Annual Report 2005

contentsProfile, mission, vision 2015 and values

Highlights

Message from the president

The conquest of self-sufficiency

Conduct of the oil market

Corporate strategy

o u r b u s i n e s s e s i n b r a z i l

22 Exploration and Production

29 Refining and Commercialization

32 Petrochemicals

35 Transportation

37 Distribution

40 Natural Gas

44 Energy

I N T E R N AT I O N A L A C T I V I T I E S

54 South America

60 North America

61 Africa

62 Asia

SOCIAL AND ENVIR ONMENTAL RESPONSIBIL IT Y

66 Social Investiments

71 Human Resources

75 Health, Safety, and Environment

I N TA N G I B L E A S S E T S

84 Technological Know-how Capital

87 Organizational Capital

88 Relationship Capital

91 Human Capital

B U S I N E S S M A N A G E M E N T

94 Business Performance

97 Capital Markets

103 Risk Management

106 Corporate Governance

112 Corporate Information

116 Glossary, Abbreviations and Addresses

contents

p e t r o b r a s i n b r a z i l a n d o v e r s e a s

THE UNITED STATES

MEXICOVENEZUELA

NIGERIA

IRAN

SINGAPURE

CHINA

ANGOLATANZANIA

BOLIVIA

PARAGUAY

URUGUAY

COLOMBIA

ENGLAND

ECUADOR

PERU

CHILE

ARGENTINA

EQUATORIAL GUINEA

JAPANLIBYA

Coari

SANTA CRUZDE LA SIERRA

GualbertoVillarroel Guillermo

Elder Bell

MANAUS

COCHABAMBASen. Canedo

BRASÍLIA

Copesul

PARAGUAI

Tramandaí

Terminal deRio Grande

Bahía Blanca

São SebastiãoRIO DE JANEIRO

REDUC

REGAP

VITÓRIA

Itabuna

DTBAS

ARACAJUCandeias

Suape

Dunas

Guamaré

Mucuripe

SÃO LUÍS

Jequié

BELÉM

PORTO ALEGRE

FORTALEZA

NATAL

MACEIÓ

SALVADOR

ESPÍRITO SANTONorte-Capixaba

Regência

GOIÂNIA

ARGENTINA

URUGUAI

FLORIANÓPOLISCURITIBA

SÃO PAULO Paranaguá

REFISAN

RICARDO ELIÇABE

REFAP

São Francisco do Sul (DTSUL)

RPBC

Macaé

Pipelines

Fertilizer Plant

Refinery

Terminal

Petrobras overseas

REVAPREPLAN

RECAP

REFINOR

UBERABA

RLAM

REMAN

RECIFE

LUBNOR

CabedeloJOÃO PESSOA

Campina Grande

REPAR

SIX

profile mission

To operate safely and profitably in

the oil, gas and energy domestic

and international markets in a socially

and environmentally responsible

manner, supplying products and

services to meet the needs of its

customers and contributing to the

development of Brazil and the

countries in which it operates.

values

Focus on the Company’s main

stakeholders: shareholders,

customers, employees, society,

government, partners, suppliers

and the communities in which

it operates;

A spirit of entrepreneurship and

an ability to meet challenges;

Focus on obtaining excellent results;

Innovative and competitive spirit

with a focus on providing services

with a competitive edge and

technological competence;

Excellence and leadership in

questions of health, safety and the

preservation of the environment;

A permanent quest for business

leadership.

P E T R O B R A S W I L L B E A N I N T E G R AT E D

E N E R G Y C O M PA N Y W I T H A S T R O N G

I N T E R N AT I O N A L P R E S E N C E A N D T H E

L E A D E R I N L AT I N A M E R I C A , O P E R AT I N G

W I T H I T S F O C U S O N P R O F I TA B I L I T Y

A N D S O C I A L A N D E N V I R O N M E N TA L

R E S P O N S I B I L I T Y.

Petrobras is a publicly listed company that

operates on an integrated and specialized basis

in the following segments of the oil, gas and

energy industry: exploration and production;

refining, commercialization, transportation and

petrochemicals; distribution of oil products;

natural gas and energy. Founded in 1953, the

Company today is the world’s 14th largest oil

company according to Petroleum Intelligence

Weekly. Leader in the Brazilian hydrocarbons

sector, Petrobras has been expanding its

operations to become an integrated energy

company with international operations and a

leader in Latin America.

profile

vision2 0 1 5vision 2015

HIGHLIGHTSHIGHLIGHTS

Operational summary | 2005

2004 2005PROVED RESERVES – SPE criteria (billions of barrels of oil equivalent - boe) (1)(2) 14.9 14.9

Oil and condensate (billions of barrels) 12.1 12.3

Natural gas (billions of boe) 2.8 2.6

AVERAGE DAILY PRODUCTION (th. boed) (1) 2,020 2,217

• Oil and NGL (th. bpd) 1,661 1,847

Onshore 407 396

Offshore 1,254 1,451

• Natural gas (th. boed) 359 370

Onshore 217 213

Offshore 142 157

PRODUCING WELLS (oil and natural gas) – 12/31/2005 (1) 13,821 14,061

Onshore 13,156 12,803

Offshore 665 1,258

DRILLING RIGS – 12/31/2005 50 64

Onshore 19 22

Offshore 31 42

OPERATING PRODUCTION PLATFORMS – 12/31/2005 95 97

Fixed 72 73

Floating 23 24

PIPELINES (km) – 12/31/2005 (1) 30,039 30,343

Oil and oil products 12,553 12,857

Natural gas 17,486 17,486

TANKER FLEET – 12/31/2005

Vessels - company owned 50 50

- chartered 74 75

Tons (millions of deadweight tons - dwt) 8 8

TERMINALS – 12/31/2005

Number 65 66

Storage capacity (million m3) (3) 9.9 10.4

REFINERIES – 12/31/2005 (1)

Number 16 16

Nominal installed capacity (th. bpd) 2,114 2,114

Average throughput processed (th. bpd) 1,847 1,861

Brazil 1,728 1,758

Overseas 119 103

Average daily production of oil products (th. bpd) 1,797 1,839

IMPORTS (th. bpd)

Oil 450 352

Oil products 109 94

EXPORTS (th. bpd)

Oil 181 263

Oil products 228 241

COMMERCIALIZATION OF OIL PRODUCTS (th. bpd)

Brazil 1,637 1,655

INTERNATIONAL SALES (th. bpd)

Oil, Gas and Oil Products 416 385

HIGHLIGHTSORIGIN OF NATURAL GAS (million m3/day) (4) 42 45

Domestic gas 23 23

Bolivian gas 19 22

NATURAL GAS MARKET DISTRIBUTION (million m3/day) (4) 42 45

Distributors 28 31

Thermoelectric power plants 7 7

Domestic consumption 7 7

ENERGY (1)

Number of thermoelectric power plants(5) 7 9

Installed capacity (MW)(5) 2,194 3,203

Energy sales (GWh) 11.32 16.64

Number of hydroelectric power plants 2 2

Installed capacity (MW)(5) 285 285

Transmission lines (km) 15,414 15,414

Energy distribution (TWh/year) 13 13

FERTILIZERS (1)

Number of plants 3 3

Some 2004 data were revised due to changes in the criteria.(1) Includes overseas data, corresponding to Petrobras’ stake in each partnership(2) Proved reserves are calculated according to SPE (Society of Petroleum Engineers) criteria(3) Includes Transpetro’ port terminals only(4) Excludes flare off, own E&P consumption, liquefaction and reinjection(5) Includes only assets with an equity stake equal or larger than 50%

4 P E T R O B R A S a n n u a l r e p o r t 2 0 0 5 P E T R O B R A S a n n u a l r e p o r t 2 0 0 5 5

2004 2005 %Gross Operating Revenue 150,440 179,065 19%

Net Operating Revenue 111,128 136,605 23%

Operating Profit 29,930 39,773 33%

Financial Result (3,321) (2,843) -14%

Net Income 16,887 23,725 40%

Net Income per Share (R$/share) 3.85 5.41 41%

EBITDA 36,798 47,808 30%

Total Debt 55,803 48,242 -14%

Net Debt 35,816 24,825 -31%

Market Value 112,458 173,584 54%

Gross Margin 41% 44% 3%

Operating Margin 27% 29% 2%

Net Margin 15% 17% 2%

Financial and Economic Indicators

Brent (US$/bbl) 38.21 54.38 42%

US Dollar Average Price - Sale (R$) 2.9262 2.4350 -17%

US Dollar final Price - Sale (R$) 2.6544 2.3407 -12%

2004 2005Own Investments 21,151 22,927

Exploration & Production 12,441 13,934

Supply 3,907 3,286

Gas & Energy 625 1,527

International 2,331 3,153

Distribution 1,223 495

Corporate Areas 624 532

Special Purpose Companies (SPCs) 775 2,385

Ventures under Negotiation 454 311

Project Finance 169 87

Total Investments 22,549 25,710

Financial summary | 2005

I N V E S T M E N T S R$ mi l l ion

R$ mi l l ionC O N S O L I D A T E D F I N A N C I A L I N F O R M A T I O N

Market Capitalization Net Equity

HIGHLIGHTS

P E T R O B R A S a n n u a l r e p o r t 2 0 0 5 7

Oil and Oil Products Spill (m3)

Spills of more than 1 barrel (0.159 m3) impacting

the environment outside the installation perimeter.

2001

2002

2003

2004

2005

2,619

197

276

530

269

Gross Margin, Operating and Net (1)

BR GAAP Criteria

Gross Margin

Operating Margin

Net Margin

Earnings/Share

BR GAAP Criteria

(R$/share)(1)(2)

2001

2002

2003

2004

2005

2.27

1.86

4.06

3.85

5.41

Net Income

BR GAAP criteria

(R$ million)(1)

2001

2002

2003

2004

2005

9,867

8,098

17,795

16,887

23,725

(1) The 2004 and 2005 fiscal years include the Specific Purpose Companies whose activities are controlled, directly or indirectly, by Petrobras (2) For the effects of comparison, Net Earnings per share were recalculated for the previous periods as a result of the share split approved by the AGM of July 22, 2005.(3) The 2001, 2002 and 2003 fiscal years include debt contracted by the SPEs with which Petrobras structured "Project Finance" and consortia. The2002, 2003, 2004 and 2005 fiscal years include leasing contracts.

Short-Term

Long-Term

Funds obtained but still not used in projects

Net Debt

20052004200320022001

Valor de Mercado Valor Patrimonial

56 54

2001 2002 2003 2004 2005

Market Capitalization x Net Equity

(R$ billion)(1)

78

174

112

87

6249

3429

2001 2002 2003 2004 2005

17%

39%36%

45%

20%

44%41%

29%

19%

12%

24%

17%

29%

15%

27%

2001 2002 2003 2004 2005

44.2

49.6

46.2

37.1

8.5 8.1 11.19.610.9

Debt – BR GAAP Criteria

(R$ billion)(1)(3)

1.3

3.3

9.7

40

34.7

35.8

24.8

18.2

Production of Oil, NGL,

Condensate and Natural Gas

(th. boed)

Voting Capital - Preferred Shares

Federal Government

BNDESPar

ADR Level 3

FMP – FGTS Petrobras

Foreign Investors (Resolution no. 2.689 C.M.N.)

Other individuals and legal entities

2001

2002

2003

2004

2005

Proved Reserves of Oil, NGL, Condensate

and Natural Gas SPE Criteria

(billions boed)

Oil, NGL and Condensate

Natural Gas

Oil, NGL and Condensate

Natural Gas

2001

2002

2003

2004

2005

BNDESPar

ADR Level 3 and Rule 144-A



Federal Government

BNDESPar

ADR (ON Shares)

ADR (PN Shares)

FMP – FGTS Petrobras



Voting Capital – Common Shares

Number of lost time injuries per millionmen-hours of exposure to risk.Note: LTIFR covers employees and outsourced workers

Lost Time Injury

Frequency Rate (LTIFR)

2001

2002

2003

2004

2005

2.89

1.53

1.23

1.04

0.97

2.8% 1.9%

2005 2004

15.7%

37.1%

31.7%

15.5%

37.2%

15.8%

31.8%

15.2%

Capital Stock

7.6% 32.2%

15.9%

8.2%

2.7%

15.7%

17.7%

32.2%

18.0%

7.8%

15.7%

2.8%

15.4%

8.1%

2005 2004

2005 2004

8.5 10.62.1

9.9 12.22.3

11.6 14.5

12.1 14.92.8

12.3 14.92.6

1,381 258 1,639

1,535 275 1,810

1,701 335 2,036

1,661 359 2,020

1,847 370 2,217

Commom shares - 2,536,673,672

Preffered shares - 1,849,478,028

Total shares - 4,386,151,700

2.8% 1.9%4.6%

7.5%

27.5%

4.9%7.9%

55.7%26.7%

55.7%

HIGHLIGHTS

2.9

MESSAGE FROM THE PRESIDENT

MESSAGE FROM THE PRESIDENTMESSAGE FROM THE PRESIDENT

“ I N A S I T U A T I O N I N W H I C H A

S C A R C I T Y O F E N E R G Y

R E S O U R C E S , M A I N LY O I L , H A S

B E C O M E M O R E A N D M O R E

E V I D E N T , A C H I E V I N G S E L F -

S U F F I C I E N C Y R E P R E S E N T S A N

I M P O R T A N T S T E P T O W A R D S

R E D U C I N G T H E R I S K A N D

V U L N E R A B I L I T Y O F B R A Z I L ´ S

T R A D E B A L A N C E . A N D

P E T R O B R A S I S P R O U D T O B E

M A K I N G A N I M P O R T A N T

C O N T R I B U T I O N T O W A R D S

R E A C H I N G T H I S G O A L .”

It is with special pride that I present the Company’s results for 2005, a year in which we set records for

production, profitability and investments. The Company ended the year with an annual daily production of oil

and gas of 2,217 million barrels of oil equivalent (boe), consolidated earnings of R$ 23,725 billion and total

investments of R$ 25,710 billion, all historical records.

In order to obtain these results, we implemented a vigorous plan of action based principally on the

continuation of a bold investment cycle that allows us to achieve sustainable returns over the medium and

long-term. This effort, initiated during the administration of President José Eduardo Dutra with whom I shared

the command of the company during 2005, made it possible to restructure our activities and improve our

strategic vision of the future.

In practical terms, I should mention that we passed the benchmark of 1.8 million barrels of oil per day

(bpd) produced in Brazil, mainly due to the startup of the P-43 and P-48 platforms. We consider this a

milestone in the ability of Petrobras’ technical and managerial staff to overcome challenges. In 2003, these

units were well behind in executing their projects and ran serious risks in contractual and

operational feasibility. Nevertheless, we were able to reverse the situation and today

the two rigs are operating at full production.

As a result, we were able to boost annual oil production in Brazil by 13%. This growth

placed Petrobras in the ranks of companies with the highest rise in production in the

world oil industry in 2005. Even with our expanded production, we were able to

guarantee a 131% replacement rate of our oil reserves. That is, for each barrel we

produced, we replaced 1.31 barrels in our reserves, meaning that we continue to maintain

long-term sustainable growth.

In step with the restructuring of our exploration portfolio and the

preservation of sustainable growth, during the 7th Bidding Round

run by the National Petroleum, Natural Gas and Biofuel Agency

(ANP), Petrobras acquired 96 new exploratory blocks, of which

42 were exclusive and 54 were in partnership, totaling the

greatest number of exploratory areas in its portfolio since

the Agency began running the auctions.

We are now quite close to self-sufficiency in

providing oil and oil products to our main market

MESSAGE FROM THE PRESIDENTM E S S A G E F R O M T H E P R E S I D E N T

MESSAGE FROM THE

in its composition, and it already is fueling fleets of buses and trucks in large cities. Developed by

Petrobras, the new fuel contributes to improve air quality and is part of the Company’s commitment to

social and environmental responsibility.

Moreover, the projects that have been approved by the current management in Brazil have a

commitment to domestic content of at least 60%, which will strengthen local industry and generate

thousands of direct and indirect jobs. Of particular note in this regard was the approval of the order for

42 tankers — the largest to be given to the naval industry in the country.

The confidence of our shareholders and investors in the Company’s results can be

measured by the performance of our shares. During the course of 2005, there was an

increase in the average daily financial trading volume of Petrobras’ shares. After the

stock split concluded in September 2005, to make shares more accessible to small

and medium sized investors, Petrobras’ shares became the most-traded security on

the São Paulo Stock Exchange. We expanded our shareholder base and earned an

investment grade rating from Moody’s Investor Service for our foreign currency debt

— four levels higher than the classification of the Brazilian sovereign risk.

Petrobras’ results in 2005 were reflected in the Company’s market capitalization,

which rose 54% in 2005. Today we are the 8th most valuable company in the sector in

the world and the highest valued in Latin America, according to Business Week magazine

In the following pages, you will find greater detail about Petrobras’ results in 2005.

They were conquests that consecrated the efforts of our employees and suppliers

along with the trust of our shareholders and customers.

JOSÉ SERGIO GABRIELLI DE AZEVEDO

President and CEO of Petrobras

— Brazil. This target, which is symbolic for Brazilian society, will materialize in a sustainable manner in 2006,

as soon as the recently launched P-50 platform reaches its peak production capacity of 180,000 bpd in

the Campos Basin. In a situation in which a scarcity of energy resources, mainly oil, has become more and

more evident, achieving self-sufficiency represents an important step towards reducing the risk and

vulnerability of Brazil´s trade balance. And Petrobras is proud to be making an important contribution

towards reaching this goal.

Petrobras has sought to expand its activities with the same entrepreneurial determination and spirit.

The Company’s project for international expansion is based upon the same ethical and business

principles that are leading the Brazilian market to sustainable self-sufficiency. Thus, in 2005 Petrobras

intensified its activities in Africa, South America and United States, strengthening its international

presence. The Company’s overseas offensive also includes the purchase of assets in Colombia, Paraguay

and Uruguay, and the acquisition of 50% of the Passadena Refinery in the United States, an investment

of some US$ 370 million that will add value to the oil produced by the Company.

Pursuing the same strategic objective of adding value to its products, Petrobras decided to build a new

refinery in the Northeast of Brazil, in the state of Pernambuco, with scheduled investments of US$ 2.5

billion. This is the first project for a Petrobras refining facility since conclusion of the Henrique Laje

Refinery (Revap) in 1980 in the state of São Paulo.

In the energy area, Petrobras took over full control of three power plants in 2005: TermoRio (1,040

MW), Eletrobolt (388 MW) and TermoCeará (220 MW) — the latter two being Merchant type plants. In

February 2006, we signed a memorandum of understanding for the acquisition of the Macaé Merchant

Plant (929 MW), thus reducing the need to make contingency payments. We took major steps to expand

natural gas distribution infrastructure with the approval of projects such as the Southeast-Northeast

Interconnection Pipeline (Gasene) and the expansion of the Southeast and Northeast grids, satisfying the

growing demand for our product.

One of the underpinnings of our action plan has been continuous massive investment in technological

development. And the results can be seen in, for example, the national record for drilling depth: a slanting

well that reached 6,915 meters below the sea bottom in the Santos Basin. Our refineries have been

adapted — and this is a permanent practice — to process more heavy oil and to improve the quality of

our products, extracting high added value oil products. We introduced Diesel 500, with 75% less sulfur

10 P E T R O B R A S a n n u a l r e p o r t 2 0 0 5

PRESIDENT

The largest natural gasreserve on theBrazilian continentalshelf is discovered inthe Santos Basin. Newlight oil provinces arefound in Espírito Santoand Sergipe, with highpotential forexploration andproduction.

Petrobras breaks thework offshoreproduction record atthe Roncador fieldin the CamposBasin, producing at1,853 meters ofwater depth.

The first semi-submersibleplatform totally developed byPetrobras technicians(Petrobras-18) beginsoperations in the Marlim fieldof the Campos Basin).

First offshore discoveryof oil: the Guaricemafield in Sergipe.

Exploration of thecontinental platformfrom Maranhão toEspírito Santo isinitiated.

Creation of thePetrobras ResearchCenter (Cenpes).

1953October 3 | President GetúlioVargas signs Law 2004 thatestablishes the monopoly of thefederal government over theactivities of the oil industry in thecountry and authorizes thecreation of Petróleo Brasileiro S.A. – Petrobras as the statecompany to be the executor ofthe monopoly.

The discovery ofthe Garoupa fieldoff the northerncoast of Rio deJaneiro marks thebeginning of theconquest of theCampos Basin,which will becomethe largestproduction regionin the country.

The giant Roncadorfield in the CamposBasin is discovered.

Campos Basinproduction beginsthrough an earlysystem installed atthe Enchova field.

The giant Albacora field isdiscovered in the Campos Basin.Production reaches 500,000barrels per day.

The giant Marlimfield is discoveredin the CamposBasin.

The Technological Innovation and AdvancedDevelopment in Deep and Ultra-Deep WaterProgram (PROCAP) is created. Initially, theprogram studies solutions for exploration andproduction in water up to 1,000 meters deep.Subsequently, the studies are extended towaters 2,000-3,000 meters in depth.

The Rio Urucu field starts producing in AltoAmazonas, celebrating a long period ofprospecting activities in the Amazon region.

The discovery ofthe Carmópolis(SE) field opensup prospects forproduction outsideof Bahia.

Oil production at the giant Albacora field inthe Campos Basin is initiated in 420 metersof water depth, a world record at the time.

Another giant oil field is discovered at theCampos Basin: Marlim Sul.

