Petrobras (PBR)

Ecuadorian Activities

In Ecuador, PESA operates Blocks 18 and 31. As of December 31, 2004, PESA held a 70% and 100% interesin Block 18 and 31, respectively.

Block 18 is located in the Oriente basin of Ecuador, having a significant potential of 28º to 33° API light crude oil reserves. The concession for production activities in Block 18 is for an initial 20-year term from October 2002. Once this term expires, Ecuadorian hydrocarbon laws provides for the possibility of an additional five-year extension period.

Block 18 production accounted for 3.8% of PESA’s total average production in barrels of oil equivalent in 2004. It has seven productive wells, one is located at the Pata field and six are located at the Palo Azul field. In addition, the area has early production facilities that can handle a daily gross production of 20,000 barrels per day. In 2004, PESA started to expand production facilities and build an oil pipeline with a view to increasing production to approximately 50,000 barrels per day by the end of the first semester of 2005. In addition, construction started in connection with the definitive oil pipeline for transportation of the block production.

Block 31 is located in a highly sensitive ecological area of the Amazon jungle in the central part of the eastern border of the upper Amazon basin and covers an area of 494 thousand net acres. Pursuant to the block’s production sharing agreement between Petroecuador and PESA, Petroecuador is entitled to a crude oil production share ranging between 15% and 17%, depending on the field’s daily crude oil production and crude oil gravity.

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PESA has conducted extensive exploratory work in Block 31, including the drilling of four exploratory wells, which led to the discovery of the Apaika/Nenke, Obe, and Minta fields. Significant investments are required to the development, but changes in PESA’s investment strategy following the Argentine crisis have resulted in a redefinition of the amounts and timing of the original investment plan.

In August 2004, the Minister of Energy of Ecuador approved an environmental impact study, completing all of the required steps for the approval of the development plan with a 20-year exploitation period. In the initial three-year period, the plan contemplates investments of U.S.$75 million, and an obligation to provide Petroecuador with a guaranty of 20% of this amount. In December 2004, as part of these contemplated investments, PESA commenced construction of a pier on the Napo River.

Future oil production in Block 31 will be shipped through a heavy crude oil pipeline known as OCP. PESA has entered into a 15-year ship-or-pay transportation contract under which OCP has committed to provide it with a shipping capacity of 80,000 barrels per day.

In January 2005, we entered into an agreement with Teikoku whereby, after obtaining approval by the Ministry of Energy of Ecuador, we will transfer 40% of our rights and interest in Blocks 18 and 31. In addition, once production in Block 31 reaches an average of 10,000 barrels of oil per day for a period of 30 consecutive days, Teikoku has agreed to assume 40% of the rights and obligations resulting from the crude oil transportation agreement entered into with OCP.

As of December 31, 2004, PESA’s crude oil proved reserves in Ecuador were approximately 53 million of barrels of oil and its oil production averaged 6.2 thousand barrels per day.