netherlands, which indicates that Brazilian health is at a lower level than that in the Netherlands. This can also be seen in the life expectancy at birth, number of physicians per 100.000 people, improved sanitation usage and improved water source usage.

Human

Life

developme expectan nt cy index (HDI) at birth value (years)

Physicia ns (per 100,000 people)

Populati on using improve d sanitatio n (%)

Populati on using an improve d water source (%)

Infant mortali ty rate (per 1,000 live births)

Netherlan ds Brazil

0,953

79,2

315

100

100

0,800

71,7

115

75

90

31

Different Health indicators (United Nations Development Programma, 2008)

Sports/Leisure The Brazilian people are very involved in sports. Most of the people regularly follow and participate in veracious kinds of sports. The most popular sport of Brazil is football. This sport is in the blood of the people and can be considered a cultural phenomenon. The climatic conditions of Brazil are perfect for playing and practicing football. Brazil is the only country to have been participated in all the Football World Cups and even won the tournament five times (1958, 1962, 1970, 1994 and 2002). The World Cup draws Brazilians together, with people skipping work to view the national team play. Besides football volleyball is becoming popular in Brazil. In 1992, during the Olympic Games in Barcelona, the golden generation conquered the gold medal. Ever since the interest has only grown. It has been said that the strength of Brazilian volleyball was in fact built around the culture associated with people playing beach volleyball all day at the famous beaches such as those in Rio de Janeiro. (Virtual-Brazil.com) Other popular sports in Brazil are footvolley and Capoeira. Footvolley is a combination of football and volleyball played on the beaches. Capoeira is an Afro-Brazilian art form that combines elements of martial arts, music and dance. It has its origins in the seventeenth century and is an uniquely Brazilian folk dance with improvised fighting movements to claims that is a battle-ready fighting form directly descended from ancient African techniques. The sport does not focus on injuring the opponent. Rather, it emphasizes skills. (Wikipedia, 2010) Brazil had 5 million visitors in 2008, of which 82,000 from the Netherlands. Therefore Brazil is 49th on the world ranking, direct revenues reached USF 5.78 billon. Domestic tourism is still a fundamental market segment for the industry with 51 million inhabitants travelled throughout the country; direct revenues reached USD 21.8 billion. (Wikipedia, 2010). Natural areas are the most popular tourism product, such as sun and beach, in combination with ecotourism, leisure and recreation. But also adventure travel, historic and cultural tourism are very popular

General advice: Introductions from mutual acquaintances are very important in Brazil and most business is acquired through networking who you know is more often than not more important than what you know or the product that you offer. When you first meet your business associates, theyll probably shake your hand. Afterwards, you may be kissed on the cheeks by males and females alike, if you are a woman, and by women, if you are a man. Brazilians normally speak in close proximity with lots of physical contact, such as touching arms/elbows while talking or even back slapping between men. Eye contact is expected and last but not least, remember that the OK hand signal is a rude gesture in Brazil.

Technology Brazil is the leader in science and technology in South America as well as one of the global leaders in fields such as biofuels and deep-water oil exploration. The Brazilian government tries to develop and support innovation in business, for example in 2004 the Innovation Law was passed, is meant to provide incentives to increase innovative activities, facilitate scientific and technological research by private companies and encourage collaboration between public and private sector. More specifically, the mining industry has benefited from the Governments support in terms of technology and research, for example the Center for Mineral Technology (CETEM) is a federally funded research and development centre under the Ministry of Science and Technology. Sixteen universities now offer courses in geology, geochemistry and geostatic and seven offer degrees in mining engineering Brazil is in the top 10 of most industries in the world and the high literacy rate and good educational system creates a sound foundation for future developments. Basic, technological and applied research is mostly carried out in public universities and research institutes, although there are some private

institutions and nonprofit nongovernmental organizations that also have research programs. That said, in most cases the funding still comes from government. The Brazilian Space Agency has the most advanced space program in Latin America, with significant capabilities to launch vehicles, launch sites and satellite manufacturing.

