Annual Reports

  • 20-F (Apr 30, 2014)
  • 20-F (Apr 29, 2013)
  • 20-F (Jul 9, 2012)
  • 20-F (May 26, 2011)
  • 20-F (Aug 31, 2010)
  • 20-F (May 20, 2010)

 
Other

Petrobras 20-F 2009
20-F
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 2008
 
     
Commission File Number 001-15106
Petróleo Brasileiro S.A.—PETROBRAS
(Exact name of registrant as specified in its charter)
  Commission File Number: 001-33121
Petrobras International Finance Company
(Exact name of registrant as specified in its charter)
     
     
Brazilian Petroleum Corporation—Petrobras
(Translation of registrant’s name into English)
   
     
     
The Federative Republic of Brazil
(Jurisdiction of incorporation or organization)
  Cayman Island
(Jurisdiction of incorporation or organization)
 
 
     
Avenida República do Chile, 65
20031-912 – Rio de Janeiro – RJ
Brazil
(Address of principal executive offices)
  Harbour Place
103 South Church Street, 4th floor
P.O. Box 1034GT – BWI
George Town, Grand Cayman
Cayman Islands
(Address of principal executive offices)
     
     
Almir Guilherme Barbassa
(55 21) 3224-2040 – barbassa@petrobras.com.br
Avenida República do Chile, 65 – 23rd Floor
20031-912 – Rio de Janeiro – RJ
Brazil
  Sérvio Túlio da Rosa Tinoco
(55 21) 3224-1410 – ttinoco@petrobras.com.br
Avenida República do Chile, 65 – 3rd Floor
20031-912 – Rio de Janeiro – RJ
Brazil
(Name, telephone, e-mail and/or facsimile number and address of company contact person)
  (Name, telephone, e-mail and/or facsimile number and address of company contact person)
 
 
 
     
Title of each class:   Name of each exchange on which registered:
 
 
Petrobras Common Shares, without par value
Petrobras American Depositary Shares, or ADSs
(evidenced by American Depositary Receipts, or ADRs),
each representing 2 Common Shares
  New York Stock Exchange*
New York Stock Exchange
Petrobras Preferred Shares, without par value*
Petrobras American Depositary Shares
(as evidenced by American Depositary Receipts),
each representing 2 Preferred Shares
  New York Stock Exchange*
New York Stock Exchange
6.125% Global Notes due 2016, issued by PifCo
5.875% Global Notes due 2018, issued by PifCo
7.875% Global Notes due 2019, issued by PifCo
  New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
 
* Not for trading, but only in connection with the registration of American Depositary Shares pursuant to the requirements of the New York Stock Exchange.
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
9.750% Senior Notes due 2011, issued by PifCo
9.125% Global Notes due 2013, issued by PifCo
7.75% Global Notes due 2014, issued by PifCo
8.375% Global Notes due 2018, issued by PifCo
 
5,073,347,344 Petrobras Common Shares, without par value
3,700,729,396 Petrobras Preferred Shares, without par value
300,050,000 PifCo Common Shares, at par value U.S.$1 per share.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.
 
Yes þ No o
 
If this report is an annual or transitional report, indicate by check mark if the registrant is not required to file reports pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.
 
Yes o No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes þ No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). N/A
 
Yes o No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ [Petrobras]     Accelerated filer o     Non-accelerated filer þ [PifCo]
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP     þ     International Financial Reporting Standards as issued by the International Accounting Standards Board o     Other o
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
 
Item 17 o Item 18 o
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o No þ


Table of Contents


Table of Contents

 
                 
        Page
 
    1  
    2  
    4  
    5  
    6  
        Petrobras     6  
        PifCo     6  
    7  
    7  
PART I
      Identity of Directors, Senior Management and Advisers     8  
      Offer Statistics and Expected Timetable     8  
      Key Information     8  
        Selected Financial Data     8  
        Exchange Rates     11  
        Risk Factors     12  
        Risks Relating to Our Operations     12  
        Risks Relating to PifCo     16  
        Risks Relating to Our Relationship with the Brazilian Government     17  
        Risks Relating to Brazil     17  
        Risks Relating to Our Equity and Debt Securities     19  
      Information on the Company     22  
        History and Development     22  
        Overview of the Group     22  
        Exploration and Production     26  
        Supply (Downstream – Brazil)     34  
        Distribution     40  
        Gas and Energy (Gas, Power and Renewables – Brazil)     41  
        International     50  
        Information on PifCo     55  
        Organizational Structure     58  
        Property, Plants and Equipment     60  
        Regulation of the Oil and Gas Industry in Brazil     60  
        Health, Safety and Environmental Initiatives     62  
        Insurance     63  
      Unresolved Staff Comments     64  
      Operating and Financial Review and Prospects     64  
        Management’s Discussion and Analysis of Petrobras’ Financial Condition and Results of Operations     64  
        Overview     64  
        Sales Volumes and Prices     65  
        Effect of Taxes on Our Income     66  
        Inflation and Exchange Rate Variation     66  
        Results of Operations     67  
        Results of Operations—2008 compared to 2007     68  
        Results of Operations—2007 compared to 2006     74  
        Additional Business Segment Information     80  
        Management’s Discussion and Analysis of PifCo’s Financial Condition and Results of Operations     81  
        Overview     81  
        Purchases and Sales of Crude Oil and Oil Products     81  
        Results of Operations—2008 compared to 2007     81  
        Results of Operations—2007 compared to 2006     82  


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        Liquidity and Capital Resources     83  
        Petrobras     83  
        PifCo     86  
        Contractual Obligations     90  
        Petrobras     90  
        PifCo     90  
        Critical Accounting Policies and Estimates     91  
        Impact of New Accounting Standards     94  
        Research and Development     96  
        Trends     97  
      Directors, Senior Management and Employees     97  
        Directors and Senior Management     97  
        Compensation     103  
        Share Ownership     103  
        Fiscal Council     103  
        Petrobras Audit Committee     104  
        Other Advisory Committees     104  
        Petrobras Ombudsman     105  
        PifCo Advisory Committees     105  
        Employees and Labor Relations     105  
      Major Shareholders and Related Party Transactions     107  
        Major Shareholders     107  
        Petrobras Related Party Transactions     108  
        PifCo Related Party Transactions     108  
      Financial Information     111  
        Petrobras Consolidated Statements and Other Financial Information     111  
        PifCo Consolidated Statements and Other Financial Information     111  
        Legal Proceedings     111  
        Dividend Distribution     115  
      The Offer and Listing     116  
        Petrobras     116  
        PifCo     117  
      Additional Information     117  
        Memorandum and Articles of Incorporation of Petrobras     117  
        Restrictions on Non-Brazilian Holders     124  
        Transfer of Control     125  
        Disclosure of Shareholder Ownership     125  
        Memorandum and Articles of Association of PifCo     125  
        Material Contracts     128  
        Petrobras Exchange Controls     128  
        Taxation Relating to Our ADSs and Common and Preferred Shares     129  
        Taxation Relating to PifCo’s Notes     136  
        Documents on Display     139  
      Qualitative and Quantitative Disclosures about Market Risk     139  
        Petrobras     139  
        PifCo     142  
      Description of Securities other than Equity Securities     144  
PART II
      Defaults, Dividend Arrearages and Delinquencies     144  
      Material Modifications to the Rights of Security Holders and Use of Proceeds     144  
      Controls and Procedures     144  
        Evaluation of Disclosure Controls and Procedures     144  
        Management’s Report on Internal Control Over Financial Reporting     144  
        Changes in Internal Controls     145  
      Audit Committee Financial Expert     145  
      Code of Ethics     145  
      Principal Accountant Fees and Services     146  


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Table of Contents

                 
        Audit and Non-Audit Fees     146  
        Audit Committee Approval Policies and Procedures     146  
      Exemptions from the Listing Standards for Audit Committees     147  
      Purchases of Equity Securities by the Issuer and Affiliated Purchasers     147  
      Change in Registrant’s Certifying Accountant     147  
      Corporate Governance     147  
PART III
      Financial Statements     149  
      Financial Statements     149  
      Exhibits     150  
    154  
    155  
    156  
    156  
 EX-2.48
 EX-2.49
 EX-8.1
 EX-12.1
 EX-12.2
 EX-13.1
 EX-13.2
 EX-15.1
 EX-15.2
 EX-15.3


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Many statements made in this annual report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), that are not based on historical facts and are not assurances of future results. Many of the forward-looking statements contained in this annual report may be identified by the use of forward-looking words, such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimate” and “potential,” among others. We have made forward-looking statements that address, among other things, our:
 
  •     regional marketing and expansion strategy;
 
  •     drilling and other exploration activities;
 
  •     import and export activities;
 
  •     projected and targeted capital expenditures and other costs, commitments and revenues;
 
  •     liquidity; and
 
  •     development of additional revenue sources.
 
Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. These factors include, among other things:
 
  •     our ability to obtain financing;
 
  •     general economic and business conditions, including crude oil and other commodity prices, refining margins and prevailing exchange rates;
 
  •     global economic conditions and the current global credit crisis;
 
  •     our ability to find, acquire or gain access to additional reserves and to successfully develop our current ones;
 
  •     uncertainties inherent in making estimates of our oil and gas reserves including recently discovered oil and gas reserves;
 
  •     competition;
 
 
  •     technical difficulties in the operation of our equipment and the provision of our services;
 
  •     changes in, or failure to comply with, laws or regulations;
 
  •     receipt of governmental approvals and licenses;
 
  •     international and Brazilian political, economic and social developments; military operations, acts of terrorism or sabotage, wars or embargoes;
 
  •     the cost and availability of adequate insurance coverage; and
 
  •     other factors discussed below under “Risk Factors.”
 
These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially from those expressed or forecast in any forward-looking statements as a result of a variety of factors, including those in “Risk Factors” set forth below.
 
All forward-looking statements are expressly qualified in their entirety by this cautionary statement, and you should not place reliance on any forward-looking statement contained in this annual report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events or for any other reason.
 
The crude oil and natural gas reserve data presented or described in this annual report are only estimates and our actual production, revenues and expenditures with respect to our reserves may materially differ from these estimates.
 
This is the annual report of both Petróleo Brasileiro S.A.—PETROBRAS (Petrobras) and its direct wholly owned Cayman Islands subsidiary, Petrobras International Finance Company (PifCo). PifCo’s operations, which consist principally of purchases and sales of crude oil and oil products, are described in further detail below.
 
Unless the context otherwise requires, the terms “Petrobras,” “we,” “us,” and “our” refer to Petróleo Brasileiro S.A.—PETROBRAS and its consolidated subsidiaries and special purpose companies, including Petrobras International Finance Company. The term “PifCo” refers to Petrobras International Finance Company and its subsidiaries.


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     Unless the context indicates otherwise, the following terms have the meanings shown below:
 
     
     
ANP
  The Agência Nacional de Petróleo, Gás Natural e Biocombustíveis (National Petroleum, Natural Gas and Biofuels Agency), or ANP, is the federal agency that regulates the oil, natural gas and renewable fuels industry in Brazil.
     
Barrels
  Barrels of crude oil.
     
BSW
  Basic sediment and water, a measurement of the water and sediment content of flowing crude oil.
     
Catalytic cracking
  A process by which hydrocarbon molecules are broken down (cracked) into lighter fractions by the action of a catalyst.
     
Coker
  A vessel in which bitumen is cracked into its fractions.
     
Condensate
  Light hydrocarbon substances produced with natural gas, which condense into liquid at normal temperatures and pressures.
     
Deep water
  Between 300 and 1,500 meters (984 and 4,921 feet) deep.
     
Distillation
  A process by which liquids are separated or refined by vaporization followed by condensation.
     
EWT
  Extended well test
     
FPSO
  Floating Production, Storage and Offloading Unit.
     
FPU
  Floating Production Unit.
     
FSO
  Floating Storage and Offloading Unit.
     
FSRU
  Floating Storage and Regasification Unit, a vessel that receives liquefied natural gas and converts it into gas suitable for use or transmission by pipeline.
     
Heavy crude oil
  Crude oil with API density less than or equal to 22°.
     
Intermediate crude oil
  Crude oil with API density higher than 22° and less than or equal to 31°.
     
Light crude oil
  Crude oil with API density higher than 31°.
     
LNG
  Liquefied natural gas.
     
LPG
  Liquefied petroleum gas, which is a mixture of saturated and unsaturated hydrocarbons, with up to five carbon atoms, used as domestic fuel.
     
NGLs
  Natural gas liquids, which are light hydrocarbon substances produced with natural gas, which condense into liquid at normal temperatures and pressures.
     
Oil
  Crude oil, including NGLs and condensates.
     
Pre-salt reservoir
  A geological formation containing oil or natural gas deposits located beneath an evaporitic layer.


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Proved reserves
  Proved oil and gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty are recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not escalations based upon future conditions.
     
Proved developed reserves
  Proved developed reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery are included as “proved developed reserves” only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.
     
Proved undeveloped reserves
  Proved undeveloped reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion, but do not include reserves attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir. Reserves on undrilled acreage are limited to those undrilled units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units are claimed only where it is demonstrated with certainty that there is continuity of production from the existing productive formation.
     
SS
  Semi-submersible unit.
     
Ultra-deep water
  Over 1,500 meters (4,921 feet) deep.

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Table of Contents

 
 
                 
                 
1 acre
  =   0.0040 km2        
                 
1 barrel
  =   42 U.S. gallons   =   Approximately 0.13 t of oil
                 
1 boe
  =   1 barrel of crude oil equivalent   =   6,000 cf of natural gas
                 
1 m3 of natural gas
  =   35.315 cf   =   0.0059 boe
                 
1 km
  =   0.6214 miles        
                 
1 km2
  =   247 acres        
                 
1 meter
  =   3.2808 feet        
                 
1 t of crude oil
  =   1,000 kilograms of crude oil   =   Approximately 7.5 barrels of crude oil (assuming an atmospheric pressure index gravity of 37° API)


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Table of Contents

 
 
     
bbl
  Barrels
bn
  Billion (thousand million)
bnbbl
  Billion barrels
bncf
  Billion cubic feet
bnm3
  Billion cubic meters
boe
  Barrels of oil equivalent
bbl/d
  Barrels per day
cf
  Cubic feet
GOM
  Gulf of Mexico
GW
  Gigawatts
GWh
  One gigawatt of power supplied or demanded for one hour
km
  Kilometer
km2
  Square kilometers
m3
  Cubic meter
mbbl
  Thousand barrels
mbbl/d
  Thousand barrels per day
mboe
  Thousand barrels of oil equivalent
mboe/d
  Thousand barrels of oil equivalent per day
mcf
  Thousand cubic feet
mcf/d
  Thousand cubic feet per day
mm3
  Thousand cubic meters
mm3/d
  Thousand cubic meters per day
mmbbl
  Million barrels
mmbbl/d
  Million barrels per day
mmboe
  Million barrels of oil equivalent
mmboe/d
  Million barrels of oil equivalent per day
mmcf
  Million cubic feet
mmcf/d
  Million cubic feet per day
mmm3
  Million cubic meters
mmm3/d
  Million cubic meters per day
mmt/y
  Million metric tons per year
MW
  Megawatts
MWavg
  Amount of energy (in MWh) divided by the time (in hours) in which such energy is produced or consumed
MWh
  One megawatt of power supplied or demanded for one hour
P$
  Argentine pesos
R$
  Brazilian reais
t
  Metric ton
tcf
  Trillion cubic feet
U.S.$
  United States dollars
/d
  Per day
/y
  Per year


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Table of Contents

 
 
In this annual report, references to “real,” “reais” or “R$” are to Brazilian reais and references to “U.S. dollars” or “U.S.$” are to the United States dollars. Certain figures included in this annual report have been subject to rounding adjustments; accordingly, figures shown as totals in certain tables may not be an exact arithmetic aggregation of the figures that precede them.
 
Petrobras
 
The audited consolidated financial statements of Petrobras and our consolidated subsidiaries as of December 31, 2008 and 2007, and for each of the three years in the period ended December 31, 2008, and the accompanying notes, contained in this annual report have been presented in U.S. dollars and prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. See Item 5. “Operating and Financial Review and Prospects” and Note 2(a) to our audited consolidated financial statements. We also publish financial statements in Brazil in reais in accordance with the accounting principles required by Law No. 6404/76, as amended, or Brazilian Corporate Law and the regulations promulgated by the Comissão de Valores Mobiliários (Brazilian Securities Commission, or the CVM), or Brazilian GAAP, which differs in significant respects from U.S. GAAP.
 
