Petrobras (PBR)

RESULT BY BUSINESS AREA

PETROBRAS is a company that operates in an integrated manner, with the greatest part of oil and gas production in the Exploration & Production area being transferred to other areas of the Company.

The main criteria used to report results by business area are highlighted below:

E&P - In 2005, operating profits for the Exploration and Production unit were R$ 22.699 million, 26% higher than the operating income reported in 2004 (R$ 18.083 million), due to the R$ 8.401 million increase in gross profits from petroleum sales and transfers, reflecting the increase in international prices as well as the 13% rise in petroleum and NGL production, and the 3% rise in natural gas production, despite a 17% appreciation in the average exchange rate of the Real against the U.S. dollar and the lesser increase in the value of heavy petroleum in the international market compared to lighter petroleum.

The spread between the average price of sold/transferred domestic petroleum and the average Brent price increased from US$ 4.72/bbl in 2004 to US$ 8.96/bbl in 2005.

Part of the increase in gross profit was offset by a rise of R$ 731 million in expenses for prospecting and drilling due to the abandonment of dry wells and/or subcommercial wells, as well as the updating of provision for abandonment of the area.

In 2005-Q4 operating profit attributable to the Exploration and Production business unit was R$ 4.960 million, 32% less than the cash profit accounted for in the previous quarter (R$ 7.348 million). This was due to a reduction of R$ 3.208 million in gross profit, reflecting the decrease in international petroleum prices, a 1% reduction in natural gas production, a 4% appreciation in the average exchange rate of the Real against the U.S. dollar and the lower increase in value of heavy petroleum in the international market compared to lighter petroleum, despite a 1% increase in petroleum and NGL production.

The spread between the average price for sold/transferred domestic petroleum and the average Brent price increased from US$ 7.29/bbl in 2005-Q3 to US$ 10.85/bbl in 2005-Q4.

Also contributing to the decrease in operating profit was a R$ 754 million increase in expenses for prospecting and drilling due to the drop in dry wells and/or subcommercial wells, aside from the updating of provisions for abandonment of the area.

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SUPPLY – In 2005, net income for the Supply segment was R$ 5.556 million, 118% higher than net income recorded in 2004 (R$ 2.553 million), reflecting the R$ 4.859 million increase in gross profit, as highlighted by the following factors:

• Rise in average production value of derivates sold in domestic and foreign markets;
  
  
• Improvement in the refineries' production profile, decreasing the need to import oil products with a greater added value;
  
  
• Increase of 4% in holdings of national oil in the loads processed by the refineries;
  
  
• Increase of 2% in production of oil products.

Part of these effects was offset by the following:

• Increase in the purchase and transfer price for petroleum and oil products, pressured by the increase in international prices, despite the 17% appreciation in the average exchange rate of the Real against the U.S. dollar and the rise in the spread between heavy and light petroleum;
  
  
• Rise in refining costs, principally due to the increase in the complexity of the refinery pool.

In 2005-4Q, net income accounted for by the Supply segment was R$ 1.272 million, 62% higher than the net income accounted for in the preceding quarter (R$ 784 million), due to an increase of R$1.458 million in gross profit, impacted by the following factors:

• Rise in average production value of products sold in domestic markets;
  
  
• Decrease of 43% in the volume of imports of oil products and 7% in the volume of petroleum imports;

• Decrease in the purchase and transfer price for petroleum, reflecting the fall in international prices and the increase in the spread between heavy and light petroleum.

Part of these effects were offset by a 4% decrease in the sales volumes of oil products in the domestic market. .

GAS AND ENERGY – In 2005 results for sales of energy showed improvement, bolstered by the signing of new contracts. Operating income for natural gas sales continued to be positive. This takes into consideration the 9% increase in sales volume and the sales price realignment process for natural gas, despite the higher operating expenses.

Increased revenues were not enough to offset losses in energy generation, as a result of continued low prices for thermo-electric capacity as well as the costs incurred in 2005 to renegotiate existing contracts and making up for thermo-plant short fall in the Northeast.

Together, these factors resulted in the Gas and Energy segment reporting a loss of R$ 624 million in 2005, but 21% higher than the R$ 517 million loss incurred in the previous year.

Excluding the extraordinary expenses, Gas and Energy segment would reach in 2005 a R$ 38 million operating profit (R$108 million operating profit in 2004).