Statistics: Biggest aerospace power of the southern hemisphere. Biggest fixed line telephone market of Latin America. 3rd in the world in the aircraft industry. 3rd biggest global steelmaking power. 3rd in the world computer market. 4th biggest TV network in the world. 5th biggest mobile phone market. 7th biggest manufacturer of cars in the world car. 8th world oil power. 10th world producer of capital goods.

Environmental Brazil is the worlds fifth largest country with a total area of 8.5 million square kilometers. It benefits from a good river system and 7.500 kilometers of coastline. The country has abundant reserves of natural resources such as iron, copper, nickel, manganese or tin. Despite having an estimated gold reserve of 2,000 tones the country accounts only for 2.5% of the global production and many regions are still unexplored, which make Brazil an attractive location for mine development and investment opportunity. However, the lack of transportation infrastructure (under-developed railway network, poor quality of the highways with development inconsistent between regions) has long been seen as a major obstacle to economic growth. In addition, the country also lacks reliable and affordable energy. Most of the countrys energy is produced from renewable sources, particularly hydroelectric power plants that provide four fifths of Brazils electricity. This dependence on hydroelectricity has resulted in severe supply shortage for example in 2001-2002 the Government had to implement an energy-rationing program. Brazils investment in infrastructure fell to just over 2% of its GDP from the year 2000, one third of the proportion allocated in China and Chile. However, investment in infrastructure has more recently become one of the priorities of the Government. In 2007, it launched an infrastructure development program, the Growth Acceleration Program (PAC) to address the country significant road, rail, energy supply and other infrastructure needs. Recent development includes the construction of two new railways connecting central Brazil to ports in the states of Rio de Janeiro and Bahia, and the construction of Acu Super port, a port and industrial complex one and a half times the size of the island of Manhattan that should be completed by 2012.

Setting up a Business
Benefits of locating in Brazil
Brazil presents one of the prime opportunities for the potential investor: The current population of approximately 190 million (according to the data published by UK Trade & Investment in Brazil: Land of Opportunity 2008). Ruralurban migration and the spread of modern agricultural methods are bringing an increasing proportion of the population into the market for manufactured goods. The Brazilian public is highly receptive to foreign brand names, which can demand a premium price over competing domestic products. Has a democratic government. Has the largest healthcare market in Latin America. Has environmental industries that are valued at US$ 5 Billion. Has a modern telecommunications and banking system. Is the worlds 10th biggest economy. Is one of the socalled BRIC markets. Brazil is 35 times the size of the UK and is the worlds 5th largest country.

As far as the actual establishment of an operation in Brazil is concerned, the potential foreign investor will have no difficulty in obtaining skilled professional assistance in preliminary stages, and will find that due to the large industrial base few problems are encountered in locating a joint venture partner or a suitable manufacturing facility. Investors may seek assistance in the following areas:

To determine whether a market exists for a particular product, there are several competent consulting firms with wide experience in market research. Several of these consulting firms are associated with the major multinational consulting companies. Similarly, plant location studies and industrial design services may be undertaken, and there is an adequate supply of competent engineering expertise. Assistance is available for locating possible jointventure and equity participation partners. Labour in Brazil is plentiful and there is a good supply of skilled and disciplined production workers in the principal industrial centres. Skilled local management is readily available and at a cost well below that of the expatriate executive. Raw materials and energy supply are easily obtainable, without Interruption The marketing and promotion industry is welldeveloped and media advertising is used extensively. The potential foreign investor is, of course, interested in the longterm prospects. In this respect, the most important feature of Brazil is that it is a truly developing country. A few of the factors that should ensure an expanding market for manufactured goods and for services are the following: Population growth and demographic factors, as previously described. A flourishing, exportoriented agricultural base, with a huge potential for expansion of land under cultivation and the improvement of crop yields by the increased use of irrigation and fertilizers. The existence of vast, untapped mineral wealth and massive investment projects currently in progress to exploit those resources. The development of energy source alternatives to imported oil, including harnessing hydroelectric power and expanding the use of ethanol and gas.

