This excerpt taken from the PBR 6-K filed Nov 12, 2008.
12.3 Petroleum and gas exploration and development expenses
Expenditure on exploration and development of petroleum and gas production are recorded according to the successful efforts method. This method establishes that the development costs of the production wells and the successful exploration wells, linked to economically viable reserves, are capitalized, while the geology and geophysics costs are considered expenses for the period in which they occur and the costs of dry exploration wells and the costs linked to non-commercial reserves should be recorded in the income statement when they are thus identified.
Capitalized costs and related assets are reviewed annually on a field by field basis, in order to identify possible losses on recovery based on the estimated future cash flow.
Capitalization costs are depreciated using the method of units produced in relation to the proven and developed reserves. The reserves are estimated by the Companys geologists and petroleum engineers according to international standards and are reviewed annually or when there are indications of material changes.
In accordance with the accounting practice adopted, supported by statement SFAS 143 - Accounting for Asset Retirement Obligations issued by the Financial Accounting Standards Board - FASB, the future liability for abandoning wells and dismantling the production area is accounted for at its present value, discounted at a risk-free rate, and is fully recorded at the time of the declaration of commerciality of each field, as part of the cost of the related assets (property, plant and equipment) as a balancing item to the provision, recorded in the liabilities, that will bear these expenses.
The interest expenses occurring on the provision for the liability in the amount of R$ 205.884 thousand in the period from January to September 2008 is classified as operating expenses - expenses with prospecting and drilling for extracting petroleum (item 3.06.05.04 of the Statement of Income Quarterly Financial Information Parent company).