1974

2003

19961987

1988

1985

1986

1999

1994

1963

1961

1966

1968

1977

1953

1962

1984

The companyreaches theproduction markof 100,000 barrelsof oil per day.

Oil industry activities in Brazilare opened up to privateinitiative. Production exceedsthe historic milestone of 1million barrels per day.

1997

Oil

prod

ucti

on i

n B

razi

l |1

953

to 2

005

self-sufficiencyThe conquest of self-sufficiency

1954

Petrobras begins itsactivities, taking overthe collection ofassets of the formerNational PetroleumCouncil (CNP).Production is 2,700barrels of oil per day. 2005

On December 19, Petrobras sets aproduction record of 1,857,425barrels of oil per day. Work on theP-50 platform, which has thecapacity to produce 180,000barrels a day, is concluded.Installed in the Albacora Lestefield of the Campos Basin, it willassure sustainable oil self-sufficiency for the country when ithits peak production in 2006.

Conduct of the Oil market

Oil prices continued rising in 2005, following a trend that began in 2004.

Brent and WTI oil were, respectively, 42% and 36% more expensive than the

average of the previous year. This increase in prices, compared to the rises of

similar magnitude that occurred during the decade of the 1970s, has been

presenting a singular characteristic because it is predominantly due to market

fundamentals rather than geopolitical events.

Strong price swings during the year also demonstrated the nervousness of

the market in the face of any changes in the perception of the market funda-

mentals, a symptom of the exhaustion of capacity in the oil chain. In particu-

lar, in 2005 attention was concentrated more on the stress in refining rather

than on production capacity.

In this sense, the effect of the passage of Hurricanes Katrina and Rita

through the Gulf of Mexico was a clear sign that the system lacks flexibility to

deal with unexpected events. Because the interruption of production was

compensated for through the liberation of strategic inventories managed by

the International Energy Agency, the oil price peaks were of short duration — US$ 67.5/bbl for Brent and US$

69.8/bbl for WTI. On the oil product market, however, the reduction by 30% of refining activity in United States

led to an increase in real prices only comparable to that seen in the 1970s.

Even with the slowdown in the growth of world demand — 1.4% in 2005 against 3.8% in 2004 — it cannot

be said that the increase in the price of oil is reducing the consumption of oil products and, as a result, crude oil

sales. The control of the price of oil products in China and the subsequent stagnation of Chinese imports of such

products contributed to reduced growth in demand, as did the impact of the hurricanes on the U.S. economy.

Nevertheless, prices remained high.

The growth of oil production in non-OPEC countries declined drastically in 2005, remaining practically stable,

according to the calculations of the International Energy Agency, compared to an increase of about 1 million bpd

in 2004. This decline is explained less by the fall in production in the mature regions such as the North Sea, than

by the temporary halt in the Gulf of Mexico and — more importantly — by the strong slowdown of production in

Russia that went from average annual increases of 10% in each of the past five years to 2.4% in 2005.

Even with the

slowdown in the

growth of world

demand — 1.4% in

2005 against 3.8% in

2004 — it cannot be

said that the increase

in the price of oil is

reducing the

consumption of oil

products and, as a

result, crude oil sales.

250.000

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

270.000

290.000

310.000

330.000

350.000

Faixa 2000-2004 2004 2005 (Depois dos furações)

(semanas)

Private Oil Stocks in the U.S. (M bbl)Source: US-DOE/EIA

10

20

30

40

50

60

70

80

1.1.061.9.051.5.051.1.051.9.041.5.041.1.041.9.031.5.031.1.031.9.021.5.021.1.021.9.011.5.011.1.011.9.001.5.001.1.00

Cesta OPEP WTI Brent

Oil Prices (US$/bbl, nominal)Source: Bloomberg

OPEC Basket WTI Brent

2000-2004 band

2004

2005

(after the hurricanes)weeks

Conduct of the Oil market

Conduct of the


Nevertheless, the rise in prices is not due to a shortage of oil in the market. To the contrary, analysts have been

surprised by the persistent high price of a barrel of oil despite the formation of private oil inventories — a sign of

abundance in the system.

Because non-OPEC oil does not satisfy incremental demand, the organization began to produce more, as in 2004,

placing excess capacity into operation, which today consists primarily of heavy oil. Although more than sufficient in

volume, the quality of this additional supply was inadequate to satisfy demand due to the lack of capacity in the world’s

refineries to convert this oil into the medium and light oil products most required, such as diesel and gasoline.

As a result, marginal refiners put

upwards pressure on the price of

lighter oils such as Brent and WTI in

order to obtain final products that

were adjusted to the demand profile.

However, because the additional

supply was of a heavy type of oil,

processing it generated surplus

supplies of fuel oil, widening the

difference between light and heavy

oils, as happened in 2004. That

explains the occurrence of even

higher refining margins in 2005,

particularly for refiners with

conversion capacity.

As a result of this market situation, the historic OPEC trade-off between high prices and high production was invalidated.

By combining the two, it obtained oil export revenues of some US$ 450 billion – 50% higher than in 2004. In Iraq, the

prolonged political instability and sabotaging of the oil infrastructure frustrated attempts to increase production, which was

lower than in 2004, to the benefit of the other members of OPEC with available capacity.

The maintenance of OPEC production at a level of about 30 million bpd also meant the increase in its production quotas

during the course of 2005 were merely cosmetic, ending the year at 28 million bpd. In September, the organization offered

the market all of its surplus capacity — without the move easing prices at all. An absolute novelty, the total production of

the ten member countries subject to quotas (Iraq excluded) was lower than the stipulated quantities — behavior that rather

than reflecting discipline demonstrated the inability to increase production: countries such as Venezuela, Iran and Indonesia

did not even meet their quotas. The year, thus, was notable for OPEC’s reduced surplus capacity, which inserted a high risk

premium into the price of oil.

Another significant fact in 2005 was the official suspension of the OPEC price target (between US$ 22/bbl and

US$ 28/bbl for its oil basket). Although the target had no longer been a benchmark for the organization since 2004,

its suspension formalized the view that OPEC desired a higher price level. The organization also adopted a new basket

of reference oils that are heavier and have higher sulfur content. Given the widening of the differential between oils,

this means that OPEC will indirectly seek a higher level for its benchmark oils (Brent and WTI), which are lighter.

The influx of speculative capital into the “paper barrels” market was also among the causes of higher oil prices

in 2005. The action of the derivatives funds occurred due to the low level of interest rates and the high rate of

monetary liquidity in the world. However, it is necessary to understand that the volatility caused by the increase in

the volume of the oil futures markets was not, by itself, the cause of the rise in the prices; rather, in a context in

which the fundamentals pointed towards an increase, it was the cause of the exacerbation of this trend.

The trend of an increase in costs throughout the oil chain continued in 2005, especially for exploration and

production development activities. Also rising was the alarmist tone of the official energy agencies regarding the need

for greater investment in order to put into operation sufficient production and refinery capacities to accommodate the

growth in demand. In this situation, the government-owned companies of China and India, anxious for energy

resources, further increased the competitive atmosphere of the sector and restricted the investment opportunities of

the large international companies in search of acquisitions to compensate for their inability to meet their targets for

growth of production and replacement of reserves.

In conclusion, 2005 was a year when the circumstances leading to an increase in prices over the previous year became

exacerbated, with few signs of an abatement in the conditions provoking these highs. In the sense that a higher level of

prices is now expected over the long term as in 2004, the year of 2005 demonstrated that it was part of a period of

transition to a new reality in the

international oil market.

-5

0

5

10

15

20

200520042003200220012000199919981997199619951994199319921991199019891988198719861985

Isthmus Cracking Isthmus Coking Maya Coking

Net U.S. Gulf Refining Margins

(real values 2005, US$/bbl)

Source: Purvin & Gertz

Oil market

23.0

24.0

25.0

26.0

27.0

28.0

29.0

Nov

-05

Sep-

05

Jul-0

5

May

-05

Mar

-05

Jan-

05

Nov

-04

Sep-

04

Jul-0

4

May

-04

Mar

-04

Jan-

04

Produção OPEP-10Cota OPEP-10

OPEC-10 Oil Production and Quotas (MM bpd)Source: OPEC and the International Energy Agency

Isthmus Cracking Isthmus Coking Maya Coking

OPEC-10 Quota OPEC-10 Production



Corporate StrategyCorporate Strategy

Petrobras’ Business Plan 2006-2010 maintains the aggressive growth targets established by the 2015 Strategic

Plan. The production of oil and natural gas in Brazil is to reach 2,860 thousand boed in 2010. With this perform-

ance, the Company will be able to boost the share of Brazilian oil in the throughputs processed in domestic refiner-

ies from 80% to 91%, thus consolidating the sustainability of self-sufficiency in this market.

Approved by the Board of Directors in August, the Business Plan calls for investments of US$ 56.4 billion – an

average of US$ 11.3 billion per year. Of the total, US$ 49.3 billion (87%) is earmarked for Brazil while US$ 7.1 bil-

lion (13%) will be applied overseas. The countries of Latin America, West Africa and the Gulf of Mexico – priority

areas within the Company’s international strategy — are where the Company will concentrate 82% of the funds

invested abroad.

The amounts exceeded the previous plan by US$ 21.9 billion, resulting in the increase in investments for

Exploration and Production (+ 73%), Supply (+ 39%) and, in view of the growing demand for natural gas, in Gas

and Energy (+ 151%). To stimulate the development of a new center of supply, at least 65% of the amount invest-

ed in the country will be earmarked for Brazilian suppliers. Of these funds – an average of US$ 6.4 billion annually –

77% will mobilize the materials, construction and assembly sectors. Petrobras will demand, directly and indirectly, the

creation of 662 thousand job positions.

In parallel with the increase in the Brazilian production of oil and natural gas, which should reach 2,200

thousand bpd in 2006, this year the country’s refineries should process 1,846 thousand bpd – a volume that

points to a target of 1,869 thousand bpd in 2010. With the sustainability of self-sufficiency guaranteed, the daily

processing of crude Brazilian oil, which was 1,376 thousand bpd in 2005, will rise to 1,710 thousand bpd in 2010.

The sale of surplus domestic oil, which was 262 thousand bpd in 2005, will reach 522 thousand barrels.

Overseas, where Petrobras produced 259 thousand boed of oil and natural gas during 2005, production should

hit 545 thousand boed in 2010, when the processed throughput in the Company’s refineries in other countries

should total 154 thousand bpd. The volume of natural gas sales in the Southern Cone (excluding Brazil), of

Investment Plan (US$ Billion)

Business Area BP 2006-10

E&P 28.0

Downstream 12.9

Gas & Energy 6.5

International 7.1

Distribution 0.9

Corporate Areas 1.0

Total 56.4

87%

13%

Brazil

Overseas

15.64 million m3/day in 2005, should reach 37 million m3/day in four years’ time.

As part of the strategy to consolidate itself as an integrated energy company with an international presence,

Petrobras seeks to optimize the use of renewable sources, such as biomass, biodiesel and wind and solar gener-

ation. In 2010, the installed capacity of generation from these sources will reach 169 MW and the capacity of the

thermoelectric and cogeneration power plants will be 4,857 MW. Furthermore, Petrobras should make available

8.2 thousand bpd of biodiesel.

The Company is maintaining its policy of alignment of its prices with the international market over the long-

term. The forecast for own cash flow generation between 2006 and 2010 is US$ 58.9 billion, which is compatible

with the investment plan. Funding raised in the financial market is forecast at US$ 12.2 billion and the debt amor-

tization is calculated to be US$ 14.7 billion. The policy of extending the debt maturity profile will proceed as before

as will efforts to reduce financial leverage. Average Return on Capital Employed (ROCE) for the period should be

15%. As a result, US$ 71.1 billion will be obtained and invested.

With the commitments it has assumed in the fields of social and environmental responsibility and technologi-

cal know-how, investments in Health, Safety and Environment (HSE), technology, telecommunications and

Information Technology (IT) for the 2006-2010 period will total US$ 4.7 billion.

Third-party Capital

Own Generation

Debt Amortization

Investments

Oil + LNG Brazil

Oil + LNG International

Natural Gas Brazil

Natural Gas International

(US$ 71.1 billion)

14,7 56,4

12,2Sources

Use

58,9

Production increase (th. bpd)

Sources and use of resources

Business

Plan Investments 2006-10


our businessesOUR BUSINESSES

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2 0 0 5 WA S A D E C I S I V E Y E A R F O R P E T R O B R A S TO A C H I E V E S E L F - S U F F I C I E N C Y. T H E C O M PA N Y P R O D U C E D 1 , 6 8 4

T H O U S A N D B A R R E L S P E R DAY O F O I L ( B P D ) , L I Q U E F I E D N AT U R A L G A S ( LG N ) A N D C O N D E N S AT E I N B R A Z I L –

12 . 8 % M O R E T H A N D U R I N G 2 0 0 4 . A D D I N G T H E I N T E R N AT I O N A L P R O D U C T I O N A N D N AT I O N A L P R O D U C T I O N

O F N AT U R A L G A S , T H E C O M PA N Y S E T A P R O D U C T I O N R E C O R D O F 2 , 2 17 T H O U S A N D B A R R E L S O F O I L

E Q U I VA L E N T P E R DAY ( B O E D ) .

D U E TO T H E I N C R E A S E I N P R O D U C T I O N A N D I N V E S T M E N T S , B R A Z I L’ S 11 R E F I N E R I E S W E R E A B L E TO

I N C R E A S E T H E A M O U N T O F D O M E S T I C O I L P R O C E S S E D F R O M 1 , 2 9 2 T H O U S A N D B P D TO 1 , 3 76 T H O U S A N D

B P D — A J U M P F R O M 76 % TO 8 0 % .

W I T H R E G A R D TO T H E D I S T R I B U T I O N O F O I L P R O D U C T S , T H E P E T R O B R A S D I S T R I B U I D O R A S U B S I D I A R Y H A D

G R O S S R E V E N U E S 2 5 % H I G H E R T H A N I N 2 0 0 4 . S A L E S I N T H E N AT U R A L G A S S E G M E N T R O S E 9 . 5 % .

P E T R O B R A S C O N T I N U E D T H E R E S U M P T I O N O F P E T R O C H E M I C A L A C T I V I T I E S , S E E K I N G

S E L E C T I V E E X PA N S I O N I N B R A Z I L A N D S O U T H E R N C O N E C O U N T R I E S . T H E

C O M PA N Y H A S A P R E S E N C E I N N E W P R O J E C T S , S U C H

A S R I O P O L Í M E R O S A N D P E T R O Q U Í M I C A PA U L Í N I A .

Two large gas production projects came on stream: in Bahia, the UPGN III at Catu (2.5 million m3/day) in

January and the Natural Gas Onshore Project (500,000 m3/day) in July in the Tucano Sul Basin. In Rio Grande do

Norte, UPGN III in Guamaré (1.5 million m3/day) initiated its pre-operation activities in December.

In 2005, the average lifting cost without government participation was US$ 5.73 per barrel of oil equivalent,

34% higher than during 2004, due to the 17% appreciation of the Brazilian real against the U.S. dollar, the increase

in the rates of leased drilling rigs, operational transportation, underwater operations, restoration and maintenance

and chemical products, as well as increases stemming from the collective bargaining agreement and an increase

in the size of the labor force. Taking into account government participations, this cost rose to US$ 14.65 per boe.

OUR BUSINESSES

The growth of domestic oil production in 2005 left the country close to self-sufficiency, boosting the Company’s

operating flexibility. Continuing its strategy of surmounting domestic demand, Petrobras produced 1,684 thousand

barrels per day (bpd) of oil, liquefied natural gas (LNG) and condensate in Brazil. The increase represented a

12.8% rise over the 1,493 thousand bpd produced in 2004.

Four large projects contributed to raise production. In addition to the P-48 platform, with capacity to produce

150 thousand bpd and which started up in February in the Caratinga field in the Campos Basin, we also had the

FPSO-MLS (100 thousand bpd) and the P-43 (150 thousand bpd) in operation, respectively, since June and

December 2004 in the Marlim Sul and Barracuda fields and that, in 2005, increased production outputs. Moreover,

we also were able to count on production from the UPGN-3, which has been in activity since June 2004 in Urucu

(AM). As reinforcement for production in the Marlim field, in November Petrobras put the P-47, with capacity for

treating 150 thousand bpd of crude oil, into operation.

Average production in 2005 increased significantly, remaining close to the established target of 1,700 bpd. The

cause of the difference was the postponement until 2006 of the startup of the P-50 (180 thousand bpd) in the

Albacora Leste field in the Campos Basin.

A number of production records were set. On December 19, Petrobras produced 1,857,425 barrels – 23

thousand more than the previous record established on June 23. Besides the exceptional performance of the

Campos Basin platforms, the Mature Fields Recovery Enhancement Program (RECAGE), which seeks to minimize

the decline in mature areas, contributed to the production peaks.

For its part, natural gas production (without LNG) also rose, going from 42.1 million m3/day in 2004 to 43.5

million m3/day. The increase, of 3.3%, was the result of the continuity of actions aimed at expanding the supply

of domestic gas, in step with the Company’s strategy to strengthen the segment and consolidate its leadership in

the distribution and commercialization of the product.


E xploration and production

I N C R E A S E I N O I L P R O D U C T I O N D U R I N G 2 0 0 5 P L A C E D

T H E C O U N T R Y O N T H E D O O R S T E P O F S E L F - S U F F I C I E N C Y


0 - 300 m

300 - 1,500 m

Production: 1,684 thousand bpd

>1,500 m

ONSHORE

Production of Oil, Condensate and LNG in Brazil

Distribution by Water Depth

Production of Non–Liquefied Natural Gas in Brazil

Distribution by Water Depth

0 - 300 m

300 - 1,500 m

>1,500 m

ONSHORE

Total Production: 43,532 thousand m3/day

Evolution of the Production of Oil, LNG, Condensate and Natural Gas

(thousands of boed)

Oil, LNG and Condensate

Natural Gas

1,270 1,491

1,336

1,500

1,540

1,493

1,684

2,300

221

232

252

250

265

274

560

1,568

1,752

1,790

1,758

1,958

2,860

2000

2001

2002

2003

2004

2005

TARGET2010

1 - Nosso Negocios (1º parte)

Produção de óleo Produção de Gás

0.0 0.5 1.0 1.5 2.0 2.5

18.2%

35.0%

3.0%

43.8%

14.4%

15.2%

5.1%

65.3%

OUR BUSINESSES

T H E C O N Q U E S T O F S E L F - S U F F I C I E N C Y

In 2006, Petrobras should reach annual average production of 1,910 thousand bpd, surpassing Brazilian

demand, which is estimated at between 1,850 and 1,900 thousand bpd. An initial step in the 2006-2010

business plan, which calls for investments of US$ 28 million in exploration and production, sustainable

self-sufficiency will be obtained through the coming on stream of the P-50 and three other platforms in

the Campos Basin — the P-34 (60 thousand bpd) in the Jubarte field, Phase I; SSP 300 (20 thousand

bpd) in the Piranema field; and an FPSO (100 thousand bpd) for the Golfinho field’s Module I.

The increase in the amounts produced is in line with the strategy for exploration and production

in Brazil. Carried out with operational excellence and social and environmental responsibility,

Petrobras has sought to strengthen its activities in deep and ultra-deep water and to take advantage

of profitable opportunities in shallow water and onshore areas. At the same time in which it invested

in optimizing mature fields, the Company launched itself into the exploration of new frontiers in order

to guarantee a sustainable ratio between production and reserves.

Besides the oil production projects, in 2006 the Company will initiate gas activities in the Manati field in

Bahia, with production of 6 million m3/day and the first phase of the Peroá-Cangoá field, with production

capacity of 2.5 million m3/day. The construction of the P-52 and P-54 platforms (180 thousand bpd each)

continues to proceed within a timetable that calls for the start up of their operations in 2007 in the Roncador

field of the Campos Basin. Two other projects are currently being executed: the P-51 and the P-53 (180

thousand bpd each), scheduled to begin operations in 2008 in Marlim Sul and Marlim Leste, respectively.

For 2009, Petrobras foresees the start up of production of the Frade project in the Campos Basin, with

capacity for 100 thousand bpd. And in 2010, in the same region, the platforms that are scheduled to begin

operating include the P-55, for the Roncador

project’s Module III; the P-57, for Phase II of

the Jubarte field; and another for the Albacora

Supplemental project. Also slated for startup

that year is the FPSO 3, for the production of

light oil in the Golfinho field.

The targets contained in the Petrobras

Strategic Plan require that, by 2010, 15 large oil and

four natural gas production projects enter into operation

and that the reserve/production ratio is 16 to 18 years in

2010. The volumes of oil and gas to be incorporated will come

from current proved and possible reserves, those still in an

exploratory evaluation stage and from new discoveries.

Discoveries

In 2005, Petrobras declared the commercial viability of eight new oil and gas fields. The gigantic Papa-Terra field in

the south of the Campos Basin, with a recoverable volume estimated at between 700 million and 1 billion barrels

of equivalent oil (boe), deserves mention; Petrobras is the operator of the field with a 62.5% stake and is

associated with Chevron-Texaco in the project. Also noteworthy was the new accumulation discovered in the Marlim

Leste field of the Campos Basin that, because it is located in geologically deeper layers, opens a new exploration

frontier in the region.