The growth of an urban working class with expanded disposable income.

Overall, the best advice for potential investors in Brazil is to look to the past experience and future plans of foreign companies that already operate here. From the smaller foreign company that has found a niche for its particular product line or technological expertise to the major multinational corporation whose Brazilian operation is among the largest of its international subsidiaries, the general message will be clear: Brazil is an option that is hard to overlook for the longterm investor.

The Civil Code The Civil Code states that companies become corporate entities with separate legal personality from their owners once registered at the Trade Board. Other forms of association, such as consortia, must also be registered with the Trade Board but these do not have own legal personality. Creditors generally cannot seize the partners assets to pay the companys debts. However, the New Civil Code states that creditors can lift the corporate veil if there has been an abuse of that legal personality by disrespecting the companys purposes of if the companys assets are indistinguishable from those of its partners. The most common company is the Corporation (S.A.) and Limited Liability Quota Company (Ltda.) because the shareholders enjoy limited liability.

Structuring the business Foreign investors may enter the Brazilian market directly through a branch or a subsidiary or through third parties by means of distribution and sales representation activities. Distribution and sales representation are, in most cases, cost saving when compared to the incorporation of a local branch or subsidiary.

However, these alternatives may bring lack of control to the foreign investors over the way the third parties distribute or sell their products in Brazil and deal with their trademarks. Both distribution and sales representation activities must be ruled by written agreements to be entered into between the foreign investors and the local third parties. Before entering into such agreements, it is recommended that the foreign investors register their trademarks with the Federal Intellectual Agency (INPI)

Branches Foreign investors may enter the Brazilian market directly, through a branch or a subsidiary. Although some multinational corporations originally set up their Brazilian operations through a branch (especially commercial aviation businesses), the most commonly used entity is the Limitada as a controlled subsidiary. The formation of a branch requires prior approval from the federal government by means of a presidential decree, which is a very lengthy process. The federal government must also authorize any amendments to the branchs articles of incorporation. The company must develop its activities within twelve months of the publication of the authorisation, if they dont, then the authorization will expire automatically. Furthermore, the government may cancel the authorisation if the company breaches public policy or acts outside its corporate purposes. The power to grant the authorizations may be delegated. Currently, the authorizations must be issued by the ministry of development, industry and commerce. Unless the parent company is not a business company, such as an association, it must allocate capital to the branch office. Different from the subsidiary, the branch is theoretically considered an extension of the foreign entity in Brazil. In this sense, the branchs foreign parent company may have unlimited liability for its debts. It is important to bear in mind that a branch is subject to Brazilian law and courts with regards to its Business and transactions carried out in Brazil.

In order to set up a branch in Brazil, foreign parent companies must first apply to the Federal Department of Trade Boards. The President can, by Decree, give the governments approval for incorporation. The Brazilian legal system is based on civil law. In this sense, only formal legislation determines the rules. Court decisions as well as analogy functions as a tool for the interpretation and correct application of current legislation. Accordingly, court precedents do not serve as source of legislation, binding only the litigating parties. The Brazilian tax system is based on the principle of strict legality and its main principles are defined by the Federal Tax Code of 1966 and by the Federal Constitution/88. Three jurisdictions and tax collection levels are defined by the tax legislation. Thus, taxes may be levied by the federal, state and municipal governments.

