Petrobras (PBR)

RESULTS OF OPERATIONS FOR 2005 COMPARED TO 2004

The comparison between our results of operations for 2005 and 2004 has been affected by the 16.8% decrease in the average Real/U.S. dollar exchange rate for 2005 as compared to the average Real/U.S. dollar exchange rate for 2004. We refer to this change in the average exchange rate as the “16.8% increase in the value of the Real against the U.S. dollar in 2005, as compared to 2004.”

The exchange variation resulting from monetary assets and liabilities related to operations of consolidated subsidiaries whose functional currency is not Reais are not eliminated in the consolidation process and such results are accounted for as cumulative translation adjustments.

Net operating revenues increased 46.6% to U.S.$ 56,324 million for 2005, as compared to U.S.$ 38,428 million for 2004. This increase was primarily attributable to an increase in prices of our products, both in the domestic market and outside Brazil, an increase in sales volume in the domestic market, and the 16.8% increase in the value of the Real against the U.S. dollar in 2005, as compared to 2004.

Consolidated sales of products and services increased 42.6% to U.S.$ 74,065 million for 2005, as compared to U.S.$ 51,954 million for 2004, primarily due to the increases mentioned immediately above.

Included in sales of products and services are the following amounts that we collected on behalf of the federal or state governments:

Cost of sales for 2005 increased 40.2% to U.S.$ 29,828 million, as compared to U.S.$ 21,279 million for 2004. This increase was principally a result of:

• a U.S.$ 1,834 million increase in taxes and charges imposed by the Brazilian government totaling U.S.$ 5,410 million for 2005, as compared to U.S.$ 3,576 million for 2004, including an increase in the special participation charge (an extraordinary charge payable in the event of high production and/or profitability from our fields) to U.S.$ 3,016 million for 2005, as compared to U.S.$ 1,883 million for 2004, as a result of higher international oil prices;
  
  
• a U.S.$ 1,654 million increase in the cost of imports due to higher prices for the products imported;
  
  
• a U.S.$ 1,375 million increase in costs attributable to: (1) maintenance and technical services for well restoration, materials, support for vessels, undersea operations, freight with third parties (these prices are tied to international oil prices) consumption of chemical products to clear out and eliminate toxic gases – principally at Marlim; and (2) higher personnel expenses primarily related to: overtime payments as set forth in our collective bargaining agreement; an increase in our workforce; and a revision in the actuarial calculations relating to future health care and pension benefits;

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• a U.S.$ 1,281 million increase in costs associated with our international trading activities, due to increases in volume and prices from offshore operations, conducted by PIFCo;
  
  
• a U.S.$ 561 million increase in costs associated with a 9.0% increase in our international market sales volumes;
  
  
• a U.S.$ 534 million increase in costs in our Argentinean subsidiary PEPSA mainly due to oil products purchases as a result of total capacity utilization of its refineries and higher sales volume of petrochemical products;
  
  
• a U.S.$ 198 million increase in costs associated with a 1.7% increase in our domestic sales volumes; and
  
  
• the 16.8% increase in the value of the Real against the U.S. dollar in 2005, as compared to 2004.

We calculate depreciation, depletion and amortization of exploration and production assets on the basis of the units of production method. Depreciation, depletion and amortization expenses increased 17.9% to U.S.$ 2,926 million for 2005, as compared to U.S.$ 2,481 million for 2004. This increase was primarily attributable to the following:

Exploration costs, including for exploratory dry holes increased 64.6% to U.S.$ 1,009 million for 2005, as compared to U.S.$ 613 million for 2004. We adopted the amended FAS 19-1 effective January 1, 2005, without material impact. This increase was primarily attributable to the following:

• the increase of U.S.$ 196 million due to a revision in the estimated expenses for dismantling oil and gas producing areas and future well abandonment that affected the exploration costs and was related to new commercial areas, increased estimates of cost to abandon and changes in asset retirement obligations estimates provided by operators in joint ventures;
  
  
• an increase of U.S.$ 98 million in geological and geophysical expenses;
  
  
• an increase of U.S.$ 16 million in dry holes expenses; and
  
  
• the 16.8% increase in the value of the Real against the U.S. dollar in 2005, as compared to 2004.

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For 2005, we recorded an impairment charge of U.S.$ 156 million, as compared to an impairment charge of U.S.$ 65 million for 2004. During 2005, the impairment charge was primarily related to investments in Venezuela (U.S.$ 134 million), due to the tax and legal changes implemented by the Ministry of Energy and Petroleum of Venezuela (MEP). During 2004, the impairment charge was related to producing properties in Brazil and principle amounts were related to the Company’s Cioba off-shore field (U.S.$ 30 million). See Note 10 (d) to our consolidated financial statements for the year ended December 31, 2005.

Selling, general and administrative expenses increased 54.2% to U.S.$ 4,474 million for 2005, as compared to U.S.$ 2,901 million for 2004.

Selling expenses increased 38.7% to U.S.$ 2,141 million for 2005, as compared to U.S.$ 1,544 million for 2004. This increase was primarily attributable to the following:

Research and development expenses increased 60.9% to U.S.$ 399 million for 2005, as compared to U.S.$ 248 million for 2004. This increase was primarily related to additional investments in programs for environmental safety, to deepwater and refining technologies of approximately U.S.$ 101 million and to the 16.8% increase in the value of the Real against the U.S. dollar in 2005, as compared to 2004.

Other operating expenses increased 65.6% to a total of U.S.$ 582 million for 2005, as compared to U.S.$ 259 million for 2004.

• a U.S.$ 304 million expense for idle capacity from thermoelectric power plants;
  
  
• a U.S.$ 153 million loss related to our investments in certain thermoelectric power plants resulting from our contractual obligations to cover losses;

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• a U.S.$ 64 million expense for unscheduled stoppages of plants and equipment; and
  
  
• a U.S.$ 61 million increase in contractual losses from compliance with our ship or pay commitments with respect to our investments in the OCP pipeline in Ecuador.

• a U.S.$ 110 million expense for idle capacity from thermoelectric power plants;
  
  
• a U.S.$ 85 million expense for unscheduled stoppages of plant and equipment; and
  
  
• a U.S.$ 64 million increase in contractual losses from compliance with our ship or pay commitments with respect to our investments in the OCP pipeline in Ecuador.

RESULTS OF OPERATIONS FOR THE FIRST QUARTER OF 2005 COMPARED TO THE FIRST QUARTER OF 2004

The comparison between our results of operations for the first quarter of 2005 and the first quarter of 2004 has been affected by the 8.0% decrease in the average Real/U.S. dollar exchange rate for the first quarter of 2005 as compared to the average Real/U.S. dollar exchange rate for the first quarter of 2004. For ease, we refer to this change in the average exchange rate as the “8.0% increase in the value of the Real against the U.S. dollar in the first quarter of 2005, as compared to the first quarter of 2004.”