Other offshore highlights included the Uruguá and Tambaú fields in the Santos Basin, totaling more than 270

million boe in recoverable volumes of light oil and natural gas, and the Canapu field in the Espírito Santo Basin. In

onshore basins, discoveries were made and commercial viability declarations issued for the following fields: Acauã,

in the Potiguar Basin; Anambé, in the Sergipe-Alagoas Basin; Jandaia, in the Recôncavo Baiano Basin; and Inhambu,

in the Espírito Santo Basin. Moreover, Petrobras has a 35% stake in the Abalone, Ostra, Nautilus and Argonauta

fields in the north of the Campos Basin, which were declared commercially viable in 2005 by Shell, which is the

operator of the concession.

The new discoveries are in line with the targets

contained in the Strategic Plan to increase domestic

production of oil and natural gas to 2,860 thousand

boe/day by 2010. Guaranteeing the sustainability of

production with replacement of reserves, these

results obtained through exploration demonstrate

that Petrobras’ decision to focus on deep and ultra-

deep offshore areas, to conduct research in new

frontiers, to resume efforts onshore and to optimize

mature fields was correct.

E x p l o r a t i o n a n d p r o d u c t i o n

Exploration Success Rate

20%

24%

23%

33%

50%

55%

2000

2001

2002

2003

2004

2005


OUR BUSINESSES

to be high risk. It is a basin with many recorded natural gas seeps and the objective is to verify the existing natural

gas potential.

The 15 offshore contract blocks acquired are located in frontier exploration areas with excellent potential. The

first areas, in deep waters in the Potiguar Basin, offer prospects of large discoveries despite a high exploration risk.

In the high-potential blocks, the areas in the Espírito Santo and Santos Basins have already shown a vocation for

discoveries of non-associated gas. The deep-water blocks have been favorable for oil discoveries, in the Campos

Basin, and both associated and non-associated natural gas in the Espírito Santo and Santos Basins.

E x p l o r a t i o n a n d p r o d u c t i o n

During the year, 292 wells were

drilled and concluded, of which 251

were onshore and 41 in the ocean.

For exploration, 69 wells were drilled

— 36 onshore and 33 offshore. The

exploration success rate hit 55%,

because 38 of the 69 wells that

reached their geological objectives

were considered to be oil or gas

discovery or production wells.

New Concessions

At the Seventh Bidding Round of the National Petroleum, Natural Gas and Biofuels Agency (ANP) held in October,

Petrobras proceeded to restructure and expand the profile of its portfolio of exploration areas, reversing the decline

that was a trend of the first rounds. Of the 109 areas it disputed, the Company acquired 96, totaling 39,872.80 km2.

With the new concessions Petrobras is seeking to guarantee the levels of production of oil and gas called for in

the 2015 Strategic Plan. The portfolio now contains 134 blocks totaling 151.5 thousand km2. Added to the 27 areas

with discovery evaluation plans (9.1 thousand km2) in operation, the total exploration area is 160.7 thousand km2.

Previously, the company had 94 blocks (111.7 thousand km2) and 31 areas with discovery evaluation plans (9.5

thousand km2), for a total exploration area of 121.2 thousand km2.

The bonuses that Petrobras and its partners offered during the Seventh Bidding Round totaled R$

726,322,700.00, with the Company’s portion being R$ 503,527,350.00. Based upon an ANP decision, similar to

the previous rounds, the 96 cells that were auctioned off were grouped into 39 contract blocks, each one consisting

of a contractual instrument. Of the 39 contract blocks, Petrobras has exclusive rights in 16 and is in partnerships

with other companies to operate another 14 blocks. In the other nine, partners are responsible for the operation

and the Company is an associate.

Furthermore, of the 39 of the contract blocks, 24 are located in onshore sedimentary basins and 15 are in

maritime basins. On land, the blocks are in two types of basins: mature coastal and inland. In the coastal basins,

Petrobras already has installed infrastructure and intends to incorporate oil volumes in the short term that should

slow the decline in production in these areas.

In blocks located in the inland basins, the objective is to make new discoveries. In the Solimões Basin, the

Company already produces oil and gas and has accumulated knowledge about the area. In the São Francisco Basin,

which is geologically older but without much seismic data and very few wells, the acquired areas are considered

BLOCKS IN ONSHORE BASINS

Mature coastal Inland

Potiguar 10 Solimões 1

Sergipe-Alagoas 5 São Francisco 1

Recôncavo 2 - -

Espírito Santo 5 - -

OFFSHORE BASINS

Exploratory frontiers (deep water) High potential (deep water)

Potiguar 2 Espírito Santo 2

- - Campos 3

- - Santos 4

Exploratory frontiers (shallow water) High potential (shallow water)

- - Espírito Santo 2

- - Santos 2


OUR BUSINESSES

The growth in the production of oil products in the country, the increase in the volume of domestic oil processed

and the sharp increase in overseas sales were highlights of the refining and commercialization activities during

2005, which are part of the Downstream area.

The investments scheduled for refining over the 2006-2010 period total US$ 8.0 billion. Of this amount,

US$ 3.1 billion is earmarked for adapting the country’s refineries to be able to process heavy oils (metallurgical

adjustments and conversion). These investments are designed to adjust the yields of oil products obtained from

heavy domestic oils to the profile of the consumer market. Moreover, in order to further raise the quality of its

diesel and gasoline products, the Company proceeded with the installation of hydrotreatment units (HDTs), which

are a part of the portfolio of projects and will require an investment of US$ 3.2 billion.

The processed throughput (primary processing) in the country’s refineries was 1,727 thousand bpd in 2005, an

increase of 1% compared to 2004. The 11 refineries in Brazil increased the amount of domestic oil

processed in 2005 by 84 thousand bpd. In comparison to the previous year, oil refining in the

country rose from 1,292 thousand bpd to 1,376 thousand bpd. As result, its share of the total

throughput in the refineries went from 76% to 80%, increasing the refining margin.

The processing of domestic oil increased without impacting the production of medium

oil products such as diesel and aviation fuel. This resulted from the investments made

to adapt the industrial plants in the requirements of heavy oil processing. With the startup

of the retarded coking units (RCUs) and diesel HDTs, the Company optimized use of

domestic oil for manufacturing oil byproducts.

REFINING AND COMMERCIALIZATION

R E F I N E R I E S A R E A D A P T E D T O P R O C E S S M O R E

D O M E S T I C O I L A N D S A L E S A R E O N T H E R I S E O V E R S E A S

Proved reserves

Petrobras’ proved reserves of oil, condensate and natural gas in Brazil reached 13.2 billion boe, using ANP/SPE

criteria, posting an increase of 1.6% over 2004. During the year, 882 million boe of reserves were incorporated while

the volume produced was 673 million boe. With this, the Proved Reserve Replacement Index (IRR) rose to 131.1%.

For each barrel produced, 1.31 was replaced in the reserves. The reserve/production ratio (R/P) was 19.7 years.

New fields that were discovered in the past few years and had commercial viability declared recently (580

million boe) contributed to the increase in the volume of the proved reserves as did new accumulations discovered

in fields that already are in production (300 million boe). The incorporation of existing fields resulted in the

transformation of probable and possible reserves into proved reserves, thanks to development continuity. They also

stemmed from reservoir management practices that sought to enhance oil recovery.

Evolution of Proved Reserves of Oil, NGL, Condensate and Natural Gas – SPE criteria

(billion boe)

Oil, LNG and Condensate

Natural Gas

8.29 9.65

8.32

9.56

10.6

11.05

11.36

1.36

1.35

1.45

1.99

1.97

1.87

9.67

11.01

12.59

13.02

13.23

2000

2001

2002

2003

2004

2005

Evolution of Proved Reserves in Brazil

(Billion boe- SPE Criteria)

Remainder of proved reserves 2004

Incorporation of New Discoveries

Incorporation in Existing Fields in 2004

13.02

12.35 0.58 0.3

2004

2005 13.23

Volume produced in 2005:

0.6 7 billion boe


OUR BUSINESSESR E F I N I N G A N D C O M M E R C I A L I Z A T I O N

According to the strategy of offering quality products with low environmental impact, Petrobras initiated

the sale of low sulfur Diesel S500 fuel. The product is sold in the metropolitan areas of São Paulo, Rio de

Janeiro and Belo Horizonte, in the São José dos Campos (SP) region and the Vale do Aço (MG). The supply

of Podium gasoline, which has high performance and less sulfur content, also was expanded thanks to the

startup of production of the fuel at Reduc, in addition to the production that already was taking place at

the Presidente Bernardes–Cubatão Refinery (RPBC).

D I E S E L S 5 0 0

Commercialization

Petrobras took advantage of new business opportunities to increase the commercialization of oil and oil products

in overseas markets in 2005. In line with the increase in production during the year and prospects for self-

sufficiency, the strengthening of relations with international buyers of Brazilian heavy oil was a determining factor

for the boost in exports, which hit 504 thousand bpd — an amount that was 23% more than in 2004.

The increase in the commercialization of oil abroad was the result of the adoption of a more aggressive sales

strategy, also motivated by the increase in the international price of the product. At the same time that the

Company sought to consolidate already developed markets, it won over new customers. The United States were

the largest customer, absorbing 39% of foreign sales, followed by customers in Asia (18%), Europe (18%), the

Caribbean (13%) and South America (12%).

In the domestic market, the commercialization of oil products by Petrobras averaged 1,655 thousand bpd, an

increase of 1.1%. The maintenance of sales near 2004 levels was caused by factors such as the increase in the

use of natural gas replacing gasoline and fuel oil, and the expansion of the dual-fuel automobile fleet through

incentives for the use of alcohol. Also contributing was the decline in the growth of demand for diesel because of

a smaller agricultural harvest.

The performance of the refineries was a consequence of the high level of operating reliability and the integrated

management of the entire Petrobras chain of supply – from the exporting of oil from the production regions to the

delivery of oil products around Brazil and abroad. The development of overseas markets for surpluses also is among

the factors that led to the increase in the processed throughput.

The production of oil products in Brazil in 2005 was 1,735 thousand bpd. In 2005, the average refining unit

cost was US$ 1.90/bbl, 38% higher than the previous year. This result stems from the appreciation of the Brazilian

real against the U.S. dollar; a greater number of scheduled maintenance industrial shutdowns compared to 2004;

higher operating costs due to the startup of new facilities; and an increase in the cost of outsourcing contracts.

The Alberto Pasqualini Refinery (Refap) was included in the program to optimize domestic oil production with

the installation of an RCU and a residues catalytic cracking unit (RCCU) that were part of the program to expand

the facility. Their operations will begin in 2006. The RCU at the Duque de Caxias Refinery (Reduc) also was initiated,

scheduled to come on stream in 2007. The basic projects for two other RCUs, at the Henrique Lage (Revap) and

Presidente Getúlio Vargas (Repar) refineries, were concluded.

As part of a program to improve the quality of diesel, the new HDT at Refap was placed into operation at the

end of the year, adding its production to the second of its type installed at the Paulínia Refinery (Replan) and the

new HDTs at Reduc, Presidente Getúlio Vargas (Repar) and the Gabriel Passos Refinery (Regap). This set of units

in operation makes possible to satisfy the environmental specifications that will be put into practice as of 2009.

Petrobras approved the initial studies for construction of the Northeast refinery — a strategic project for achieving

sustainable self-sufficiency. With an estimated investment of US$ 2.5 billion, the refinery is to be a joint venture with

Petróleos de Venezuela S.A. (PDVSA), located in the Porto de Suape industrial complex in Pernambuco. It will have

the capacity to process 200 thousand bpd of heavy oil from the two countries and startup is scheduled for 2011.


OUR BUSINESSES


In order to build an integrated Acrylic Complex in Minas Gerais for production of

160 thousand tons/year of crude acrylic acid and some byproducts, including

acrylate, Petrobras concluded the first stage of a technical-economic and

environmental study of the project, which is budgeted at an estimated US$ 500

million and is scheduled for startup in 2009. A pioneer effort in Latin America, the

complex is designed to substitute importation of the product and its byproducts,

helping develop the chain of production dedicated to the acrylic and acrylate sector,

with new manufacturing companies to be incorporated.

Petroquisa also initiated studies for the building of a purified terephthalic acid

(PTA) plant in Pernambuco, with capacity to produce 550 thousand tons/year.

Budgeted at US$ 492,1 million, and with operations to come on stream in 2009

the plant will use para-xylene as its raw material, initially imported but subsequently

to be substituted for by the product manufactured at the future Rio de Janeiro

petrochemical refinery.

Located in Duque de

Caxias, Riopol initiated

operations in

November, using

ethane and propane

extracted from Campos

Basin natural gas as

raw material.

Petrobras participates in the petrochemical sector through its Petrobras Química S.A. (Petroquisa) subsidiary, which

has ownership stakes in all of the petrochemical complexes in the country and in companies that manufacture

resins and other products. In 2005, Petroquisa’s net earnings totaled R$ 213.8 million.

The following petrochemical projects were noteworthy in 2005: Rio Polímeros, Paulínia Petrochemical (PPSA),

Petrochemical Refinery, the Acrylic Acid Complex and the PTA Project.

Located in Duque de Caxias (Rio de Janeiro), Rio Polímeros S.A. (Riopol) initiated operations in November,

using ethane and propane extracted from natural gas from the Campos Basin as its raw material. Riopol has the

capacity to produce 540 thousand tons of polyethylene and 75,000 tons of propane per year. Petroquisa owns

16.7% of the shares, together with Suzano (33.3%), Unipar (33.3%) and BNDESPar (16.7%). In 2005,

Petroquisa invested R$ 57 million in the project, totaling R$ 245 million of investments since its beginning.

In compliance with the strategy to expand its presence in the market, Petroquímica Paulínia S.A (PPSA) was

constituted on September 16, with ownership stakes belonging to Petroquisa (40%) and Braskem (60%). This

company will be responsible for building an industrial plant with additional polypropylene production capacity of

300,000 tons/year, located near REPLAN in the municipality of Paulínia (SP), based upon a propane-grade

polymer supplied by REPLAN and REVAP. The project is scheduled for conclusion at the beginning of 2008, at an

investment estimated at US$ 240 million.

The 2015 Strategic Plan highlighted installation of a Rio de Janeiro Petrochemical Refinery. Developed in

partnership with the Ultra Group, it will have the capacity to process 150 thousand bpd of heavy domestic oil.

Besides producing ethane, propane, para-xylene, benzene, LPG and diesel, this facility will produce a number of

second-generation petrochemicals, such as polyethylene, polypropylene, ethylengycol and purified terephthalic

acid. The refinery, with total investments of some US$ 6 billion, is scheduled to begin operating in 2011.

Petrochemicals

I N V E S T M E N T S I N N E W P R O J E C T S S H O W S T H A T P E T R O B R A S

H A S R E T U R N E D T O T H E S E G M E N T W I T H F U L L F O R C E

Company Product Voting capital (%) Total capital (%)

Braskem S.A. Basic, intermediate

and final petrochemicals 10.0 8.4

Cia. Petroquímica do Sul – Copesul Basic petrochemicals 15.6 15.6

Petroquímica União S.A Basic petrochemicals 17.5 17.4

Metanol do Nordeste – Metanor S.A. Methanol 49.5 34.3

Deten Química S.A. Linear alkylbenzene 28.6 27.7

Fábrica Carioca de Catalisadores S.A. Catalyzers 50.0 50.0

Petrocoque S.A. Indústria e Comércio Calcinated petroleum coke 35.0 35.0

Petroquímica Triunfo S.A. Low density polyethylene 70.5 85.0

Petroquisa’s Participation in Operating Companies | December/2005

OUR BUSINESSES

Petrobras is active in the field of the transportation and storage of oil, oil products and gas through its wholly owned

Transpetro subsidiary. Responsible for the operation of 50 oil tanker ships, 44 terminals and 9,839 km of pipelines,

the company provides services to the Petrobras System as a way of adding value to its products. It plays a strategic

role because its integrated logistical solutions and operating flexibility give the Petrobras System a series of

competitive advantages.

Transpetro is the largest shipping company in South America, owning a fleet with a capacity of 2,480,000

deadweight tons (DWT). Of the vessels operated by the company, 46 belong to Transpetro and Petrobras while

four are chartered on a bareboat basis from third parties. The fleet also includes a Floating Storage and Offloading

unit (FSO) and an AHTS-type offshore support boat.

As part of the strategy to increase its services to Petrobras, Transpetro has implemented the first phase of its

Fleet Modernization and Expansion Program — involving an investment of US$ 1.2 billion. The company initiated a

tender process construction of 26 Suezmax, Aframax, Panamax, product and LPG ships by 2010.

The program calls for 42 new vessels by 2015 to allow Transpetro to handle all of Petrobras’ coastal shipping and

50% of its long haul requirements. The renovation of the fleet also will make it possible for the company to take

advantage of business opportunities that emerge in the field of renewable products, such as alcohol and biodiesel.

The orders for the tankers, financed by the BNDES through funds made available by the Merchant Marine Fund,

have a premise: at least 65% of the ships must be domestic content, which is in line with the guidelines of the

National Petroleum and Natural Gas Industry Mobilization Program (Prominp).

Over 20 thousand jobs will be created during construction of the first 26 vessels. By contracting the

manufacturing of the ships in Brazil, Transpetro is contributing to the resumption of large scale naval construction

in the country. It is expected that the dock yards will gain international competitiveness, stimulated by the scale of

production and the incentive for technological modernization, coupled with the training of their professional staffs.

F E R T I L I Z E R S F O R B R A Z I L I A N A G R O B U S I N E S S

Petrobras’ strategy is to increase its participation in the fertilizer segment, mainly nitrogenates, in

view of the fact that a major portion of the demand from Brazilian agribusiness — a sector

that represents 30% of the GDP — is supplied via imports. In 2005, the sales of ammonia

and urea generated net revenues of US$ 330 million for Petrobras, rising 8% over the

previous year.

The nitrogenous fertilizer plants sold 205,000 tons of ammonia on the domestic market,

the fourth consecutive year in which sales increased. Another noteworthy point regarding ammonia

was the record production of Fafen/SE (400 thousand tons). In the segments of urea used as

fertilizer, Petrobras remained the leader of the domestic market, with sales of 708 thousand

tons during the year.

Seeking improvements in urea logistics and quality, Petrobras initiated construction of a

warehouse at the Sergipe plant with capacity for storing 30 thousand tons and a granulation unit to

process 600 tons/day of the product. These investments totaled R$ 53.8 million, with the conclusion

of the projects scheduled for the first half of 2006. At the nitrogenous fertilizer plant in Bahia,

R$ 26.3 million was invested to increase ammonia production by

50 thousand tons annually and to boost urea production by 68

thousand tons a year.

Petrobras is finalizing studies for construction of a

nitrogenous fertilizer plant in the Center-West Region of the

country, for an estimated investment of US$ 780 million, to

come on stream in 2010. Using natural gas imported from

Bolivia, the plant will have the capacity for annual production

of 760 thousand tons of ammonia and 1 million tons of urea.


Transportation

T R A N S P E T R O ’ S F L E E T E X P A N S I O N A N D M O D E R N I Z A T I O N

P R O G R A M C A L L S F O R 4 2 N E W V E S S E L S B Y 2 0 1 0

OUR BUSINESSES

In the field of fuel distribution, Petrobras operates through its Petrobras Distribuidora (BR) subsidiary, which has the

largest network of service stations in the country. Of the 6,933 BR service stations spread through all regions of the

nation, 763 are owned by the company while the other 6,170 belong to franchisees of the Petrobras flag brand.

Being the preferred brand of consumers and adding value to the Petrobras System are the strategic objectives

of the company, which is the market leader of the segment. In 2005, net revenues for products and services totaled

R$ 46.3 billion – an increase of 25.1% over the previous year, stemming from a greater volume of sales.

Petrobras’ share of the distribution market reached 33.8% - 2.2 percentage points higher than recorded

in 2004. The increase of its presence in the segment was a consequence of the 8.6% growth in the volume

of fuel sales.

Petrobras also is the leader of the Vehicular Natural Gas (VNG) market, with a 25.1% share of sales during

2005, thanks to the supply of the product through a network of 295 BR outlets. Its leadership position of the gas

market also encompasses the supply of direct consumers — large industrial clients, trucking fleets, airlines and

public authorities.

The strategy for expanding business in the commercialization area has been the guiding factor for the increase

in investments in new markets, such as that for liquefied petroleum gas (LPG) and green petroleum coke (GPC).

After the acquisition in 2004 of Agip do Brasil, which had its official name changed to Liquigás Distribuidora S.A.,

Petrobras reached 21.83% market share of the LPG market in 2005.

Petrobras Distribuidora invested R$ 459.7 million in 2005. The funds were applied on a priority basis to expand

and modernize its service stations, to support industrial and commercial customers, on Health, Safety and

Environment (HSE) programs and in logistics and operations.

In the automotive segment, the strategy continues to be to get closer to the resellers and end consumers. The

objective is to offer speedy and qualified service in order to increase market presence and profitability. Petrobras

Distribution

P E T R O B R A S D I S T R I B U I D O R A I N C R E A S E S I T S M A R K E T

S H A R E A N D I S T H E L E A D E R O F V E H I C L E N A T U R A L G A S S A L E S

The company seeks to offer quality services at competitive prices along with an excellent level of compliance

with the standards for Health, Environment and Safety (HSE). In 2005, fleet operating reliability reached its target

of 98%. Its vessels achieved an average grade of 783 in the Navio 1000 Program that evaluates operating and

managerial conditions of the ships according to international regulations.

The volume of product spills from its ships totaled only 25 liters, compared to 102 liters in 2004. This reduction

is a result of the number of environmental actions taken by the company, such as its Process Safety Program.

