Petrobras (PBR)

RESULTS BY BUSINESS SEGMENT

PETROBRAS is an integrated company with the largest production of oil and gas in which the Exploration and Production area is composed by transfers made from other areas of the Company.

Outlined below are the main criteria used to report results by business segment:

a) Net operating revenue: revenues are considered revenues if said sales were made to external clients, and billing and transfers are made between the business areas, using as reference the internal transfer prices defined by said areas with a methodology based on market parameters;

b) Included in the computation of the operating income are: net operating revenues costs of goods and services sold, which are reported by each business segment, considering the internal price of transfer and other operating costs relative to each business area, as well as operating expenses effectively incurred in each area considered;

c) Financial results are allocated to the corporate group;

d) Assets: include identified assets in each area. Equity accounts of financial nature are allocated to the corporate group.

E&P – In 2006 net income for the Exploration and Production segment totaled R$ 24,762 million, 8% above the net income of 2005 (R$ 22,835 million), as a result of an increase of R$ 2,794 million in gross operating income generated primarily by a 6% increase in oil and NGL production, which allowed for oil exports to grow, coupled  with a 20% increase in the average domestic price for sale/transfer (US$/bbl). These gains were partially offset by a lower valuation of heavy oil relative to light oil, higher expenses related to government take, higher daily rates for drilling rigs, higher costs for intervention services in wells and fields, and the effects derived from the appreciation of the Real of 11% against the US dollar.

The spread between the average domestic price of oil sold/transferred and the average price of Brent increased from US$ 8.96/bbl in 2005 to US$ 10.43/bbl in 2006.

When comparing quarterly figures, net income was 28% lower, as gross profit declined R$ 2,539 million due to lower international oil prices as well as lower heavy oil prices when compared to light oils. Said effects were partially compensated by the 2% volume growth in oil and NGL production.

The spread between the average domestic sold/transferred price and the average price of Brent increased from US$ 10.80/bbl in 3Q06 to US$ 10.98/bbl in 4Q06.

SUPPLY – Net income in 2006 for the Supply segment totaled R$ 6,110 million, 10% above net income in 2005 (R$ 5,546 million), an increase in gross operating profit of R$ 1,126 million due to the following factors:

These effects were partially offset by the following factors:

In 4Q06 net income for the Supply segment was R$ 1,462 million, 45% above that registered during the previous quarter (R$ 1,006 million), due to the R$ 641 million increase in gross profit as gasoline and diesel prices remained stable while the cost of crude oil purchased/transferred declined and the light/heavy oil price differential increased.  These positive factors were partially offset by the following:

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GAS AND ENERGY – The net loss registered by the Gas and Energy segment during 2006 of R$ 1,188 million was 128% above the loss of 2005 (R$ 520 million) due to the following factors:

These variations were partially offset by the reduction in general and administrative expenses, which in 2005 included expenses related to contractual contingencies for thermoelectric plants and credit losses for doubtful gas supply contracts.

In 4Q06 the Gas and Energy segment registered a loss of R$ 307 million, which is 47% below the loss registered in the previous quarter, and is explained by the following factors:

DISTRIBUTION – During 2006 the Distribution segment registered a net income of R$ 585 million, 23% below that of 2005 (R$ 761 million). The gross profit increase was generated by higher volumes of oil products sold during the period, which was offset by the increase in operational expenses. Among the highest expenses were product commercialization and contingency provisions.

The Company’s market share in the combustible distribution market totaled 33.6% in 2006 compared to 33.8% in the previous year.

During 4Q06, net income for the Distribution segment reached R$ 130 million, which is 19% below that of the previous quarter (R$ 160 million). The loss is explained by a 2% decline in gross profit due to lower commercialization margins for oil products as a result of the efforts made by the Company to increase sales and expand its market share in the combustible distribution market. Said effect was partially compensated by the 2% increase in volume sales. As a result of such strategy, the market share during the quarter reached 35.1% at the close 4Q06 when compared to 34.2% in the third quarter.