Certain prior year amounts for 2007, 2006, 2005 and 2004 have been reclassified to conform to current year presentation standards. These reclassifications had no impact on our net income.
 
Our functional currency is the Brazilian real. As described more fully in Note 2(a) to our audited consolidated financial statements, the U.S. dollar amounts as of the dates and for the periods presented in our audited consolidated financial statements have been recalculated or translated from the real amounts in accordance with the criteria set forth in Statement of Financial Accounting Standards No. 52, or SFAS 52, of the U.S. Financial Accounting Standards Board, FASB. U.S. dollar amounts presented in this annual report have been translated from reais at the period-end exchange rate for balance sheet items and the average exchange rate prevailing during the period for income statement and cash flow items.
 
 
Unless the context otherwise indicates:
 
  •     historical data contained in this annual report that were not derived from the audited consolidated financial statements have been translated from reais on a similar basis;
 
  •     forward-looking amounts, including estimated future capital expenditures, have all been based on our Petrobras 2020 Strategic Plan, which covers the period from 2008 to 2020, and on our 2009-2013 Business Plan, and have been projected on a constant basis and have been translated from reais in 2009 at an estimated average exchange rate of R$2.10 to U.S.$1.00, and future calculations involving an assumed price of crude oil have been calculated using a Brent crude oil price of U.S.$58 per barrel for 2009, U.S.$61 per barrel for 2010, U.S.$72 for 2011, U.S.$74 for 2012 and U.S.$68 per barrel for 2013, adjusted for our quality and location differences, unless otherwise stated; and
 
  •     estimated future capital expenditures are based on the most recently budgeted amounts, which may not have been adjusted to reflect all factors that could affect such amounts.
 
PifCo
 
PifCo’s functional currency is the U.S. dollar. Substantially all of PifCo’s sales are made in U.S. dollars and all of its debt is denominated in U.S. dollars. Accordingly, PifCo’s audited consolidated financial statements as of December 31, 2008 and 2007, and for each of the three years in the period ended December 31, 2008, and the accompanying notes contained in this annual report have been presented in U.S. dollars and prepared in accordance with U.S. GAAP and include PifCo’s wholly owned subsidiaries: Petrobras Europe Limited, Petrobras Finance Limited, Bear Insurance Company Limited (BEAR) and Petrobras Singapore Private Limited.


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Since December 31, 2008, PifCo has incurred U.S.$1,500 million of indebtedness through the issuance of notes in the international capital market and U.S.$4,000 million of indebtedness through various credit facilities. See Item 5. “Operating and Financial Review and Prospects—Liquidity and Capital Resources—PifCo—Long-Term Indebtedness Incurred after December 31, 2008.”
 
On May 19, 2009, we concluded negotiations with China Development Bank for a bilateral loan in the amount of U.S.$10 billion. The loan will have a tenor of 10 years and the proceeds will be used to finance our 2009-2013 Business Plan and to finance the acquisition of goods and services from Chinese companies.

 
 
The estimates of our proved reserves of crude oil and natural gas as of December 31, 2008, included in this annual report have been calculated according to the technical definitions required by the U.S. Securities and Exchange Commission, or the SEC. DeGolyer and MacNaughton provided estimates of most of our net domestic reserves as of December 31, 2008. All reserve estimates involve some degree of uncertainty. See Item 3. “Key Information—Risk Factors—Risks Relating to Our Operations” for a description of the risks relating to our reserves and our reserve estimates.
 
We also file oil and gas reserve estimates with governmental authorities in most of the countries in which we operate. On January 15, 2009, we filed reserve estimates for Brazil with the ANP, in accordance with Brazilian rules and regulations, totaling 11.9 billion barrels of crude oil and condensate and 12.7 trillion cubic feet of natural gas. The reserve estimates we filed with the ANP and those provided herein differ by approximately 27%. This difference is due to (i) the ANP requirement that we estimate proved reserves through the technical abandonment of production wells, as opposed to limiting reserve estimates to the life of our concession contracts as required by Rule 4-10 of Regulation S-X and (ii) different technical criteria for booking proved reserves, including the use of 3-D seismic data to establish proved reserves in Brazil and the use of
 
average oil prices as opposed to year-end prices to determine the economic producibility of reserves in Brazil.
 
We also file reserve estimates from our international operations with various governmental agencies under the guidelines of the Society of Petroleum Engineers, or SPE. The aggregate reserve estimates from our international operations, under SPE guidelines, amounted to 0.497 billion barrels of crude oil and NGLs and 2,967 billion cubic feet of natural gas, which is approximately 8.24% higher than the reserve estimates calculated under Regulation S-X, as provided herein. This difference occurs because, unlike Regulation S-X, the SPE’s technical guidelines allow for the booking of our reserves in Nigeria based on certain oil recovery techniques, such as fluid injection, based on analogous fields.
 
In December 2008, the SEC adopted revisions to its oil and gas reporting rules in order to modernize and update the oil and gas disclosure requirements. The changes bring the reporting guidance up to date with advances made in the industry around oil and gas reserves determinations. We are studying the impact of the new SEC guidelines for reporting of our oil and gas proved reserves. The new SEC guidelines have not gone into effect and have not been used in the determination of reserves for year-end 2008.


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Table of Contents

 
 
Item 1.       Identity of Directors, Senior Management and Advisers
 
Not applicable.
 
Item 2.       Offer Statistics and Expected Timetable
 
Not applicable.
 
Item 3.       Key Information
 
 
Petrobras
 
     The following tables set forth our selected consolidated financial data, presented in U.S. dollars and prepared in accordance with U.S. GAAP. The data for each of the five years in the period ended December 31, 2008 has been derived from our audited consolidated financial statements, which were audited by KPMG Auditores Independentes for the years ended December 31, 2008, 2007 and 2006 and by Ernst & Young Auditores Independentes S/S for each of the years ended December 31, 2005 and 2004. The information below should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements and the accompanying notes and Item 5. “Operating and Financial Review and Prospects.”
 
     Certain prior year amounts for 2007, 2006, 2005 and 2004 have been reclassified to conform to current year presentation standards. These reclassifications had no impact on our net income.
 
BALANCE SHEET DATA—PETROBRAS
 
                                         
    As of December 31,  
    2008     2007     2006     2005     2004  
    (U.S.$ million)  
 
Assets:
                                       
Total current assets
    26,758       29,140       30,955       25,784       19,426  
Property, plant and equipment, net
    84,719       84,282       58,897       45,920       37,020  
Investments in non-consolidated companies and other investments
    3,198       5,112       3,262       1,810       1,862  
Total non-current assets
    11,020       11,181       5,566       5,124       4,774  
                                         
Total assets
    125,695       129,715       98,680       78,638       63,082  
                                         
Liabilities and shareholders’ equity:
                                       
Total current liabilities
    24,756       24,468       21,976       18,161       13,328  
Total long-term liabilities(1)
    22,340       25,588       19,929       14,983       14,226  
Long-term debt(2)
    16,031       12,148       10,510       11,503       12,145  
                                         
Total liabilities
    63,127       62,204       52,415       44,647       39,699  
                                         
Minority interest
    659       2,332       1,966       1,074       877  
                                         
Shareholders’ equity
                                       
Shares authorized and issued:
                                       
Preferred share
    15,106       8,620       7,718       4,772       4,772  
Common share
    21,088       12,196       10,959       6,929       6,929  
Capital reserve and other comprehensive income
    25,715       44,363       25,622       21,216       10,805  
                                         
Total shareholders’ equity
    61,909       65,179       44,299       32,917       22,506  
                                         
Total liabilities and shareholders’ equity
    125,695       129,715       98,680       78,638       63,082  
                                         
 
 
(1) Excludes long-term debt.
(2) Excludes current portion of long-term debt.


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INCOME STATEMENT DATA—PETROBRAS
 
                                         
    For the Year Ended December 31,  
    2008     2007     2006     2005     2004  
    (U.S.$ million, except for share and per share data)  
 
Net operating revenues
    118,257       87,735       72,347       56,324       38,428  
Operating income
    25,294       20,451       19,844       15,085       9,711  
Net income for the year(1)
    18,879       13,138       12,826       10,344       6,190  
Weighted average number of shares outstanding:(2)
                                       
Common
    5,073,347,344       5,073,347,344       5,073,347,344       5,073,347,344       5,073,347,344  
Preferred
    3,700,729,396       3,700,729,396       3,699,806,288       3,698,956,056       3,698,956,056  
Operating income per:(2)
                                       
Common and Preferred Shares
    2.88       2.33       2.26       1.72       1.11  
Common and Preferred ADS(3)
    5.76       4.66       4.52       3.44       2.22  
Basic and diluted earnings per:(1)(2)
                                       
Common and Preferred Shares
    2.15       1.50       1.46       1.18       0.71  
Common and Preferred ADS(3)
    4.30       3.00       2.92       2.36       1.42  
Cash dividends per:(2)(4)
                                       
Common and Preferred shares
    0.47       0.35       0.42       0.34       0.21  
Common and Preferred ADS(3)
    0.94       0.70       0.84       0.68       0.42  
 
 
(1) Our net income represents our income from continuing operations.
(2) We carried out a two-for-one stock split on April 25, 2008. Share and per share amounts for all periods give effect to the stock split.
(3) We carried out a four-for-one reverse stock split in July 2007 that changed the ratio of underlying shares to American Depositary Shares from four shares for each ADS to two shares for each ADS. Per share amounts for all periods give effect to the stock split.
(4) Represents dividends paid during the year.


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PifCo
 
     The following tables set forth PifCo’s selected consolidated financial data, presented in U.S. dollars and prepared in accordance with U.S. GAAP. The data for each of the five years in the period ended December 31, 2008 have been derived from PifCo’s audited consolidated financial statements, which were audited by KPMG Auditores Independentes for the years ended December 31, 2008, 2007 and 2006, and by Ernst & Young Auditores Independentes S/S for each of the years ended December 31, 2005 and 2004. The information below should be read in conjunction with, and is qualified in its entirety by reference to, PifCo’s audited consolidated financial statements and the accompanying notes and Item 5. “Operating and Financial Review and Prospects.”
 
BALANCE SHEET DATA—PifCo
 
                                         
    For the Year Ended December 31,  
    2008     2007     2006     2005     2004  
    (U.S.$ million)  
 
Assets:
                                       
Total current assets
    30,383       28,002       19,241       13,242       11,057  
Property and equipment, net
    2       1       1              
Total other assets
    2,918       4,867       2,079       3,507       3,613  
                                         
Total assets
    33,303       32,870       21,321       16,749       14,670  
                                         
                                         
Liabilities and stockholder’s equity:
                                       
Total current liabilities
    28,012       27,686       9,264       7,098       4,929  
Total long-term liabilities(1)
                7,442       3,734       3,553  
Long-term debt(2)
    5,884       5,187       4,640       5,909       6,152  
                                         
Total liabilities
    33,896       32,873       21,346       16,741       14,634  
                                         
Total stockholder’s (deficit) equity
    (593 )     (3 )     (25 )     8       36  
                                         
Total liabilities and stockholder’s equity
    33,303       32,870       21,321       16,749       14,670  
                                         
 
 
(1) Excludes long-term debt.
(2) Excludes current portion of long-term debt.
 
 
                                         
    For the Year Ended December 31,  
    2008     2007     2006     2005     2004  
    (U.S.$ million)  
 
Net operating revenue
    42,443       26,732       22,070       17,136       12,356  
Operating (loss) income
    (927 )     127       (38 )     (13 )     20  
Net (loss) income for the year
    (772 )     29       (211 )     (28 )     (59 )


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Subject to certain procedures and specific regulatory provisions, there are no limitations to the purchase and sale of foreign currency and the international transfer of reais as long as the underlying transaction is valid. Foreign currencies may only be purchased through financial institutions domiciled in Brazil and authorized to operate in the exchange market. We cannot predict whether the Central Bank or the Brazilian government will continue to let the real float freely or will intervene in the exchange rate market through a currency band system or otherwise.
 
The real appreciated 8.1% in 2004 against the U.S. dollar and continued to appreciate 11.8% in 2005, 8.7% in 2006 and 17.2% in 2007 and 10.1% in the first half of 2008. Beginning in the second half of 2008, the real greatly depreciated against the U.S. dollar. The real depreciated 31.9% against the U.S. dollar in 2008. As of May 20, 2009, the real has appreciated to R$2.020 per U.S.$1.00, representing an appreciation of approximately 13.6% in 2009 year-to-date. The real may depreciate or appreciate substantially in the future. See “—Risk Factors—Risks Relating to Brazil.”

 
     The following table provides information on the selling exchange rate, expressed in reais per U.S. dollar (R$/U.S.$), for the periods indicated. The table uses the commercial selling rate prior to March 14, 2005.
 
                 
    (R$/U.S.$)
    High   Low   Average(1)   Period End
 
Year ended December 31,
               
2008
  2.500   1.559   1.836   2.337
2007
  2.156   1.733   1.947   1.771
2006
  2.371   2.059   2.175   2.138
2005
  2.762   2.163   2.435   2.341
2004
  3.205   2.654   2.926   2.654
Month:
               
December 2008
  2.500   2.337   2.398   2.337
January 2009
  2.380   2.189   2.313   2.316
February 2009
  2.392   2.245   2.320   2.378
March 2009
  2.422   2.238   2.313   2.315
April 2009
  2.290   2.170   2.202   2.178
May 2009 (through May 20, 2009)
  2.178   2.020   2.098   2.020
 
 
Source: Central Bank of Brazil
 
(1) Annual average exchange rates represent the average of the month-end exchange rates during the relevant period. Monthly average exchange rates represent the average of the exchange rates at the close of trading on each business day during such period.
 
Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or there are serious reasons to foresee
 
 
a serious imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. See “—Risk Factors—Risks Relating to Brazil.”


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RISK FACTORS
 
 
 
The majority of our revenue is derived primarily from sales of crude oil and oil products and, to a lesser extent, natural gas. We do not, and will not, have control over the factors affecting international prices for crude oil, oil products and natural gas. The average price of Brent crude, an international benchmark oil, was approximately U.S.$96.99 per barrel for 2008, U.S.$72.52 per barrel for 2007 and U.S.$65.14 per barrel for 2006, and the price of Brent crude was U.S.$41.76 per barrel on April 30, 2009. Changes in crude oil prices typically result in changes in prices for oil products and natural gas.
 
Historically, international prices for crude oil, oil products and natural gas have fluctuated widely as a result of many factors. These factors include:
 
  •     global and regional economic and geopolitical developments in crude oil producing regions, particularly in the Middle East;
 
  •     the ability of the Organization of Petroleum Exporting Countries (OPEC) to set and maintain crude oil production levels and defend prices;
 
  •     global and regional supply and demand for crude oil, oil products and natural gas;
 
  •     competition from other energy sources;
 
  •     domestic and foreign government regulations; and
 
  •     weather conditions.
 
Volatility and uncertainty in international prices for crude oil, oil products and natural gas may continue. Substantial or extended declines in international crude oil prices may have a material adverse effect on our business, results of operations and financial condition, and the value of our proved reserves. Significant decreases in the price of crude
 
oil may cause us to reduce or alter the timing of our capital expenditures, and this could adversely affect our production forecasts in the medium term and our reserve estimates in the future. In addition, our pricing policy in Brazil is intended to be at parity with international product prices over the long term. In general we do not adjust our prices for diesel, gasoline and LPG during periods of volatility in the international markets. As a result, material rapid or sustained increases in the international price of crude oil and oil products may result in reduced downstream margins for us, and we may not realize all the gains that our competitors realize in periods of higher international prices.
 
 
Our ability to achieve our long-term growth objectives, including those defined in our 2009-2013 Business Plan, is highly dependent upon our ability to obtain new concessions through new bidding rounds and discover additional reserves, as well as to successfully develop our existing reserves. We will need to make substantial investments to achieve the growth targets set forth in our 2009-2013 Business Plan and we cannot assure you we will be able to raise the required capital.
 