Pipelines and terminals

Transpetro is the operator of the majority of Petrobras’ land-based and maritime terminals, oil pipelines, gas

pipelines and natural gas processing units. This network, which transports a major part of the Company’s

production, was the focus of a number of improvement actions during 2005. The objective is to maintain these

facilities within suitable conditions of operating reliability, assuring the safety of people, installations and the

environment — whether within the company or in neighboring communities.

Its network is comprised of 7,011 kilometers of oil pipelines and multiple pipelines and 2,828 kilometers of gas

pipelines. The storage capacity of its 44 terminals totals 65 million barrels (10 million m3). In 2005, Transpetro’s

network was responsible for the movement of nearly 640 million m3 of oil, oil products and alcohol,

and of 33 million m3 of gas per day. At its waterway terminals, the monthly average was

382 ships in operation. The company also managed the supply of bunker to ships

all along the Brazilian coastline, supplying some 350

thousand m3 of this fuel per month.

In the natural gas segment, Transpetro operates the

Malhas Project that, by 2012, will boost the supply of the

product to 14 million m3/day in the Southeast. In 2005, yet

another phase of the Cabiúnas Project was concluded,

increasing the natural gas processing capacity of the Campos

Basin to 14.9 million m3/day.

For the 2006-2010 period, in line with the Petrobras Business

Plan and the transportation requirements created by self-

sufficiency, Transpetro has forecast an increase in capacity of the

Southeast and South pipelines and the construction of an oil products

terminal in Fortaleza.

The company has been investing in the creation of a “corridor” for

exporting alcohol from the São Paulo countryside and for an increase in

the gas processing capacity at Cabiúnas. This project will raise supply of

the product to 20 million m3/day, satisfying the requirements of industrial

companies located in the Rio de Janeiro Gas and Chemical Complex.

.


OUR BUSINESSESD i s t r i b u t i o n

E X C E L L E N C E I N C U S T O M E R R E L A T I O N S

Increasingly, BR gas stations are being converted into service stations, with service excellence being a

priority. Besides the Petrobras Card, clients have at their disposal a chain of convenience stores (BR

Mania), advanced lubrication centers (Lubrax Center), car washes (Lava Mania), ATM machines and VHS

and DVD rental shops, as well as “Siga Bem”, a program aimed at professional truck drivers.

AP • 22

PA • 109AM • 61

RO • 42

MT • 165

MS • 196

GO • 241

TO • 63

MA • 71

PI • 89

BA • 384

CE • 256

MG • 1.052

SP • 1.619

RJ • 391

ES • 104

SE • 60

AL • 92

PE • 197

PB • 79

RN • 100

PR • 428

SC • 276

RS • 634

RR • 36

AC • 33

BR Service Stations per State (2005)

Distribuidora maintains several contact mechanisms with resselers, including regular visits of commercial

representatives and publication of a newsletter, the Jornal do Revendedor, along with regular meetings to map out

strategies and plan courses of action.

The increase in the demand for hydrated alcohol in 2005 was 15% compared to the previous year, while

demand for gasoline rose little more than 1%. The growth of alcohol sales was driven by the leap in sales of multi-

fuel automobiles (flex fuel). Surpassing forecasts, flex fuel vehicles reached 50% of the total of all new vehicles

sold during the year – more than double the amount in the new car market in 2004.

Flex fuel vehicle sales should continue growing in 2006. However, the expansion of this fleet should be

contained over the course of the year by a rise in the relative price of alcohol resulting from exports of the product.

In the direct fuel consumer market, Petrobras Distribuidora’s share is 45%, with highlights being the company’s

share of aviation products (55.7%), large consumers (44.3%), asphalt (29.5%) and retail delivery fleets (TRR –

42.1%). One of our advantages over the

competition is the ability to supply technical support

throughout the country, a factor that boosts the

level of customer loyalty.

Petrobras Distribuidora has the largest network for

the distribution of fuels and lubricants in Brazil. There

are 51 operating installations that are strategically

located — 22 terminals and 29 bases, ensuring

excellent capillarity network for placing our products.

This network also makes it possible to integrate

transportation and inventory solutions — another

distinguishing characteristic that sets us apart from

the competition in terms of service quality.

Stake of the Fuel Distribution Companies in Brazil (%)

2001

2002

2003

2004

2005

40,0

30,0

20,0

10,0

0,0

BR Ipiranga Shell Esso Texaco Others


Units

BR Outlets 6,933

Urban 5,334

Highway 1,567

Maritime 32

Active Outlets 5,885

Own Outlets 763

Third Party Outlets 6,170

Convenience Stores 740

VNG Outlets 295

Service Station Network

OUR BUSINESSES


This project is consistent strategically with the development of production in the

Campos Basin and Petrobras’ exploration of offshore blocks in order to ensure the

ability to take advantage of future discoveries. The construction of the Southeast-

Northeast Interconnection Gas Pipeline (Gasene) and the expansion of the pipeline

grid in the two regions are among the investments currently being studied.

The Gasene project is comprised of three gas pipelines: The Cabiúnas–Vitória

Pipeline (Gascav), the Cacimbas–Vitória Pipeline and the Cacimbas–Catu Pipeline.

The Company obtained an R$ 800 million loan from the National Economic and

Social Development Bank (BNDES) for the Cabiúnas-Vitória stretch. Gasene will

make it possible to ship out natural gas produced in the oil and gas fields in the north

of the state of Espírito Santo.

The Cabiúnas–Vitória stretch already has been granted a prior license, an installation license and a construction

permit. The construction timetable calls for work to begin in January 2006 with the project scheduled to come on

stream in March 2007. With the start up of the Cabiúnas–Vitória stretch in 2007, the Southeast Grid of pipelines will

be connected until the state of Espírito Santo. At this stage of the Gasene Project, gas will flow in a North-South

direction, reinforcing supply of Vitória and the Southeast Region.

In the Brazilian Northeast, the routes that have been decided upon will favor the interior. Budgeted at R$ 3 billion

over the course of the construction period, the project encompasses seven northeastern states. The contracts signed

with Petrobras and the other partners contain clauses that ensure the use of a major portion of the funding for

national content. This will have a multiplying effect on employment and income, fostering the development of local

suppliers and creating an alternative supply center for the Company. Many of the projects involved are permanent

in nature and their maintenance and operation will require creation of fixed job positions along the route of the

pipeline. In the Northeast region, of the five pipelines that are scheduled, four are under construction, representing

50% of the physical execution of the total that is planned.

In the Southeast region, the construction projects, with total investments of some R$ 1.9 billion over the course

of the program, encompass the states of Rio de Janeiro, São Paulo and Minas Gerais.

In Brazil’s North region, Petrobras has been investing in building the strategically important Urucu–Coari–Manaus gas

pipeline designed to transport nearly 5.5 million m3/day of natural gas. This gas will be consumed for the most part by

thermoelectric power plants in the region that have been converted from fuel oil to gas due to the more rational economic

and environmental advantages of the latter. Some of the product will be earmarked for industrial companies, homes and

the fleet of natural gas-fueled vehicles in Manaus and the seven municipalities located along the pipeline’s right of way.

Natural gas sales increased 9.5% in 2005, with average sales of 36 million m3/day. Petrobras continued to follow

its strategy of developing the segment in an integrated manner with the Company’s other chains of production in

Brazil. During the year, the financial turnover of this business totaled more than R$ 5 billion.

Two factors were responsible for maintaining the Brazilian market for this product in expansion: (i) the growth

of the supply logistical infrastructure, and (ii) the growing pressure for the use of fuels that have a less aggressive

impact on the environment. In September, the country passed the milestone of 1 million automobiles converted

to use VNG, according to the Brazilian Petroleum Institute (IBP), counting for this upon a network of more than

1,190 VNG stations. It is the second largest VNG fleet in the world, behind only Argentina’s, which is fueled by a

network of approximately 1,500 stations, of which 47% belong to Petrobras.

In order to satisfy the increase in demand, besides domestic production Petrobras imported 23 million m3/day

of natural gas, representing 98% of all Brazilian imports of the product, which was an increase of 2.5 million m3/day

compared to 2004.

Petrobras continued to be the largest investor in the segment, increasingly striving to insert the product into the

Brazilian energy matrix. In view of the prospects for the expansion of the market, the new discoveries are making

it possible to increase the supply of Brazilian gas at competitive costs, supplemented through imports.

Transportation

The company remained committed to setting up a Basic Natural Gas

Transportation Network (RBTGN) – which consists of a set of interconnected

gas pipelines that will extend from Fortaleza to Porto Alegre and from São

Paulo to Bolivia, thus helping expand the market.

Natural Gas

I M P R O V E M E N T I N S U P P LY I N F R A S T R U C T U R E

A N D N E W D I S C O V E R I E S E N L A R G E D T H E M A R K E T

Brazil has the second-

largest VNG fleet in the

world, after only Argentina,

which is supplied through

a network of

approximately 1,500

service stations, of which

47% belong to Petrobras .

OUR BUSINESSESN a t u r a l G a s


Petrobras owns a share of eight natural gas

pipeline transportation companies, including:

Transportadora Brasileira Gasoduto Bolívia-Brasil

and Gás Trans-Boliviano S.A., owners, respectively,

of the Brazilian and Bolivian stretches of the

Bolivia-Brazil gas pipeline. The other six gas

transportation companies in which Petrobras

participates are Sul-Brasileira de Gás S.A., Meio

Norte S.A., TNG Participações Ltda., Amazonense

de Gás S.A., Capixaba de Gás S.A. and Nordeste-

Sudeste de Gás S.A..

In the domestic distribution market, Petrobras

maintained its holdings in 19 distribution

companies, but increased its participation in the capital stock of Distribuidora de Gás Natural Canalizado CEG-Rio to

37.41% after acquiring 12.41% of its shares (common and preferred) in July 2005 for R$ 39.33 million (US$ 16.54

million). Through this acquisition, Petrobras gained shared control of CEG-Rio

Petrobras continued to support projects for anticipating the supply of natural gas, either through compressed

natural gas (CNG) as, for example, at Gaspisa, or participating in the Gemini Consortium, which will make it possible

to supply the product in the form of liquefied natural gas (LNG) to Cebgás, Goiasgás and upcountry areas operated

by Gasmig and Compagás. The Gemini Consortium will establish, in 2006, the first LNG plant in Brazil.

Technology

As part of the strategy to develop the segment, two technological enhancement initiatives in the natural gas chain

of production were chosen as priority programs for investment: the RedeGasEnergia (Gas Energy Network) and

the Gas Technology Center. With 90 projects on the drawing boards for expanding the use of the product, the

Network involves universities research institutes, distributors, equipment manufacturers and government

organizations. In partnership with the National Industry Service (SENAI), the Center promotes the use of gas and

fosters the training of specialized manpower.

Within the context of bringing the use of natural gas to a mass market, RedeGasEnergia’s Excellence Network

undertakes cooperative and segmented efforts focused on technology and the development of the natural gas

market, striving to increase the share of this fuel in the domestic energy matrix in a sustainable manner, connecting

up all of the links in the chain of production. Among the 90 projects currently being contracted or alreadyunderway

around Brazil, we can highlight the following:

In the automotive segment, the Ottolized (converted to VNG) Gas-Fueled Bus Using Light Cylinders Project

promoted the conversion of an OM 366 LA diesel engine in order to evaluate the performance of the engine

and obtain technical, economic and environmental data based on field tests and operating in real passenger

transportation conditions;

In the residential segment, Vala Técnica de Caxias do Sul is a laboratory that makes it possible to consolidate

the methodology of shared utility networks (gas, water, etc.) in a single trench; and also to implement new RGE

projects, designed to use this methodology in the residential segment. Also in this segment, the objective of the

Pre-Payment System Meter is to develop a metering pre-payment system that can be used in housing projects

to measure natural gas consumption in residences;

For the industrial segment, the project for the construction of a Natural Gas Tunnel Kiln for the Red Ceramic

Industry seeks to design and build to serve as a demonstration plant for other red ceramic producers;

In the commercial segment, the proposal of a micro co-generator that uses domestic technology is to help

develop and build a micro co-generator prototype using local technology that incorporates a gas generator, a

free power turbine and a heat recovery unit;

In the alternative mode segment, the RedeGasEnergia is developing a final use program for LNG, which is

an advance alternative for the natural gas market in view of the relative lack of gas pipeline transportation

infrastructure.

OUR BUSINESSES


The acquisition of the three merchant plants ended legal controversies regarding

the consortium contracts signed with the plants in 2001 and 2002. The Company

had been obliged to make contingency payments regarding taxes, fees, operating

costs, maintenance and investments in situations in which the companies involved

had not obtained efficient funds. The acquisitions were designed to reduce costs

and to guarantee receipt of all of the energy generation revenues in compliance

with Petrobras’ guidelines for its participation in the electricity sector.

In March 2005, Petrobras acquired all of the quotas belonging to the Cubatão

thermoelectric power plant, scheduled to start up operations in October 2007,

supplying 47 MW and 415t/h of steam to the RPBC refinery.

Construction of the Termoaçu Plant (RN) is continuing. Petrobras has a 46%

stake in the project, which is scheduled to come on stream in 2007. This plant,

budgeted at US$ 300 million, should generate 310 MW and 610 t/h of steam,

which will be used to be injected into oil wells to increase the production of oil.

In compliance with Petrobras’ Strategic Plan, the Company will invest US$ 1.3 billion in the Energy Sector over

the 2006-2010 period. The Business Plan calls for acquisitions, the conclusion of projects and the conversion of gas-

fueled thermoelectric plants to bi-fuel facilities as well as the development of generation from renewable sources.

Petrobras’ own thermoelectric power plants, or those that are under its management, generated a total of

3,100,632 MWh in 2005, having “generation by inflexibility” of 42% as its main ratio, thus contributing to the safety

of the Electric System and the saving of reservoir water, especially in the Northeast. Most of this generation,

1,271,830 MWh, was earmarked to comply with an agreement Petrobras signed at the end of 2004 to guarantee

saleable power from the northeast region thermoelectric power plants. The accumulated generation for the year

for this purpose was used to rebate 49.6% of the initial debt of 2,562,639 MWh.

The conversion of thermoelectric power plants to bi-fuel (natural gas and diesel) seeks to guarantee greater

reliability regarding the supply of fuels to the plants and, in compliance with the legal requirement that

establishes mandatory proof of the

origin of fuel for 100% of the

generation capacity of each

thermoelectric power plant (Decree

no. 5.163, of July 30, 2004),

Petrobras decided to convert part of

its thermoelectric power plants to

bi-fuel operation. The basic projects

for the conversions have been

concluded and now await the

granting of environmental licenses.

The next phase will be to contract

the required construction work.

Petrobras’ main

projects for the use of

renewable energy

sources are for the

production of biodiesel

and the generation of

electricity through

wind power.

Petrobras increased its share of the thermoelectricity segment, oriented by a strategy of consolidating itself as an

integrated energy company. The Company is present in the entire thermal generation chain of production,

optimizing the use of natural gas, ensuring the placement of oil products, operating power plants and selling energy.

Its presence in the sector strengthens the contribution of the thermoelectric power plants in improving the reliability

of the National Interconnected System (SIN).

According to the new electric sector model, energy is sold through Regulated Contracts via auctions, and Free

Contracts through bilateral contracts between sellers and buyers.

At the new energy auction held in December by the National Electric Energy Agency (ANEEL), Petrobras sold

1,391 MW made available by its power plants. The final result of the auction gave the Company a fixed revenue

for a period of 15 years, of R$ 199,842,928.00/year (in current values) as of 2008, which will reach R$

277,927,992.00/year as of 2010.

Thermoelectric power plants

Petrobras took over full control of three thermoelectric power plants during 2005. TermoRio (1,040 MW) was

acquired for US$ 83 million from NGR, as were two merchant-type plants – the Barbosa Lima Sobrinho

thermoelectric power plant, former Eletrobolt (386 MW), also in Rio de Janeiro, and the TermoCeará thermoelectric

power plant (220 MW). The former was purchased for US$ 65.1 million, with absorption of a debt of US$ 98.9

million from Sociedade Fluminense de Energia; the latter was acquired for US$ 137 million, including the

liquidation of debt obligations with financing institutions. At the beginning of 2006, Petrobras signed a

Memorandum of Understanding for the acquisition of the Macaé Merchant thermoelectric power plant.

T H E C O M P A N Y A C Q U I R E D N E W T H E R M O E L E C T R I C P O W E R P L A N T S

A N D I N V E S T E D I N T H E D E V E L O P M E N T O F R E N E W A B L E E N E R G Y S O U R C E S

Energy

OUR BUSINESSESE n e r g y

The Company’s activities in sustainable development businesses in the field of energy during 2005 were

designed to evaluate projects that are eligible to receive carbon credits according to the Clean Development

Mechanism (CDM) defined by the Kyoto Protocol, as well as to propose commercialization policies for these

certificates. Toward this end, the technical feasibility and baseline methodologies necessary to obtain the

approval of these products were studied. The main projects being evaluated that might qualify for CDM

credits were the following:

Renewable and alternative energies;

The UN-SIX agricultural schist project in São Mateus do Sul (PR);

The Urucu–Manaus Gas Pipeline: evaluation of its potential;

The reutilization of industrial exhaust gases;

Closed cycles in thermoelectric power plants;

Reduction of leakages in natural gas transportation compression stations.

Of particular note is the proactive participation of Petrobras in its support, through an agreement, of the

Brazilian Climate Change Forum, that is seeking the development of a Brazilian policy regarding climate change.

S U S T A I N A B L E D E V E L O P M E N T

Measures were implemented at all Petrobras units to meet, in addition to the aforementioned projects, the energy

consumption and emission reduction targets that were established. For this, energy diagnosis surveys were conducted

in all of the Company’s industrial facilities. Furthermore, each Business Unit that will operate future production platforms

will be the focus of efforts to ensure that the projects they prepare are based on the efficient use of energy.

In 2005, the National Program for the Rational Use of Oil Products and Natural Gas (Conpet) increased by 23%

the size of the fleet it services, surpassing the 10% target that had been established at the beginning of the year.

The environmental counterpart of this performance meant that 920 thousand fewer tons of CO2 went into the

atmosphere, an effort that is allied to Petrobras’ overall commitment to social and environmental responsibility.

Renewable energy

The main projects under development for the utilization of renewable energy sources are aimed at production of biodiesel

and the generation of electric energy through wind power. To this end, the Strategic Plan established targets of 481

thousand m3/year of biodiesel and 169 MW of electric energy through renewable sources to be available by 2010.

Investments of some US$ 335 million are foreseen over this period for the development of renewable energy businesses.

An experimental plant with capacity to produce 4,000 tons/year, to provide technological support for the

production of biodiesel, was built in Guamaré (RN); the biodiesel it produces makes use of vegetable oil deriving

mainly from castor beans.

In terms of production of electricity through wind power, Petrobras already is operating a pilot wind farm in Macau

(RN) with an installed generating potential of 1.8 MW, and it is preparing a second pilot project in Rio Grande (RS),

with 4 MW capacity. The building of wind farms with larger scales of production is being negotiated with outside

partners and takes into account the opportunity for the acquisition and development of projects that are structured

within the Alternative Electric Energy Sources Incentive Program (Proinfa) located in the Northeast region and whose

production of energy already has been contracted by Eletrobrás. The objective of these projects is to increase the

supply of electric energy to the Northeast, supplementing the power that is generated through natural gas.

Also along these lines, Petrobras signed a protocol of intentions with the National Department for Drought

Projects (DNOCS) and is studying the technical and economic feasibility of the hydroelectric potential of DNOCs

reservoirs, aimed at implementing small hydroelectric power plants

(PCHs) in the Northeast.

Energy efficiency

Petrobras’ promotion of energy efficiency is strongly linked in the Strategic Plan, 2015 vision,

in which social and environmental responsibility is highlighted. To this end, the In-house Energy

Conservation Program was involved in the development, coordination and implementation of

activities related to energy efficiency, fostering a relative reduction of the burning of fossil fuels and,

consequently, CO2 emissions, the one of the main greenhouse gases.

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internationalinternational activities

international activitiese c o n O M I C I N F O R M A T I O N

94

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154

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Petrobras’ average overseas production of oil and LNG reached 162,8 thousand bpd in 2005, while production of

natural gas was 95,900 boed – for a total of 258,700 boed. Average listing cost was US$ 2.90/boe.

In 2005, the company‘s overseas proved reserves reached 1.68 billion boe, using ANP/SPE criteria. Petrobras‘

refineries abroad, with an installed processing capacity of 129 thousand bpd, processed 103 thousand bpd, a

volume 2.4% higher than in 2004.


Foreign Production of Oil, LNG, Condensate and Natural Gas

(th boed)

Oil, LNG and condensate

Natural gas

71

58

246

262

259

545

2001

2001

2001

2001

2002

2002

2002

2002

2003

2003

2003

2003

2004

2004

2004

2004

2005

2005

2005

2005

META2010

TARGET2010

TARGET2010

2001

2002

2003

2004

2005

TARGET2010

206

161 85

168 94

163 96

339

45

35 23

26

Unit Cost of Foreign Lifting

(US$/bbl)

2.46

2.6

2.9

2.1

2.26

2.08

Proved Foreign Reserves of Oil, LNG and Condensate and Natural Gas

SPE Criteria (MM boe)

Oil, LNG and condensate

Natural gas

979

1,123

1,870

1,681

1,013 891

1,010 860

955 726

226

320 803

753

1,904

Proved Foreign Natural Gas Reserves by country

SPE Criteria (BCF)

Proved Foreign Reserves of Oil

and Condensate by country

SPE Criteria (MM bbl)

Total Throughput - Foreign

(th bpd)

Unit Cost of Foreign Refining

(US$/bbl)

1.17

1.09

1.30

1.8

1.15

0.94

With a presence in 21 countries, Petrobras participates in the entire chain of operations of the oil, natural gas

and electricity industries on the continent and also is expanding its participation in projects in North America, Africa

and Asia. Associated with 71 oil companies, Petrobras is the operator for 170 blocks of the 357 blocks in which it

has a share.

