Petrobras (PBR)

Barracuda and Caratinga

In order to boost production in the Barracuda and Caratinga fields, located in the Campos Basin, a structured finance arrangement was established through the SPC Barracuda and Caratinga Leasing Company B.V. (“BCLC”), a limited partnership based in the Netherlands. With funds derived from its capital resources (US$ 100 million) and from financing operations obtained in the financial market (US$ 2.400 million), BCLC is responsible for acquiring all assets required by the project (wells, underwater equipment and production units). During the asset acquisition stage, PETROBRAS will participate in the project as the construction manager, as BCLC’s representative (Owner’s Representative) and as the subcontractor for drilling services. After the assets become operational, a stage initiated in the second half of 2004, PETROBRAS will participate in the project as operations manager and assets lessee, through lease and charter contracts, and will make monthly payments to BCLC under these agreements.

Additional obligations undertaken by PETROBRAS within the scope of the project are: (i) pledge on pre-defined volumes of oil and on proceeds arising from the sale of such volumes in guarantee of the payment of lease and charter amounts made by PETROBRAS; (ii) PETROBRAS’ commitment to open a bank account pursuant to Brazilian Central Bank Resolution No. 2.644 to deposit lease amounts, in case reais may not be translated into dollars; (iii) pledge on an account in reais to receive deposits related to lease payments, in case reais may not be translated into dollars or in the case of any events that prevent deposits in the account maintained in accordance with BACEN Resolution No. 2.644; (iv) to obtain a letter of credit at an amount equivalent to 10% of the total value of the drilling agreement, to be valid for the period the drilling services within its responsibility are guaranteed, to cover its obligations as a subcontractor to perform drilling services for KBR under the EPC (Engineering, Construction and Procurement) project agreement; (v) through its subsidiary Brasoil, PETROBRAS commits to purchase the assets belonging to BCLC in case of default by PETROBRAS in the project; (vi) through Brasoil, PETROBRAS commits to make payments owed by BCLC if this company is unable to fulfill any obligations assumed under the financing agreements; and (vii) during the construction stage, PETROBRAS commits to pay BCLC an amount, limited to US$ 37 million, if the EPC contract is terminated.

Under an EPC turnkey contract, BCLC retained Kellog Brown & Root (KBR), a Halliburton Group company, as the prime contractor with single point responsibility for all the work to construct the Barracuda/Caratinga Project assets, including Drilling activities, for which PETROBRAS has been subcontracted.

In December 2003, KBR filed a Pre-packaged Chapter 11 with the U.S. courts specifically limited to its asbestos business. As informed by KBR in its official announcements to the market (SEC included), and later (January 12, 2004) confirmed by the competent court, its bankruptcy protection proceedings would not directly impact the remaining businesses, including its obligations under the Barracuda/Caratinga Project EPC contract. According to official information provided by KBR and its parent company HALLIBURTON on a press release dated December 16, 2004, Chapter 11 proceedings are in the final stage and full completion is expected for the first quarter of 2005.

In the capacity of “Owner’s Representative” under the project, on June 17, 2003, PETROBRAS, on behalf of BCLC, finalized negotiations with KBR involving some of the claims made by KBR for time extensions and project cost increases, in addition to the bankruptcy protection proceeding previously mentioned. After formal approval from the project sponsors, as contractually defined, such negotiations resulted in an amendment to the original agreement, as approved on October 31, 2003. The objectives of such amendment were to mitigate the risks involved, especially the risk related to the bankruptcy protection filed by KBR, and to ensure asset construction completion in the shortest period. Also, it should be stressed that the original package of guarantees provided by KBR has been maintained and new guarantees have been provided by KBR and its parent company HALLIBURTON.

After KBR and PETROBRAS signed the contractual amendment, the former sought the latter with a view to proceeding with the negotiations relating to outstanding claims that could not be resolved between them until then. As a result of this negotiation round, in April 2004, the parties entered into a preliminary agreement referred to as Term-Sheet. This document, which did not yet bind the parties to its terms and conditions, established the basic conditions to resolve all previous outstanding matters relating to the CLAIMS made by KBR, to the contra-claims filed by BCLC against KBR, to the liabilities due by KBR and its parent company (HALLIBURTON) and other issues relating to the EPC contract. The Term-Sheet aimed to define the basic guidelines relating to amendments to project contracts, binding the parties to all issues negotiated between KBR and PETROBRAS, with a view to minimizing the risks of project delays that might compromise the Company’s goal to start the commercial operations of Barracuda and Caratinga fields in the shortest period possible and avoiding that legal disputes between the parties were to be settled through arbitration.

Similarly to the first round of negotiations, as previously described, after the required approval was obtained from the project’s sponsors, the Term Sheet generated a set of contractual amendments signed by all parties involved on December 6, 2004. Thus, upon execution of this new amendment, the parties consider all outstanding items and disputes in connection with the claims to be extinguished, as well as other issues relating to delays in construction work, fines, liquidated damages, responsibilities for pending services and other outstanding issues relating to the project.

With regard to physical project works, it should be mentioned that one FPSO, P-43, installed in the Barracuda field, became operational on December 21, 2004, and the other FPSO, P-48, to be installed in the Caratinga field, was shipped from the Brasfels shipyard in Angra dos Reis on December 13, 2004 and is currently being prepared for the start-up of operations.