Further, our competitive advantage in bidding rounds for new concessions in Brazil has diminished over the years as a result of the increased competition in the oil and gas sector in Brazil. In addition, our exploration activities expose us to the inherent risks of drilling, including the risk that we will not discover commercially productive crude oil or natural gas reserves. The costs of drilling wells are often uncertain, and numerous factors beyond our control (such as unexpected drilling conditions, equipment failures or accidents, and shortages or delays in the availability of drilling rigs and the delivery of equipment) may cause drilling operations to be curtailed, delayed or cancelled. These risks are heightened when we drill in deep and ultra-deep water. Deep and ultra-deepwater drilling represented approximately 35% of the exploratory wells we drilled in 2008.


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Unless we conduct successful exploration and development activities or acquire properties containing proved reserves, or both, and are able to raise the necessary capital to fund these activities, our proved reserves will decline as reserves are extracted. If we fail to gain access to additional reserves we may not achieve our goals for production growth for 2009 through 2013 and our results of operations and financial condition may be adversely affected.
 
 
The current global financial crisis and uncertain economic environment that worsened in the second half of 2008 have led to a worldwide decrease in demand for oil products. As a result, prices for oil products have fallen and our cash flows have been reduced. If oil prices remain low, we may be required to revise our growth objectives, particularly in light of substantial decreases in the availability of credit in the capital markets. The global financial and economic situation may also have a negative impact on third parties with whom we do, or may do, business. Any of these factors may affect our results of operations, financial condition and liquidity.
 
 
A guaranteed source of crude oil and natural gas reserves is essential to an oil and gas company’s sustained production and generation of income. Under Brazilian law, the Brazilian government owns all crude oil and natural gas reserves in Brazil and the concessionaire owns the oil and gas it produces. We possess the exclusive right to develop our reserves pursuant to concession agreements awarded to us by the Brazilian government and we own the hydrocarbons we produce under the concession agreements, but if the Brazilian government were to restrict or prevent us from exploiting these crude oil and natural gas reserves, our ability to generate income would be adversely affected.
 
 
 
The proved crude oil and natural gas reserves set forth in this annual report are our estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable from known reservoirs under existing economic and operating conditions (i.e., prices and costs as of the date the estimate is made). Our proved developed crude oil and natural gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. There are uncertainties in estimating quantities of proved reserves related to prevailing crude oil and natural gas prices applicable to our production, which may lead us to make revisions to our reserve estimates. Downward revisions in our reserve estimates could lead to lower future production, which could have an adverse effect on our results of operations and financial condition.
 
 
Exploiting our oil and gas discoveries in the pre-salt reservoirs will require substantial additional amounts of capital, human resources and a broad range of offshore oil services. A primary operational challenge will be increasing our drilling rig fleet. The availability of existing rigs is limited, as is shipyard capacity to build new drilling units. We are continually forced to prioritize between development wells and exploration wells, and we may not be able to secure as many drilling rigs as we will require to meet our exploration, production and development goals with respect to our pre-salt reservoirs.
 
 
Our activities are subject to a wide variety of federal, state and local laws, regulations and permit requirements relating to the protection of human health and the environment, both in Brazil

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and in other jurisdictions in which we operate. In Brazil, we could be exposed to administrative and criminal sanctions, including warnings, fines and closure orders for non-compliance with these environmental regulations, which, among other things, limit or prohibit emissions or spills of toxic substances produced in connection with our operations. We have experienced oil spills in the past that resulted in fines by various state and federal environmental agencies, and several civil and criminal proceedings and investigations. See Item 8. “Financial Information—Legal Proceedings.” Waste disposal and emissions regulations may also require us to clean up or retrofit our facilities at substantial cost and could result in substantial liabilities. The Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis (Brazilian Institute of the Environment and Renewable Natural Resources, or IBAMA) routinely inspects our oil platforms in the Campos Basin, and may impose fines, restrictions on operations or other sanctions in connection with its inspections. In addition, we are subject to environmental laws that require us to incur significant costs to cover damage that a project may cause to the environment. These additional costs may have a negative impact on the profitability of the projects we intend to implement or may make such projects economically unfeasible.
 
As environmental regulations become more stringent, and as new laws and regulations relating to climate change, including carbon controls, become applicable to us, it is probable that our capital expenditures for compliance with environmental regulations and to effect improvements in our health, safety and environmental practices will increase substantially in the future. In addition, because our capital expenditures are subject to approval by the Brazilian government, increased expenditures to comply with environmental regulations could result in reductions in other strategic investments. Any substantial increase in expenditures for compliance with environmental regulations or reduction in strategic investments may have a material adverse effect on our results of operations or financial condition.
 
 
 
We are currently a party to numerous legal proceedings relating to civil, administrative, environmental, labor and tax claims filed against us. These claims involve substantial amounts of money and other remedies. Several individual disputes account for a significant part of the total amount of claims against us. For example, on the grounds that drilling and production platforms may not be classified as sea-going vessels, the Brazilian Revenue Service asserted that overseas remittances for charter payments should be reclassified as lease payment and subject to a withholding tax of 25%. The Revenue Service has filed two tax assessments against us that in the aggregate, on December 31, 2008, amounted to R$4,372 million (approximately U.S.$1,871 million). See Item 8. “Financial Information—Legal Proceedings.”
 
In the event that claims involving a material amount and for which we have no provisions were to be decided against us, or in the event that the losses estimated turn out to be significantly higher than the provisions made, the aggregate cost of unfavorable decisions could have a material adverse effect on our financial condition and results of operations. In addition, our management may be required to direct its time and attention to defending these claims, which could preclude them from focusing on our core business. Depending on the outcome, certain litigation could result in restrictions on our operations and have a material adverse effect on certain of our businesses.
 
 
Over the past five years, we have invested, alone or with other investors, in a number of gas-fired power plants in Brazil. These gas-fired power plants provide non-base-load capacity to the grid and tend to operate at low average utilization rates. This low utilization rate has a negative effect on our ability to provide a return on these investments.
 
Natural gas demand is also influenced by general economic conditions and oil prices. In the first quarter of 2009, non-thermoelectric demand for natural gas in Brazil declined 22% compared to average demand in 2008, due primarily to a downturn in the industrial sector and lower

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international prices for crude oil and oil products, the primary alternatives to natural gas. Our natural gas prices do not immediately adjust to fluctuations in the international price of crude oil and oil products, which can make natural gas less competitive until it adjusts to lower international prices. Sustained declines in the Brazilian natural gas market may have a material adverse effect on our results of operations and financial condition.
 
We are also subject to fines and may lose our license to sell electricity if we are unable to fulfill our energy delivery commitments to the Agência Nacional de Energia Elétrica—ANEEL, the Brazilian energy regulator, due to gas supply constraints. There are several factors that may affect our ability to deliver gas to our gas-fired power plants including our inability to secure supply of natural gas, problems affecting our natural gas infrastructure and increasing demand in the non-thermoelectric market. See Item 4. “Information on the Company—Gas and Energy—Power—Electricity Sales” for a more detailed description of these risks.
 
As a result of the foregoing, our investment in the natural gas and domestic power markets has generated losses in the past and may not generate the returns we expect in the future.
 
 
The impacts of fluctuations in exchange rates, especially the real/U.S. dollar rate, on our operations are varied and may be material. The principal market for our products is Brazil, as over the last three fiscal years over 73% of our revenues have been denominated in reais, while some of our operating expenses and capital expenditures and a substantial portion of our indebtedness are, and are expected to continue to be, denominated in or indexed to U.S. dollars and other foreign currencies. In addition, during 2008 we imported U.S.$22.2 billion of crude oil and oil products, the prices of which were all denominated and paid in U.S. dollars. Conversely, a substantial share of our liquid assets are held in U.S. dollar denominated assets, or indexed to the U.S. dollar, but we do not use forwards, swaps and futures contracts to mitigate the impact of changes in currency values
 
on our operations and financial statements because of their limited liquidity and cost.
 
Our recent financial statements reflect the appreciation of the real by 11.8%, 8.7% and 17.2% against the U.S. dollar in 2005, 2006 and 2007, respectively, and the depreciation of the real by 31.9% against the U.S. dollar in 2008. The weakness of the U.S. dollar against other currencies in general has also affected our results. As of May 20, 2009, the exchange rate of the real to the U.S. dollar was R$2.020 per U.S.$1.00, representing an appreciation of approximately 13.6% in 2009, year-to-date.
 
 
As of December 31, 2008, approximately 66%—U.S.$17,956 million of our total indebtedness—consisted of floating rate debt. In light of cost considerations and market analysis, we decided not to enter into derivative contracts or make other arrangements to hedge against the risk of an increase in interest rates. Accordingly, if market interest rates (principally LIBOR) rise, our financing expenses will increase, which could have an adverse effect on our results of operations and financial condition.
 
 
We do not maintain coverage for business interruptions of any nature for our Brazilian operations, including business interruptions caused by labor action. If, for instance, our workers were to strike, the resulting work stoppages could have an adverse effect on us. In addition, we do not insure most of our assets against war or sabotage. Therefore, an attack or an operational incident causing an interruption of our business could have a material adverse effect on our financial condition or results of operations.
 
 
We operate in a number of different countries, particularly in Latin America, West Africa and the Middle East, that can be politically, economically and socially unstable. The results of operations and financial condition of our


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subsidiaries in these countries may be adversely affected by fluctuations in their local economies, political instability and governmental actions relating to the economy, including:
 
  •     the imposition of exchange or price controls;
 
  •     the imposition of restrictions on hydrocarbon exports;
 
  •     the fluctuation of local currencies;
 
  •     the nationalization of oil and gas reserves, as experienced in recent years in Venezuela, Ecuador and Bolivia;
 
  •     increases in export tax and income tax rates for crude oil and oil products, as experienced in recent years in Argentina, Venezuela, Ecuador and Bolivia; and
 
  •     unilateral (governmental) institutional and contractual changes, including controls on investments and limitations on new projects, as experienced in recent years in Venezuela, Ecuador and Bolivia.
 
If one or more of the risks described above were to materialize we may lose part or all of our reserves in the affected country and we may not achieve our strategic objectives in these countries or in our international operations as a whole, which may result in a material adverse effect on our results of operations and financial condition.
 
Of the countries outside of Brazil in which we operate, Argentina is the most significant, representing 44.65% of our total international crude oil and natural gas production and 31.71% of our international proved crude oil and natural gas reserves as of December 31, 2008. The Argentine government has established export tax rates for crude oil, natural gas and oil products that have negatively affected our results of operations and financial condition. We also have significant operations in Bolivia and Venezuela that represented, respectively, 24.32% and 6.29% of our total international production in barrels of oil equivalent at December 31, 2008. Bolivia accounted for 31.02% of our international proved crude oil and natural gas reserves at December 31, 2008. On
 
January 25, 2009, Bolivia adopted a new constitution that prohibits private ownership of the country’s oil and gas resources. In light of the new constitution, we may be required to write off some or all of our proved reserves in Bolivia at the end of 2009. For more information about our operations outside Brazil, see Item 4, “Information on the Company—International.”
 
 
 
PifCo’s financial position and results of operations are directly affected by our decisions. PifCo is a direct wholly owned subsidiary of Petrobras incorporated in the Cayman Islands as an exempted company with limited liability. PifCo purchases crude oil and oil products from third parties and sells them at a premium to us on a deferred payment basis. PifCo also purchases crude oil and oil products from us and sells them outside Brazil. Accordingly, intercompany activities and transactions, and therefore PifCo’s financial position and results of operations, are affected by decisions made by us. Additionally, PifCo sells and purchases crude oil and oil products to and from third parties and related parties mainly outside Brazil. Commercial operations are carried out under market conditions and at market prices. PifCo’s ability to service and repay its indebtedness is consequently dependent on our own operations.
 
Financing for PifCo’s operations is provided by us, as well as third-party credit providers in favor of whom we provide credit support. Our support to PifCo’s debt obligations is made through guarantees and standby purchase agreements whereby we agree to repurchase from the holders of PifCo’s notes their right to receive payment from PifCo in the event PifCo defaults on its payment obligations.
 
Our own financial condition and results of operations, as well as our financial support of PifCo, directly affect PifCo’s operational results and debt servicing capabilities. For a more detailed description of certain risks that may have a material adverse impact on our financial condition or results of operations and therefore affect PifCo’s ability to meet its debt obligations, see “Risks Relating to Our Operations.”


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PifCo is principally engaged in the purchase of crude oil and oil products for sale to us, as described above. PifCo regularly incurs indebtedness related to such purchases and/or in obtaining financing from us or third-party creditors. All such indebtedness has the benefit of a guaranty, a standby purchase obligation or other support from us, and PifCo has historically passed on its financing costs to us by selling crude oil and oil products to us at a premium to compensate for its financing costs. If for any reason we are not permitted to continue these practices, this would have a materially adverse effect on PifCo’s business and on its ability to meet its debt obligations in the long term.
 
 
 
The Brazilian government, as our controlling shareholder, has pursued, and may pursue in the future, certain of its macroeconomic and social objectives through us. Brazilian law requires the Brazilian government to own a majority of our voting stock, and so long as it does, the Brazilian government will have the power to elect a majority of the members of our board of directors and, through them, a majority of the executive officers who are responsible for our day-to-day management. As a result, we may engage in activities that give preference to the objectives of the Brazilian government rather than to our own economic and business objectives.
 
In particular, we continue to assist the Brazilian government to ensure that the supply and pricing of crude oil and oil products in Brazil meets Brazilian consumption requirements. Accordingly, we may make investments, incur costs and engage in sales on terms that may have an adverse effect on our results of operations and financial condition. Prior to January 2002, prices for crude oil and oil products were regulated by the Brazilian government, occasionally set below prices prevailing in the world oil markets. We cannot assure you that future governments in Brazil will not reinstate price controls.
 
 
 
The Brazilian government maintains control over our investment budget and establishes limits on our investments and long-term debt. As a state-controlled entity, we must submit our proposed annual budgets to the Ministry of Planning, Budget and Management, the Ministry of Mines and Energy, and the Brazilian Congress for approval. If our approved budget reduces our proposed investments and incurrence of new debt and we cannot obtain financing that does not require Brazilian government approval, we may not be able to make all the investments we envision, including those we have agreed to make to expand and develop our crude oil and natural gas fields. If we are unable to make these investments, our operating results and financial condition may be adversely affected.
 
 
The Brazilian government has historically exercised, and continues to exercise, significant influence over the Brazilian economy. Brazilian political and economic conditions have a direct impact on our business and may have a material adverse effect on our results of operations and financial condition.
 
The Brazilian government’s economic policies may have important effects on Brazilian companies, including us, and on market conditions and prices of Brazilian securities. Our financial condition and results of operations may be adversely affected by the following factors and the Brazilian government’s response to these factors:
 
 
  •     devaluations and other exchange rate movements;
 
  •     inflation;
 
  •     exchange control policies;
 
  •     social instability;
 
  •     price instability;
 
  •     interest rates;
 
  •     liquidity of domestic capital and lending markets;


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  •     tax policy;
 
  •     regulatory policy for the oil and gas industry, including pricing policy; and
 
  •     other political, diplomatic, social and economic developments in or affecting Brazil.
 
We may specifically be affected by certain initiatives to increase taxation on our upstream activities. In June 2003, the State of Rio de Janeiro enacted a new tax law that imposed a Domestic State Tax (ICMS) on our upstream activities, including on import of oil and gas exploratory equipment. The State of Rio de Janeiro has never enforced this law, and its constitutionality is being challenged in the Brazilian Supreme Court (Supremo Tribunal Federal, or STF). In the event that the state government attempts to enforce this law and the courts uphold that enforcement, we estimate that the amount of ICMS that we would be required to pay to the State of Rio de Janeiro could increase approximately R$10.7 billion (U.S.$6.2 billion) per year. In addition, there have been recent initiatives in the Brazilian Congress to reform the Brazilian tax laws and there is a risk that the proposed reforms would increase taxation on our upstream activities. Due to the uncertainties related to these initiatives, we cannot quantify what our tax burden would be if the new laws or reforms were approved.
 