Argentina

Bolivia

U.S.

Peru

Venezuela

4% 3% 1%

23%

69%

Tabela 4

Tabela 5

Angola

Argentina

Bolivia

Colombia

Ecuador

U.S.

Nigeria

Peru

Venezuela

1%

25%

25%

18%

10%

9%

6%4% 2%

p e t r o b r a s O V E R S E A S

ARGENTINA

Exploration and Production; refining; pipelines transportation; commercialization;

distribution; gas and energy; petrochemicals; eletric energy

BOLIVIA

Exploration and production; refining; pipelines transportation;

commercialization; distribution; gas and energy

CHILE Representative Office and commercialization

COLOMBIA Exploration and Production

ECUADOR Exploration and Production

THE UNITED STATES Exploration and Production; refining

MEXICO Exploration and Production

PARAGUAY Distribuition

PERU Exploration and Production

URUGUAY Natural gas distribution; pipelines transportation

VENEZUELA Exploration and Production

ANGOLA Exploration and Production

CHINA Representative Office and commercialization

SINGAPURE Representative Office and commercialization

EQUATORIAL GUINEA Exploration

IRAN Exploration

ENGLAND Representative Office and commercialization

JAPAN Representative Office

LIBYA Exploration

NIGERIA Exploration

TANZANIA Exploration

international activitiess o u t h a m e r i c a

SOUTH AMERICAArgentina, Bolivia, Colombia, Venezuela, Uruguay, Ecuador, Paraguay, Peru, Chile

Argentina

Petrobras has a presence in the country through Petrobras Energía S.A. (PESA), which acts throughout the value

chain of an integrated oil and natural gas company. Its exploration and production area achieved an average

production of 61.9 thousand bpd of oil and LNG and 42.2 thousand boed of natural gas, totaling 104.1 thousand

boed, comprising the Company’s largest overseas production region. Its Argentine company operated and

participated in 26 blocks – 16 in production and 10 in the exploratory phase. Lifting cost was US$ 3.76 per boe.

Petrobras Energía operates the Ricardo Eliçabe (Bahía Blanca) and San Lorenzo (Rosário) refineries and also

participates and operates Refinaria Del Norte (Refinor), with a 28.5% ownership stake. Considering the proportion

of its share, in Refinor, the company has installed capacity of 76.2 thousand bpd, and processed average

throughput of 68 thousand bpd in 2005.

Petrobras Energía has three units in the petrochemical and fertilizer segments in Argentina: Puerto General San

Martin, Zarate and Campana. The company also has a 40% stake in Petroquímica Cuyo and is the only producer

in Argentina of products such as SBR (styrene butadiene rubber), polystyrene and UAN (urea + ammonium

nitrate) and is the exclusive manufacturer in South America of bioriented polystyrene. It also has activities in Brazil,

in Rio Grande do Sul, through Innova, producing styrene and polystyrene.

In the distribution of oil products, PESA owns 746 service stations – 436 flying the Petrobras flag – and 24

exclusive Compressed Natural Gas (CNG) stations. In 2005, the company’s sales in the country totaled 50.7

thousand bpd.

Among the products offered by Petrobras Energía service stations, of particular note are Podium gasoline and

Lubrax lubricating oils. With high performance and low sulfur content, sales of Podium gasoline increased 70%

compared to 2004, while overall sales of premium gasoline in the country rose 33.3%. Lubrax’s sales also continued

to grow, rising 11% and guaranteeing an 8.7% share of the Argentrine lubricant market for Petrobras Energía.

The good acceptance of Petrobras products in Argentina is related to the strategy to consolidate the brand in

the country. With an 8.7% share of the automobile fuel market, Petrobras Energía extended the presence of the

brand to 121 service stations in its network during 2005. As a result, sales increased on average 21%, while

average market growth 8.8%.

Natural gas sales were affected by the deregulation of the price of gas for generators and distributors, which

began to use the Electronic Gas Market (MEG) for spot market operations. Government policy that directed gas

that previously was exported to the domestic market impacted Petrobras Energía by approximately 115 thousand

m3/day. The company sold 7.9 million m3/day of gas, of which 0.9 million m3/day came from Bolivia.

For the transportation of natural gas, Petrobras Energía has a 50% stake in the holding company of

Transportadora de Gás Del Sur (TGS), which has the largest gas pipeline network in the country, totaling 7,400

kilometers with capacity for 62 million m3/day. TGS increased the capacity of a 495-kilometer stretch by 2.9 million

m3/day in order to satisfy growing Argentine demand. The BNDES and the gas producers financed this project,

requiring an investment of US$ 342 million.

In the electric energy segment, Petrobras Energía has 100% ownership of the Pichi Picún Leufú hydroelectric

power plant and the Genelba natural gas thermoelectric plant. The company has a minority position in the

Hidrelétrica de Piedra del Águila hydroelectric power plant (5.4%); in Edesur, a power distributor in the Buenos


Aires central region; and in Transener, the main electricity transmission company in the country. Its stake in the

latter company was reduced from 32.5% to 26.33% in June as part of a financial restructuring agreement.

Petrobras owns 34% of Cia. Mega, which has a separate natural gas unit in Loma la Lata, Neuquén province,

and fractioning facility in Bahía Blanca, Buenos Aires province. Furthermore, it operates a 600-kilometer multiple

pipeline and has tank farms and facilities for exporting products. In 2005, this company sold 495 thousand tons

of products (ethane, propane, butane and natural gasoline), with gross revenues of US$ 220 million.

Bolivia

The main focus of Petrobras’ activities in Bolivia is exploration and production of natural gas for export as

part of its strategy for the integration of the Southern Cone markets.

In 2005, while Petrobras’ production of oil and LNG in Bolivia was 8.5 thousand bpd, natural gas production

reached 7.75 million m3/day, the equivalent to 54.1 thousand boed. Gas exports to Brazil through the Bolivia-Brazil

Gas Pipeline totaled 22.9 million m3/day, of which 6.1 million m3/day were commercialized by Petrobras, besides

the 0.9 million m3/day that went to Argentina.

Petrobras is associated in seven production blocks in Bolivia, and is the operator of six. With the new

Hydrocarbons Law effective as of May 2005, the concession contracts currently underway will need to be changed.

The Regulations still need to be defined for the oil companies to be able to adjust themselves to the new terms

of the legislation approved by Congress.

The most important financial consequence of the new law is the institution of the Direct Hydrocarbon Tax,

which applies a 32% levy at the “wellhead.” Because royalties and other governmental participations already total

18%, the overall tax burden has now risen to 50%. The increase will have an important effect on the Company’s

exploration and production operations in the country.

Petrobras Bolívia is the largest company in Bolivia, having initiated its activities in 1996. With a significant share

in the GDP and a major taxpayer, it is recognized both for its operational quality as well as its commitment to

environmental and social questions. Besides participating in GTB, which is the operator of the Bolivian stretch of

the Bolivia–Brazil Gas Pipeline, Petrobras has a 44.5% stake in Transierra, the controlling company of the

Yacuíba–Rio Grande gas pipeline, with

capacity for transporting 17 million

m3/day. Petrobras also owns the San

Marcos gas pipeline and part of the Rio

Grande gas compression station and

two gas processing units at the San

Alberto and Sábalo fields.

Through Petrobras Bolivia Refinación

S.A. (the former Empresa Boliviana de

Refinación), the company is the owner

of the Gualberto Villaroel refinery in

Cochabamba and the Guillermo Elder

Bell refinery in Santa Cruz de la Sierra. In 2005, these units jointly processed 39,800 bpd, corresponding to 67%

of the installed capacity. The utilization rate of the refineries is low due to the characteristics of the Bolivian oil and

of the local market.

The average volume of sales for oil products distributed by the company in Bolivia was 7.9 thousand bpd during

the year. Of the company’s 105 service stations, 40 operate under the flag of the Empresa Boliviana de Refinación;

46 are under a neutral flag and 19 are under the Petrobras brand. The stations, which have Spacio 1 and Lubrax

Center facilities, are consolidating the company’s leadership of the market with a 25% share.

Colombia

Petrobras is entering the oil product distribution segment in the country, where it already conducts exploration and

production activities. In line with the strategy for expansion and leadership on the continent, the Company signed

an acquisition contract which will allow it to incorporate retail and supply assets in the country. The negotiation,

which also involves Uruguay and Paraguay, has an estimated value of US$ 140 million. The assets should pass over

to Petrobras’ control in 2006.

The acquisitions in Colombia, subject to governmental permits, include 38 own or long-term leased service

stations in Bogotá with annual sales of 235 thousand m3 and commercial supply contracts of 149 thousand m3 per

year. Also part of the accord are: a tank farm in Puente Aranda with capacity for 9 thousand m3; a lubricants mixing

plant, with capacity of 38 thousand m3; and a basic products terminal in Santa Marta.

Furthermore, the company entered the lubricants market in the country through the launch of its Lubrax brand,

which includes lubricants for diesel and gasoline engines, for transmissions, hydraulics and two-cycle motors. In

2005, more than 800 m3 in products were sold, surpassing the target for the year by more than 75%.

Petrobras has a stake in 18 exploration and production contracts in the country (six of them in production), and

is the operator in 12 of them. Over 2005, the average production of oil and LNG was 16,520 bpd while natural

gas production was, 11 thousand m3/d, totaling 16,582 boed.

Venezuela

With four production and two exploration

assets, Petrobras Energía produced 44.2

thousand bpd of oil and LNG in the country

as well as 3.4 thousand boed of natural

gas, for total of 47.6 thousand boed.

Because the Venezuelan Ministry of

Energy and Oil initiated a review of

operating concessions in exploratory

blocks, Petrobras Energía signed

transitional agreements committing it to




Ecuador

With operations in two blocks, Petrobras Energía produced 9.1 thousand boed of oil and LNG in the country. The

company negotiated an agreement with Teikoku for the cession of 40% of its stake in Block 18, currently in production,

and Block 31, in the exploratory phase. The transaction requires the final approval of the Ecuadorian government.

In order to proceed with exploration operations in Block 31, part of which is located in the new of Yasumi

National Park, Petrobras Energía is negotiating a solution with authorities that would permit activities in the location.

Paraguay

Petrobras is entering the oil product distribution segment in Paraguay through an agreement that also includes assets

in Colombia and Uruguay. Some 154 service stations with 52 convenience stores should pass over to the control of

the Company. Spread throughout Paraguay, the network has annual sales of 241 thousand m3 and commercial

supply contracts totaling 67 thousand m3 per year. The agreement encompasses assets for the sale of LPG, offered

in 17 service stations for vehicular use. Furthermore, it includes commercialization of products for aviation at the

Asuncion and Cidade Del Este airports, with an annual sales volume of 18 thousand m3.

Peru

Of the five blocks in the country in which Petrobras Energía is associated, one is currently in production (Lot X),

and the others are in the exploratory phase. In 2005, average production of oil reached 12.6 thousand bpd, and

the average production of gas was 1.8 thousand boed, totaling 14.4 thousand boed.

Chile

With the establishment of a representation office in Santiago at the end of 2005, Petrobras began to prospect for

business opportunities in the Andean nation. In line with its strategy for expanding around the continent, the

Company’s interests in the Chilean market include oil and natural gas activities, taking into account the agreements

the country has with Argentina in this field.


negotiate the conversion of these contracts to mixed-ownership companies in which the Venezuelan government

would have more than a 50% stake.

Petrobras made the winning bid for the Moruy II block in the 2nd Round of the tender for underwater exploration

in Venezuela, denominated the Rafael Urdaneta – Phase B Project, together with Teikoku Oil Co., Ltd. The 874 km2-

block that was picked up is located in the southeast section of the Gulf of Venezuela, north of Lake Maracaibo and

450 kilometers west of Caracas.. Petrobras and Teikoku each own 50% of the project and the Brazilian company

will be the operator.

Uruguay

In December 2004, Petrobras acquired shareholding control (55%) of Conecta S.A., thus beginning the activities

of Petrobras in Uruguay. The Administración Nacional de Combustibles Alcohol y Portland (Ancap), which is

controlled by the Uruguayan government, has the other 45% of the voting shares of this company.

Conecta S.A. has the government concession to distribute natural gas, liquefied petroleum gas (LPG) and

manufactured gas through a 300-km-long pipeline network along with exclusivity to supply small and medium

consumers (up to 5 thousand m3 per day) to the upcountry regions of Uruguay. Revenues in 2005 were some

US$ 4.0 million, with sales volume totaling 39 thousand m3/day involving 3,400 clients.

Natural gas distribution activities are being expanded through the acquisition of 51% of the shares of Gaseba

Uruguay S.A., which holds the concession to distribute gas to the province of Montevideo’s 1.4 million inhabitants

until January 2025. The end of the negotiation with the Gaz de France Internacional Group, the parent company,

depends upon compliance with legal requirements and approval by Uruguayan and French authorities. Gaseba,

which services customers who consume less than 5 thousand m3/day in a regulated market, will be Petrobras’

second gas distribution company in the country.

Petrobras is preparing to enter the oil product distribution market. Through an agreement signed in 2005 that

also encompasses assets in Colombia and Paraguay, the Company should assume control of a 89 service stations

with annual sales of 227 thousand m3 and supply contracts totaling 62 thousand m3 per year. The agreement also

includes the sale of marine products, asphalt and aviation fuel at the

Carrasco International Airport.

AFRICA | Nigeria, Equatorial Guinea, Angola, Tanzania, Libya

Nigeria

With the governmental sanction for development of the gigantic Agbami field in

February, Petrobras is preparing itself to invest US$ 460 million over the next four years

in the project. Scheduled to begin in 2008, total production will be 230 thousand bpd,

with the Company having the right to receive 30 thousand bpd in association with

Chevron Texaco, the operator, Famfa Oil of Nigeria and Norway’s Statoi

The development of Akpo – another giant field in the Niger River Delta – also was approved, in August. Petrobras will

invest US$ 960 million over the next four years and its share of the production, which will total 185 thousand bpd as of 2008,

is 36 thousand bpd. The company’s partners in the project are Total, the operator, and South Atlantic Petroleum of Nigeria.

In September, exploration of the OPL 324 block was guaranteed for another three years. The operator,

Petrobras’ participation is 37.5% together with Exxon Mobil and Statoil.

The company was successful in the tender for new blocks held in Nigeria in 2005, offering the best proposal

for the OPL 315 block, as operator in partnership with Statoil and Nigeria’s Ask Petroleum. Petrobras’ stake in this

block is 45%. The acquisition is in line with the strategy to strengthen the Company’s position in the deep and

ultra-deep waters of the West Coast of Africa.

Moreover, the Company supports the use of alcohol as a fuel in the country. In August, Petrobras signed a

memorandum of understanding with the Nigerian National Petroleum Corporation (NNPC) for providing technical

assistance to a project for mixing the product with gasoline, as is done in Brazil.

Equatorial Guinea

In November, Petrobras obtained a 50% stake in L Block. Its partners are Chevron (operator), Amerada Hess, Energy

Africa and Sasol Oil. The work program includes the drilling of a pioneer exploration well during the second quarter of

2006. If successful, Petrobras will be the operator of the production development phase.

Angola

The Company has two E&P assets in the country –Block 2, located in shallow water in the Lower Congo Basin,

and Block 34, in deep water. With a 27.5% stake of a consortium made up of Total, Sonangol and Chevron, which

is the operator, Petrobras produced an average of 8.3 thousand bpd in Block 2 during 2005. In Block 34, located

in 1,500 to 2,500 meters of water, after drilling two wells, Petrobras brought together a group of technicians to

analyze the potential of the block, based upon accumulated knowledge and recent discoveries along the Brazilian

coastline. The study indicated good prospects in deeper layers. As a result, the consortium requested and

obtained an extension of the contract exploration deadline. In Block 34, Petrobras is associated with Sonangol

and Norsk Hydro.

NORTH AMERICA | The United States, Mexico

The United States

In order to position itself among the companies that are most actively exploring for oil and natural gas in the Gulf

of Mexico, Petrobras continued to apply its strategy of strengthening its operations along four fronts: ultra-deep

water activities; the search for deep fields with large gas reserves in shallow water and onshore; prospecting in the

extreme western section of the Gulf; and exploration efforts in lower-risk deep water areas.

Petrobras has stakes in 271 blocks, and is the operator in 180. In the 196th Bidding Round for concessions in

exploratory areas in 2005, the Company picked up 53 blocks. Of these, 18 cover three prospects that have the

potential for large oil reserves and have the objective of consolidating Petrobras’ position in ultra-deep water. Also

during this round, and as a way of consolidating its position in the extreme western section of the Gulf, the

Company acquired 26 blocks, obtaining full control of 10 prospects with high potential for gas reserves; drilling is

scheduled to begin in 2006.

During the year, its average production in the Gulf of Mexico was 4.6 thousand boed, which was lower than the 7.9

thousand boed that had been forecast due to the unscheduled shutdowns in August and September imposed on the

activities of oil companies in the Gulf of Mexico by Hurricanes Katrina and Rita and their effects in subsequent months.

Petrobras proved the extension of the oil reservoirs of the Cascade accumulation in ultra-deep waters in the

American sector of the Gulf of Mexico upon conclusion of the drilling of a discovery delineation well. After

evaluating productivity, to be carried out in 2006, the Company will establish the best manner of production.

In the exploration of deep gas reservoir, the Company proceeded with drilling activities in the Blackbeard

prospect, whose objectives are deeper than 7 thousand meters. Petrobras also picked up a stake in the Mega Mata

onshore prospect, scheduling drilling for 2006.

In deep waters, the Company has been seeking to increase its share in prospects located in the Garden Banks

Quadrant, which presents comparatively smaller potential reserves but offers lower risk and the possibility of high

profitability. Following this strategy Petrobras absorbed an 80% stake in the Cottonwood discovery where the first

well operated by the Company in deep waters in the Gulf had been drilled. Once the size of the gas accumulation

is confirmed, production should begin in 2007. Meanwhile, drilling was initiated at the Live Oak exploratory

prospect in 2005 and other wells should be drilled in the region in 2006.

Petrobras entered the refining sector of U.S. by acquiring 50% of the Pasadena Refinery in Texas, an investment

of aproximately US$ 370 million.

Mexico

Petrobras participates, in association with Teikoku of Japan and Diasvaz of Mexico, in two multiple service contracts

with Pemex in the Cuervito and Fronterizo blocks. The services that are provided include exploration, production

development and production activities. Petrobras’ stake in each one of these contracts is 45%. In 2005, 14

production wells were drilled and turned over to Pemex, surpassing the targets for the year.

Petrobras operates

180 blocks in the

Gulf of Mexico.

The Company picked

up 53 exploration blocks

during the 196th Bidding

Round held in 2005.


international activitiesa s i a

China

Petrobras signed its second agreement in the country in February 2005 for the formalizing of an understanding

with the China National Petroleum Corporation (CNPC) for the development of joint businesses. The terms of the

cooperation encompass activities such as oil exploration and production, refining and transportation via pipeline in

the country, in Brazil and other regions of the world.

A Strategic Cooperation Agreement containing similar objectives had been signed in 2004 with Sinopec, another

of the three Chinese state oil companies, upon the occasion of the inauguration of the Petrobras office in the

country. Among the goals of this office is to support the sale of oil to China and to prospect new market

opportunities for the Company in Asia.

Tanzania

Petrobras is getting ready to begin seismic surveys in Block 5, which should be extended to Block 6 in ultra-deep waters

in the Gulf of Mafia. After having signed an exploration contract for Block 5 with the government and the state-owned

Tanzania Petroleum Development Corporation in 2004, the company picked up Block 6 during the third exploration

area auction in May. Thus, it reinforced its position in a frontier exploratory region on the east coast of Africa, which is

in line with its international expansion and portfolio diversification strategy. When the new contract has been signed,

the project portfolio in the country will total 18.5 thousand km2 in concession areas that are fully operated by Petrobras.

Libya

With rights to Area 18 located in deep water (200-700 meters) in the Libyan sector of the Mediterranean

Sea, obtained in an auction that was run in January 2005, Petrobras signed a contact for shared production

with the state-owned National Oil Company (NOC) in March. Associated with Oil Search Limited, of Papua

New Guinea, the Company is the operator, with a 70% stake. In the event of exploration success, NOC will assume

51% of the investments.

The work program in Area 18 to be carried out by the consortium calls for acquisition of 2 thousand kilometers

of 2D and 500 km2 of 3D seismic data and the drilling of an exploration well with a minimum total investment

of US$ 21 million.

ASIA | Iran, China

Iran

In the search for business opportunities in the Middle East, guided by the strategic objective of becoming more active

in the region, Petrobras maintains a subsidiary, Petrobras Middle East, in Iran. In 2005, the Company began

preparations for exploration activities in the Tusan Block in shallow waters in the Persian Gulf. Petrobras is the operator,

with a 100% stake, under the terms of an agreement signed in 2004 with the National Iranian Oil Company (Nioc).

Petrobras’ contractual commitments, with a minimum budget of US$ 32 million, includes reprocessing of 2,000

kilometers of seismic 2D data, the acquisition and processing of 400 km2 of seismic 3D and the drilling of two

exploration wells — the first in 2006.

