Petrobras (PBR)

Pag: 117

The year-on-year reduction in the negative gas and energy result was due to the wider gas sales margin, influenced by higher realization prices, and the increase in electricity and natural gas sales volume.

These effects were partially offset by the increase in contractual fines and charges related to natural gas supply.

The quarter-on-quarter decline was due to:

• Lower electricity sales margins;

• The increase in the average acquisition cost of national and imported natural gas;

• Higher operating expenses from thermal plants and contractual fines and charges related to natural gas supply.

These effects were partially offset by the increase in average natural gas sales.

Pag: 117

(A free translation of the original report in Portuguese)

08.01 – COMMENTS ON THE CONSOLIDATED PERFORMANCE IN THE QUARTER

• An increase in the following expenses:

•Selling expenses (R$ 252 million) to meet increased export volume (R$ 158 million) and operations abroad (R$ 104 million), R$ 74 million of which in off-shore operations, offset by the reduction in distribution expenditure (R$ 74 million);

• General and administrative expenses (R$ 791 million) from personnel in Brazil (R$ 265 million) and abroad (R$ 72 million); greater expenditure on third-party services (R$ 242 million), especially IT and consulting services; and new companies abroad (R$ 43 million);

• Exploration costs (R$ 280 million), related to higher expenditure in Brazil (R$ 84 million) and abroad (R$ 362 million) and the monetary restatement of provisions for abandonment (R$ 49 million), offset by the reduction in the write-off of dry wells in the US and Bolivia in 2007 (R$ 211 million);

• R& D (R$ 109 million), most of which went to projects in ANP-accredited universities and institutes (R$ 59 million) and personnel (R$ 43 million);

• The Pension and Health Plan (R$ 598 million), due to the amendments to the Petros Plan regulations;

•Other operating expenses (R$ 1,817 million), especially from the amendments to the Petros Plan (R$ 1,051 million) and the Collective Bargaining Agreements (R$ 287 million); contractual charges related to natural gas and electricity supply (R$ 263 million); and the addition to the provisions for legal contingencies (R$ 125 million), offset by the recovery of ICMS tax credits (R$ 101 million), pursuant to the agreement with the Ceará State Finance Department.

• A negative impact of R$ 1,823 million on the net financial result, due to:

• The appreciation of the Real and the increase in dollar credit exposure, especially in operations between Petrobras and its overseas subsidiaries (R$ 2,566 million);

•Part of this impact was offset by the reduction in financial expenses (R$ 742 million), reflecting the restructuring of the debt profile and increased financing for ongoing projects, resulting in higher interest capitalization.

• Recognition of exchange losses from the conversion of foreign subsidiaries’ shareholders equity (R$ 137 million), reflected in the Special Participations result.

Pag: 117

The first-half international unit lifting cost increased by 34% in comparison with the first half of 2006, due to (1) higher expenditure with third-party services and materials in Argentina; (2) increased expenditure in the United States following the return to normal operations, (3) partial production stoppage in 2006 due to the hurricanes; (4) the operational start-up of the deepwater Cottonwood field; and (5) higher expenses in Angola from the recovery of mature wells and installation maintenance.

Compared to the first quarter of 2007, the second-quarter international unit lifting cost increased by 8% due to (1) higher expenditure with third-party services related to well maintenance in Argentina; (2) increased expenditure in the United States due to the upturn in output from the deepwater Cottonwood field; and (3) expenses from equipment repairs. Partially offsetting these increases, expenditure in Angola was lower in the second quarter of 2007.