In addition, the recent discovery of large petroleum and natural gas reserves in the pre-salt geological layer of the Campos and Santos basins has prompted discussions on possible changes to the existing Oil Law. The Brazilian government has created an inter-ministerial committee to consider substantial changes in the regulation of exploration and production activities in areas of the pre-salt geological layer not subject to existing concessions. The committee has not yet made a formal recommendation to the Brazilian government, and we cannot estimate the impact that any change to the Oil Law would have on Petrobras, or when any new regulations may become effective. See Item 4. “Information on the Company—Regulation of the Oil and Gas Industry in Brazil—Discussions on Possible Changes to the Oil Law.”
 
Uncertainty over whether the Brazilian government will implement these or other changes in policy or regulations that may affect any of the factors mentioned above or other
 
factors in the future may lead to economic uncertainty in Brazil and increase the volatility of the Brazilian securities market and securities issued abroad by Brazilian companies. Such changes in policies and regulations may have a material adverse effect on our results of operations and financial condition.
 
 
Our principal market is Brazil, which has, in the past, periodically experienced extremely high rates of inflation. Inflation, along with governmental measures to combat inflation and public speculation about possible future measures, has had significant negative effects on the Brazilian economy. The annual rates of inflation have been historically high in Brazil prior to 1995 and Brazil experienced hyperinflation in the past. As measured by the National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo, or IPCA), Brazil had annual rates of inflation of 3.14% in 2006, 4.46% in 2007 and 5.90% in 2008. Considering the historically high rates of inflation, Brazil may experience higher levels of inflation in the future. The lower levels of inflation experienced since 1995 may not continue. Future governmental actions, including actions to adjust the value of the real, could trigger increases in inflation, which may adversely affect our financial condition.
 
 
The market value of securities of Brazilian companies is affected to varying degrees by economic and market conditions in other countries, including the United States and other Latin American and emerging market countries. Although economic conditions in these countries may differ significantly from economic conditions in Brazil, investors’ reactions to developments in these other countries may have an adverse effect on the market value of securities of Brazilian issuers. Crises in other countries or economic policies of other


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countries may diminish investor interest in securities of Brazilian issuers, including ours. This could adversely affect the market price of our shares and ADSs, and could limit our ability to finance our operations.
 
The recent global financial crisis has had significant consequences worldwide, including in Brazil, such as stock and credit market volatility, unavailability of credit, higher interest rates, a general slowdown of the world economy, volatile exchange rates and inflationary pressure, among others, which have and may continue to, directly or indirectly, adversely affect our operating results, financial position and the price of securities issued by Brazilian companies.
 
 
 
Petrobras shares are some of the most liquid in the São Paulo Stock Exchange (Bovespa), but overall, the Brazilian securities markets are smaller, more volatile and less liquid than the major securities markets in the United States and other jurisdictions, and may be regulated differently from the way in which U.S. investors are accustomed. Factors that may specifically affect the Brazilian equity markets may limit the ability of holders of ADSs to sell the common or preferred shares underlying our ADSs at the price and time they desire.
 
 
Some of PifCo’s notes are not listed on any securities exchange and are not quoted through an automated quotation system. We can make no assurance as to the liquidity of or trading markets for PifCo’s notes. We cannot guarantee that the holders of PifCo’s notes will be able to sell their notes in the future. If a market for PifCo’s notes does not develop, holders of PifCo’s notes may not be able to resell the notes for an extended period of time, if at all.
 
 
 
Holders of ADSs who are residents of the United States may not be able to exercise the preemptive rights relating to the common or preferred shares underlying our ADSs unless a registration statement under the U.S. Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the common or preferred shares relating to these preemptive rights, and therefore we may not file any such registration statement. If a registration statement is not filed and an exemption from registration does not exist, JPMorgan Chase Bank, N.A., as depositary, will attempt to sell the preemptive rights, and holders of ADSs will be entitled to receive the proceeds of the sale. However, the preemptive rights will expire if the depositary cannot sell them. For a more complete description of preemptive rights with respect to the common or preferred shares, see Item 10. “Additional Information—Memorandum and Articles of Association of Petrobras—Preemptive Rights.”
 
Restrictions on the movement of capital out of Brazil may impair the ability of holders of ADSs to receive dividends and distributions on, and the proceeds of any sale of, the common or preferred shares underlying the ADSs and may impact our ability to service certain debt obligations, including guarantees and standby purchase agreements we have entered into in support of PifCo’s notes.
 
The Brazilian government may impose temporary restrictions on the conversion of Brazilian currency into foreign currencies and on the remittance to foreign investors of proceeds from their investments in Brazil. Brazilian law permits the Brazilian government to impose these restrictions whenever there is a serious imbalance in Brazil’s balance of payments or there are reasons to foresee a serious imbalance.
 
The Brazilian government imposed remittance restrictions for approximately six months in 1990. The Brazilian government could decide to take similar measures in the future. Similar restrictions, if imposed, could impair or prevent the conversion of dividends, distributions,


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or the proceeds from any sale of common or preferred shares from reais into U.S. dollars and the remittance of the U.S. dollars abroad. If such restrictions were imposed, the depositary for the ADSs would hold the reais it cannot convert for the account of the ADS holders who have not been paid. The depositary would not invest the reais and would not be liable for the interest.
 
Similar restrictions, if imposed, could also impair or prevent the conversion of payments under guaranty and standby purchase agreements supporting PifCo’s notes from reais into U.S. dollars and the remittance of the U.S. dollars abroad. In the case that the PifCo noteholders receive payments in reais corresponding to the equivalent U.S. dollar amounts due under PifCo’s notes, it may not be possible to convert these amounts into U.S. dollars. These restrictions, if imposed, could also prevent us from making funds available to PifCo in U.S. dollars abroad, in which case PifCo may not have sufficient U.S. dollar funds available to make payment on its debt obligations.
 
In addition, payments of dividends and other distributions to shareholders and payments under Petrobras’ guarantees and standby purchase agreements in connection with PifCo’s notes do not currently require approval by or registration with the Central Bank of Brazil. The Central Bank of Brazil may nonetheless impose prior approval requirements on the remittance of U.S. dollars abroad, which could cause delays in such payments.
 
 
The Brazilian custodian for our common or preferred shares underlying our ADSs must obtain a certificate of registration from the Central Bank of Brazil to be entitled to remit U.S. dollars abroad for payments of dividends and other distributions relating to our preferred and common shares or upon the disposition of the common or preferred shares. If holders of ADSs decide to exchange their ADSs for the underlying common or preferred shares, they will be entitled to continue to rely, for five Brazilian business days from the date of exchange, on the custodian’s certificate of registration. After that period, such holders may not be able to obtain and remit U.S. dollars abroad
 
upon the disposition of the common or preferred shares, or distributions relating to the common or preferred shares, unless they obtain their own certificate of registration or register under Resolution No. 2,689, of January 26, 2000, of the Conselho Monetário Nacional (National Monetary Council), which entitles registered foreign investors to buy and sell on the São Paulo Stock Exchange. In addition, if such holders do not obtain a certificate of registration or register under Resolution No. 2,689, they may be subject to less favorable tax treatment on gains with respect to the common or preferred shares.
 
If such holders attempt to obtain their own certificate of registration, they may incur expenses or suffer delays in the application process, which could delay their ability to receive dividends or distributions relating to the common or preferred shares or the return of their capital in a timely manner. The custodian’s certificate of registration or any foreign capital registration obtained by such holders may be affected by future legislative or regulatory changes and we cannot assure such holders that additional restrictions applicable to them, the disposition of the underlying common or preferred shares, or the repatriation of the proceeds from the process will not be imposed in the future.
 
 
Our corporate affairs are governed by our bylaws and Brazilian Corporate Law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States or elsewhere outside Brazil. In addition, the rights of an ADS holder, which are derivative of the rights of holders of our common or preferred shares, as the case may be, to protect their interests against actions by our board of directors are different under Brazilian Corporate Law than under the laws of other jurisdictions. Rules against insider trading and self-dealing and the preservation of shareholder interests may also be less developed and enforced in Brazil than in the United States. In addition, shareholders in Brazilian companies ordinarily do not have standing to bring a class action.
 
We are a state-controlled company organized under the laws of Brazil and all of our directors and officers reside in Brazil. Substantially

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all of our assets and those of our directors and officers are located in Brazil. As a result, it may not be possible for holders of ADSs to effect service of process upon us or our directors and officers within the United States or other jurisdictions outside Brazil or to enforce against us or our directors and officers judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain requirements are met, holders of ADSs may face greater difficulties in protecting their interest in actions against us or our directors and officers than would shareholders of a corporation incorporated in a state or other jurisdiction of the United States.
 
 
Holders of ADSs may encounter difficulties in the exercise of some of their rights as a shareholder if they hold our ADS rather than the underlying shares. For example, if we fail to provide the depositary with voting materials on a timely basis, holders of ADSs may not be able to vote by giving instructions to the depositary on how to vote for them.
 
In addition, a portion of our ADSs represents our preferred shares. Under Brazilian law and our bylaws, holders of preferred shares generally do not have the right to vote in meetings of our stockholders. This means, among other things, that holders of ADSs representing preferred shares are not entitled to vote on important corporate transactions or decisions. See Item 10. “Additional Information—Memorandum and Articles of Incorporation of Petrobras—Voting Rights” for a discussion of the limited voting rights of our preferred shares.
 
 
We have entered into a standby purchase agreement in support of some of PifCo’s obligations under its notes and indentures. Our obligation to purchase from the PifCo noteholders any unpaid amounts of principal, interest and other amounts
 
 
due under the PifCo notes and the indenture applies, subject to certain limitations, irrespective of whether any such amounts are due at the maturity of the PifCo notes or otherwise.
 
We have been advised by our counsel that the enforcement of the standby purchase agreement in Brazil against us, if necessary, will occur under a form of judicial process that, while similar, has certain procedural differences from those applicable to enforcement of a guarantee and, as a result, the enforcement of the standby purchase agreement may take longer than would otherwise be the case with a guarantee.
 
 
If proceedings were brought in Brazil seeking to enforce our obligations in respect of the guaranty and standby purchase agreement relating to PifCo’s notes, we would be required to discharge our obligations only in reais. Under the Brazilian exchange control rules, an obligation to pay amounts denominated in a currency other than reais, which is payable in Brazil pursuant to a decision of a Brazilian court, may be satisfied in reais at the rate of exchange, as determined by the Central Bank of Brazil, in effect on the date of payment.
 
 
PifCo’s obligation to make payments on the PifCo notes is supported by our obligation under the guaranty or standby purchase agreement. We have been advised by our external U.S. counsel that the guaranty and the standby purchase agreement are valid and enforceable in accordance with the laws of the State of New York and the United States. In addition, we have been advised by our general counsel that the laws of Brazil do not prevent the guaranty and the standby purchase agreement from being valid, binding and enforceable against us in accordance with their terms. In the event that U.S. federal fraudulent conveyance or similar laws are applied to the guaranty and the standby purchase agreement, and we, at the time we


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entered into the relevant guaranty or standby purchase agreement:
 
  •     were or are insolvent or rendered insolvent by reason of our entry into such guaranty or standby purchase agreement;
 
  •     were or are engaged in business or transactions for which the assets remaining with us constituted unreasonably small capital; or
 
  •     intended to incur or incurred, or believed or believe that we would incur, debts beyond our ability to pay such debts as they mature; and
 
  •     in each case, intended to receive or received less than reasonably equivalent value or fair consideration therefore,
 
then our obligations under the guaranty and the standby purchase agreement could be avoided, or claims with respect to such agreements could be subordinated to the claims of other creditors. Among other things, a legal challenge to the guaranty and the standby purchase agreement on fraudulent conveyance grounds may focus on the benefits, if any, realized by us as a result of PifCo’s issuance of these notes. To the extent that the guaranty and the standby purchase agreement are held to be a fraudulent conveyance or unenforceable for any other reason, the holders of the PifCo notes would not have a claim against us under the relevant guaranty and standby purchase agreement and will solely have a claim against PifCo. We cannot assure you that, after providing for all prior claims, there will be sufficient assets to satisfy the claims of the PifCo noteholders relating to any avoided portion of the guaranty and the standby purchase agreement.
 
Item 4.    Information on the Company
 
 
Petróleo Brasileiro S.A.—PETROBRAS—was incorporated in 1953 to conduct the Brazilian government’s hydrocarbon activities. We began operations in 1954 and for approximately forty years carried out crude oil and natural gas production and refining activities in Brazil on behalf of the government.
 
 
In the 1990s, in a series of legislative actions, the Brazilian state relinquished its monopoly on oil and gas activities. On November 9, 1995, the Brazilian constitution was amended to authorize the Brazilian government to contract with any state or privately owned company to carry out upstream and downstream oil and gas activities in Brazil. On August 6, 1997, Brazil enacted the Oil Law (Law No. 9,478), which established competition in Brazilian markets for crude oil, oil products and natural gas. Effective January 2, 2002, Brazil deregulated prices for crude oil, oil products and natural gas. See “Regulation of the Oil and Gas Industry in Brazil—Price Regulation.”
 
Our common and preferred shares have been traded on the São Paulo Stock Exchange since 1968. Petrobras was incorporated as a state-controlled company under Law No. 2,004 (effective October 3, 1953), and a majority of our voting capital must be owned by the Brazilian federal government, a state or a municipality. As of December 31, 2008, the Brazilian government owned 32.2% of our outstanding capital stock and 55.7% of our voting shares. We operate through subsidiaries, joint ventures, and associated companies established in Brazil and many other countries. Our principal executive office is located at Avenida República do Chile 65, 20031-912 Rio de Janeiro, RJ, Brazil and our telephone number is (55-21) 3224-4477.
 
 
We are an integrated oil and gas company that is the largest corporation in Brazil and one of the largest companies in Latin America in terms of revenues. Because of our legacy as Brazil’s former sole supplier of crude oil and oil products and our ongoing commitment to development and growth, we operate most of Brazil’s producing oil and gas fields and hold a large base of proved reserves and a fully developed operational infrastructure. In 2008, our average domestic daily hydrocarbons production was 2,176 mboe/d, an estimated 98.5% of Brazil’s total. Over 84% of our proved reserves are in large, contiguous and highly productive fields in the offshore Campos Basin, which allows us to concentrate our operational infrastructure and limit our costs of exploration, development and production. In 40 years of developing Brazil’s offshore basins we have developed special expertise in deepwater


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exploration and production, which we exploit both in Brazil and in other offshore oil provinces.
 
We operate substantially all the refining capacity in Brazil. Most of our refineries are located in Southeastern Brazil, within the country’s most populated and industrialized markets and adjacent to the Campos Basin that provides most of our crude oil. Our domestic refining capacity of 1,942 mbbl/d is well balanced with our domestic refining production of 1,787 mbbl/d and sales of oil products to domestic markets of 1,748 mbbl/d. We are also involved in the production of petrochemicals and fertilizers. We distribute oil products through our own “BR” network of retailers and to wholesalers.
 
We participate in most aspects of the Brazilian natural gas market. This market has been constrained by the level of domestic gas production and our transportation and distribution infrastructure. We expect that our natural gas activities will grow in the future as we expand our production of both associated and non-associated gas, mainly from offshore fields in the Campos, Espírito Santo and Santos basins, and extend Brazil’s gas transportation infrastructure. We use LNG terminals to meet demand and diversify our supply. We also participate in the domestic power market primarily through our investments in gas-fired thermoelectric power plants.
 
Internationally, we are active in 23 countries. In Latin America, our operations extend from exploration and production to refining,
 
marketing, retail services and natural gas pipelines. In North America, we produce oil and gas and have refining operations in the United States. In Africa, we produce oil in Angola and Nigeria, and in Asia, we have refining operations in Japan. In other countries, we are engaged only in oil and gas exploration.
 
Our activities comprise five business segments:
 
  •     Exploration and Production: oil and gas exploration, development and production in Brazil;
 
  •     Supply: downstream activities in Brazil, including refining, oil products and crude oil exports and imports, petrochemicals and fertilizers;
 
  •     Distribution:  distribution of oil products to wholesalers and through our “BR” retail network in Brazil;
 
  •     Gas and Energy: gas transmission and distribution, electric power generation using natural gas and renewable energy sources and biofuels operations in Brazil; and
 
  •     International:  exploration and production, supply (downstream activities including refining, petrochemicals and fertilizers), distribution and natural gas and energy operations outside of Brazil.