Petrobras
The oil industry in Brazil is dominated by Petrobras a mixed-economy company created to explore the monopoly on every oil activity in the country. On November 9, 1995, the Constitution of 1988 was amended to break this monopoly, allowing the federal government to contract with any private or government company to carry out exploration, production, refining and distribution of hydrocarbons. This amendment was regulated by the enactment of Law 9478 on August 6, 1997 (known as the Petroleum Law), which established the rules for competition in the Brazilian market for oil, natural gas and refined products. The new regulatory arrangement includes the National Energy Policy Council (CNPE) and the National Petroleum, Natural Gas and Biofuels Agency (ANP) as the regulator of the oil and gas sector in Brazil. Starting on January 2, 2002, the government deregulated the prices of petroleum and derivatives, although with a general rule that domestic prices should follow international ones. The gradual transformation of the Brazilian oil and gas sector since 1997 has led to an impressive growth on production with a greater participation by international companies, both as competitors and partners in joint undertakings.

Although causality will not be empirically tested, such changes on business environment and the resulting impressive increase in performance on all oil activities in Brazil will be the subject of this chapter. Section 2 presents the evolution of the oil sector and Section 3 examines the oil and natural gas pricing policies. Next section describes the corporative development of Petrobras and indicates long term prospects on oil production in the country. Section 5 analyses other energy regulatory approaches that affect the oil and natural gas sector, such as, electricity and biofuels. Last section just presents final comments. Evolution and Development of Oil Sector in Brazil This section summarizes the history of petroleum exploration and production in Brazil that section summarizes the history of petroleum exploration and production in Brazil that can be divided into four phases. The first goes from the initial exploratory efforts in the second half of the nineteenth century up to 1938. This activity was sparse and carried out by private initiative. The second phase began with the nationalization of mineral resources by the Brazilian government and the creation of the National Petroleum Council in 1938. The third phase started with the establishment of the state monopoly and creation of the federally owned company Petrleo Brasileiro S.A. Petrobras, according to Law 2004 of October 3, 1953, under the government of President Getlio Vargas. This was a noteworthy phase in the history of oil in Brazil, especially because Petrobras emerged from a democratic debate, after broad and lengthy discussion among political parties and the public at large (UNICAMP, 2007). The fourth and current phase began with the enactment of Law 9478 on August 6, 1997, the second Petroleum Law in Brazilian history. This law relaxed the state monopoly on oil industry activities and created the National Petroleum Agency (ANP) as the regulator for the petroleum, natural gas and biofuels sector.

The Creation of Petrobras

The lengthy The Oil is Ours debate was won by the nationalist faction, and on October 3, 1953 Law 2004 was signed by President Vargas, establishing a federal monopoly over the activities of the oil industry:

Research and extraction of deposits of petroleum and other fluid hydrocarbons and rare gases in national territory; Refining of domestic or imported crude oil; Maritime transport of crude oil of domestic origin or derivatives of petroleum produced in the country; Transport by pipelines of crude oil and refined products, as well as any rare gases of any origin Law 2004/53 also established that the Brazilian government was authorized to set up Petrleo Brasileiro S.A. Petrobras, as the state-owned oil company, to exercise the monopoly, including any related or similar activities thereto. Petrobras was incorporated on March 12, 1954, during the 82nd Extraordinary Session of the National Petroleum Council (CNP), a decision that was officially approved by Decree 35,308. Petrobras began its activities with the assets received from the CNP, which retained its oversight function. These assets were composed of: oilfields with capacity to produce 2,700 barrels per day (bpd); assets of the Commission for Processing Bituminous Schist (Comisso de Industrializao do Xisto Betuminoso); Mataripe Refinery, in the state of Bahia (currently known by the initials RLAM), processing 5,000 bpd; a refinery under construction in Cubato, So Paulo (currently RPBC); twenty oil tankers with capacity to carry 221 thousand metric tons; recoverable reserves estimated at 15 million barrels; a market consuming refined products equivalent to 137,000 bpd; and a fertilizer factory under construction in Cubato, SP) (Petrobras, 2007). At the time Petrobras was created, oil output in Brazil was very small, not more than 3,000 barrels per day, and was concentrated onshore in the Recncavo Baiano region. In an effort to find more oil, from 1954 to 1961 a large contingent of foreign technicians and other experts was recruited, with exploratory efforts centered in Bahia and the Amazon region. In the following years, until 1968, the prospecting focus was shifted to offshore basins. In the period from 1984 to 1997, the huge gas potential was confirmed of the deepwater regions of the Campos Basin, and attention also turned to ultradeep waters. There were important discoveries, such as the Barracuda and Roncador fields. The giant Roncador field was discovered in 1996 and

began producing in 1999. In this period, Petrobras drilled 930 wells on land and 549 at sea, while the companies with risk contracts drilled 71 onshore and 10 offshore wells, attaining modest results. The goal of producing one million barrels per day was achieved in 1997, the same year the monopoly was loosened.