Q U A L I T Y , S A F E T Y , E N V I R O N M E N T , A N D H E A L T H

The Company considers that the corporate requirements of Quality, Safety, the Environment and Health are

also an integral part of its overseas processes and products, where it seeks to act in a socially and

environmentally responsible manner, respecting each country’s legislation.

Its overseas units obtained significant HSE results during the year. In Bolivia, the Gualberto Villarroel

Refinery in Cochabamba completed five years without any accidents with loss of time – a record among

Petrobras’ refineries. In Argentina, Petrobras Energía’s Lost Time Injury Frequency Rate (LTIFR) continued to

decline — to 0.90 in 2005 from 5.67 in 2002, 2.13 in 2003 and 1.4 in 2004.

Petrobras Energía inaugurated the first Environmental Defense Center in Argentina in June at the Ricardo

Eliçabe Refinery in Bahía Blanca. By 2008, another 12 centers will be established in the country

representing a total investment of US$ 15 million – the largest network of its kind by an

oil and energy company in Argentina. The centers extend the Company’s logistics

concept overseas, making its response in the event of emergency spill situations

quicker and more effective.

Among the distinctions obtained by the Company’s overseas units for recognition

of the care they exercised in the field of HSE was the Colombian Prize for Management

Quality offered by the federal government and awarded for the first time to a company in

the oil industry. In Argentina, Petrobras Energía won the Environmental Excellence Prize

granted by the Buenos Aires University of Social and Environmental Sciences. The

award was for the company’s support of a program to stimulate student interest in

scientific knowledge and defense of the environment.

social and environmentalSocial and Environmental Responsibility

DA

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T H E C R E AT I O N O F A S O C I A L A N D E N V I R O N M E N TA L R E S P O N S I B I L I T Y M A N A G E M E N T C O M M I T T E E E N H A N C E D T H E

P E T R O B R A S C O R P O R AT E G O V E R N A N C E M O D E L B Y A L I G N I N G A N D I N T E G R AT I N G T H E M A N A G E M E N T O F T H E

C O M PA N Y ’ S S O C I O - E C O N O M I C A C T I O N S . T H E AT T R I B U T E S O F T H E C O M M I T T E E I N C L U D E T H E P R O P O S A L O F

C O R P O R AT E S O C I A L A N D E N V I R O N M E N TA L R E S P O N S I B I L I T Y S T R AT E G I E S A N D G U I D E L I N E S , T H E S U G G E S T I N G

O F P E R F O R M A N C E I N D I C ATO R S A N D TA R G E T S , T H E F O L LO W - U P O F T H E A C T I V I T I E S A N D T H E P U B L I C I Z I N G O F

B E S T P R A C T I C E S A S A WAY O F U N I F Y I N G T H E P R O C E D U R E S O F T H E B U S I N E S S U N I T S I N T H E R E L AT I O N S H I P

W I T H S O C I E T Y.

T H E C O M M I T T E E I S C O M P O S E D O F A C O N S U LTA N T TO T H E P R E S I D E N T A N D R E P R E S E N TAT I V E S

O F T H E O M B U D S M A N O F F I C E , O F 12 E X E C U T I V E D E PA R T M E N T S A N D O F T H E P E T R O B R A S

D I S T R I B U I D O R A A N D T R A N S P E T R O S U B S I D I A R I E S . A M O N G T H E I N I T I AT I V E S T H AT W E R E

A D O P T E D I N 2 0 0 5 WA S T H E C R E AT I O N O F T H E G E N D E R C O M I S S I O N A N D

T H E C O M I S S I O N O F P R E PA R AT I O N A N D E V A L U AT I O N O F S O C I A L A N D

E N V I R O N M E N TA L R E S P O N S I B I L I T Y R E P O R T S . W O R K G R O U P S F O R

M A N A G E M E N T I N D I C ATO R S A N D C E R T I F I C AT I O N A N D T H E D O W J O N E S

S U S TA I N A B I L I T Y I N D E X C H A L L E N G E A L S O W E R E E S TA B L I S H E D .

responsabilityof civil society and public policies, the program fosters social activism by encouraging the direct participation of the

communities that are involved.

The Petrobras Zero Hunger initiatives involve five lines of action — guarantee of the rights of children and

teenagers, education and professional training, generation of jobs and income, social projects and volunteerism.

On these fronts, the program runs programs aimed at promoting racial and gender equality and the inclusion of

the handicapped.

The great majority of the projects for the Petrobras Zero Hunger program was chosen through a public selection

process. A total of R$ 18 million was earmarked in 2005 for this process, resulting in sponsorship of 74 new

projects. As a result, Petrobras’ funds and knowledge were merged with society’s own resources in an effort to

overcome misery and to foster the social inclusion of low-income communities around Brazil.

The Petrobras System disbursed R$ 42 million to the Infancy and Adolescence Fund (FIA) through the National

Council (Conanda), the Piauí State Council and municipal councils in order to guarantee the rights of children and

teenagers. The funds were used in 190 municipalities, in a majority of the states, to finance more than 300 projects

for the prevention and eradication of child labor, the combat of sexual exploitation of children and teenagers and

vocational training of young people.

Petrobras continued to support vocational training activities for both youths and adults. Its Mova-Brasil Project,

run in conjunction with the Paulo Freire Institute and the Petroleum Workers’ Federation (FUP), taught more than

23 thousand people how to read and write in the states of São Paulo, Rio de Janeiro, Bahia, Sergipe, Rio Grande

do Norte and Ceará. The project’s target is to teach literacy to 40 thousand people between August 2003 and May

2006, and involves the training of 1,600 educators and 160 regional coordinators. Regarding the generation of

jobs and income, projects designed to promote cooperative action succeeded in organizing nearly 10 thousand

autonomous collectors of recyclable materials around Brazil, disseminating a socio-environmental consciousness

and knowledge about the selective collection and processing of waste materials.

With the support of the Advanced Program for Assistance and Treatment of Special Persons (Pate), Petrobras

helped handicapped people exercise their basic rights of citizenship. In 2005, as part of its policy of combating

inequality and achieving social inclusion, the program focused on adapting society to the reality of these people

while also running programs in the fields of education, culture, sports and professional training.

responsabilityS o c i a l I n v e s t m e n t s

A signatory of the United Nations Global Compact, the Company is involved in the dissemination of the document’s

ten principles, which involves topics such as human rights, workplace conditions, the environment and combat of

corruption. In 2005, Petrobras joined the UN task force and the European Foundation for Management

Development, which develop the bases for the formation of business leaders committed to the vision that social

and environmental responsibility is an integral part of business. It was the first oil and energy company and the

only Latin American participant among the 21 members of the group

In 2005, Petrobras signed a declaration of intentions with the United Nations Children’s Fund (UNICEF) to

develop technical planning, research, communication, and the generation of financial resources in order to

guarantee the rights of children and teenagers in Latin America and the Caribbean. The initiatives contributed to

helping meet the targets set for the UN’s Millennium Objectives.

As a way of further enhancing transparency, Petrobras has participated as a monitor and contributed with

suggestions in the meetings of the Extractive Industries Transparency Initiative (EITI). This is a voluntary initiative

created in 2003 with the participation of governments, international organizations, NGOs and investors that is

designed to ensure that the money extractive industries pay to governments contributes to sustainable

development and poverty reduction in the countries in which they operate.

Social sponsorships

The Petrobras Zero Hunger Program, which was launched in 2003, joins together the efforts of the Company in

the fight for social inclusion and the eradication of misery and hunger in Brazil through citizen-based development

actions. In 2005, we invested R$ 139.6 million in projects in every state in the country. In step with the initiatives

Social Investments

O N E O F T H E F I R S T S I G N A T O R I E S O F T H E U N I T E D

N A T I O N S G L O B A L C O M P A C T , P E T R O B R A S H A S

I N T E N S I F I E D I T S S U P P O R T O F I N C L U S I O N P R O J E C T S

66 P E T R O B R A S A n n u a l r e p o r t 2 0 0 5


Environmental Projects

A number of projects accepted as part of the first public selection of the Petrobras Environmental Program in 2003

are being developed in biomes such as the Amazon region, the Caatinga and Cerrado areas, the Atlantic Forest and

the Pantanal. Being run in partnership with NGOs, universities and labor organizations, the projects are involved in

the preservation of hydrographic basins, ecosystems and landscapes, encompassing approximately 5 thousand

species of Brazilian fauna and flora.

In the more than 250 municipalities that were benefited, taken together the projects influence over 900

thousand hectares. About 3 million people were directly helped while another 20 million received indirect assistance.

The first selection of Petrobras Environmental Program projects involved an investment of some R$ 40 million over

the first two years they were being run, with approximately 5 thousand people working to conserve water resources.

In December 2005 during the National Environmental Conference, the Company presented the results of the

analyses of samples that were collected in Brazil’s main rivers, reservoirs and lakes through the Brasil das Águas

project that was carried out over 14 months and covered 120 thousand kilometers. The second phase of the

project calls for preservation actions in seven rivers that have been selected based upon the results of the research

study and the existing social, economic and environmental situation of the regions that are involved.

The Company continues to sponsor programs aimed at preserving marine biodiversity — including the

Tamar Marine Turtle, Humpback Whale, Manatee and Southern Right Whale projects. Sponsored since

2002, the Humpback Whale Project has catalogued 332 individuals of this threatened species along

Brazil’s South Region coastline, representing a 14% increase per year. Approximately 2,000 whales

have been catalogued by the Southern Right

Whale project, which is conducted on the

Northeast coast. This is the third largest

group of the species found to date on the

planet. The project has recorded an annual increase of 13% in their numbers.

Cultural sponsorship

Petrobras continues to be largest sponsor of culture in Brazil with an annual

investment of about R$ 150 million and more than 700 active projects. The

guidelines for cultural support are in tune with public policy for the sector and seek

to encourage national culture and the expansion of opportunities for the creation,

circulation and fruition of projects as well as the permanent building of a Brazilian

cultural memory.

Petrobras’ cultural sponsorships are structured through the Petrobras Cultural

program, which earmarks 75% of the funding to projects that have been chosen

through a public selection process. In 2005, of the 4 thousand projects that were

in the running, 200 publicly selected projects received R$ 46 million, distributed in the fields of filmmaking,

scenic arts, visual arts and music. Approximately another 100 projects directly invited to participate received

funding in the amount of R$ 15 million.

The third edition of Petrobras Cultural (2005-2006) was launched in November with total funds of R$

62 million. Support to publicly selected projects covered actions for cultural preservation, production and

dissemination of films, theater productions, bands, choral groups, orchestras and regional musical groups.

The directly chosen projects involved film, scenic arts, visual arts and music as well as the maintenance of

archeological sites such as those at Xingó (SE) and Serra da Capivara (PI).

The Company encourages registration of projects throughout the country through the Petrobras Cultural

Caravan, which visits Brazilian state capitals between September and December each year. In 2005, a

workshop was added to the caravan for formatting the projects, being at helping cultural producers in all

regions to prepare their proposals. Decentralization already can be seen in the 2004–2005 edition of the

program: of the 171 publicly selected projects, 57% were produced outside the Rio–São Paulo axis. During

the previous edition, the figure was 32%.

Petrobras continues

to be the largest

sponsor of culture in

the country, with annual

investments of some

R$ 150 million and

more than 700

projects underway.

responsability

Sports sponsorship

One of the major partners of Brazilian sports, during the year Petrobras destined some R$ 50 million in support of

different sporting activities. Besides traditional sponsorship — such as Formula 1 motor racing, the Petrobras Lubrax

Team and the Flamengo soccer club, the Company sought to consolidate the presence of its brand in the worlds of

surfing, tennis and handball. The latter, which is the most practiced sport in public schools in the country, was chosen

as the focus of its support of the Olympic ideals.

Sponsorship of tennis was definitively incorporated into the Company’s internationalization strategy in South

America. Through the second holding of the Petrobras Tennis Cup, disputed in Brazil, Argentina, Colombia, Uruguay

and Chile, the Company brand was on display in countries where it has commercial interests in view of its business

expansion around Latin America.

In surfing, Petrobras sought to associate youthful characteristics with its brand name as well as the energy and

strength of the ocean, in reference to the offshore production of oil of gas. The Company sponsored four important

tournaments disputed by top athletes — the Petrobras Women’s Surfing Circuit, the Petrobras Longboard Classic, the

Petrobras Men’s Selective Surfing Championship and the Petrobras Surfing Festival.

The Company continued sponsor the Brazilian Handball Confederation (CBH) and initiated a partnership with the

Brazilian Olympic Committee (COB). Its sponsorship of the Handball Brazil project encompasses the Brazilian national

handball team as well as actions that encourage the practice of the sport. Through the COB, Petrobras’ brand name remains

associated with the Olympic movement, emphasizing the role of sports in the education of young people. Furthermore,

Petrobras is a sponsor of the XV Pan-American Games Rio 2007, involving athletes from more than 40 countries.

In motor sports, Petrobras continued its sponsorship of a number of different types of events, with

particular emphasis on presence of its brand in Formula 1 motor racing. Since

1998, the Company has been developing a special fuel used by England

Williams F1 team in the most important automobile competition in the

world. The development of motor sport products is part of the strategy

to use auto race courses as laboratories. One example is the production

of the Podium gasoline, created thanks to the work carried out with

Williams and available in Brazil and Argentina. (for more information,

consult our social and environmental report 2005)

70 P E T R O B R A S A n n u a l r e p o r t 2 0 0 5 P E T R O B R A S A n n u a l r e p o r t 2 0 0 5 71

One important milestone in the Human Resources area in 2005 – year dedicated to improving and adjusting its

strategies to the 2015 Strategic Plan and the 2006-2010 Business Plan - was the creation of the HR Management

Committee made up of executives from different Petrobras areas. The idea is to foster alignment between business

development, management of the Company and the main HR initiatives. Towards this end, an agenda of medium

and long-term priorities was created consisting of topics related to the organization and management of the HR

Function, the management of human capital, business education, external relations and organizational climate.

In order to publicize the best HR management practices, Petrobras organized a series of in-house forums and

seminars during the year. It also obtained 100% participation of the employees in the new system used to manage

personnel performance.

Salary Policy

Expenditures on personnel totaled R$ 6.569 billion during the year, including fixed and variable compensation

components that make up the Company’s salary policy. Fixed compensation encompasses remuneration such as

wages, extras, bonuses and promotion increases payments; variable compensation involves profit and results

sharing (PLR) linked to the business results tied to the Strategic Plan’s targets.

Human Resources

T H E C R E A T I O N O F A M A N A G E M E N T C O M M I T T E E A N D

T H E E S T A B L I S H M E N T O F A N A G E N D A O F P R I O R I T I E S

W E R E H I G H L I G H T S O F T H E A R E A I N 2 0 0 5

Gráfico 1

Tabela 2

Corp. Consulting and Support 16% 20% Downstream

International Area - Overseas 11%

1% International Area - BrazilResearch 3%

33% E&P

Subsidiaries 13%

Gas and Energy 2% 1% Support of Senior ManagementPercentage of Employees

in the Petrobras System

by Area of Activity

responsabilityH u m a n R e s o u r c e s

Petrobras System Number of Employees

Subsidiaries

International Area - Overseas

PETROBRAS Holding

System

60.000

50.000

40.000

30.000

20.000

10.000

0

2001

5,674

0

32,809

38,483

2002

5,875

6,328

34,520

46,723

2003

6,625

5,810

36,363

48,798

2004

7,007

5,939

39,091

52,037

2005

7,197

6,166

40,541

53,904

in the number of employees. These positions, in a number of different areas, will be filled gradually, using the

existing candidate database and the conducting of public selection processes The Company ran a public selection

in 2005 for the admission of professionals at several different job levels. During the year, 1,806 employees were

admitted — 835 college-educated professionals and 971 high-school educated.

Professional Training

In order to satisfy the requirement for the transmission of knowledge throughout the Company, the Petrobras

University had 1,216 new employees enrolled during 2005, of which 749 completed training courses. With 60

professors — 13 with PhDs, 28 holders of Masters degrees and 19 specialists — the University’s Human Resources

Development (HRD) process was certified to IS0 9001/2000 standards.

In collaboration with all areas of the Company, the University’s Business and Management School prepared a

management training model involving the instruction of 4 thousand managers and supervisors. A Business

Teaching Plan was created to improve the learning-apprenticeship process.

Moreover, Petrobras University had its specialization courses in the fields of Petroleum Engineering and Process

Engineering recognized by the Ministry of Education. Created in partnership with the Federal University of Bahia

(UFBA) and the State University of Rio de Janeiro (UERJ), respectively, these courses are in line with the strategy

of strengthening the relationship of the University with Brazilian and international teaching and research institutions.

Health Care

The Multidisciplinary Health Care Service (AMS) helped an average of 249 thousand people per month —

employees, retirees and pensioners and their dependents. Petrobras disbursed R$ 460 million to help pay for

medical appointments, examinations and hospitalization. The effective network encompasses 21,260

establishments throughout Brazil, including hospitals, clinics, laboratories and healthcare specialists. Under the free

choice option, beneficiaries may choose health professionals from outside of the accredited network.

In 2005, as a part of the collective work agreements, three important changes were introduced in AMS: the

increase, from 8 to 18 years, of the age limit for including children and teenagers in an adoption process; the

adjustment of the major risk contribution table to the National Health Agency’s (ANS) age groups, according to the

Statute for the Elderly; and the use of the same consignable margin of 13% for active participants as well as retirees.

Collective Wage Agreements

In the collective wage agreements with onshore union employees in september and offshore employees in november,

Petrobras remained open to negotiation, being represented also in regular follow-up meetings.

As in previous years, the agreements consolidated important advances for employees. Among the main results

were: a salary readjustment of 6.02% and the granting of a level of career progression for all employees; the creation

of an Onshore Field Production Bonus; the commitment to present a proposal encompassing all of the union

demands pertaining to Petros, with a two-month deadline as of the signing of the Collective Wage Agreement of 2005.

Admissions

In order to face the needs that expansion is bringing to Petrobras and are foreseen in the 2015 Strategic Plan, in

October the Executive Board approved the opening up of 9 thousand new jobs, representing an increase of 23%

responsability

Petrobras’ health, safety and environment (HSE) policy, laid out in the 2015 Strategic Plan, seeks to consolidate

HSE aspects as values that are intrinsic to the Company’s planning and management processes, based upon 15

corporate guidelines approved by the executive board in 2001. Subsequently they were divided into different levels

of guidelines and published as the HSE Management Manual.

The HSE guidelines have being implemented since 2002 through the Process Safety Program (PSP). This has

involved the development and implementation of corporate action plans and specific programs for the business

and service units, designed to ensure that the objectives of the HSE policy are met at all levels of the Company.

The visible commitment of the top management and qualification are also the focus of the HSE corporate

guidelines. The president and the Company’s directors participated in 10 HSE audits conducted in the business

units during 2005. The training programs have had the participation of 36,000 persons since 2002.

In April 2004, the Business Committee approved, in its Strategic Plan, the HSE Excellence Strategic Project,

designed to equip the Company with international standards of excellence in the fields of accident prevention,

incidents and failures; emergency readiness; worker health; ecoefficiency in operations and products; and HSE

management, following up on the actions that were initiated by the PSP.

The Company invested R$ 2.8 billion in HSE in 2005. Of the total, R$ 1.6 billion was earmarked for

safety programs, projects and actions, R$ 1 billion went to the environment and

health got R$ 184 million. These values did not include expenditures on behalf of the

Multidisciplinary Health Assistance program or sponsorship of environmental

programs and projects run by society’s organizations.

Part of the disbursements – R$ 777 million – was made through the Program for

Excellence in Environmental and Operational Safety (Pegaso). Transpetro subsidiary also

invested R$ 502 million in the program, totalling a amount of R$ 1.3 billion in 2005.

Health, Safety and Environment

T H E S E A R C H F O R E X C E L L E N C E I N C L U D E S T R A I N I N G P R O G R A M S ,

A U D I T S A N D I N V E S T M E N T S T O T A L I N G R $ 2 . 8 B I L L I O N I N 2 0 0 5

Pension Plan

The Petros Plan is a defined benefit plan that is closed to new participants. The new employees were covered in

2005 by a life insurance policy fully underwritten by the Company until the creation of a supplemental pension

plan for them. Petrobras expects to discuss a proposal for a new plan submitted by a committee made up of

representatives of the company, Petros, the Petroleum Workers’ Federation (FUP) and labor unions.

Educational Benefits

The benefits are of a supplemental nature, complementing the beneficiary’s contribution to the overall cost and

encompass day care centers, helpers, kindergarten, grade school and middle school as well as supplemental

education. In 2005, the amounts disbursed directly to employees totaled R$ 65 million and the total cost, including

taxes, was nearly R$ 100 million. Through the Collective Wage Agreement, Petrobras began to offer the benefits to

employees with minor children under their care who they were seeking to adopt.

Career Plan

Petrobras continued to review its Job Classification and Evaluation Plan (PCAC) in order to adjust its Career Plan to

the challenges defined in the Strategic Plan. The study — conducted by a work group comprised of representatives

of all company areas, the Petroleum Workers Federation (FUP) and the labor unions – received contributions from

more than one thousand employees during the job description phase. The conclusion of the project is scheduled

for May 2006, according to the 2004/2005 collective bargaining agreements.

Transparency and the participation of the workforce have been encouraged throughout the entire PCAC review

process. Among the review premises are: adjustment of the length of careers to the expectation of time with the

company and the mobility mechanisms; the analysis of positions and careers based upon the market and their

importance to Petrobras; and the observance of the weight of personnel costs and its impact on the Petros Plan.