 

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     The following table sets forth key information for each business segment in 2008:
 
                                                                 
    2008  
    Exploration &
                Gas and
                      Group
 
    Production     Supply     Distribution     Energy     International     Corporate(1)     Eliminations     Total  
    (U.S.$ million)  
 
Net operating revenues
    59,024       96,202       30,892       8,802       10,940             (87,603 )     118,257  
Income (loss) before minority interest and income tax     31,657       (2,956 )     1,245       (504 )     (605 )     (1,986 )     141       26,992  
Total assets at December 31     51,326       27,521       4,775       14,993       13,439       17,583       (3,942 )     125,695  
Capital expenditures     14,293       7,234       309       4,256       2,908       874             29,874  
 
 
(1) Our Corporate segment includes our financing activities not attributable to other segments, including corporate financial management, central administrative overhead and actuarial expenses related to our pension and health care plans for inactive participants.
 
     The following table sets forth our production of crude oil and natural gas by geographic area in 2008, 2007 and 2006:
 
                                                                         
    2008     2007     2006  
    Oil
    Nat. Gas
    Total
    Oil
    Nat. Gas
    Total
    Oil
    Nat. Gas
    Total
 
    (mbbl/d)     (mmcf/d)     (mboe/d)     (mbbl/d)     (mmcf/d)     (mboe/d)     (mbbl/d)     (mmcf/d)     (mboe/d)  
 
Brazil:
                                                                       
Offshore:
                                                                       
Campos Basin
    1,546.8       824.9       1,684.3       1,475.3       750.0       1,600.3       1,468.3       759.1       1,594.9  
Other
    86.5       499.5       169.7       87.8       281.8       134.8       77.4       256.5       120.1  
Total offshore
    1,633.3       1,324.4       1,854.0       1,563.1       1,031.8       1,735.1       1,545.7       1,015.6       1,715.0  
Onshore
    221.3       603.1       321.8       229.0       605.0       329.8       232.0       644.0       339.3  
                                                                         
Total Brazil(1)
    1,854.6       1,927.5       2,175.8       1,792.1       1,636.8       2,064.9       1,777.7       1,659.6       2,054.3  
                                                                         
International:
                                                                       
Argentina
    51.8       289.9       100.0       54.4       285.7       102.0       62.1       274.9       107.9  
Bolivia
    8.4       276.4       54.5       9.3       307.3       60.5       8.9       288.9       57.0  
Colombia
    15.3       0.8       15.5       16.6       0.1       16.6       16.8       0.2       16.9  
Ecuador
    11.4       0.0       11.4       10.4       0.0       10.4       11.9       0.0       11.9  
Peru
    14.1       11.9       16.1       13.3       10.9       15.1       12.7       10.9       14.6  
Venezuela
    0.0       0.0       0.0       0.0       0.0       0.0       10.5       4.3       11.2  
United States
    1.9       15.7       4.5       4.7       40.8       11.5       1.4       15.9       4.0  
Angola
    2.6       0.0       2.6       3.6       0.0       3.6       5.3       0.0       5.3  
Nigeria
    5.3       0.0       5.3       0.0       0.0       0.0       0.0       0.0       0.0  
                                                                         
Total International
    110.8       594.7       209.9       112.3       644.8       219.7       129.6       595.1       228.8  
                                                                         
Total consolidated production
    1,965.4       2,522.2       2,385.7       1,904.4       2,281.6       2,285.2       1,907.3       2,254.7       2,283.1  
Equity and non-consolidated affiliates: (2)
                                                                       
Venezuela
    12.8       7.8       14.1       13.9       11.5       15.9       12.6       11.5       14.4  
                                                                         
Worldwide production
    1,978.2       2,530.0       2,399.8       1,918.3       2,293.1       2,300.5       1,919.9       2,266.2       2,297.5  
                                                                         
 
 
(1) Brazilian production figures include reinjected gas volumes, which are not included in our proved reserves figures.
(2) Companies in which Petrobras has a minority interest.


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     The following tables set forth our estimated net proved developed and undeveloped reserves of crude oil and natural gas by region as of December 31, 2008:
 
                         
    Reserves of Crude Oil  
    Developed     Undeveloped     Total  
          (mmbbl)        
 
Brazil:
                                                                 
Offshore:
                       
Campos Basin
    4,802.2         3,066.5         7,868.7    
Other
    116.7         107.1         223.8    
Total offshore
    4,918.9         3,173.6         8,092.5    
Onshore
    427.6         196.2         623.8    
                         
Total Brazil
    5,346.5         3,369.8         8,716.3    
                         
International:
                       
Argentina
    90.3         27.5         117.8    
Bolivia
    28.7         7.4         36.1    
Colombia
    18.3         10.3         28.6    
Ecuador
    5.7         0.6         6.3    
Peru
    46.0         54.1         100.1    
United States
    5.9         9.6         15.5    
Angola
    1.2         0.0         1.2    
Nigeria
    14.8         68.8         83.6    
                         
Total International
    210.9         178.3         389.2    
                         
Group
    5,557.4         3,548.1         9,105.5    
Equity and non-consolidated affiliates(1):
                       
Venezuela
    27.6         21.6         49.2    
 
 
(1) Companies in which Petrobras has a minority interest.
 
                         
    Reserves of Natural Gas  
    Developed     Undeveloped     Total  
          (bncf)        
 
Brazil:
                                                                 
Offshore:
                       
Campos Basin
    2,610.3         2,005.9         4,616.2    
Other
    1,168.2         1,680.5         2,848.7    
Total offshore
    3,778.5         3,686.4         7,464.9    
Onshore
    1,291.4         589.7         1,881.1    
                         
Total Brazil
    5,069.9         4,276.1         9,346.0    
                         
International:
                       
Argentina
    555.4         481.8         1,037.1    
Bolivia
    1,040.8         448.8         1,489.6    
Colombia
    0.6         0.5         1.1    
Ecuador
    1.4         0.3         1.8    
Nigeria
    25.6         1.3         26.9    
Peru
    63.2         47.5         110.7    
United States
    67.9         58.3         126.2    
                         
Total International
    1,754.9         1,038.5         2,793.4    
                         
Group
    6,824.8         5,314.6         12,139.4    
Equity and non-consolidated affiliates(1):
                       
Venezuela
    47.3         28.4         75.7    
 
 
(1) Companies in which Petrobras has a minority interest.
 
We calculate reserves based on forecasts of field production, which depend on a number of technical parameters, such as seismic interpretation, geological maps, well tests and economic data. All reserve estimates involve some degree of uncertainty. The uncertainty depends mainly on the amount of reliable geological and engineering data available at the
 
time of the estimate and the interpretation of this data. Our estimates are thus made using the most reliable data at the time of the estimate, in accordance with the best practices in the oil and gas industry. DeGolyer and MacNaughton (D&M) reviewed and certified 94% of our domestic proved crude oil, condensate and natural gas reserve estimates as of December 31, 2008. The


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estimates for the certification were performed in accordance with Rule 4-10 of Regulation S-X of the SEC. See “Supplementary Information on Oil and Gas Producing Activities” beginning on page F-107 for further details on our proved reserves.
 
The statements contained in this Item 4 regarding exploration and development projects and production estimates are forward-looking and subject to significant risks and uncertainties. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that our actual levels of activity, production or performance will meet these expectations. See Item 3. “Key Information—Risk Factors.”
 
 
Oil and gas exploration and production activities in Brazil are the largest component of our company portfolio. In 1970, we produced 164 mbbl/d of crude oil, condensate and natural gas liquids in Brazil. We increased production to 181 mbbl/d in 1980, 654 mbbl/d in 1990, 1,271 mbbl/d in 2000 and 1,855 mbbl/d in 2008. In 1974 we made our first discovery in the Campos Basin offshore in Brazil, which now accounts for over 84% of our proved reserves. We aim to grow oil and gas reserves and production sustainably and be recognized for excellence in Exploration and Production operations. Our primary goals are to:
 
  •    explore and develop oil resources in increasingly deeper waters in the Campos Basin;
 
  •    explore and develop Brazil’s two other most promising offshore basins: Espírito Santo (light oil, heavy oil and gas) and Santos (gas and light oil);
 
  •    develop gas resources in the Santos Basin and elsewhere to meet Brazil’s growing demand for gas and increase the contribution of domestic gas production to meeting that demand;
 
  •    explore and develop the potentially substantial pre-salt reservoirs that lie below the Espírito Santo, Campos and Santos basins; and
 
  •    sustain and increase production from onshore fields through drilling and enhanced recovery operations.
 
 
In new areas, our activities typically begin with geological research and seismic activities, followed by exploratory drilling. When this yields encouraging results, we proceed with extended well tests, development drilling and pilot production, which typically involve substantial investments. It usually takes several years for successful exploration activity to be reflected in increased reserves and production.
 
During 2008, our oil and gas production from Brazil averaged 2,176 mboe/d, of which 85% was oil and 15% was natural gas. On December 31, 2008, our estimated net proved crude oil and natural gas reserves in Brazil were 10.3 billion boe, of which 85% was crude oil and 15% was natural gas. Brazil provided 91% of our worldwide production in 2008 and accounted for 92% of our worldwide reserves at December 31, 2008 on a barrels of oil-equivalent basis. Historically, approximately 85% of our total Brazilian production has been oil; in the future, we plan to increase the share of natural gas to meet increasing domestic demand.
 
Brazil’s richest oil fields are located offshore, most of them in deep waters. Since 1971, when we started exploration in the Campos Basin, we have been active in these waters and we have become globally recognized as innovators in the technology required to explore and produce hydrocarbons in deep and ultra-deep water. We operate more production (on a boe basis) from fields in deep and ultra-deep water than any other company, according to PFC Energy, an energy consultancy. In 2008, offshore production accounted for 88% of our production and deepwater production accounted for 76% of our production in Brazil. At December 31, 2008, we operated 155 wells in water deeper than 1,000 meters (3,281 feet). By December 31, 2008, we had drilled around 322 exploratory wells in water deeper than 1,000 meters (3,281 feet). We continue to upgrade our deepwater technologies. See Item 5. “Operating and Financial Review and Prospects—Research and Development.”
 
Offshore exploration, development and production costs are generally higher than those onshore, but we have been able to offset these higher costs by higher drilling success ratios, larger discoveries and greater production volumes. We have historically been successful in finding and developing significant oil reservoirs offshore,


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which has allowed us to achieve economies of scale by spreading the total costs of exploration, development and production over a large base. By focusing on opportunities that are close to existing production infrastructure, we limit the incremental capital requirements of new field development.
 
 
We have also implemented a variety of asset-rationalization programs designed to increase oil recovery from existing fields and reduce natural decline from producing fields.
 
Our exploration and production activities outside Brazil are included in our International business segment. See “—International.”

 
Exploration and Production Key Statistics
                         
     2008     2007     2006  
    (U.S.$ million)  
 
Exploration and Production:
                       
Net operating revenues
    59,024       41,991       35,738  
Income before minority interest and income tax
    31,657       21,599       18,441  
Total assets at December 31
    51,326       53,175       38,366  
Capital expenditures
    14,293       9,448       7,329  


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     Information about our principal oil and gas producing fields in Brazil is summarized in the table below.
 
                 
Basin   Fields   Petrobras %   Type   Fluid(1)
 
Alagoas
  Pilar/Rio Remedio   100%   Onshore   Light Oil/Natural Gas
Camamu
  Manati   35%   Shallow   Natural Gas
Campos
  Albacora   100%   Shallow   Intermediate Oil
            Deepwater   Intermediate Oil
    Albacora Leste   90%   Deepwater   Intermediate Oil
    Barracuda   100%   Deepwater   Intermediate Oil
    Bicudo   100%   Shallow   Intermediate Oil
    Bijupirá/Salema   22.4%(2)   Deepwater   Intermediate Oil
    Bonito   100%   Shallow   Intermediate Oil
    Carapeba   100%   Shallow   Intermediate Oil
    Caratinga   100%   Deepwater   Intermediate Oil
    Cherne   100%   Shallow   Intermediate Oil
    Corvina   100%   Shallow   Intermediate Oil
    Enchova   100%   Shallow   Heavy Oil
    Espadarte   100%   Deepwater   Intermediate Oil
    Jubarte   100%   Deepwater   Heavy Oil
    Marimba   100%   Deepwater   Intermediate Oil
    Marlim   100%   Deepwater   Heavy Oil
    Marlim Leste   100%   Deepwater   Intermediate Oil
            Ultra-deepwater   Intermediate Oil
    Marlim Sul   100%   Deepwater   Intermediate Oil
    Namorado   100%   Shallow   Intermediate Oil
    Pampo   100%   Shallow   Intermediate Oil
    Pargo   100%   Shallow   Intermediate Oil
    Roncador   100%   Ultra-deepwater   Intermediate Oil
    Vermelho   100%   Shallow   Heavy Oil
    Voador   100%   Deepwater   Heavy Oil
                 
Espírito Santo
  Fazenda Alegre   100%   Onshore   Heavy Oil
    Peroá   100%   Shallow   Light Oil
    Golfinho   100%   Deepwater   Intermediate Oil
            Ultra-deepwater   Intermediate Oil
                 
Potiguar
  Canto do Amaro/Alto da   100%   Onshore   Intermediate Oil/Natural Gas
    Pedra/Cajazeira Estreito/Rio
Panon
  100%   Onshore   Heavy Oil/Natural Gas
                 
Recôncavo
  Jandaia   100%   Onshore   Light Oil
    Miranga   100%   Onshore   Light Oil/Natural Gas
                 
Santos
  Merluza   100%   Shallow   Natural Gas
                 
Sergipe
  Carmopolis   100%   Onshore   Intermediate Oil
    Sirirízinho   100%   Onshore   Intermediate Oil
                 
Solimões
  Leste do Urucu   100%   Onshore   Light Oil/Natural Gas
    Rio Urucu   100%   Onshore   Light Oil/Natural Gas
 
(1) Heavy oil = up to 22° API; intermediate oil = 22° API to 31° API; light oil = greater than 31° API
(2) Petrobras is not the operator in this field.
 
We conduct exploration, development and production activities in Brazil through concession contracts, which we obtain through participation in bid rounds conducted by the ANP. Some of our existing concessions were granted by the ANP without an auction in 1998, as provided by the Oil Law. These are known as the “Round Zero” concession contracts. Since such time, we have participated in all
 
 
of the auction rounds and in the most recent round of December 2008, we acquired 27 of the 54 blocks offered, for a total of 10,476 km2 (2.6 million acres).
 
     Our domestic oil and gas exploration and production efforts are primarily focused on three major basins offshore in Southeastern Brazil: Campos, Espírito Santo and Santos.

 


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     The following map shows our concession areas in Brazil as of December 2008.
 
(MAP OF CONCESSION AREAS)
 
 
The Campos Basin, which covers approximately 115,000 km2 (28.4 million acres), is the most prolific oil and gas basin in Brazil as measured by proved hydrocarbon reserves and annual production. Since we began exploring this area in 1971, over 60 hydrocarbon accumulations have been discovered, including eight large oil fields in deep and ultra-deep water. The Campos Basin is our largest oil- and gas-producing region, producing an average 1,547 mbbl/d of oil and 23.7 mmm3/d (894.3 mmcf/d) of associated natural gas during 2008, 77% of our total production from Brazil.
 
At December 31, 2008, we were producing from 39 fields at an average rate of 1,593 mbbl/d of oil and held proved crude oil reserves representing 90% of our total proved crude oil reserves in Brazil.
 
At December 31, 2008, we held proved natural gas reserves in the Campos Basin representing 49% of our total proved natural gas reserves in Brazil. We operated 34 floating production systems, 14 fixed platforms and 5,697 km (3,540 miles) of pipeline and flexible pipes in water depths from 80 to 1,886 meters (262 to 6,188 feet), delivering oil with an average API gravity of 23.1° and an average BSW of 1%.
 
We expect that future new-source production from Campos will be predominantly from deepwater oil fields. We are currently developing 12 major projects in the Campos Basin: Marlim Sul Modules 2 and 3, Marlim Leste Module 2, Roncador Modules 3 and 4, Jubarte Phase II, Cachalote Phase I, pre-salt reservoirs of Parque das Baleias, Papa-Terra, Frade, Ostra and Baleia Azul.


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At December 31, 2008, we held exploration rights to 22 blocks in the Campos Basin, comprising 6,679.71 km2 (1.6 million acres).
 
