Petrobras (PBR)

Accounting for Suspended Well Costs

Our accounting for exploratory drilling costs is governed by Statement of Financial Accounting Standards No. 19, “Financial Accounting and Reporting by Oil and Gas Producing Companies” (SFAS No. 19). On February 4, 2005, the Financial Accounting Standards Board (FASB) posted for comment a proposed FASB Staff Position (FSP SFAS 19-a) that would amend SFAS No. 19 with respect to the deferral of exploratory drilling costs.

Costs we have incurred to drill exploratory wells that find commercial quantities of oil and gas are carried as assets on our balance sheet under the classification “unproved oil and gas properties.” Each year, we write off the costs of these wells unless (1) the well is in an area requiring major capital expenditure before production can begin and (2) additional exploratory drilling is under way or firmly planned to determine whether the capital expenditure is justified. As of December 31, 2004, the total amount of unproved oil and gas properties was $1,684 million, and of that amount $840 million ($779 million of which related to projects in Brazil) represented costs that had been capitalized for more than one year, which generally are a result of (1) extended exploratory activities associated with offshore production and (2) the transitory effects of deregulation in the Brazilian oil and gas industry, as described below.

In 1998, our government-granted monopoly ended and we signed concession contracts with the Agência Nacional de Petróleo (National Petroleum Agency, or ANP) for all of the areas we had been exploring and developing prior to 1998, which consisted of 397 concession blocks. Since 1998, the ANP has conducted competitive bidding rounds for exploration rights, which has allowed us to acquire additional concession blocks. If companies, including us, do not find commercial quantities of oil and gas within a specific time period, generally 4-6 years depending on the characteristics of the exploration area, then the concession block must be relinquished and returned to the ANP. Because we were forced to assess a large volume of concession blocks in a limited time frame, even when an exploratory well has found sufficient reserves to justify completion and additional wells are firmly planned, finite resources and expiring time frames in other concession blocks have dictated the timing of the planned additional drilling.

The following table shows the net changes in capitalized exploratory drilling costs during 2004, 2003 and 2002.