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In the 2005-4Q the Gas and Energy segment posted a loss of R$ 476 million, compared with a loss of R$ 42 million in the previous quarter, due to the impact on indebtedness of the devaluation of the real in relation to the U.S. dollar, as well as to expenses realized in the quarter and the negotiation of contractual deferred charges and to the acquisition of thermoelectric plants and making up for thermo-plant short fall in the Northeast.

DISTRIBUTION – In 2005, the Distribution business posted a net income of R$ 784 million, 26% above the net income posted for 2004 (R$ 623 million), due to an increase of R$ 636 million in gross profit, largely from the consolidation of Liquigás (purchased in August 2004), which had a positive impact on the volumes sold, 10% greater than in 2004.

These effects were partially offset by an increase of R$ 226 million in operating expenses, particularly the increase in commercial and distribution expenses for products and for personnel.

The market share of distribution of fuels in 2005 was 33.8% (552 thousand bbl/day), including the company Liquigás, whereas in 2004 it was 31.6% (500 thousand bbl/day).

In 2005, Liquigás contributed gross and net incomes of R$ 548 million and R$ 111 million, respectively. From August to December 2004, the contribution of Liquigás to gross and net incomes of R$ 319 million and R$ 155 million, respectively.

In relation to the previous quarter, when the net income posted in the area of Distribution was R$ 205 million, the net income in the 2005-Q4 was 44% greater, due to a reduction of R$ 36 million in operating expenses.

The market share for distribution of fuels was 33.8% in the 2005-Q4 (561 thousand bbl/day), including the company Liquigás, and was 33.6% in the 2005-Q3 (568 thousand bbl/day).

INTERNATIONAL – In 2005, the International business posted a net income equivalent to R$ 567 million, 63% greater than the equivalent net income of R$ 347 posted in 2004.

This increase in net income was due principally to the following factors:

• Increase of R$ 355 million in gross profit, due to the increase in the international price of oil, the increase in the sale of gas from Bolivia to Brazil, and the contract for the sale of Bolivian gas to Argentina, which entered into effect in June 2004. These effects were partially offset by the following factors: i) declining production in mature fields in Argentina and Angola; ii) rise in production costs in Bolivia due to the increase of the tax on hydrocarbons from 18% to 50% beginning in May 2005; iii) lower margins on the sale of diesel and gasoline in Argentina due to the restrictions imposed by the government on retail prices; and iv) the 12% increase in the real in relation to the U.S. dollar during the process of conversion of the financial statements.

• Increase in earnings from interests in other companies, in the amount of R$ 79 million, due principally to the improved results of interest in companies associated with PEPSA, highlighted by the electric energy sector in Argentina.

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These effects were partially offset by the increase in operating expenses, in the amount of R$ 106 million, due to reduction of tax credits in Ecuador, and to the increase in general and administrative expenses.

In 2005-Q4, the International business posted a net income equivalent to R$ 47 million, in comparison to the equivalent net income of R$ 1 million posted in the previous quarter.

This increase in net income was due principally to the following factors:

• Increase of R$ 253 million in the gross profit due to the effect of the devaluation of the Real in relation to the U.S. dollar in the currency conversion of the financial statements; and
  
  
• Reduction of R$ 141 million in income tax expenses, due principally to the recovery of tax credits in Argentina

This increase was partially offset by the increase in operating expenses, in the amount of R$ 152 million, highlighted by the abandonment of dry and/or sub-commercial wells and expenses with geological studies.

CORPORATE – The corporate activities of the PETROBRAS System produced a loss of R$4,096 million in 2005, 11% above the loss posted for 2004 (R$ 3,677 million), highlighted by greater spending on personnel, advertising, publicity, and with the change to the assumptions in the actuarial revision of the Health Plans (Supplementary Medical Assistance) and Retirement (“Petros”), regarding retired persons and pensioners.

A part of these effects were offset by a decrease of R$ 767 million in the net financial result, concerning loans and financing, principally as a result of the rise of the real in relation to the U.S. dollar in 2005 (12%), when compared with the previous year (8%).

In 2005-Q4 a net income of R$ 948 million was posted in comparison with the loss in the previous quarter of R$ 2,014 million, highlighted by the gains obtained from assets exposed to exchange variation (R$ 2,651 million), as a result of the 5% devaluation of the real in relation to the U.S. dollar.