The risk contracts were in effect from 1979 to 1988, when the promulgation of the new Brazilian Constitution forbade new such contracts (because they had not had the effects the government had hoped for). Only those under which commercial discoveries had been made continued in effect. All told, under the risk contracts 122 onshore and 74 offshore wells were drilled, in addition to 165,500 km of 2D seismic studies (ANP, 2004). From 1954 to 1997, the efforts of Petrobras alone along with those of companies operating under risk contracts were responsible for discovering 209 onshore and 79 offshore fields, scattered in eight sedimentary basins.

Evolution of proven Brazilian reserves and their location

Evolution of Brazilian production of petroleum and condensate, by area

Supply and Consumption of Oil and Natural Gas in Brazil Despite Brazils large output of biofuels (particularly ethanol from sugarcane) and ample hydroelectric generation, petroleum and its derivatives remain one of the main sources of energy in the country, corresponding in 2006 to 37.7% of the total domestic energy supply (the sum of internal supply of energy from renewable and non-renewable sources). The same year the internal supply of natural gas was responsible for 9.6% of this energy, a figure that has been growing steadily for over a decade. Therefore, oil and gas together in 2006 accounted for nearly half of Brazils energy supply. The consumption of final energy from petroleum derivatives was equal to 42% of the energy consumed by the country in 2006 (MME, 2007), a figure that has remained relatively stable for the past decade. The sectors of the economy where that count most heavily on this source are transportation (50.7% of total consumption in 2006) and industry, that includes the energy sector (18.5% in the same year). The same year, final energy consumption of natural gas was equal to 6.4% of the energy consumed in the country. Again, the sectors most reliant on gas are industry and transportation (in the latter case, in the land mode). The use of natural gas to power vehicles (cars and buses) has been growing since the

1980s, mainly through conversion of engines to run on vehicular natural gas (VNG). The consumption of natural gas in the transportation sector was equal to 8.4% of the total, and in industry this figure was 31.3% in 2006 (MME, 2005). The figure below shows the breakdown of natural gas consumption in Brazil in 2006.

Structure of Natural Gas Consumption in Brazil in 2006

Brazilian Reserves of Petroleum and Natural Gas

According to data from the International Energy Agency (IEA), Brazil has the third largest remaining petroleum reserves, after Venezuela and Mexico, equivalent to 8.9 billion barrels. According to the US Geological Service, Brazil also has around 47 billion barrels of undiscovered recoverable oil equivalent and 8 billion barrels of undiscovered recoverable natural gas liquids, nearly all located in offshore fields (USGS, 2000).

Evolution of total petroleum reserves

National Output of Oil and Natural Gas In 2006, there were 8,287 wells producing oil and natural gas, 3.6% more than in 2005. The onshore wells, representing 90.8% of the total number, increased by 3.4% in the period, while the offshore wells (9.2% of the total) increased by 5.4% between 2005 and 2006. The same year, daily national output of petroleum (including crude oil and condensate but not including natural gas liquids (NGL), schist oil, LPG and C5 +) was 1.7 million barrels (628.8 million barrels a year), an increase of 5.5% over 2005. Between 1997 and 2006, production grew by an annual average of 8.3%, making Brazil the worlds 16th largest oil producer in 2006 (including crude oil, condensate and NGL). The reserves/production ratio of natural gas (R/P) fell from 23.2 years in 1997 to 19.4 years in 2006. On average, this index fell by 2.0% a year in the previous ten years. Most national output of petroleum (including NGL) came from offshore fields, responsible for 88.7% of total output. The state of Rio de Janeiro was responsible for 94.9% of offshore production and 84.2% of national output. In 2006, this state once again registered a substantial increase in petroleum production of 5.6%, the highest increase of any state.