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INTERNATIONAL – Net income in the International segment during 2006 totaled R$ 352 million, a decrease of 76% from the net income registered in 2005 (R$ 1,450 million). The following factors were responsible for the decline:

•  A R$ 572 million increase in exploration expenses , because of write-offs of exploration costs in the US and Bolivia and higher seismic expenses in the US, Iran and other countries;

•  A R$ 544 million decline in gross profit due to: i) a reduction in the participation of the operations in Venezuela; ii) higher government take in Bolívia; iii) a 9% appreciation of the Real against the US dollar used for conversion purposes in the accounting statements; and iv) lower margins for oil products sold in Argentina due to the local government price controls. These effects were partially compensated by the following factors: i) increase in international oil prices; ii) higher volumes and prices for electric energy sold in Argentina; iii) higher export prices for oil products in Bolivia;

•  A R$ 116 million increase in general and administrative expenses as a result of higher employee costs due to the collective agreement in Argentina and the inclusion of costs associated with the company acquisitions in Uruguay, Paraguay, Colombia and the US.

These effects were partially compensated by the recovery of exploration costs in Nigeria of R$ 69 million, and the recovery of fiscal credits in Ecuador in the amount of  R$ 85 million.

In 4Q06 the International segment registered a loss equal to R$ 247 million compared to net income of R$ 107 million in the previous quarter.

The decline in net income was a result of the following factors:

•  A R$ 261 million decrease in gross profit due to: i) a decline in international oil prices; ii) lower sales volume in Argentina due to the strike of private oil producers; iii) lower sales volume in Bolivia following a stoppage to repair damages to the gas pipeline San Antonio caused by heavy rains ; and

•  Write-off of exploratory wells in the US and higher seismic costs in Argentina and in the US amounting to R$ 195 million.

Said effects were partially compensated by the reduction in other operational expenses, mainly due to the recovery of fiscal credits in the amount of R$ 51 million, and the reduction of ship or pay expenses of R$ 10 million, both in Ecuador.

CORPORATE – Corporate activities for the PETROBRAS System in 2006 generated a loss of R$ 4,184 million, which was 19% below the loss registered in 2005 (R$ 5,180 million), primarily as a result of the decline in financial expenses of  R$ 1,511 million.

The reduction in corporate financial expenses activities was partially offset by an increase of R$ 432 million in general and administrative expenses, mainly driven by higher costs associated with third party services and employee costs due to an increase in the workforce during 2006 and the salary adjustment negotiated at the end of 2005 and 2006.

When compared to the third quarter, the loss generated by the corporate group in 4Q06 was R$ 798 million compared to R$ 377 million, and was mainly driven by:

•  A reduction in the fiscal benefit related to the interest on own capital provisions of R$ 671 million in 4Q06 compared to R$ 1,492 million in 3Q06;

•  An increase in other operational expenses generated by higher expenses associated with sponsorships of cultural projects, which are in part being considered as fiscal benefits contemplated by the the Rouanet law, as well as the expenses associated with the FIA – Fund of Chidlhood and Adolescense, which will allow the company to reduce its income tax payment by R$ 150 million.

These effects were partially compensated by the reduction of R$ 603 million in net financial expenses.

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RESULTS BY BUSINESS SEGMENT

Petrobras is a company that operates in an integrated manner, with the largest portion of oil and gas production in the Exploration and Production area being transferred to other areas of the Company.

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

a) Net operating revenue: the revenues related to sales made to external clients were considered, plus the billing and transfers between business areas, using internal transfer prices defined between the areas as a reference, with methodology based on market parameters;

b) Included in the computation of operating income are: net operating revenues, the costs of goods and services sold, which are reported by each business areas considering the internal transfer price and the other operating costs of each area, as well as operating expenses in which the expenses effectively incurred in each area are considered.

c) Financial results are allocated to the corporate group;

d) Assets: includes the assets identified in each area. The equity accounts of a financial nature are allocated to the corporate group.

E&P – In the period from January to September 2006, net income for the Exploration and Production segment was R$ 20,122 million, a 12% increase over the net income attained in the same period of the previous year (R$ 17,887 million). This increase was driven by the R$ 3,401 million increase in gross profit due to higher sales and transfers of oil, reflecting the 6% increase in oil and NGL production, as well as the increase in international oil prices.