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RESULT BY BUSINESS AREA

PETROBRAS is a company that operates in an integrated manner, with the greatest part of oil and gas production in the Exploration & Production area being transferred to other areas of the Company.

The main criteria used to report results by business area are highlighted below:

E&P - In 2005, operating profits for the Exploration and Production unit were R$ 22.699 million, 26% higher than the operating income reported in 2004 (R$ 18.083 million), due to the R$ 8.401 million increase in gross profits from petroleum sales and transfers, reflecting the increase in international prices as well as the 13% rise in petroleum and NGL production, and the 3% rise in natural gas production, despite a 17% appreciation in the average exchange rate of the Real against the U.S. dollar and the lesser increase in the value of heavy petroleum in the international market compared to lighter petroleum.

The spread between the average price of sold/transferred domestic petroleum and the average Brent price increased from US$ 4.72/bbl in 2004 to US$ 8.96/bbl in 2005.

Part of the increase in gross profit was offset by a rise of R$ 731 million in expenses for prospecting and drilling due to the abandonment of dry wells and/or subcommercial wells, as well as the updating of provision for abandonment of the area.

In 2005-Q4 operating profit attributable to the Exploration and Production business unit was R$ 4.960 million, 32% less than the cash profit accounted for in the previous quarter (R$ 7.348 million). This was due to a reduction of R$ 3.208 million in gross profit, reflecting the decrease in international petroleum prices, a 1% reduction in natural gas production, a 4% appreciation in the average exchange rate of the Real against the U.S. dollar and the lower increase in value of heavy petroleum in the international market compared to lighter petroleum, despite a 1% increase in petroleum and NGL production.

The spread between the average price for sold/transferred domestic petroleum and the average Brent price increased from US$ 7.29/bbl in 2005-Q3 to US$ 10.85/bbl in 2005-Q4.

Also contributing to the decrease in operating profit was a R$ 754 million increase in expenses for prospecting and drilling due to the drop in dry wells and/or subcommercial wells, aside from the updating of provisions for abandonment of the area.

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SUPPLY – In 2005, net income for the Supply segment was R$ 5.556 million, 118% higher than net income recorded in 2004 (R$ 2.553 million), reflecting the R$ 4.859 million increase in gross profit, as highlighted by the following factors:

• Rise in average production value of derivates sold in domestic and foreign markets;
  
  
• Improvement in the refineries' production profile, decreasing the need to import oil products with a greater added value;
  
  
• Increase of 4% in holdings of national oil in the loads processed by the refineries;
  
  
• Increase of 2% in production of oil products.

Part of these effects was offset by the following:

• Increase in the purchase and transfer price for petroleum and oil products, pressured by the increase in international prices, despite the 17% appreciation in the average exchange rate of the Real against the U.S. dollar and the rise in the spread between heavy and light petroleum;
  
  
• Rise in refining costs, principally due to the increase in the complexity of the refinery pool.

In 2005-4Q, net income accounted for by the Supply segment was R$ 1.272 million, 62% higher than the net income accounted for in the preceding quarter (R$ 784 million), due to an increase of R$1.458 million in gross profit, impacted by the following factors:

• Rise in average production value of products sold in domestic markets;
  
  
• Decrease of 43% in the volume of imports of oil products and 7% in the volume of petroleum imports;

• Decrease in the purchase and transfer price for petroleum, reflecting the fall in international prices and the increase in the spread between heavy and light petroleum.

Part of these effects were offset by a 4% decrease in the sales volumes of oil products in the domestic market. .

GAS AND ENERGY – In 2005 results for sales of energy showed improvement, bolstered by the signing of new contracts. Operating income for natural gas sales continued to be positive. This takes into consideration the 9% increase in sales volume and the sales price realignment process for natural gas, despite the higher operating expenses.

Increased revenues were not enough to offset losses in energy generation, as a result of continued low prices for thermo-electric capacity as well as the costs incurred in 2005 to renegotiate existing contracts and making up for thermo-plant short fall in the Northeast.

Together, these factors resulted in the Gas and Energy segment reporting a loss of R$ 624 million in 2005, but 21% higher than the R$ 517 million loss incurred in the previous year.

Excluding the extraordinary expenses, Gas and Energy segment would reach in 2005 a R$ 38 million operating profit (R$108 million operating profit in 2004).

