Petrobras (PBR)

Argentine Activities

With our acquisition of 58.6% of PEPSA (formerly Perez Companc), which owned 98.2% of PESA (formerly PECOM Energía S.A.), in 2002, we reinforced our position as an exploration and production leader in South America, especially in Argentina, where we already maintained activities. As of December 31, 2004, our combined crude oil and natural gas proved reserves in Argentina were approximately 393 million barrels of oil equivalent, approximately 59% of which were proved developed reserves and approximately 41% of which were proved undeveloped reserves. In 2004, we drilled three exploratory wells in Argentina, which resulted in two discoveries, the Puesto Olivério and Estación Agua Fresca Fields in the Austral Basin.

PESA’s production in Argentina is concentrated in the Neuquén and Austral Basins. PESA owns 579 thousand net acres under production concessions in the Neuquén Basin and 2,632 thousand net acres under production concessions in the Austral Basin. Our gross production acreage in Argentina amounted to 4,027 thousand acres (3,211 thousand net), and we have a total of 2,536 gross productive wells (1,498 thousand net). For the year ended December 31, 2004, our combined crude oil and natural gas production in Argentina averaged 114.5 thousand barrels of oil equivalent per day.

In the downstream segment we have a refining capacity of 69 thousand barrels per day, distributed in two refineries operating with a throughput rate of 91%. We also have a 28.5% interest in Refinaria Del Norte. We also participate in the retail sector in Argentina, where we currently own 727 retail service stations that operate under the brand names Petrobras (330 stations), Eg3 (337 stations) and San Lorenzo (60 stations).

We also participate, through PESA, in petrochemical businesses, in which we have three plants, Puerto General San Martin, Zarate and Campana in Argentina, where we also have a 40% participation in Petroquímica Cuyo. We also own a petrochemical plant in Brazil, INNOVA, through PESA.

We own a 34% participation in the MEGA project (representing a total investment of U.S.$728 million), a joint venture among us, Repsol-YPF and Dow Chemical to fractionate natural gas liquids. The project consists of a natural gas processing plant in Loma La Lata (Province of Neuquén), a 600 km extension pipeline and a separating plant and port, storage and effluent treatment facilities in Bahía Blanca (Province of Buenos Aires). We are obligated under an off-take contract to take minimum volumes of LPG and natural gasoline, if delivered, at market prices.

The sponsors financed approximately 70% of the project costs with a U.S.$472 million loan from commercial banks and other institutional lenders. The loan was structured to be non-recourse to the sponsors following the termination of sponsor completion guarantees to the lenders during the construction period for their respective shares in the project (Repsol-YPF 38%, Petrobras 34%, and Dow Chemical 28%). The guarantees were originally set to expire on December 31, 2001, but were subsequently extended to December 31, 2003.

While the MEGA project reached mechanical completion and met or exceeded the performance tests established for the release of the sponsors’ guarantees, the lenders maintained that other conditions required for the release were

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not met. The sponsors agreed in December of 2003 to extend their guarantees until December 31, 2005 and to permit all lenders the right to put their MEGA notes to the sponsors immediately prior to the guarantees’ expiration. In addition, the sponsors granted MEGA’s fixed rate noteholders the right to exercise their put immediately. In turn, the sponsors were granted call option rights to redeem MEGA notes. On January 15, 2004, all fixed rate noteholders exercised their put option rights. As a result of these events, we purchased our respective share of MEGA’s fixed rate notes (U.S.$58 million). On December 2004, we exercised our call option right (U.S.$54 million) in connection with our share of MEGA’s floating rate notes in the same manner as the other shareholders. Also, in December 2004, MEGA pre-payed all the floating rate notes to the noteholders, canceling them. The remaining, fixed rate notes issued by MEGA are owned by its shareholders. In December 2004, the shareholders entered into a Waiver Agreement to amend the covenants of the Indenture governing the notes to restrict certain financial operations by MEGA.

Regarding the Gas and Energy sector, we participate, through PESA, as shareholder in TGS, which owns a 7,400 km extension pipeline with a transport capacity of 62 MMcmd and a gas processing plant located in Bahía Blanca, with a processing capacity of 42 million MMcmd.

As far as the electricity assets in Argentina, also through PESA, we cover the entire productive chain. We account for 6.5% of the country’s electricity generation through our ownership interests in three generation plants—two hydroelectric (Piedra Del Águila and Pichi Picún Leufú) and one thermoelectric (Genelba). We also have an interest in Transener, Argentina’s largest transmission company and owner of 95% of Argentina’s high-tension network. PESA also maintains an important presence in the central area of Buenos Aires, an area with more than 2.1 million customers, through Edesur, Argentina’s largest energy distribution company by volume.

On January 21, 2005, special shareholders’ meetings of each of PESA, EG3 S.A., or EG3, Petrobras Argentina S.A., or PAR, and Petrolera Santa Fe SRL, or PSF, approved the merger of the latter three companies into PESA. PESA is the surviving entity from the merger. Prior to the merger, through our subsidiary PPSL, we held a 99.6% interest in EG3 and a 100% interest in each of PAR and PSF. Pursuant to the merger, PPSL received 230,194,137 newly issued class B shares of PESA, representing 22.8% of PESA’s capital stock. As a result, the interest of PEPSA in PESA declined to 75.8%. Considering our 58.62% participation in PEPSA, we now own a 67.2% total indirect participation in PESA.

EG3 was mainly engaged in the refining and processing of oil and oil by-products and the distribution and marketing of liquid and gaseous fuels, and lubricants through gas stations and fuel retail outlets. EG3 had a refinery located at Bahía Blanca, Buenos Aires, with a crude processing capacity of approximately 31,000 barrels per day, EG3 had a wide network of gas stations (approximately 621) throughout the country that operate under the Petrobras and EG3 brands.

PAR was mainly engaged in oil and gas production. PAR owned a concession for a production area at the Noroeste basin, with a production volume of approximately 7,000 barrels of oil equivalent per day and proved reserves of 17 million barrels of oil equivalent as of December 31, 2004.

PSF was engaged in oil and gas production. PSF had concessions for five oil fields, which were located in the Neuquén, San Jorge and Cuyana basins. These fields had an aggregate production volume of approximately 12,000 barrels of oil equivalent per day and proved reserves of 78 million barrels of oil equivalent as of December 31, 2004.

During 2005, PESA prepaid the total outstanding principal amount of certain Class K and M notes under its Global Notes Program in a total amount of US$335 million. In connection with these series of notes, PESA was subject to compliance with certain covenants, including restrictions on payments of dividends and capital expenditures. As a result of the prepayment, its obligations under these covenants are no longer in effect. PESA also prepaid the outstanding amount of Class C medium term notes for US$63 million.