These effects were partially offset by the following factors:

• R$ 408 million expense adjustment for gas that was produced and reinjected in reservoirs in the Solimões, Campos and Espírito Santo basins;
• New ANP interpretation of the deductibility of expenses related to Project Finance in the Marlim fields, leading to an increase in the calculation of special participation tax of R$ 426 million;

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• Lower value of heavy oil compared to light oil;
• 13% appreciation of the Real against the U.S. dollar.

The spread between the average price of sold/transferred domestic oil and the average Brent price rose from US$ 8.37/bbl during the first nine months of 2005 to US$ 10.08/bbl during the same period of 2006.

In comparison with the prior quarter, net income was 7% lower, mainly due to a R$ 733 million reduction in gross profit. This decline was because of expense adjustments in the amount of R$ 408 million for gas previously produced and reinjected in reservoirs at Bacias de Solimões, Campos and Espírito Santo, as well as a new ANP interpretation for the deductibility of expenses for Project Finance for Campo de Marlim, calculated as special participation charges in the amount of R$ 426 million.

These effects were partially offset by the 1% increase in oil and NGL production and by the reduction in the spread between the average domestic oil price and the average Brent price from US$ 11.42/bbl in the 2Q06 to US$ 10.80/bbl in the 3Q06.

SUPPLY – For the period between January and September 2006, net income for the supply segment was R$ 4,648 million, 10% higher than the net income reported for the same period of the previous year (R$ 4,221 million), reflecting the R$ 929 million increase in gross profit, mainly due to the following factors:

• An increase in the average realization price of oil products in the domestic and international markets:
• A 2% increase in oil product sales volume in the domestic market;
• Lower valuation for heavy oil versus light oil.

These effects were partially offset by the following factors:

• Increases in the cost of oil and oil products, as a direct result of the increase in international prices;
• 4% increase in volumes of imported oil and oil products.

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In the third quarter 2006, net income for the supply segment was R$ 1,006 million, 39% lower than net income recorded in the previous quarter (R$ 1,642 million), mainly due to the R$ 919 million reduction in gross profit, as a result of the following factors:

• 15% increase in imports of oil and oil products; 
•  Sales of inventory with higher costs during the quarter, purchased when international oil prices were higher;
• Increase of 18% refining costs in Reais, primarily due to higher expenses associated with the programmed stoppages during the quarter when compared to the previous quarter. 
  

These effects were partially offset by the following factors:

• Increase of 4% in the domestic oil product sales volume;
• 2% increase in the average value realized for basic oil products marketed in the domestic market.

GÁS AND ENERGY – For the first nine months of 2006, net loss for the Gas and Energy segment was R$ 881 million, R$ 506 million higher than the net loss for the same period of last year (R$ 375 million), due to the below factors:

• Reduction of R$ 181 million in gross profit, mainly due to lower margins in the sales of energy. This occurred as a result of increases in the price for settling differences from the Câmara de Comercialização de Energia Elétrica (Electric Energy Marketing Chamber), due to the reduction of the outflow of hydroelectric reserves in the Southern region; 
•  Increase of R$ 66 million in research and development costs, R$ 47 million of which was due to the ANP settlement; 
•  Recognizing a loss in the amount of R$ 167 million from the termination of a hedge contract to reduce the volatility in natural gas prices, signed with the company ANDINA. In the same period of last year, this operation caused a gain of R$ 94 million. 
  

These effects were partially offset by a 7% volume increase in natural gas sold.

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In the 3Q06, the Gas and Energy segment realized a loss of R$ 581 million, compared to a loss of R$ 222 million reported in the previous quarter. The loss was mainly due to:

• Reduction of R$ 150 million in gross profit, mainly due to lower margins in the sales of energy. This occurred as a result of increases in the price for settling differences from the Câmara de Comercialização de Energia Elétrica, due to the reduction of the outflow of hydroelectric reserves in the Southern region. 
• Recognizing a loss in the amount of R$ 167 million, as a result of terminating the hedge contract with the company ANDINA, which had originally been established to reduce the volatility of natural gas prices. 
  

These effects were partially offset by a 5% increase in the volume of natural gas sold during the third quarter when compared to the prior quarter.

DISTRIBUTION – For the first nine months of 2006, the Distribution segment reported a net income of R$ 455 million, compared to net income of R$ 554 million recorded in the same period of the prior year. This segment registered an increase in gross profit, driven by an increase in average price of oil products.