Clubs

With the creation of a Leisure Center in Vitória,

Petrobras expanded its network of clubs open to

employees, retirees, pensioners, dependents and other

members of the local community, on a membership

basis. Its more than 30 clubs have recreational and

sports infrastructure, helping integrate employees and

provide well being for their families.

P E T R O B R A S A n n u a l r e p o r t 2 0 0 5 75

P E T R O B R A S A n n u a l r e p o r t 2 0 0 5 7776 P E T R O B R A S A n n u a l r e p o r t 2 0 0 5

Environment

Environmental responsibility actions implemented in 2005 were aimed mainly at atmospheric emissions

management, liquid effluents and waste management; ecosystems evaluation and monitoring; remediation and

emergency responses.

Emissions

In December, Petrobras published an Air Emissions Management Performance Report, consolidating information

of its operations in Latin America between 2002 and 2004. The report was filed for public consultations with the

Global Greenhouse Gas Register of the World Economic Forum (www.ghgr.org/public) and Petrobras website

(www.petrobras.com.br/environment).

The data contained in the report resulted from an inventory conducted by the Air Emissions Management

System (Sigea) and verified by an independent international consulting firm.

Through the system, Petrobras monitors the emissions of the main greenhouse gases (carbon dioxide, methane

and nitrous oxide) as well as carbon monoxide, sulfur and nitrogen oxides, volatile organic compounds and

particulate matter. The Company has over 20,000 sources registered of emissions in its facilities in South America.

Employees

Outsourced Workers

Totals

Number of Fatalities

2001

2002

2003

2004

2005

12

Emission of Greenhouse Gases

(in millions of tons of equivalent CO2)

Total emissions (direct + indirect) associated with Petrobras’

installations in Brazil and abroad and consolidated by Sigea

As of 2003, the data includes the emissions from the Gas

and energy area, from the assets of Petrobras Energia S.A.

located in Brazil, Argentina, Bolivia, Peru and Venezuela and

from the shipsof Petrobras´ own fleet and vessels chartered

for international trips

44.41

51.56

30.43

39.09

18

318

16

30

21

3

15

1615

1

15

19

0

The number of fatal

accidents was stable

compared to 2004. The

company pays special

attention to this aspect,

because the corporate

target for this type of

incident is zero.

Fatal Accident Rate (TAF)

Number of fatalities per 100 million manhours

of exposure to risk, encompassing own

employees and outsourced workers.

Implemented since 2000, Pegaso strives to eliminate the risks and the liabilities in Petrobras’ installations and

activities, constituting one of the largest initiatives of its kind in the world oil industry. Overall, Pegaso has had some

R$ 9.26 billion in investments and operating expenses since it was created in 2000.

The Pegaso project includes the Pipeline Integrity Program, which absorbed R$ 226.5 million in investments

during 2005. The program covers inspection projects, tests, appraisals, repair and rehabilitation of oil and gas

pipelines designed to guarantee the safety of its operations and to minimize the impact of eventual accidents on

nearby communities.

The HSE Management Evaluation Program oversees the execution of Petrobras’ safety, environment and health policy.

In 2005, 20 appraisals were conducted – 13 in facilities in Brazil and seven outside of the country. The evaluations

encompassed the degree of compliance with corporate guidelines and the requirements of ISO 14001 and OHSAS

18001 standards, which certify environmental, health and safety systems in 171 units in the country and 26 abroad.

Operational Safety

Petrobras continues to reduce its Lost Time Injury Frequency Rate (LTIFR), and is approaching the levels of

excellence prevailing in the international oil and gas industry benchmarks.

The total number of manhours of exposure to risk rose from 483 million in 2004 to 533 million in 2005, a result

of the increase in the Company’s operating activities. The number of accident fatalities remained stable as compared

to 2004. The company gives special attention to this topic cause the corporate target for this type of incident is zero.

The Fatal Accident Rate (TAF), which corresponds to the number of fatalities per 100 million men-hours of

exposure to risk, maintained a trend in 2005 consistent with the overall decline that has been seen. The rate for

the year was substantially under the average for the world oil and gas industry that, in 2004, according to Oil and

Gas Producers (OGP) data, was 5.2.

Lost Time Frequency Injury Rate (LTIFR)

Number of accidents with injuries and time lost from work

per million manhours of exposure to risk, encompassing

own employees and outsourced workers.

1.23

1.04

0.97

2.89

1.53

4.57

2.81

15.70

6.29

3.30

2001

2002

2003

2004

2005

2001

2002

2003

2004

2005

2002

2003

2004

2005

responsabilityE n v i r o n m e n t

Biodiversity

Conserving biodiversity of the ecosystems that are influenced by Petrobras’ activities is a permanent concern of the

Company. This attitude reflects its strategic commitment to apply the principles of social and environmental

responsibility to all of the stages of its projects, including planning, construction, operation and decommissioning.

In 2005, Petrobras established a workgroup to prepare a corporate standard to manage potential impacts to

biodiversity. This standard, scheduled to begin implementation in 2006, covers strategies and actions for

characterizing protected or environmentally sensitive areas influenced by the Company’s operations, guide

protection measures or recovery of the ecosystems involved.

With this objective, the Company in March initiated an environmental assessment of a number of ecosystems in

Guanabara Bay at an estimated investment of R$ 9 million. In the Amazon region, studies being carried out with universities

and research institutes are evaluating the potential impact of Petrobras’ operations in the surrounding ecosystems.

Petrobras’ strategy for acting during emergency situations is based on the integration of the contingency resources

of its business units with dedicated vessels along the Brazilian coast and the Environmental Protection Centers

(CDAs). The CDAs operate 24 hours a day and have trained professionals and equipment at their disposal in order

to act quickly and effectively. This includes ships and oil collectors, contention barriers and absorbers. There are nine

CDAs around the country and six advanced bases in the North Region of Brazil and one in the Center-West Region.

This network of protection against accidents effects, which also can count on funds from public agencies and

communities, has six emergency plans in place that cover all Brazilian regions and are evaluated through emergency

simulation exercises. Civil Defense, police, environmental agencies, city governments and the population participate,

as well. In 2005, six regional exercises were run in various locations around Brazil.

The Company maintains three vessels dedicated to emergency operations in a state of permanent

readiness — in Guanabara Bay, on the coast of São Paulo and the coast of Sergipe and

Alagoas. In 2005, Petrobras invested nearly R$ 36 million in Transpetro’s waterway

terminals to establish Emergency Response Centers (CREs) to reinforce

protection of the coastal regions.

E M E R G E N C Y P R E P A R E D N E S S

Belém

Belo Monte

Porto Velho

Cruzeiro do Sul

Coari

Urucu

CDAAmazônia(Manaus)

Uberaba

CDACentro-Oeste(Goiânia)

CDA Sul (Itajaí)

CDAMaranhão(São Luís)

CDA Bahia (Madre de Deus)

CDARio Grande do Norte(Guamaré)

CDA São Paulo (Guarulhos)CDA Rio de Janeiro (Rio de Janeiro)

CDA Bacia de Campos (Macaé)

Rebelo XV

Astro Ubarana

Marati CDA Environmental Defense Center

CDA Environmental Defense Center - São Paulo

National / International Logistics

Advanced Base

Dedicated Ships

Regional Emergency Plans

Fauna Rehabilitation Units

I

V

II

III

VI

IV

I VIa

Water Resources and Effluents

Petrobras directed its efforts in re-utilizating and optimizating water use in its refineries, prioritizing the facilities where

operating scenarios point to a potential scarcity of the resource.

In 2005 the Company concluded evaluation of the current and future availability of water sources that supply

Repar, Refap, Rlam, Lubnor and its nitrogenous fertilizer plants in Sergipe and Bahia. Similar studies already had

been carried out at refineries in the Southeast region, at the Campos Basin production units and Transpetro’s

Cabiúnas Terminal.

These studies provided subsidies for the initiatives designed to optimize and re-use water. Among them, two

are in a phase of conclusion: closing the refrigeration cycle at Reduc, which will no longer make use of water from

Guanabara Bay for this purpose; and the re-utilization by Replan’s cooling towers of 80 m3/h of water coming from

the vacuum distillation units.

Solid Wastes

The Company’s Corporate Waste System registered 532

thousand tons of hazardous solid wastes generated in

2005. This corresponded to the total of the wastes

generated by operating activities in Brazil and abroad, of the

wastes produced during remediation processes in impacted

areas and that which constitute environmental liabilities of

assets that were acquired by the Company. During the year,

468 thousand tons of hazardous wastes were treated and

disposed of in environmentally appropriate manner.

Treatment and disposal plans were agreed to with

environmental agencies and will be initiated in 2006 for

more than 90% of the stock of hazardous solid wastes

accumulated at the Company’s facilities at the end of 2005.

Sulfur Oxide - SOx Emissions

(in tons)

Emissions consolidated by Sigea; methodological

improvements led to a review of the previously published

values for the 2002-2004 period

As of 2003, the data includes the emissions from the Gas

and energy area, of the assets of Petrobras Energia S.A.

located in Brazil, Argentina, Bolivia, Peru and Venezuela and

the ships from Petrobras´own fleet and vessels chartered for

international trips

160,845

151,617

158,620

156,677

153,717

P E T R O B R A S A n n u a l r e p o r t 2 0 0 5 7978 P E T R O B R A S A n n u a l R e p o r t 2 0 0 5

2001

2002

2003

2004

2005

responsabilityh e a l t h


Regarding the reasons leading to Petrobras’ own employees leaving their jobs in 2005, as shown in the following

chart, by far the main cause was non-occupational disease — that is, reasons that were not related to professional

activities of employment.

This fact justified the Company’s emphasis on the Health Promotion Program, both on and off the job, which

encourages the adoption of healthier lifestyles. The Company also seeks to motivate employees to participate in the

annual medical checkup campaigns it offers and promotes the idea that they should follow the recommendations

that are made as a result of the exams they take.

The Company also has been running an Occupational Hygiene and Ergonomics Program designed to identify, control

and eliminate occupational risks at all units. The procedures for guaranteeing the good health of employees during trips,

which include medical check-ups prior to travel and medical supervision upon return, also are being standardized.

In order to provide better levels of health for its employees and members of their families, Petrobras and the

National Cancer Institute (Inca) trained nearly 500 health professionals to deal with and treat employees who

smoke cigarettes. They represent 11% of the workforce – a percentage that is lower than the maximum prescribed

by the World Health Organization (WHO), of 15%.

Gráfico 1

Tabela 2

88.4%

0.1%5.9%

4.5%

Non-occupational disease

Work-related (occupational) disease

Workplace accident

Non-workplace accident

Accident on way to work

1.1%

Cause of Employee Missed Time

Health

The underpinnings of Petrobras’ actions on behalf of employee health rest upon the fostering of good health and

disease prevention, based on the integral health concept — both at work and outside of it. The programs and

interventions in the area are guided by epidemiological analysis of information such as mortality, morbidity and the

prevalence of risk factors.

This systematic procedure has produced positive results regarding the health of our employees. The Percentage

of Time Lost index, which measures the amount of time lost due to illness or accidents, has declined consistently

over the past four years.

Oil and oil product spills

The volume of spills in 2005 was significantly lower than in 2004, maintaining , as it has in the last three years,

the standards of excellence in terms of the global oil and gas industry. In 2005, without any reported large spills

of oil and oil products, the Company obtained its second best annual result for this indicator over the past six years.

Percentage of Time Lost (PTP)

Percentage of the total potential work hours lost

due to medical authorization caused by

occupational diseases or not and work accidents;

calculated only for own employees.

2.88

2.48

2.90

3.01

2.57

Oil and oil products spills

(m3)

Spills of more than 1 barrel (0,159 m3) impacting

the environment outside installation perimeter.

276

269

2,619

197

530

2001

2002

2003

2004

2005

2001

2002

2003

2004

2005

Intangible assets


Intangible assets

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P E T R O B R A S I S S T R U C T U R I N G T H E F U N C T I O N O F K N O W L E D G E M A N A G E M E N T, S E E K I N G TO E S TA B L I S H T H E

G U I D E L I N E S F O R T H E C R E AT I O N , P R OT E C T I O N , M A I N T E N A N C E A N D M E A S U R E M E N T O F I T S I N TA N G I B L E A S S E T S

— C L A S S I F I E D I N TO F O U R T Y P E S O F C A P I TA L — H U M A N C A P I TA L , O R G A N I Z AT I O N A L C A P I TA L , R E L AT I O N S H I P

C A P I TA L A N D T E C H N O LO G I C A L K N O W - H O W — A S C A L L E D F O R B Y T H E 2 015 S T R AT E G I C P L A N . P E T R O B R A S WA S

A P I O N E E R I N T H E M A N A G E M E N T O F I N TA N G I B L E A S S E T S – E S P E C I A L LY A F T E R C R E AT I O N O F T H E L E O P O L D O

A M É R I C O M I G U E Z D E M E L L O R E S E A R C H C E N T E R ( C E N P E S ) I N 1 9 6 3 . C O N S I S T E N T T E C H N O L O G I C A L

M A N A G E M E N T H A S M A D E I T P O S S I B L E F O R T H E C O M PA N Y TO A C H I E V E T E C H N O LO G I C A L E X C E L L E N C E I N A L L

S E G M E N T S O F T H E O I L A N D G A S I N D U S T R Y.

T H I S E X C E L L E N C E WA S R E C O G N I Z E D W I T H T H E S E L E C T I O N O F P E T R O B R A S A M O N G T H E F I N A L I S T S F O R T H E

M A K E ( M O S T A D M I R E D K N O W L E D G E E N T E R P R I S E S ) P R I Z E – G LO B A L 2 0 0 5 E D I T I O N , A WA R D E D B Y T H E

E N G L I S H - B A S E D K N O W N E T W O R K . I N T H E O V E R A L L C L A S S I F I C AT I O N , P E T R O B R A S C A M E I N 3 5 T H A N D , I N T H E

O I L A N D G A S S E C TO R , I T W E N T F R O M 10 T H P L A C E I N 2 0 0 4 TO 5 T H P L A C E I N 2 0 0 5 A M O N G C O M PA N I E S T H AT

B E S T A P P LY A N D D E V E LO P T H E I R B U S I N E S S K N O W L E D G E .

Intangible assets The continuity of the Deep Water Technological Program (Procap) is in line with the

priorities that Cenpes has established. The objective of the program is to anticipate

solutions for production in the Marlim Leste and Albacora Leste fields, in the next

stages of Roncador and Marlim Sul fields, in the deep water blocks in the Santos and

Espírito Santo Basins and in fields found in up to 3,000 meters of water depth.

Cenpes restructured its exploration R&D program in 2005. Until then based

upon joint projects with Brazilian universities, research now has a central focus on

the identification of exploration targets with a high degree of probability of an

accumulation of oil and the detection of the exploration risks in ultra-deep waters

and onshore basins. As a result, Cenpes’ participation in solving the Company’s

specific challenges has grown.

Restructuring led to the creation of the Basin Modeling Program (Promob) and a Geophysics Department.

Promob is aimed at running geological simulations designed to reduce exploration risks. The new department will

intensify the development of computer applications, emphasizing 4D seismic imaging used to explore areas with

complex geological compositions.

Beside reducing costs and optimizing Petrobras’ investments, Cenpes’ programs seek to achieve high levels of

operational reliability, safety excellence and the preservation of the environment. For the Company’s downstream

and refining activities, one of the main R&D programs strives to adjust Petrobras’ refineries to the characteristics of

heavy oil in view of the increase production of this type of oil in Brazil.

Technologies to be applied in processes, products and services also are under development by Cenpes, including the

formulation of fuels with lesser environmental impact. Another line of research is aimed at the development of solutions

to increase the useful life of the Company’s pipeline network and to reduce operating costs and transportation risks.

In the field of natural gas, thermoelectric power generation and renewable fuels, Cenpes is a part of Petrobras’

overall efforts to consolidate itself as an integrated energy company. Besides working on innovations for expanding

the use of gas, in order to boost gas consumption to 78 million m3/day in 2010, Cenpes is developing programs

to enable the Company’s operations to achieve environmental excellence and sustainability and become eco-

Technological research

Technological know-how is a strategic imperative for sustaining self-sufficiency in Brazilian oil production. The

Leopoldo Américo Miguez de Mello Research and Development Center (Cenpes), located on the Ilha do Fundão

campus of the Federal University of Rio de Janeiro (UFRJ), is responsible for anticipating and supplying the

technological needs for all of Petrobras’ areas.

Cenpes, whose 1,569-person staff has 350 members who hold Master’s degrees and 130 researchers with PhD

qualifications, is composed of technological programs in Research and Development (R&D) and Basic Engineering

(BE). The integration of the Center with the 2015 Strategic Plan’s targets has resulted in a number of contributions

to the Company’s activities. Among them are the basic projects for the P-34 and P-50 platforms, which are

hallmarks of sustained self-sufficiency. With regard to production R&D, in 2005 Cenpes gave priority to three lines

of research: improving the production of heavy oil in an offshore environment; achieving technological

advances in ultra-deep water areas; and the minimizing of the decline of mature onshore and offshore

oil fields. In its efforts to improve production technology, one of Cenpes’

objectives is to reduce costs for the Company.

Horizontal wells are one of Cenpes’ technological contributions

for enhancing resources since they increase the flow of oil out of

offshore fields by up to a factor of five — thus making Petrobras’

large projects economically feasible. The use of artificial

oil lifting equipment, installed at a depth of 2,000

meters, also has been a decisive factor for the

development of heavy oil production.

TECHNOLOGICAL KNOW-HOW CAPITAL

C E N P E S C O N D U C T S R E S E A R C H I N T O T H E O P T I M I Z A T I O N O F O F F S H O R E H E A V Y

O I L P R O D U C T I O N , O P E R A T I O N S I N U LT R A - D E E P W A T E R A N D M A T U R E O I L F I E L D S

In the fields of natural

gas, thermoelectric

generation and

renewable energy sources,

Cenpes participates in

efforts to consolidate

Petrobras as an integrated

energy company.


Intangible assets efficient. Furthermore, it seeks technologies that will make it possible to optimize the use of renewable sources of

energy, satisfying the business targets of a number of segments within the Company.

Cenpes’ basic engineering area participated in seven large projects in 2005, including natural gas production

projects in the Santos Basin and heavy oil production projects in the Jubarte field in the Campos Basin. In downstream

activities, it was involved in projects at RPBC, Replan and Repar encompassing improvements in fuel quality, the

reduction of polluting emissions and expansion of heavy oil refining operations. The Center also developed the new

formulation of Podium gasoline in Argentina and continued its research for the production of biodiesel fuel.

Cenpes carried out a number of relationship activities with its stakeholders, strengthening the role of the

Company as a technological leader and adding value to the brand. The Center launched a second edition of the

Petrobras Technology Prize, created in 2004 to encourage the work of researchers and students in the field of oil

and gas. For their innovative contributions to the Company’s oil, gas and energy sectors, the authors of 27 projects

that were selected during the first edition of the Prize received their awards in October.

Petrobras has initiated expansion of Cenpes in view of the new research demands that have emerged in fields

such as the environment, gas and energy. New facilities, totaling 88.7 thousand m2, will be built on its land directly

in front of the current buildings. The new building will contain effluent treatment and recycling stations and other

technological resources, incorporated into the project according to the eco-efficiency concept.


Petrobras is the company that files the most patents in Brazil and the Brazilian company with the most

patents filed in the United States. In 2005, ten patents were granted and 80 patent requests were filed

in Brazil. Overseas, 49 patents were filed while 58 patent requests were granted.

The Company requested nine trademarks in Brazil while 141 trademarks were requested in 29 other

countries. Overseas, Petrobras obtained 89 trademark requests as well as the registration of seven

software and three copyrights requests.

P A T E N T S


Brands

The Petrobras brand is managed as a strategic asset due to its importance and its potential to add value to prod-

ucts and services. Based on the 2015 Strategic Plan, the Company created a Marketing and Brand Committee to

improve management of this asset in view of the demand stemming from the expansion of its activities.

Among the attributes of the new committee, which is linked to the Businesses Committee, is the preparation

of a brand management operating model, designed to establish the guidelines for use of brand names within the

Petrobras System. By the creation of these guidelines, the Company is seeking greater protection of the asset while,

at the same time, it continues to be involved in the legal defense of its brand in the markets where it is active.

The global management of the brand is in step with Petrobras’ strategy of an integrated effort to increase its

visibility and strengthen the identity of its products and services on the markets. At the corporate level, the

Company has been implementing initiatives that are designed to develop global brands for its products and

services, standardizing the visual aspects of its installations and communication actions.

Management Practices

The Management Quality Evaluation Program, created at the beginning of the 1990s, was held for the sixth time

during the year, During the cycle, the units that are evaluated organize programs for implementing improvements,

based upon the results of the appraisal. Many of the management practices that have been widely adopted

throughout the Company were created or improved as result of this program.

Management excellence was responsible for two important distinctions received by the Company during 2005.

Petrobras Colombia received the Colombian Prize for Management Quality, becoming the first Business Unit overseas

to obtain a prize of this nature. In Brazil, the Downstream area won silver in the Federal Government Quality Award

competition (PQGF).

Organizational Capital

T H E M A R K E T I N G A N D B R A N D S C O M M I T T E E W A S B O R N W I T H T H E M I S S I O N

O F C R E A T I N G A M A N A G E M E N T M O D E L F O R T H E P E T R O B R A S B R A N D

Intangible assets

Company evaluation

Petrobras has been carrying out increasingly wider ranging opinion surveys to check on how its practices and

products are viewed and evaluated by stakeholders. The surveys, which have given the Company substantial

knowledge about the socio-economic environment in which it operates, are based upon 18 indicators that make

it possible to evaluate perceptions regarding management, competitiveness, growth, overseas activities, vision of

the future, social support, ethics, social and environmental responsibility.

