Petrobras (PBR)

Financial expense

Financial expense decreased 36.4% to U.S.$ 909 million for the nine-month period ended September 30, 2005, as compared to U.S.$ 1,430 million for the nine-month period ended September 30, 2004. This decrease was primarily attributable to the following:

• a U.S.$ 96 million decrease in expenses relating to repurchases of our own securities;
  
  
• a U.S.$ 261 increase in our interest expense capitalized as part of the cost of construction and development of crude oil and natural gas production projects; and
  
  
• a gain of U.S.$ 31 million related to fair value adjustments on gas hedge transactions for the nine-month period ended September 30, 2005. See note 7 to our unaudited consolidated financial statements as of September 30, 2005 for a breakdown of financial income and expenses.

Financial expense

Financial expense decreased 20.4% to U.S.$ 744 million for the first half of 2005, as compared to U.S.$ 935 million for the first half of 2004. This decrease was primarily attributable to the following:

• a U.S.$ 98 million decrease in expenses relating to repurchases of our own securities; and
  
  
• a U.S.$ 141 increase in our interest expense capitalized as part of the cost of construction and development of crude oil and natural gas production projects.

This decrease was partially offset by fair value adjustments on gas hedge transactions, which resulted in a loss of U.S.$ 103 million for the first half of 2005. See note 7 to our unaudited consolidated financial statements as of June 30, 2005 for a breakdown of financial income and expenses.

Financial Expense

PIFCo’s financial expense consists of interest paid and accrued on its outstanding indebtedness and other fees associated with PIFCo’s issuance of debt. PIFCo’s financial expense increased 53.3% to U.S.$482.7 million in 2003, as compared to U.S.$314.7 million in 2002, primarily due to the increase in the amount of its long-term indebtedness. PIFCo’s long-term indebtedness increased to U.S.$5,825.3 million at December 31, 2003, as compared to U.S.$3,248.7 million at December 31, 2002. The increase in financial expense was partially offset by the lower average interest rate on its outstanding debt.

Financial expense

Financial expense decreased 15.0% to U.S.$ 431 million for the first quarter of 2005, as compared to U.S.$ 507 million for the first quarter of 2004. This decrease was primarily attributable to the following:

Financial expense

Financial expense increased 39.0% to U.S.$ 1,733 million for 2004, as compared to U.S.$ 1,247 million for 2003. This increase was primarily attributable to an increase of approximately U.S.$ 233 million in financial expenses resulting from PEPSA’s hedge operations; as well as a loss of U.S.$ 137 million on repurchases of our own securities.