The increase in gross profit was offset by higher operating expenses, primarily from higher freight expenses due to larger volumes of commercial products, and for provisioning related to contingency reserves of a civil nature.

Participation in the combustible distribution market during the January to September 2006 period was 33.1%, and compared to 33.8% for the same period of last year.

In comparison with the previous quarter, net income for the 3Q06 was R$ 160 million, 21% higher than the net income of R$ 132 million registered in the 2Q06. This increase is mainly due to the R$ 44 million increase in gross profit caused by an 11% increase in volume of products sold, reflecting market share that reached 34.2% in the third quarter compared to 32.2% in the previous quarter.

The increase in gross profit when compared to the previous quarter was partially offset by the R$ 14 million increase in operating expenses caused mainly by higher freight costs for the higher volume of commercial products.

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INTERNATIONAL – For the nine month period ended September 2006, the International segment reported a net income in the amount equivalent to R$ 599 million, 42% lower than the net income equivalent of R$ 1,035 million that was registered in the same period of 2005.

This decline in net income was primarily because of the following factors:

• Gross profit decline of R$ 50 million due to the following factors: i) loss of participation in the Venezuelan operations due to the transformation in Venezuela from operating agreements to a mixed company in which the Venezuelan government assumed a majority interest through the PDVSA; ii) increased production costs in Bolivia due to an increase in the tax rate for hydrocarbons from 18% to 50% as of May 2005, and from 50% to 82% as of May 2006; iii) 2% appreciation of the Real against the U.S. dollar for the accounting conversion process; iv) the temporary interruption in production from the main fields in the United States after hurricanes Rita and Katrina; and v) natural decline in production in some mature fields in Angola. This decline was partially offset by the increase in international oil prices, by the larger volume and price for commercial electric energy in Argentina, by the increase in sales volume of natural gas from Bolivia to Brazil and Argen tina, and by the higher natural gas prices in Argentina; 
• Increase of R$ 352 million in prospecting and drilling expenses due exploration spending write-offs in the U.S. and Bolivia, and by the higher seismic expenses, mainly in the U.S., Tanzania, Iran, and Colombia; 
• Reduction in other operating expenses primarily generated from the 2006 recuperation of exploration expenses in Nigeria, in the amount of R$ 73.7 million. 
  

For the third quarter, net income equivalent for the International segment was R$ 107 million, 58% lower than the equivalent net income of R$ 256 million that was reported in the second quarter of 2006. This difference is mainly due to the factors below:

•  Increase of R$ 114 million in prospecting and drilling expenses in the U.S. primarily related to the write-off of the Blackbeard well in the Gulf of Mexico, as well as costs associated with higher seismic expenses; 
• Gross profit decline of R$ 18 million, primarily because of the following factors: i) increased production costs in Bolivia due to an increase in the tax rate for hydrocarbons from 18% to 50% as of May 2005, and from 
  

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50% to 82% as of May 2006; and e ii) revision of the tariff adjustment for electric energy in Argentina, recognized in June 2006.

CORPORATE – Corporate activities for the PETROBRAS System generated a net loss of R$ 3,386 million, 38% lower than reported in the January to September period of 2005 (R$ 5,478 million), mainly due to the following factors:

• $ 1,110 million reduction in net financial expenses, as mentioned on page 7; 
• A reduction of R$ 734 million in expenses for non-controlling shareholder participation due to the lower financial results reported by the Special Purpose Companies and controlled companies, where PETROBRAS and its subsidiaries do not have total control. 
  

These effects were partially offset by the increase in corporate overhead, mainly due to higher personnel expenses derived from the salary repositioning by category in accordance with the collective bargaining agreement signed at the end of the 2005, and by the entrance of new employees during 2006.

In comparison with the previous quarter when net loss for the corporate segment was R$ 1,147 million, 3Q06 net loss was R$ 377 million, primarily because of the tax benefit of R$ 1,492 million derived from the economic tax from the provisioning of interest on capital.

This effect was partially offset by the R$ 534 million increase in net financial expenses, mainly generated from the premium when repurchasing outstanding high coupon Bonds by PIFCO, realized in July 2006 (R$ 321 million), whose objective was to improve the indebtedness profile, as mentioned on page 7.

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