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In the 2005-4Q the Gas and Energy segment posted a loss of R$ 476 million, compared with a loss of R$ 42 million in the previous quarter, due to the impact on indebtedness of the devaluation of the real in relation to the U.S. dollar, as well as to expenses realized in the quarter and the negotiation of contractual deferred charges and to the acquisition of thermoelectric plants and making up for thermo-plant short fall in the Northeast.

DISTRIBUTION – In 2005, the Distribution business posted a net income of R$ 784 million, 26% above the net income posted for 2004 (R$ 623 million), due to an increase of R$ 636 million in gross profit, largely from the consolidation of Liquigás (purchased in August 2004), which had a positive impact on the volumes sold, 10% greater than in 2004.

These effects were partially offset by an increase of R$ 226 million in operating expenses, particularly the increase in commercial and distribution expenses for products and for personnel.

The market share of distribution of fuels in 2005 was 33.8% (552 thousand bbl/day), including the company Liquigás, whereas in 2004 it was 31.6% (500 thousand bbl/day).

In 2005, Liquigás contributed gross and net incomes of R$ 548 million and R$ 111 million, respectively. From August to December 2004, the contribution of Liquigás to gross and net incomes of R$ 319 million and R$ 155 million, respectively.

In relation to the previous quarter, when the net income posted in the area of Distribution was R$ 205 million, the net income in the 2005-Q4 was 44% greater, due to a reduction of R$ 36 million in operating expenses.

The market share for distribution of fuels was 33.8% in the 2005-Q4 (561 thousand bbl/day), including the company Liquigás, and was 33.6% in the 2005-Q3 (568 thousand bbl/day).

INTERNATIONAL – In 2005, the International business posted a net income equivalent to R$ 567 million, 63% greater than the equivalent net income of R$ 347 posted in 2004.

This increase in net income was due principally to the following factors:

• Increase of R$ 355 million in gross profit, due to the increase in the international price of oil, the increase in the sale of gas from Bolivia to Brazil, and the contract for the sale of Bolivian gas to Argentina, which entered into effect in June 2004. These effects were partially offset by the following factors: i) declining production in mature fields in Argentina and Angola; ii) rise in production costs in Bolivia due to the increase of the tax on hydrocarbons from 18% to 50% beginning in May 2005; iii) lower margins on the sale of diesel and gasoline in Argentina due to the restrictions imposed by the government on retail prices; and iv) the 12% increase in the real in relation to the U.S. dollar during the process of conversion of the financial statements.

• Increase in earnings from interests in other companies, in the amount of R$ 79 million, due principally to the improved results of interest in companies associated with PEPSA, highlighted by the electric energy sector in Argentina.

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These effects were partially offset by the increase in operating expenses, in the amount of R$ 106 million, due to reduction of tax credits in Ecuador, and to the increase in general and administrative expenses.

In 2005-Q4, the International business posted a net income equivalent to R$ 47 million, in comparison to the equivalent net income of R$ 1 million posted in the previous quarter.

This increase in net income was due principally to the following factors:

• Increase of R$ 253 million in the gross profit due to the effect of the devaluation of the Real in relation to the U.S. dollar in the currency conversion of the financial statements; and
  
  
• Reduction of R$ 141 million in income tax expenses, due principally to the recovery of tax credits in Argentina

This increase was partially offset by the increase in operating expenses, in the amount of R$ 152 million, highlighted by the abandonment of dry and/or sub-commercial wells and expenses with geological studies.

CORPORATE – The corporate activities of the PETROBRAS System produced a loss of R$4,096 million in 2005, 11% above the loss posted for 2004 (R$ 3,677 million), highlighted by greater spending on personnel, advertising, publicity, and with the change to the assumptions in the actuarial revision of the Health Plans (Supplementary Medical Assistance) and Retirement (“Petros”), regarding retired persons and pensioners.

A part of these effects were offset by a decrease of R$ 767 million in the net financial result, concerning loans and financing, principally as a result of the rise of the real in relation to the U.S. dollar in 2005 (12%), when compared with the previous year (8%).

In 2005-Q4 a net income of R$ 948 million was posted in comparison with the loss in the previous quarter of R$ 2,014 million, highlighted by the gains obtained from assets exposed to exchange variation (R$ 2,651 million), as a result of the 5% devaluation of the real in relation to the U.S. dollar.

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