 
We have made several discoveries of light oil and natural gas in the Espírito Santo Basin, which covers approximately 75,000 km2 (18.5 million acres) offshore and 14,000 km2 (3.5 million acres) onshore. At December 31, 2008, we were producing from 41 fields at an average rate of 69.2 mbbl/d and held proved crude oil reserves, representing 1% of our total proved crude oil reserves in Brazil. At December 31, 2008, we were producing natural gas at an average rate of 7.2 mmm3/d (273 mmcf/d) and held proved natural gas reserves representing 7% of our total proved natural gas reserves in Brazil.
 
On December 31, 2008, we held exploration rights to 35 blocks, 18 onshore and 17 offshore, comprising 9,359.88 km2 (2.3 million acres).
 
We are developing two deepwater projects to increase natural gas production from the Espírito Santo Basin—the Camarupim project served by the FPSO Cidade de São Mateus with capacity to produce 10 mmm3/d, and the Canapu project served by the FPSO Cidade de Vitória with capacity to produce 2 mmm3/d—both of which are expected to come on stream in the second quarter of 2009.
 
In addition to developing new projects, we are also optimizing existing resources in the Golfinho field by moving the FPSO Capixaba to the Parque das Baleias field in the Campos Basin in anticipation of our pre-salt exploration efforts there. We will reconnect the well previously served by the FPSO Capixaba to another FPSO in the Golfinho field.
 
 
The Santos Basin, which covers approximately 348,900 km2 (86 million acres) off the city of Santos, in the State of São Paulo, is one of the most promising exploration areas offshore Brazil and the focus of our plans to develop domestic natural gas. At December 31, 2008, we produced oil from one field at an average rate of 1.8 mbbl/d and held proved crude oil reserves representing 0.5% of our total proved crude oil reserves in
 
Brazil. At December 31, 2008, we produced natural gas at an average rate of 0.721 mmm3/d (25.46 mmcf/d) and held proved natural gas reserves in the Santos Basin representing 17% of our total proved natural gas reserves in Brazil.
 
In January 2006, we approved the U.S.$18 billion ten-year Master Plan for Development of Natural Gas and Oil Production in the Santos Basin, which will substantially increase our gas production to meet increasing domestic gas demand. We subsequently established a second plan, known as Plangas, to accelerate gas production and build supporting infrastructure in the Santos and Espírito Santo basins. As part of this plan, we are developing the Mexilhão and Urugua-Tambau deepwater fields described below. We expect these investment plans to increase our average gas production from the Santos Basin from 0.66 mmm3/d (23.3 mmcf/d) in 2008 to 11.4 mmm3/d (402.5 mmcf/d) in 2010.
 
Gas development plans for the Santos Basin include:
 
  •    Mexilhão, located in shallow water in Santos Basin Block BS-400, is scheduled to come on stream in 2010 with initial production of approximately 6.5 mmm3/d (229.5 mmcf/d), potentially increasing to 8.0 mmm3/d (282.5 mmcf/d) in 2012;
 
  •    Urugua-Tambau is expected to produce at an initial rate of 3.5 mmm3/d (123.6 mmcf/d) in 2010, potentially increasing to 7.0 mmm3/d (247.2 mmcf/d) of gas and 30 mbbl/d of light oil in 2012; and
 
  •    Lagosta, expected to come on stream in 2009, with initial production of approximately 1.4 mmm3/d (49.4 mmcf/d), potentially increasing to 1.8 mmm3/d (63.6 mmcf/d).
 
On December 31, 2008, we held exploration rights to 62 blocks in the Santos Basin, comprising 36,259.54 km2 (9.0 million acres).
 
 
In recent years, we have focused our offshore exploration efforts on pre-salt reservoirs located in a region approximately 800 km (497 miles) long and 200 km (124 miles) wide stretching from the Campos to the Santos basins.

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We have drilled 30 wells in this 114,000 km2 (28.2 million acre) area since 2005, 87% of which have yielded discoveries of hydrocarbon resources. We are the operator in most of these exploration areas, and hold interests in them ranging from 20% to 100%. In the southern part of the region, where the salt layer is thick and the hydrocarbons have been more perfectly preserved, we have made particularly promising discoveries, including Block BM-S-11 (Tupi and Iara) in the Santos Basin in 2006 and 2008. In the northern part of the region, we made a significant discovery in the area known as Parque das Baleias, in the Campos Basin in 2008.
 
We intend to commit substantial resources to develop these pre-salt discoveries, which are located in deep and ultra-deep waters at target depths of between 5,000 and 7,000 meters (16,404 and 22,966 feet) and present considerable technical challenges. Over the next five years we plan to invest U.S.$28.9 billion, approximately 31% of our total domestic capital expenditures for exploration and production in the period, in the development of the pre-salt reservoirs.
 
Our existing concessions cover approximately 23% (26,000 km2 or 6.4 million acres) of the pre-salt reservoirs. An additional 2% (3,000 km2 or 0.7 million acres) is under concession to other oil companies for exploration. The remaining 75% (85,000 km2 or 21 million acres) of the pre-salt region is not yet under concession, and the licensing of new pre-salt concessions is on hold pending the outcome of a regulatory review by the Brazilian government. See “—Regulation of the
 
Oil and Gas Industry in Brazil—Discussions on Possible Changes to the Oil Law.”
 
In the pre-salt region of the Santos Basin, first oil was produced during an extended well test in Tupi, which began in May 2009. It will be followed by a pilot system FPSO with capacity of 100 mbbl/d, which is scheduled to start up in Tupi by the end of 2010. Although we have made promising discoveries in the region, we are still in the early stages of our exploration efforts and do not expect to classify any pre-salt reserves as proven before 2010. In addition to the EWTs, we will drill a number of appraisal wells to better understand and delineate the pre-salt reservoirs in the Santos Basin. We also expect to start up two pilot systems in Iara and Guará during 2013-2014. We expect that future new-source production from the Santos Basin will be predominantly from pre-salt reservoirs.
 
In the pre-salt region of the Campos Basin, we drilled two wells off the coast of the State of Espírito Santo and made a significant discovery of intermediate oil (30° API) in the Parque das Baleias area. In September 2008, we commenced an EWT in this area, with a single well pilot system producing in the Jubarte field at an average rate of 10 to 12 mbbl/d. We are continuing to study these promising finds and expect to accelerate pre-salt production in Parque das Baleias using existing infrastructure in the area. In December 2008, we began another EWT with a dynamic positioned vessel in the Cachalote field and we expect to start producing from this field and from the Baleira Franca field using an existing FPSO by the second half of 2010.

 


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     The map below shows the location of the pre-salt reservoirs as well as the status of our exploratory activities there.
 
map of pre-salt reservoirs
 
Other Basins
 
We produce hydrocarbons and hold exploration acreage in eight other basins in Brazil. Of these, the most significant are the shallow offshore Camamu Basin and the onshore Potiguar, Recôncavo, Rio Grande do Norte, Sergipe, Alagoas and Solimões basins. While our onshore production
 
is primarily in mature fields, we plan to sustain and slightly increase production from these fields in the future by using enhanced recovery methods.
 
We had a total of 312 production agreements as of December 31, 2008, and were the 100% owner in 285 of them. We are operators under 15 of our 27 partnership agreements.

 


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     The following table describes our principal development projects in the various basins and their production capacity:
 
                                             
            Crude Oil
    Natural Gas
                 
            Nominal
    Nominal
    Water
           
    Unit
  Production
  Capacity
    Capacity
    Depth
    Start Up
     
Field   Type   Unit   (bbl/d)     (mcf/d)     (meters)     (year)     Notes
 
Marlim Sul – Module 2
  SS   P-51     180,000       211,884       1,255       2009 (1)    
Marlim Leste – Module 2
  FPSO   Cidade de Niteroi     100,000       123,599       1,400       2009 (2)   Chartered from Modec
Tupi EWT
  FPSO   BW Cidade de São Vicente     30,000       0       2,170       2009 (3)   Chartered by BW Offshore
Canapu
  n/a   n/a     0       70,628       1,440       2009     Production by FPSO Cidade de Vitória
Camarupim
  FPSO   Cidade de
São Mateus
    25,000       353,140       720       2009     Chartered from Prosafe
Lagosta
  n/a   n/a     0       52,971       131       2009     Production by PMLZ-1
Frade(4)
  FPSO   Frade     100,000       81,222       900       2009      
Ostra(5)
  FPSO   Espírito
Santo
    100,000       49,440       1,600       2009      
Mexilhão
  Fixed
Platform
  PMXL-1     0       529,710       172       2010      
Urugua – Tambau
  FPSO   Cidade de Santos     35,000       353,140       1,300       2010     Chartered from
Modec
PIPA 2 – Baleia Azul
  FPSO   Dynamic Producer     30,000       0       1,400       2010     Chartered from
Petroserv
Tupi pilot
  FPSO   Cidade de Angra dos Reis     100,000       123,603       2,200       2010     Chartered from
Modec
Cachalote and Baleia Franca
  FPSO   Capixaba     100,000       123,599       n/a       2010     Existing FPSO
chartered from SBM
Marlim Sul – Module 3
  SS   P-56     100,000       211,884       n/a       2011      
Jubarte – Phase II
  FPSO   P-57     180,000       70,628       1,300       2011      
Baleia Azul
  FPSO   Espadarte     100,000       88,285       1,400       2012     Existing FPSO chartered from SBM
Roncador – Module 3
  SS   P-55     180,000       211,884       1,790       2012      
Roncador – Module 4
  FPSO   P-62     180,000       211,884       1,545       2013      
Papa-Terra – Module 1
  TLWP   P-61     0       0       1,180       2013     Production by P-63
Papa-Terra – Module 2
  FPSO   P-63     150,000       31,783       1,165       2013      
Piloto de Guara
  FPSO   n/a     100,000       176,570       n/a       2013      
Pre-salt reservoirs of Parque das Baleias
  FPSO   P-58     180,000       211,884       1,400       2014      
 
 
(1) Production began in January 2009.
(2) Production began in February 2009.
(3) Production began in May 2009.
(4) Petrobras 30%, Chevron (operator) 51.74%, Frade Japão 18.26%.
(5) Petrobras 35%, Shell (operator) 35%, Esso 30%.
 
 
As of December 31, 2008, we had 186 exploration agreements covering 256 blocks, and 35 evaluation plans. We are exclusively responsible for conducting the exploration activities in 77 of the 186 exploration agreements. As of December 31, 2008, we had partnerships in exploration with 29 foreign and domestic companies, for a total of 109 agreements. We conduct exploration activities under 70 of our 109 partnership agreements.
 
We focus much of our exploration effort on deepwater drilling, where the discoveries are substantially larger and our technology and expertise create a competitive advantage. In
 
2008, we invested a total of U.S.$2.47 billion in exploration activities in Brazil. We drilled a total of 135 gross exploratory wells in 2008, of which 47 were offshore and 88 onshore, with a success ratio of 44%.
 
Because offshore Brazil is geographically isolated from other offshore drilling areas, and because we often drill in unusually deep waters, we plan carefully for our future drilling rig needs. By using a combination of our own rigs and units that we contract for periods of five years or longer, we have historically ensured the availability of drilling units to meet our needs, and paid lower average day rates than if we had contracted the units on a spot basis. We continually evaluate our need for rigs,


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renew our drilling contracts, contract ahead for rigs as needed, and stimulate new rig construction by
 
signing long-term operating leases with drilling contractors for rigs that are not yet built.

 
 
                                                 
Drilling Units in Use by Exploration and Production   On December 31  
    2008     2007     2006  
    Leased     Owned     Leased     Owned     Leased     Owned  
 
Onshore
    25       11       14       13       6       13  
Offshore, by water depth (WD)
    31       8       27       8       24       9  
Jack-up rigs
    2       4       1       4       1       5  
Floating rigs:
                                               
500 to 1000 meter WD
    9       2       6       2       4       2  
1000 to 1500 meters WD
    10       1       10       1       10       1  
1500 to 2000 meters WD
    7       1       7       1       7       1  
2000 to 2500 meters WD
    2       0       2       0       1       0  
2500 to 3000 meters WD
    1       0       1       0       1       0  
 
We have entered into five- to seven-year contracts beginning in 2009 and 2010 for 15 new drilling rigs. Two will operate in water depths of less than 1,000 meters (6,560 feet), three may operate in water depths of 2,000 meters (6,560 feet), nine may operate in water depths of 2,400 meters (7,830 feet), and one will drill in water depths of 3,000 meters (9,840 feet). All of such new rigs will be chartered.
 
In 2008, higher oil prices contributed to cost inflation in the industry and reduced availability of oil and gas production equipment. We have taken measures to minimize cost and risk by simplifying and standardizing our equipment, wherever possible. We are increasing our use of industry-standard equipment instead of developing our own custom-made standards and equipment. We also intend to minimize costs by dividing engineering procurement and construction packages into smaller pieces and purchasing equipment from or contracting with a greater number of competitors, as well as by increasing oversight over suppliers.
 
 
On December 31, 2008, our estimated reserves of crude oil and natural gas in Brazil totaled 10.3 billion barrels of oil equivalent, including: 8.7 billion barrels of crude oil and natural gas liquids and 247.6 bnm3 (9.3 tcf) of natural gas. As of December 31, 2008, our domestic proved developed crude oil reserves represented 61% of our total domestic proved developed and undeveloped crude oil reserves. Our domestic proved developed natural gas reserves represented 54% of our total domestic proved developed and undeveloped natural gas reserves. Total domestic proved crude oil reserves decreased at an average annual rate of 1% in the last
 
five years. Natural gas proved reserves increased at an average annual rate of 3% over the same period. Recent discoveries in our pre-salt reservoirs are still under evaluation and are not included in our proved reserves.
 
We are in discussions with ANP about the possible extension of the production concessions we hold for our major producing fields. In 2007 and 2008, we received a positive response from ANP about extending the concession for the Albacora Leste, Barracuda, Marlim Leste, Marlim Sul, Roncador, Marlim, Espadarte, Albacora, Jubarte, Cachalote, Baleia Franca, Candeias, Canto do Amaro, Ubarana and Siririzinho fields, which resulted in an increase in our proved reserves in those fields. We are discussing with ANP similar amendments to other production concessions.
 
See “—Overview of the Group,” and “Supplementary Information on Oil and Gas Producing Activities” in our audited consolidated financial statements for further details on our proved reserves.
 
 
We are an integrated company with a dominant market share in our home market. As of December 31, 2008, we operated 98.4% of Brazil’s total refining capacity and we supplied almost all of the refined product needs of third-party wholesalers, exporters and petrochemical companies, in addition to the needs of our Distribution segment. We own and operate eleven refineries in Brazil, with a total net distillation capacity of 1,942 mbbl/d, making us the world’s eighth largest refiner among publicly traded companies.
 
We operate a large and complex infrastructure of pipelines and terminals and a


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shipping fleet to transport oil products and crude oil to domestic and export markets. Most of our refineries are located near our crude oil pipelines, storage facilities, refined product pipelines and major petrochemical facilities, facilitating access to crude oil supplies and end-users.
 
We also import and export crude oil and oil products. We import certain oil products, particularly diesel, for which Brazilian demand exceeds refining capacity. We expect the need for imports to decline in the future as we build
 
additional refining capacity and upgrade our refineries to facilitate the processing of domestically produced crudes. We export our surplus heavy crude oil, and expect exports to increase as our production increases more rapidly than Brazilian demand for oil.
 
Our Supply segment also includes petrochemical and fertilizer operations that add value to the hydrocarbons we produce and provide beneficial inputs to the growing Brazilian economy.

 
 
 
 
                         
    2008     2007     2006  
    (U.S.$ million)  
 
Supply:
                       
Net operating revenues
    96,202       69,549       57,959  
Income (loss) before minority interest and income tax
    (2,956 )     4,171       3,850  
Total assets at December 31
    27,521       31,218       20,820  
Capital expenditures
    7,234       4,488       1,936  
 
 
Our refining capacity in Brazil as of December 31, 2008, was 1,942 mbbl/d and our average throughput during 2008 was 1,765 mbbl/d.
 

 
 
 
     The following table shows the installed capacity of our Brazilian refineries as of December 31, 2008, and the average daily throughputs of our refineries in Brazil and production volumes of principal oil products in 2008, 2007 and 2006.
                     