Over the preceding ten years, Rio de Janeiros petroleum production grew by an average of 10.4% a year. However, in 2006 the greatest increase in offshore petroleum production was in waters off the coast of the state of Esprito Santo, which jumped by 181.9%. This states share of national production grew 3.6% that year 2006. In the opposite direction, the state of Paran experienced the largest drop in production in 2006 (-36.2%), which reduced its share of national petroluem output to 0.3% in 2006. Figure shows the evolution of total volume of crude oil between 1977 and 2003, broken down by origin (onshore and offshore, in waters less and more than 400 meters deep), as well as Petrobras targets until 2009.

Distribution of national output of crude oil by location of reserve

Oil and Natural Gas Pricing Policy in Brazil

This section examines the pricing policies and structures followed for petroleum derivatives and natural gas in Brazil. Because of the differences in pricing policies, both over time and due to the structure of the industries, the study looks at the petroleum derivatives and natural gas separately

Evolution of the price policy for petroleum derivatives

Until the 1990s, the prices of products refined from oil were regulated by the government as an economic policy instrument, with prices adjusted at levels below inflation. The policy was to set the prices of basic derivatives (diesel oil, fuel oil and LPG) below true market rates as a way to minimize the costs for the industrial, transport and residential sectors. This was enabled by passing the cost to the price of gasoline, a product basically used for private transportation, with a lesser impact on the productive chain and hence on inflation. The deregulation of the fuel supply sector in Brazil began in the 1990s and included, among other measures, liberation of prices, margins and transport costs along the entire productive chain. The policy of uniform national prices started to be abandoned with the following steps: (1) removal of transport subsidies from the refineries to distribution bases, and of the final price of some derivatives, such as LPG; (2) liberation of the retail prices, within a cap price.

Evolution of price policy for natural gas in Brazil

Since the enactment of Law 2004 in 1953 until Constitutional Amendment 9 in 1995, all activity for exploration, production, processing and transport of natural gas was a monopoly of Petrobras, which gave the company the power to define the markets and penetration of natural gas in the countrys energy matrix. The only change during this period occurred in 1988, upon promulgation of the current Constitution, by which the states gained the powerto grant distribution concessions, usually to companies owned by the state governments themselves. Starting in 2000, the price of natural gas of domestic origin was regulated by MME/MF Interministerial Edict 003/2000. The price has basically consisted of two components, one the wellhead price, to remunerate the producer, and the other called the transport tariff, to pay for moving the gas between producing and consuming areas. The price was the sum of the two components, and the transport tariff was calculated by the ANP (ANP, 2001b).

Since 2002, with the deregulation of prices under the Petroleum Law, prices are no longer controlled. Nevertheless, the above mechanism is still applied, which

makes the subject of the final market price complex (Costa, 2003). For imported natural gas, the sale price to distributors was already liberated since the issuance of the referred edict. The product price and transport tariffs in this case have been freely negotiated between the parties. Finally, there is a special price for thermoelectric plants under the Thermoelectricity Priority Program (Programa Prioritrio de Termeletricidade PPT), pursuant to MME/MF Interministerial Edict 176 of 2001. This establishes a maximum price for gas supplied to thermopower plants regardless of origin (domestic or imported). In an attempt to make feasible the thermoelectric projects planned under the PPT, which were mainly intended to be supplied with imported gas (more expensive to distributors than national gas), an average price was established based on a profile of 80% imported gas versus 20% domestic gas.

Corporation Development of Petrobras

This section presents an evolution of the corporation development of Petrobras from a typical state-owned structure towards Open Corporation. First it is worth to mention that, based on consolidated revenues in 2006, Petrobras is the largest company in Brazil and one of the largest oil and gas companies in Latin America. In 2006 sales of products and services reached US$ 93.893 million, and net operating revenues were US$ 72.347 million, producing a net profit of US$ 12.826 million. Secondly, the Company is involved in a wide range of oil and gas activities, covering the following areas of operations: Exploration and Production E&P activities include exploration, development and production of oil and gas fields in Brazil. Supply supply activities take in refining, logistics, transportation and purchase of petroleum, as well as purchase and sale of refined products and fuel alcohol. Besides this, it also has a division producing petrochemicals and fertilizers. Distribution distribution of petroleum derivatives and alcohol in Brazil through a wholly owned subsidiary, Petrobras Distributors S.A. - BR . Over the past 23 years, Petrobras, a pioneer in the concept of floating production, has always stressed innovation and improvement of its offshore operations. The first PROCAP (which in Portuguese stands for Program to Develop Technology for Deepwater Production Systems)-was launched in 1986,

with the objective of improving the companys technical competence in oil and gas production in waters up to 1000 meters deep. Under this initial effort, the Albacore and Marlim fields were developed. The results of this program and other discoveries encouraged the company in 1993 to create a second such program, dubbed PROCAP-2000. This was a much greater challenge, prompted by the desire to put into production the discoveries already made in deep waters, and to find new fields at depths up to 3000 meters. The current version of this program, launched in 2000, is called PROCAP-3000, for ultra deep waters. The Company has also a Research and Development Centre (CENPES) to meet Petrobras needs for new technologies. Advanced technology is the basis for consolidation and expansion of the company in the world energy market. With over 1500 employees working in an area of 122 thousand square meters, CENPES has 30 pilot units and 137 laboratories that serve the various parts of the company. The technologies developed by CENPES have resulted in 950 international patent applications and 500 purely national ones, besides a considerable number or registered trademarks.

The Corporative System

Before enactment of the Petroleum Law in August 1997, the President of the Republic, with terms of three years, named the members of the board of directors and executive board and all the officers had seats on the board of directors. The chief executive officer had the power to veto decisions of the board of directors. The first big change in the bylaws occurred in 1999 and introduced great changes in the companys governance, such as: - The power to name the executive board passed to the board of directors, the latter elected by the general shareholders meeting; - All restrictions were eliminated on detaining common shares by minority stockholders; - The officers no longer had seats on the board of directors, and the chairman of the board ceased to be the CEO as well (although continuing to be a member of the board); - The number of directors was reduced from 12 to 9; - The minority shareholders gained the right to elect one member of the board of directors. During the following years, a great effort was made to expand the shareholder base through two public offers of common and preferred shares (with the Brazilian government still holding the majority of voting shares). There was also an overhaul of the organizational structure, with more professional management, strictly focused on profitability with social and environmental responsibility. At the end of 2001, the board of directors decided that the company should take an additional step to assure its access to financing, through another reform of the bylaws to raise the corporate governance level higher, by giving additional rights to minority shareholders and increasing transparency.

Summary
Since establishment in 1997 of the current regulatory regime for the oil and gas sector until the end of 2006, Brazils proven petroleum reserves jumped from 7.1 billion to 12.2 billion barrels and the proven reserves of natural gas rose from 228 billion m to 348 billion m. Yearly oil output in the same period rose from 306 million to 629 million barrels a volume that made Brazil selfsufficient in oil and production of natural gas went up from 9.8 billion m to 17.7 billion m (ANP, 2007). Since 1997, the oil and gas industry has grown over 300% in monetary terms. Between 1997 and 2006, its contribution toward the nations gross domestic product (GDP) increased from 2.75% to nearly 10%. For the period from 2006 to 2010, the minimum investments declared to the ANP by the current concession holders are US$ 33.8 billion, a figure that has certainly increased due to subsequent discoveries (ANP, 2007).