        Crude
           
        Distillation
           
        Capacity at
           
        December 31,
  Average Throughput
     Name (Alternative Name)(1)   Location   2008   2008   2007   2006
        (mbbl/d)       (mbbl/d)    
 
LUBNOR
  Fortaleza (CE)   7   6   6   7
RECAP (Capuava)
  Capuava (SP)   53   45   42   40
REDUC (Duque de Caxias)
  Rio de Janeiro (RJ)   242   256   243   254
REFAP (Alberto Pasqualini)
  Canoas (RS)   189   142   148   114
REGAP (Gabriel Passos)
  Betim (MG)   151   143   132   136
REMAN (Isaac Sabbá)
  Manaus (AM)   46   39   41   36
REPAR (Presidente Getúlio Vargas)
  Araucária (PR)   189   183   169   183
REPLAN (Paulínia)
  Paulinia (SP)   365   324   348   341
REVAP (Henrique Lage)
  São Jose dos Campos (SP)   251   205   236   211
RLAM (Landulpho Alves)
  Mataripe (BA)   279   254   261   261
RPBC (Presidente Bernardes)
  Cubatão (SP)   170   168   153   163
                     
Total
      1,942   1,765   1,779   1,746
                     
 
 
(1) We have a 100% interest in each of these refineries, with the exception of REFAP, in which we have a 70% share.
 
The crude oil we currently produce in Brazil is heavy or intermediate, while our refineries were originally designed to run on lighter imported crude. We import some lighter crude to balance the slate for our refineries and are investing in our refinery
 
system to maximize our ability to process heavier domestic crude. These investments will give us the flexibility to adjust our mix between heavy and light crudes to take advantage of market prices and match our refinery outputs to product demand.


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In general, we plan to invest in refinery projects designed to:
 
  •     enhance the value of Brazilian crude oil by increasing our capacity to refine greater quantities of the heavier crude oil that is produced domestically;
 
  •     increase production of oil products that the Brazilian market demands but that we must currently import, such as diesel;
 
  •     improve gasoline and diesel quality to comply with stricter environmental regulations currently being implemented; and
 
 
  •     reduce emissions and pollutant streams.
 
 
We are in the early stages of building a new 230 mbbl/d refinery at Abreu e Lima in Northeastern Brazil in a proposed partnership with PDVSA, the Venezuelan state oil company. This refinery is designed to process 16o API crude and will produce 162 mbbl/d of diesel as well as LPG, naphtha, bunker fuel and petroleum coke.
 
We are also planning two new refineries located in Northeastern Brazil: Premium I and Premium II with capacity of 600 mbbl/d and 300 mbbl/d, respectively. These refineries are designed to process heavy crude oil (20o API) and to maximize production of low-sulfur diesel in addition to LPG, naphtha, low-sulfur kerosene, bunker fuel and petroleum coke.
 

 
The following table shows our most significant planned investments in our refineries for 2009 to 2013:
 
         
Planned Investments 2009-2013   (U.S.$ million)  
 
Quality (diesel and gasoline)
    13,196  
Cokers
    4,602  
Expansion and metallurgic adaptation
    590  
         
Total
    18,388  
         
 
 
In addition to the new projects mentioned above, our 2009-2013 Business Plan includes investments in several key refineries, primarily for hydro-treating units to reduce sulfur and meet international standards and coking units capable of converting heavy oil into lighter products. These investments will allow us to begin offering diesel in metropolitan areas containing a maximum sulfur content of 50 parts per million, significantly lower than current levels in 2009. Of our total U.S.$18.4 billion in planned refinery investments for 2009 to 2013,


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U.S.$13.2 billion will be used for improving diesel and gasoline quality and U.S.$4.6 billion for delayed coking units to convert fuel oil into lighter fractions. The principal planned investments are:
 
     
     
Refinery (Alternative Name)   Objective
 
RECAP (Capuava)
  Upgrade diesel and gasoline quality
REDUC (Duque de Caxias)
  Increase heavy oil processing, upgrade diesel and gasoline quality
REFAP (Alberto Pasqualini)
  Upgrade diesel and gasoline quality
REGAP (Gabriel Passos)
  Upgrade diesel and gasoline quality
REMAN (Isaac Sabbá)
  Install mild thermal cracking units to upgrade the quality of diesel and gasoline
REPAR (Presidente Getúlio Vargas)
  Expand refinery, increase heavy oil processing, upgrade diesel and gasoline quality, new propylene unit
REPLAN (Paulínia)
  Expand refinery, increase heavy oil processing, upgrade diesel and gasoline quality, new propylene unit
REVAP (Henrique Lage)
  Increase heavy oil processing, upgrade diesel and gasoline quality, new propylene unit
RLAM (Landulpho Alves)
  Upgrade diesel and gasoline quality
RPBC (Presidente Bernardes)
  Upgrade diesel and gasoline quality
 
 
We use exports and imports of crude oil and oil products to balance our domestic production and refinery capacity with market needs and optimize our refining margins, importing light crude for our refineries and exporting heavier crude that is surplus to our needs. We import
diesel due to insufficient production in our Brazilian refineries and export gasoline, largely because ethanol and vehicular natural gas provide a substantial share of Brazil’s light vehicle transportation fuels. We also export fuel oil and approximately 79% of our bunker fuel production.
 

 
 
 
     The table below shows our exports and imports of crude oil and oil products in 2008, 2007 and 2006:
 
             
    2008   2007   2006
    (mbbl/d)
 
Exports(1)
           
Crude oil
  439   353   335
Fuel oil (including bunker fuel)
  152   160   168
Gasoline
  40   59   44
Other
  42   43   34
             
Total exports
  673   615   581
             
Imports
           
Crude oil
  373   390   370
Diesel and other distillates
  100   83   56
LPG
  40   29   27
Naphtha
  23   17   20
Other
  34   19   15
             
Total imports
  570   538   488
             
 
 
(1) Includes sales made by PifCo to unaffiliated third parties, including sales of oil and oil products purchased internationally.
 
Logistics and Infrastructure
 
We own and operate an extensive network of crude oil and oil products pipelines in Brazil that connect our terminals, refineries and other primary distribution points. On December 31, 2008, our
 
onshore and offshore, crude oil and oil products pipelines extended 13,830 km (8,595 miles). We operate 26 marine storage terminals and 20 other tank farms with nominal aggregate storage capacity


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of 65 million barrels. Our marine terminals handle an average 5,000 vessels annually.
 
We operate a fleet of owned and chartered vessels. These provide shuttle services between our producing basins offshore Brazil and the Brazilian mainland, domestic shipping and international shipping to other parts of South America, the Caribbean Sea and Gulf of Mexico, Europe, West Africa and the Middle East. The fleet includes double-hulled vessels, which operate internationally where required by law, and single-hulled vessels, which operate in South America and Africa only. According to our 2009-2013 Business Plan, we will contract with Brazilian shipyards to construct 49 new vessels by 2015. The new ships are needed to upgrade our fleet and handle increased production volumes. Upgrades will include replacing single-hulled tankers with double-hulled vessels and
 
replacing vessels nearing the end of their 25-year useful life.
 
We have signed contracts with three shipyards for 23 of these vessels for delivery between 2010 and 2014, including:
 
  •     ten Suezmax and five Aframax ships to be constructed by the Atlantico Sul shipyard, in Suape, Pernambuco;
 
  •     four Panamax ships to be constructed by the EISA shipyard in Rio de Janeiro; and
 
  •     four tankers to be constructed by the Mauá shipyard in Niterói.
 
We expect that we will continue to charter additional vessels as needed in the future.

 
 
 
     The table below shows our operating fleet and vessels under construction as of December 31, 2008.
 
                         
    In Operation   Under Construction
        000 Tons
      000 Tons
        Deadweight
      Deadweight
    Number   Capacity   Number   Capacity
 
Owned fleet:
                       
Tankers
    45       2,666,082     23   2,620,450
LPG tankers
    6       40,146     0   0
Anchor Handling Tug Supply (AHTS)
    1       1,920     0   0
Floating, Storage and Offloading (FSO)
    1       28,903     0   0
Layed-up vessel
    1       143,929     0   0
                 
Total
    54       2,880,980     23   2,620,450
                 
                     
Chartered vessels:
                       
Tankers
    111       11,092.76          
PG tankers
    24       539.09          
                 
Total
    135       11,631.85          
                 
 
Prior to the 1997 Oil Law, we held a monopoly on Brazilian oil and natural gas pipelines and shipping oil products to and from Brazil. The Oil Law provided for open competition in the construction and operation of pipeline facilities and gave the ANP the power to authorize other entities to transport crude oil, natural gas and oil products. We subsequently transferred our transportation and storage network and fleet to a separate wholly owned subsidiary, Petrobras Transporte S.A.—Transpetro. The transfer was required by the Oil Law and facilitates access to excess capacity by third parties on a non-discriminatory basis. We enjoy preferred access to the Transpetro network based on our historical usage levels. In practice, third parties make very limited use of this network.
 
We have distributed ethanol to the domestic market through our pipelines for 30 years. As the global demand for ethanol has increased, we are investing to expand our ethanol pipeline and logistics capacity, including:
 
  •     converting the existing oil products pipeline between Guararema and Guanabara Bay to transport 2.88 mmm3/y of ethanol by June 2010, with a plan to expand to 4 mmm3/y by December 2010; and
 
  •     building a new ethanol pipeline from Paulínia to São Sebastião to transport 12.9 mmm3/y of ethanol, primarily for export.


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Our petrochemicals operations provide a growing market for the crude oil and other hydrocarbons we produce, increase our value added and provide domestic sources for products that would otherwise be imported. We aim to expand our petrochemicals operations in Brazil and elsewhere in South America and to integrate these into our overall business.
 
Our strategies are to:
 
  •     increase domestic production of basic petrochemicals and engage in second generation and biopolymers activities through investments in companies in Brazil and abroad, capturing synergies within all our businesses; and
 
  •     increase production of fertilizers in order to supply the Brazilian market.
 
In the past, the Brazilian petrochemicals industry was fragmented into a large number of small companies, many of which were not internationally competitive and were therefore poor customers for our petrochemical feedstocks.
 
In 2008, we participated in the consolidation and restructuring of the Brazilian petrochemicals industry.
 
In June 2008, we combined our interests in Suzano Petroquímica (Suzano), including our interest in Rio Polímeros S.A. and Petroquímica União, with certain petrochemical assets of União de Indústrias Petroquímicas S.A. (Unipar) in a new company, Quattor Participações (Quattor). Both we and Unipar increased production of polyolefins and basic petrochemicals as a result of this joint venture.
 
Also in 2008, Odebrecht S.A., Nordeste Química S.A. and Braskem S.A. (Braskem) implemented a similar restructuring in connection with the acquisition of Ipiranga Química’s assets.
 
We and our partners combined our interests in certain petrochemical companies at Braskem.
 
As a result of this restructuring, we hold minority stakes in the two principal companies in the Brazilian petrochemical industry, Quattor (40% of total capital, 40% of voting stock) and Braskem (23.8% of total capital, 31% of voting stock).

 
 
 
     Quattor and Braskem together operate 27 petrochemical plants producing basic petrochemicals and plastics, and related distribution and waste processing operations. The table below shows the primary production capacities of each of Quattor and Braskem as of December 31, 2008.
 
         
Petrochemical Materials   Nominal Capacity  
    (mmt/y)  
 
Quattor Participações
       
Ethylene
    1.02  
Propylene
    0.32  
Cumene
    0.31  
Polyethylene
    1.01  
Polypropylene
    0.88  
         
Braskem
       
Ethylene
    2.48  
Propylene
    1.13  
Polyethylene
    1.82  
Polypropylene
    1.04  
PVC
    0.52  
 
Through our minority holdings in Brazil’s two new major petrochemicals companies, we can better participate in planning the industry’s future needs.
 
We have four new petrochemicals projects under construction or in various stages of engineering or design:
 
  •     Complexo Petroquímico do Rio de Janeiro—Comperj: a 150 mbbl/d petrochemical facility that will use
 
 
our innovative proprietary Petrochemical FCC technology to convert Brazilian heavy crude into basic and intermediate petrochemicals, plastic resins, aromatics, coke, diesel oil and naphtha. We are in the process of selecting strategic partners and planning this project with a goal of starting up in 2012;
 
  •     Companhia Petroquímica de Pernambuco—PetroquímicaSuape: a 700,000 t/y purified terephthalic
 


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acid plant to start up in 2010. PetroquímicaSuape was originally a joint venture between Companhia Integrada Têxtil do Nordeste—Citene and Petroquisa. In August 2008, Citene declared its intention to withdraw from this partnership and Petroquisa subsequently acquired 100% of the project. Construction began in 2008;
 
  •     Companhia Integrada Têxtil de Pernambuco—Citepe: a 240,000 t/y of polyester yarn facility expected to start up in 2010; and
 
  •     Companhia de Coque Calcinado de Petróleo—Coquepar: two calcined petroleum coke plants, one in Rio de Janeiro and one in Paraná, with a combined capacity of 700,000 t/y. The first of the two plants is expected to start up in 2011. Coquepar is a joint venture between Petroquisa (40%), Unimetal (30%) and Brazil Energy (30%).
 
Our fertilizer plants in Bahia and Sergipe produce ammonia and urea for the Brazilian market. In 2008, these plants sold a combined 231,000 t of ammonia and 695,000 t of urea. We are currently conducting feasibility studies for two additional fertilizer facilities:
 
  •     Bahia: 120,000 t/y nitric acid plant to supply Pólo Petroquímico de Camaçari; and
 
 
  •     South-Central Brazil: facility (UFN-3) to produce 1 million t/y of urea and 760,000 t/y of ammonia from natural gas.
 
 
Our Distribution segment sells oil products that are primarily produced by our Supply operations and works to expand the domestic market for these and other liquid and transportation fuels. Our primary goals are to: create value by meeting growing customer needs for fuels, including both traditional hydrocarbons and biofuels; and sustain and expand our market share by providing superior quality, service and leadership in the growing biofuels sector.
 
We supply and operate Petrobras Distribuidora S.A.—BR, which accounts for 34.9% of the total Brazilian distribution market, according to the ANP. BR distributes oil products, ethanol and biodiesel, and vehicular natural gas to retail, commercial and industrial customers. In 2008, BR sold the equivalent of 698.0 mbbl/d of oil products to wholesale and retail customers, of which the largest portion (39.6%) was diesel.

 
 
                         
    2008     2007     2006  
    (U.S.$ million)  
 
Distribution:
                       
Net operating revenues
    30,892       23,320       18,681  
Income before minority interest and income tax
    1,245       676       451  
Total assets at December 31
    4,775       5,652       3,675  
Capital expenditures
    309       327       351  
 
At December 31, 2008, our BR network included 5,998 service stations, or 17.1% of the stations in Brazil. This total does not include the 784 stations in Northern, Northeastern and Northwestern Brazil that we acquired from Ipiranga in 2007, and which were incorporated into the BR network in April 2009. See “—Supply—Petrochemicals and Fertilizers.” The integration of Ipiranga and its service stations into our network was approved by the Conselho Administrativo de Defesa Econômica, or CADE (Brazilian Antitrust Authority) in December 2008.
 
BR was Brazil’s leading service station in 2008, with BR-owned and franchised stations making 26.3% of Brazil’s retail diesel, gasoline, ethanol, vehicular natural gas and lubricant sales, according to the ANP. Most BR stations are owned by franchisees that use the BR brand name under license and purchase exclusively from us; we also provide technical support, training and advertising. We own 656 of the BR stations and are required by law to subcontract the operation of these owned stations to third parties.
 
The retail fuel market in Brazil is highly competitive and we expect that prices will be


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subject to continued pressure. We seek to enhance profitability and customer loyalty by building on our strong brand image and providing superior quality and service. We believe that our market share position is supported by a strong BR brand image and by the remodeling of service stations and the addition of lubrication centers and convenience stores.
 
The primary fuel used in Brazil is diesel, which accounts for approximately 766.8 mbbl/d (45.5%) of the total Brazilian fuels market. By law, all diesel sold in Brazil from July 2008, was required to be at least 3% biodiesel; this proportion will be increased to 4% in July 2009. We acted as a catalyst for developing the new market by securing and blending biodiesel supplies and furnishing these to smaller distributors as well as our own service stations. Brazil is a global leader in the use of ethanol as a fuel for light vehicles. Today, 91.2% of new gasoline vehicles sold in Brazil have flexfuel capability, and service stations offer a choice of 100% ethanol as well as a blend of 25% ethanol and gasoline, as required by the regulator. Although we do not produce ethanol, we have supported the development of that market by distributing and wholesaling ethanol and by stimulating improvements in product quality.
 
Service stations in our network also sell vehicular natural gas. The number of stations offering this product increased to 453 in December 2008, from 409 in December 2007, and total gas sales in 2008 were 566 mmm3 (19,989 mmcf).
 
We also distribute oil products and biofuels under the BR brand to commercial and industrial customers. Our customers include aviation, transportation and industrial companies, as well as utilities and government entities, all of which generate relatively stable demand.
 
We also sell oil products produced by our Supply operations to other retailers and to wholesalers.
 
Our LPG distribution business, Liquigas Distribuidora, held a 22.3% market share and ranked third in LPG sales in Brazil in 2008, according to the ANP.
 
We participate in the retail sector in other Latin American countries through our International business segment. See “—International.”
 
 
For many years, we have been simultaneously developing Brazil’s natural gas reserves, infrastructure and markets. As part of this process, we developed gas sources off shore Brazil and in Bolivia, the Bolivia-Brazil gas pipeline, a domestic transportation system and gas-fired electric power generation capacity. We built two LNG terminals in 2008 to supplement our domestic supply of natural gas. These initiatives contributed to increase our supply of natural gas from approximately 11.0 mmm3/d (388.5 mmcf/d) in 1999 to 60.7 mmm3/d (2,143.6 mmcf/d) in 2008. Natural gas supplied 3.7% of Brazil’s total energy needs in 1998 compared to 10.3% today and a projected 14.0% in 2010, according to Empresa de Pesquisa Energética, a branch of the Ministry of Mines and Energy.
 
The development plans of our Exploration and Production operations are expected to result in substantial increases in gas production from the Espírito Santo and Santos basins off the Brazilian coast, including from pre-salt reservoirs. We are investing in transportation infrastructure to deliver these new volumes to markets in Northeastern and Southeastern Brazil and to improve the flexibility of our distribution system. Natural gas imported from Bolivia will play a lesser though still important role in our operations as we increase domestic gas production. We are also improving our commercial operations through a suite of natural gas sales contracts that better allow us to match supply and demand for gas and electric power.
 
Our primary goals for our gas and energy segment are to:
 
  •     add value by monetizing Petrobras’ natural gas reserves;
 
  •     assure flexibility and reliability in the commercialization of natural gas in thermoelectric and non-thermoelectric markets;
 
  •     expand our LNG business to meet demand and diversify our supply of natural gas; and
 
  •     optimize our thermoelectric power plant portfolio.

 


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    2008   2007   2006
    (U.S.$ million)
 
Gas and Energy:
                       
Net operating revenues
    8,802       4,912       4,090  
Loss before minority interest and income tax
    (504 )     (947 )     (414 )
Total assets at December 31
    14,993       15,536       9,597  
Capital expenditures
    4,256       3,223       1,664  
 
 
Our natural gas business comprises three activities: transportation (building and operating natural gas pipeline networks in Brazil); equity participation in distribution companies that sell natural gas to end-users; and commercialization (purchase and resale).
 
 
Our natural gas transportation system in Brazil comprises two main pipeline networks — the 4,413 km (2,743 mile) Malha Sudeste (Southeast Network), which connects our main offshore natural gas producing fields in the Campos and Espírito Santo basins to the growing markets of the Southeast Region, including Rio de Janeiro and São Paulo, and the 1,980 km (1,231 mile) Malha Nordeste (Northeast Network), which transmits gas from onshore and offshore natural gas fields in the Northeast to consumers in that region. The Southeast Network includes the 2,593 km (1,612 mile) Brazilian portion of the Bolivia-Brazil natural gas pipeline. The two main pipeline networks will be linked by the Southeast Northeast Interconnection Gas Pipeline (GASENE), which we expect to be completed by the first quarter of 2010. In the Northern Region, the 660 km (410 mile) Urucu-Coari-Manaus pipeline will connect the Solimões Basin to Manaus, where natural gas will be used primarily to generate electric power, and also to meet industrial, commercial and retail demand.
 
In 2008, we invested U.S.$3.3 billion to improve and expand our natural gas transportation system. We extended our natural gas transport system by a total of 776 km (482 miles) to 6,933 km (4,309 miles), including the following additions to the Southeast and Northeast Networks:
 
  •     303 km (188 mile) gas pipeline linking Cabiúnas to Vitória, the site of the gas processing facility that handles gas produced from the Campos
 
 
Basin. This pipeline has the capacity to transport up to 20 mmm3/d (707 mmcf/d) from the Espírito Santo Basin to the Southeast Region;
 
  •     255 km (158 mile) addition to the Campinas—Rio pipeline in the Southeast Region with capacity to transport up to 8.6 mmm3/d (303.7 mmcf/d) of natural gas, increasing our ability to deliver volumes imported via the Bolivia-Brazil gas pipeline to market;
 
  •     196 km (122 mile) gas pipeline linking Catu to Itaporanga with the capacity to transport up to 10 mmm3/d (353 mmcf/d) of natural gas from the Manati gas field and other sources to the Northeast Region; and
 
  •     22 km (14 mile) gas pipeline linking the Pecém LNG terminal to our distribution network in the Northeast Region with capacity to transport up to 7 mmm3/d (247 mmcf/d) of natural gas.
 
In addition, we are in the final stages of a pipeline construction program that will connect most of Brazil’s principal gas pipelines, allowing gas to be transported through pipelines from the South to the Northeast of the country and from the Solimões Basin to the Amazonian market. This will increase the capacity and flexibility of our natural gas networks and allow us to make better use of growing gas supplies. We expect that the program will be completed by the first quarter of 2010. The program includes:
 
  •     constructing the 954 km (593 mile) final section of the GASENE, completing the link between Malha Sudeste and Malha Nordeste. This pipeline will transport up to 20 mmm3/d (707 mmcf/d) from
 


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        Cacimbas to the city of Catu in the State of Bahia and will be completed in the first quarter of 2010; and
 
  •     completing the 660 km (410 mile) Urucu-Coari-Manaus pipeline, which
will supply up to 5.5 mmm3/d (194 mmcf/d) of natural gas from the Solimões Basin to the city of Manaus starting in the third quarter of 2009.

 
 
 
     The map below shows our existing pipelines and our pipelines under construction.
 
(MAP)
 
 
We have completed construction of two LNG terminals, one in Rio de Janeiro with a send-out capacity of 20 mmm3/d (706 mmcf/d) that was completed in January 2009, and the other in Pecém in Northeastern Brazil with a send-out capacity of 7 mmm3/d (247 mmcf/d) that was completed in December 2008. The terminals will be supported by two large LNG regasification ships with a capacity of 14 mmm3/d (494 mmcf/d) and 7 mmm3/d (247 mmcf/d), respectively. The new terminals and regasification ships give us the flexibility to import gas from other sources to supplement domestic natural gas supplies. We have negotiated and signed with several
 
companies LNG supply contracts and Master Sales Agreements that will be used to acquire spot cargoes as needed.
 
 
Under Brazilian law, each state holds a monopoly over local gas distribution. Most states have formed companies to act as local gas distributors and we hold interests that vary from 24% to 100% in 20 of these 27 distribution companies. Nonetheless, in all of the companies where we hold a minority stake, we appoint executive officers and members of the board of

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directors. The State of Espírito Santo has assigned us exclusive rights to distribute natural gas through our BR subsidiary. In 2008, Brazil’s distribution
 
companies sold a combined 50 mmm3/d (1,732 mmcf/d) of natural gas, of which our share was 22%, according to our estimates.

 
 
 
     The map below shows the name and location of each local gas distributor in which we have an equity interest and our share in those companies.
 
(MAP)
 
     Our most significant distribution holdings are:
 
                             
              Average Gas Sales in
       
Name   State   Group Share %     2008 (mmm3/d)     Customers  
 
CEG RIO
  Rio de Janeiro     37.40       8.99       21,537  
BAHIAGAS
  Bahia     41.50       3.47       277  
GASMIG
  Minas Gerais     40.00       2.41       269  
BR
  Espirito Santo     100.00       1.83       13,480  
 
According to our estimates, our two most significant holdings, CEG Rio and Bahiagás, sold 18.3% and 7.1% of Brazil’s national gas volumes in 2008, respectively. CEG Rio and Bahiagás are Brazil’s second and fourth largest gas distributors. These companies, together with independent distributors Comgás (28.3% of Brazil’s 2008 national gas volumes) and CEG (17.3% of the same), supply 71% of the Brazilian market.
 
Commercialization
 
In 2008, our Gas and Energy segment supplied an average 60.7 mmm3/d (2,143.6 mmcf/d) of natural gas for consumption. Of the 2008 total, 18.3% was used in our refineries, 21.1% was used for thermoelectric power generation and the remaining 60.6% was consumed by industrial, commercial and retail natural gas users.


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In 2008, our Exploration and Production segment supplied 50% of our total gas needs and we imported the balance of 50% from Bolivia. We expect the proportion of domestic gas in our total
 
supply mix to increase in future years as our Exploration and Production segment brings new gas fields on stream.


 
 
 
     The table below shows the sources of our natural gas supply, our sales and internal consumption of natural gas, and our revenues for each of the past three years:
 
                         
Supply and Sales of Natural Gas   2008     2007     2006  
    (mmm3/d)  
 
Sources of natural gas supply
                       
Domestic production
    30.3       22.4       21.9  
Imported from Bolivia
    30.4       26.9       24.4  
Liquified Natural Gas
    0.0       0.0       0.0  
                         
Total natural gas supply
    60.7       49.3       46.3  
                         
Sales of natural gas
                       
Sales to local gas distribution companies(1)
    36.8       35.1       33.7  
Sales to gas-fired power plants
    12.8       4.1       6.1  
                         
Total sales of natural gas
    49.6       39.3       39.8  
                         
Internal consumption (refineries and gas-fired power plants)(2)
    11.1       10.0       6.5  
Revenues (U.S.$ billion)(3)
    6.0       3.4       1.8  
 
 
(1) Includes sales to local gas distribution companies in which we have an equity interest.
 
(2) Includes gas used in the transport system.
 
(3) Excludes internal consumption.
 
     The table below shows how the natural gas we supplied was utilized in our principal markets from 2006 to 2008:
 
                         
Natural Gas Consumption   2008     2007     2006  
    (mmm3/d)  
 
Industrial, commercial and retail
    36.8       35.1       33.7  
Gas-fired power plants
    14.7       5.8       6.1  
Refineries
    7.9       10.3       6.5  

 
Consumption by industrial, commercial and retail natural gas customers increased 4.5% per year from 2006 to 2008. The increase in the non-thermoelectric market was due mainly to the competitive price of natural gas compared to fuel oil, the primary energy alternative. Thermoelectric consumption increased 153% from 2007 to 2008, due primarily to increased participation by gas-fired plants in Brazil’s power grid.
 
Gas Sales Contracts and Pricing
 
In 2007, we adopted a new suite of gas contracts that offer customers four different supply options to give us the flexibility to match our gas sales more closely to the volumes we have available. The principal characteristics of these contracts are:
 
  •     Firm Inflexible: the distributor assures payment under take-or-pay contracts and we guarantee delivery of the contracted volume.
 
 
  •     Firm Flexible: we may interrupt supplies in accordance with negotiated conditions, in which case we agree to supply a substitute fuel and compensate the end user for additional costs. The price is equivalent to the gas sold under Firm Inflexible contracts.
 
  •     Interruptible: we have the right to interrupt supplies in accordance with negotiated conditions and the distributor or end user is responsible for finding alternative fuels. The distributor pays a lower price for gas under this type of contract.
 
  •     Preferential: we are obligated to provide natural gas as demanded, but the consumer has the right to interrupt purchases at any time. We expect this type of contract to be used predominantly by thermoelectric customers using LNG.



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The price of gas under the first three contracts includes a fixed component, which is revised annually based on the IGP-M inflation index, and a variable component, which is revised quarterly based on a fuel oil basket and exchange rate variation. Preferential contracts are priced based on a fixed component, which is revised annually based on the IPCA inflation index, and a variable component based on the price of imported LNG, which is revised monthly based on the Henry Hub rate and exchange rate variation.
 
 
During 2008, we converted nine out of 18 customers to the new contracts in addition to the three customers converted in 2007. Of our total sales of 36.8 mmm3/d (1,299.6 mmcf/d) to distribution companies in the non-thermoelectric market in 2008, approximately 53% was delivered under the new contracts. We will use the new contracts to deliver up to 63% of the volumes committed to the non-thermoelectric market through 2012.

 
The table below shows the volumes committed to the non-thermoelectric market through 2012 under the new supply contracts:
 
                                 
    Type of Supply Contract        
Year Contract Signed   Firm Inflexible     Firm Flexible     Interruptible     Total  
          (mmm3/d)              
 
2007
    7.37       1.75       2.6       11.72  
2008
    15.24       2.03       1.90       19.17  
                                 
Total
    22.61       3.78       4.50       30.89  
                                 
 
The table below shows our future gas supply commitments from 2009 to 2013, including sales to both local gas distribution companies and gas-fired power plants.
 
                                         
Natural Gas Sales Contracts   2009     2010     2011     2012     2013  
    (mmm3/d)  
 
To local gas distribution companies:
                                       
Related parties(1)
    15.06       17.16       18.66       19.23       19.50  
Third parties
    17.63       18.09       17.68       17.36       17.21  
To gas-fired power plants:
                                       
Related parties(1)
    4.71       3.57       4.65       3.72       3.39  
Third parties
    0.82       6.38       7.06       8.00       8.71  
                                         
Total(2)
    38.22       45.20       48.05       48.31       48.81  
                                         
Estimated contract revenues (U.S.$ billion)(3)(4)
    3.5       4.0       4.5       4.8       5.0  
 
 
(1) For purposes of this table, “related parties” include all local gas distribution companies and power generation plants in which we have an equity interest and “third parties” refer to those in which we do not have an equity interest.
(2) Estimated volumes are based on “take or pay” agreements in our contracts, expected volumes and contracts under negotiation, not maximum sales.
(3) Figures show revenues net of taxes. Estimates are based on outside sales and do not include internal consumption or transfers.
(4) Prices may be adjusted in the future and actual amounts may vary.
 
Long-Term Natural Gas Commitments
 
When we invested in the Bolivia-Brazil pipeline in 1996, we entered into a series of long-term contracts with three companies:
 
  •     Gas Supply Agreement (GSA) with the Bolivian state-owned company Yacimientos Petrolíferos Fiscales Bolivianos (YPFB) to purchase certain minimum volumes of natural gas at prices linked to the international fuel oil price through 2019, after which the agreement
 
 
may be extended until all contracted volume is delivered. In February 2007, we agreed to make additional payments to YPFB for liquids contained in the natural gas purchased through the GSA, in the amount of between U.S.$100 million and U.S.$180 million per year. The amendment to the GSA is still under negotiation, and payment will be retroactive to May 2007;


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  •     Ship-or-Pay agreement with Gás Transboliviano (GTB), owner and operator of the Bolivian portion of the pipeline to transport certain minimum volumes of natural gas through 2019; and
 
 
  •     Ship-or-Pay agreement with Transportadora Brasileira Gasoduto Bolivia-Brasil (TBG), owner and operator of the Brazilian portion of the pipeline to transport certain minimum volumes of natural gas through 2019.
 

 
     Our volume obligations under the ship-or-pay arrangements were generally designed to match our gas purchase obligations under the GSA. The tables below show our contractual commitments under these agreements for the five-year period from 2009 through 2013.
 
                                         
Commitments to Purchase and Transport Natural Gas   2009     2010     2011     2012     2013  
 
Purchase commitments to YPFB
                                       
Volume obligation (mmm3/d)(1)
    24.06       24.06       24.06       24.06       24.06  
Volume obligation (mmcf/d)(1)
    850.00       850.00       850.00       850.00       850.00  
Brent crude oil projection (U.S.$)(2)
    58.00