The weight point average of the indicators in the public opinion segment led to the creation of a general

indicator. The information resulting from the surveys its consolidated within the Corporate Image Monitoring System

(Seismic). Using this company reputation monitoring tool, management can follow the evolution of Petrobras’

image and adjust its communication policies and actions and management practices in different areas.

Relationship Capital

P E T R O B R A S I N V E S T S I N O P I N I O N S U R V E Y S I N O R D E R T O M O V E

E N H A N C E D I A L O G U E W I T H I T S I N V E S T O R S A N D S H A R E H O L D E R S

Environmental NGOs

Communities

Employees

Suppliers

PressSocial NGOs

Government

Public opinion

Shareholders

Clients

Seismic

Investor relations

Petrobras has constant dialogue with its investors and shareholders, aligned with

the principles of transparency for the disclosure of information. In order to improve

this relationship, the Company conducts two surveys annually focused in two dis-

tinct audiences.

The quality of the work with relation to the institutional investors and analysts is

verified through a perception study conducted by the Investor Relations

department that encompasses the disclosure media and the entire IR program. Its

results are indicators for the IR’s Balanced ScoreCard (BSC) performance – with a

part of them being replicated on the Financial Department’s panel. Furthermore, at the end of each conference call

about the Company’s quarterly results, a study is conducted to evaluate the degree of perception of the messages

that were transmitted by the IR director and the other managers.

Quantitative and qualitative surveys have made it possible to obtain the socio-economic profile of the

Company’s minority shareholders, allowing us to evaluate the quality of the service that is provided to them and

to check up on their perception of Petrobras. The aspects that are monitored include competitiveness, technology,

vision of the future, profitability, overseas activities, management, the environment, energy diversification, social

efforts, transparency, ethical behavior, corporate governance, communication with society and the shareholders.

These results also have become performance indicators for the BSC.

In 2005, Petrobras won the Transparency Trophy for the second consecutive year awarded by the National

Association of Finance Executives (Anefac) in recognition of the transparency of its financial reports and in the

providing of information. It also received the Best Investor Relationship Program Prize, in the Individual Investors

category, granted by Investor Relations Magazine of the U.S.

Relationship with suppliers

Petrobras adopted a new registration process for outsourced suppliers in 2005, integrating materials and

services companies into a single system that is aligned with the corporate Health, Safety and Environment (HSE)

and social responsibility guidelines. Besides incorporating the requirements of these two areas, the Company

perfected the technical, legal-tax and economic-financial aspects of the registration process.

In 2005, for the second

consecutive year

Petrobras won the

Transparency Trophy

awarded by Anefac in

recognition of the

transparency of its

financial reports.

Corporate image monitoring system (Seismic)


Intangible assets

Knowledge management

In compliance with the corporate policies to strengthen operational, managerial and technological competencies to

ensure the internal dissemination of knowledge, construction of a Knowledge Management Program for the

Petrobras System was initiated based upon a model developed by the International area. During the year, pilot

projects were set up for knowledge management practices (case histories, the recording of narratives, a best

practices database, a catalogue of specialists, a meeting about lessons learned, communities of practice and

taxonomies), which provided methodological support to the program.

Designed to disseminate the E&P experiences and best practices to the area’s professionals, the E&P

Communities of Practice Program was instituted in 2005. This program makes it possible to merge the different

knowledge environments without the limitations imposed by organizational boundaries. In the six communities

originally covered, the involvement of some 2,500 employees is expected.

Seeking to improve the Company’s internal practices using world-class corporate examples, Petrobras

participated in two international study groups of benchmarking practices in the field of Knowledge Management,

coordinated by the American Productivity & Quality Center (APQC). The focus was on two knowledge management

topics: Communities of Practice and the Extended Value Chain.

Petrobras participated in the 4th Annual Oil and Gas Industry Knowledge Management Conference in Singapore.

The Company presented the Knowledge Memory Project that records the history of the development of knowledge

within Petrobras and the Knowledge Management initiatives that support the Program for Excellence in Environmental

Management and Operational Safety (Pegaso), and notably its information management system (Infopae).


The registry also was improved in order to include other processes, both centralized and regional, for the evaluation

and qualification of suppliers in order to standardize methodologies and rationalize efforts. Petrobras currently has some

5,000 companies enrolled in its database for the acquisition of goods and services for operating requirements and new

projects. Moreover, there are about 40,000 smaller companies throughout Brazil that supply Petrobras with goods and

services. The Company also created a Registration Portal in 2005, in order to strengthen the relationship with its suppliers.

For the acquisition of goods, the new Materials Supply Conditions (CFM) are in effect for contracts signed as of

November 1st. The result of interaction between Petrobras and professional associations of suppliers, the CFM

adapted contract clauses to legislation and current market practices. The Company also adopted new payment

conditions for goods that have a long manufacturing timeframe, supplied by companies in Brazil.

Petrobras continued its partnership with the Brazilian Service for the Support of the Micro and Small Business

(Sebrae) to encourage the competitive insertion of micro and small companies into the oil, natural gas and electric

energy productive chain.

The agreement covers the 12 states where there are Petrobras Business Units and is worth R$ 12 million over

a three-year period, with the Company committed to investing R$ 6 million and Sebrae putting up the remaining

R$ 6 million. In addition, an investment of some R$ 3 million has been earmarked for participating companies. Due

to the large number of companies that are participating, the portion of the investments destined for the small

companies rose to R$ 16.7 million in 2005.

Human Capital

P I L O T P R O J E C T S K I C K O F F T H E B U I L D I N G O F A P R O G R A M

D E S I G N E D T O M A N A G E T H E C O M P A N Y ’ S K N O W L E D G E

The Materials Procurement System made US$ 2.89 billion in direct purchases in 2005. Thanks

to an increase in the competitiveness of Brazilian-based suppliers, their share in the

transactions was the highest of the past few years, reaching 89% of all purchases made.

Part of the acquisitions were conducted through the electronic trading portal Petronect,

which ended 2005 with 2,686 suppliers registered in Brazil, Argentina, Bolivia,

Colombia, Ecuador, the United States, Peru, Singapore and Venezuela. In three

years of operations, Petrobras System companies used the Petronect for

concluding 81 thousand purchases, 56 direct auctions and 138 reverse auctions.

M A T E R I A L S P R O C U R E M E N T


managementbusinessbusinessBUSINESS MANAGEMENT

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B I L L I O N — A N D F O R T H E I N C R E A S E O F T H E P R O D U C T I O N O F O I L A N D G A S I N B R A Z I L – 1 , 9 5 8 T H O U S A N D

B A R R E L S O F O I L E Q U I VA L E N T P E R DAY, 11 . 4 % H I G H E R T H A N I N 2 0 0 4 . P E T R O B R A S S P E N T R $ 2 5 . 7 B I L L I O N O N

C A P I TA L E X P E N D I T U R E S I N 2 0 0 5 , 14 % M O R E T H A N I N 2 0 0 4 .

P E T R O B R A S ’ P R E F E R R E D S H A R E S W E R E T H E O N E S W I T H H I G H E R L I Q U I D I T Y I N T E R M S O F T H E F I N A N C I A L

V O L U M E T R A D E D , W I T H A N AV E R A G E O F R $ 13 1 . 6 M I L L I O N P E R DAY. T H E Y A L S O B E C O M E T H E O N E S W I T H

G R E AT E R W E I G H T O N T H E I B O V E S PA T H E O R E T I C A L P O R T F O L I O – 9 . 2 2 7 % F O R T H E J A N U A R Y - A P R I L P E R I O D O F

2 0 0 6 . A D D I N G T H E N U M B E R S O F T H E O N A N D P N S H A R E S , P E T R O B R A S S E C U R I T I E S H A D T U R N O V E R O F

A P P R O X I M AT E LY R $ 16 3 M I L L I O N P E R DAY, R E P R E S E N T I N G M O R E T H A N 10 % O F T H E AV E R A G E F I N A N C I A L

V O L U M E O F T H E B O V E S PA I N 2 0 0 5 .

T H E C O M PA N Y ’ S M A R K E T C A P I TA L I Z AT I O N , P R O P E L L E D B Y I T S P E R F O R M A N C E O N T H E S TO C K M A R K E T S ,

E N D E D T H E Y E A R AT R $ 173 . 6 B I L L I O N – T H E H I G H E S T A M O U N T A M O N G A L L P U B L I C LY T R A D E D C O M PA N I E S I N

L AT I N A M E R I C A . T H I S R E P R E S E N T S A N I N C R E A S E O F 5 4 % C O M PA R E D TO 2 0 0 4

management


transportation units; the full utilization rate of coke and de-asphalting units, resulting

from the high heavy oil refining capacity; and the development of markets for the

production surpluses of oil and oil products. It should be noted that this result was

achieved without expanding installed refining capacity and fully respecting the

Company’s principles for Health, Safety and Environment.

The production of oil and natural gas in Brazil hit 1,958 thousand boe/day,

representing an increase of 11.4% compared to the previous year, mainly because

of the start up of platforms FPSO-MLS (Marlim Sul) in June 2004, P-43 (Barracuda)

in December 2004 and P-48 (Caratinga) in February 2005, and the coming on

stream of the UPGN-3 (Urucu) in June 2004, that increased the LNG production of

the Solimões Basin Unit.

Overseas, the production of oil and gas declined 1.1% over 2004, totaling 259 thousand boe/day, due to the

maintenance shutdown of the Palanca terminal for equipment change (Angola) and a strike in the Austral Basin

(Argentina) area over labor-related issues. This result was partially compensated for by the increase in gas

production by the Bolivia in order to satisfy an increase in demand.

Petrobras’ proved reserves of oil, condensate and natural gas were 14.913 billion boe on December 31, 2005,

an increase of 0.13% (0.018 billion boe) over the previous year, according to Society of Petroleum Engineers (SPE)

criteria, with 89% of the reserves located in Brazilian territory and 11% overseas. For each barrel of oil equivalent

produced in 2005, 1.023 barrels of oil equivalent were appropriated, resulting in a Reserves Replacement Ratio

(IRR) of 102.3%. The Reserves-Production Ratio (R/P) was 19.6 years.

Of particular note was the 208 thousand bpd increase in net exports of oil and oil products. From a deficit of

150 thousand bpd in 2004, 2005 saw a surplus of 58 thousand bpd. From a financial point of view, this meant a

reduction in the oil and oil products trade deficit of some US$ 3 billion.

Consolidated gross operating revenues were R$ 179.1 billion, whereas the net operating revenues totaled R$ 136.6

billion, surpassing these indicators in 2004 by 19% and 22.9%, respectively. Contributing to

this result was the increase in prices on the domestic and overseas markets together with

the increase in the domestic market volume of sales, including natural gas and exports.

On the domestic market, the effect of the increase in the realization price of oil

products and the growth in volumes sold led to a rise in net operating revenues

of R$ 14.3 billion, mainly due to the increases in revenues from diesel

(27.3%), gasoline (24.7%) and aviation fuel (26.5%). Gasoline sales

volumes grew 4.4% (12 thousand bpd), surpassing the 1.4% increase in

diesel (9 thousand bpd) and 5.4% rise in aviation fuel (4 thousand bpd).

However, the effect of the price of diesel was stronger when compared

to gasoline and aviation fuel, with these products presenting,

respectively, increases of 25.8% (R$ 0.21/lt), 19.7% (R$ 0.15/lt)

and 20.2% (R$ 0.19/lt) of their average realization prices in 2005

in relation to 2004.

Business performance

P E T R O B R A S ’ N E T E A R N I N G S W E R E 4 0 % H I G H E R T H A N I N 2 0 0 4 W H I L E

C A P I T A L E X P E N D I T U R E S S U R P A S S E D T H E R $ 2 5 B I L L I O N M A R K

Petrobras maintained

the price policy it

adopted in 2004,

avoiding immediately

passing along the

volatility of oil prices

on the international

market to consumers.

Oil prices reached very high levels on the international market; the Brent average (US$ 54.38/bbl) was 42.3% above

the 2004 average, hitting a peak monthly average of US$ 64.12/bbl in August. This rise directly impacted the lifting cost

of Brazilian oil and the portion of oil that is imported, which represented 20.4% on average of the processed throughput.

Petrobras maintained the price policy it adopted in 2004, of avoiding the immediate pass-through to consumers

of the volatility of the price of oil on the international market. In 2005, the Average Realization Price of oil products

on the domestic market in 2005 was R$ 141.57/barril, 19.5% higher than in 2004. This was principally due to the

increase in the prices of gasoline and diesel that took place at the end of 2004 and in September 2005, the

commercializing of S500 diesel as of the beginning of 2005 and sales of other oil products, notably naphtha and

aviation fuel, whose prices were readjusted to accompany the higher prices on the international market.

Petrobras’ total sales, including exports, natural gas and international sales, totaled 2,780 thousand barrels of oil

equivalent (boe), growing 4.3% over 2004 (2,665 thousand boe). However, excluding sales based on imports,

the Company’s sales rose 11%, that is by 210 thousand boe.

The energy segment grew 2.6%, considerably under the 9.5% obtained in 2004. Gas sales in 2005 rose 7.8%

over 2004, mainly due to growth of the South/Southeast market, while the oil products market saw sales expand

by 1.9%. Energy sales volumes rose 76.8% the result of the beginning of contracts signed in previous years

coupled with an increase in the volume of sales linked to existing contracts.

The share of domestic oil in the processed throughput (79.6%) was 3.7 percentage points higher than the

previous year (75.9%), going from 1,296 thousand bpd in 2004 to 1,376 thousand bpd in 2005 — without

harming the production of medium oil products such as diesel and aviation fuel. This significant performance was

due to a series of factors, of which the following can be highlighted: the excellent and collaborative integrated

management of the supply chain, from the shipping of oil from the production regions until the delivery of oil

products to Petrobras’ customers in Brazil and abroad; the high operating reliability of the production, refining and

management


On the export market, net revenues increased by R$

7.3 billion, with the export of oil, which was responsible for

about 59.6% of the total, being particularly noteworthy.

Moreover, Petrobras’ offshore sales grew by R$ 0.8

billion over 2004.

Operating Profit was R$ 39.8 billion, some 32.9%

higher than the previous year, basically due to the increase

of net operating revenues, the significant rise in production

and the respective processing of more domestic oil,

leading to an increase in the Cost of Goods and Services

Sold, which presented growth of 18.5% whereas the

increase in the price of Brent benchmark oil was 42.3%.

In 2005, the Financial Result was a negative R$ 2.8 billion in counterpart to 2004, when it was R$ 3.3 billion.

This result was influenced by the appreciation of the real, substantially greater than the variation during the same

period of 2004 with respect to the main currencies traded by Petrobras.

Thus, Net Profit was R$ 23.7 billion, 40.5% higher than in 2004.

Consequently, the EBITDA was R$ 47.8 billion, 29.9% above the result for the previous year, while the Return

on Capital Employed (ROCE) increased 4 percentage points over 2004, reaching 24%.

Petrobras’ total assets reached R$ 183.5 billion, representing growth of 11.5% over 2004. This was the result

of a 12.6% increase of fixed assets and 14.1% in current assets (cash on hand and financial investments alone

represented 46.1% of the variation in current assets), compared to a reduction of 5.4% in long-term assets.

The counterpart in liabilities occurred mainly in net equity, which grew 26.8%, with the 57.6% rise in reserves

being particularly noteworthy.

Regarding the Company’s debt, leverage (Net Debt over Net Capitalization) declined from 37% to 24%.

Petrobras had capital expenditures totaling R$ 25.7 billion (equivalent to US$ 10.6 billion), 14% higher than in

2004. The E&P area invested R$ 15.5 billion, with the priority being given to the need for an increase in production

and the oil and gas reserves. The Downstream area invested R$ 3.3 billion to add value to the Petrobras System’s

raw materials (oil and gas), focusing on a higher value and higher quality product mix. In the International area,

investments of some R$ 3.2 billion were in step with the Company’s efforts to become the leading integrated

energy company in Latin America.

Of the total, about R$ 2.3 billion was through Specific Purpose Companies (SPCs), a figure that was 208%

higher than the previous year.


50

100

150

200

IbovespaOrdináriasPreferenciais

12/29/0510/31/058/30/056/30/054/29/052/28/05

Share performance

The year was a positive one for Petrobras on the stock markets. The nominal appreciation of the Company’s shares –

55.12% for its common shares (PETR3) and 53.21% for its preferred shares (PETR4) – surpassed the most often

used market indicators in the country, such as the IBrX (37.32%), the Ibovespa (27.71%) and the IGC (43.76%).

Petrobras’ preferred shares had higher liquidity in terms of the financial volume traded, with an average of R$ 131.6

million per day. They also had greater weight on the Ibovespa theoretical portfolio – 9.227% for the January-April

period of 2006. Adding the numbers of the ON and PN shares, Petrobras securities had turnover of approximately R$

163 million per day, representing more than 10% of the average financial volume of the Bovespa in 2005.

Capital Markets

P E T R O B R A S ’ S H A R E S W E R E O N E O F T H E Y E A R ’ S H I G H L I G H T S ,

A N D I T S M A R K E T C A P I T A L I Z A T I O N R E A C H E D R $ 1 7 3 B I L L I O N

Fields in Campos, Espírito Santoand Santos Basins declaredcommercially feasible as well asdiscoveries of light oil in deeperCampos Basin water

Petrobras rises more than theIbovespa

Stock split

10/13 Petrobras is raised toInvestment Grade

9/10 Increase in the price ofgasoline and diesel

Large increase in production due to startup of the P-43 (Dec/2004)and P-48 (Feb/2005) platforms.

I

II

II

III III

IV

IVV

VVI

VI

VI

I

I

I

Preferred Shares Common Shares Ibovespa

R$ US$

ON PN PBR PBRA

Closing price 2005 41.30 37.21 71.27 64.37

2004 26.63 24.29 39.78 36.21

Daily average volume ($ billion) 2005 30.88 131.48 95.17 55.68

2004 30.59 100.61 43.32 23.52

Average price 2005 32.32 28.63 53.76 47.61

2004 23.24 20.97 32.01 28.82

Average number of daily transactions 2005 392 2,009

2004 397 1,394

Ibovespa index relative weight 2005 2.05% 7.93%

2004 2.63% 9.17%

Source: Economática

business managementC A P I T A l S M a R k e t s


On the New York Stock Exchange (NYSE), as a result of the appreciation of the real over the dollar, the returns

for holders of Petrobras’ ADRs were even greater: the receipts representing the ON shares (PBR) had a nominal

appreciation of 79.19%, and the PN shares (PBRA) rose 77.77%. Petrobras’ shares rose higher than important

indexes such as the Dow Jones Industrial (- 0.61%), a major benchmark for the American stock market; the Amex

Oil Index (36.85%), made up of large companies in the oil and gas industry; and the NYSE's International 100

(8.09%), which contains the 100 most liquid ADRs.

In financial volume, the turnover of Petrobras’ common shares for the year on the NYSE was US$ 24.04 billion,

while transactions with preferred shares totaled US$ 14.4 billion. Respectively, Petrobras securities were the fifth

and 13th most actively traded ADRs in the U.S. Adding together both the PBR and PBRA positions, Petrobras came

in third among the corporations with the most transactions on the ADR market.

The Company’s market capitalization, propelled by its performance on the stock markets, ended the year at R$

173.6 billion – the highest amount among all publicly traded companies in Latin America. This represents an

increase of 54% compared to 2004 (R$ 112.5 billion) and 96% over 2003 (R$ 88.7 billion). In U.S. currency, its

market capitalization reached US$ 75 billion in 2005, against US$ 42 billion in 2004 and US$ 30.9 billion in 2003.

Stock split

In order to facilitate access of small investors and to increase share liquidity, on September 1st Petrobras conducted

a stock split, substituting one former share for four new ones. Capital stock now is represented by 2,536,673,672

common shares and 1,849,478,028 preferred shares, with the number of investors having risen by 11 thousand

at the end of 2005. This increase reflectes the excellent operating and financial performance of the Company and

how it is perceived by the market, as well as confidence about its future results.

0

2.000

4.000

6.000

8.000

10.000

12.000

15 years10 years5 years1 year

26 57 58 29 158 164 190

945

2.109 1.984

6.871

10.228

Ibovespa Preferenciais Ordinárias

Real Accumulated Appreciation (%)

Data deflated by the IGP-DI

Source: Economática

Ibovespa Preferred Shares Common Shares

70% supported operations for importing oil and oil products and 30% went for

ensuring compliance with the obligations of other operations for various areas of

the Company.

Regarding credit lines through the international banking market, PIFCo, PEB and

Refap S.A. raised a total of US$ 1.578 billion, an amount that was 26% more than

during 2004. Of the total, US$ 1.538 billion was used to support activities for the

commercialization of oil and oil products while the remainder went for specific

operations at the subsidiaries. The increase in funding, despite the Company’s

favorable liquidity situation, was a consequence of Refap’s cash flow requirements,

which represented nearly 70% of the total volume raised.

As part of its debt extension policy, US$ 485 million (31%) all the total raised

through the lines of credit were contracted to mature in three, five and seven years.

The other US$ 1.093 billion (69%) had maturities of up to 60 days in view of

Refap’s cash flow requirements.

In order to provide a liquidity “cushion” for the Company, PIFCo has contracted,

since 2004, US$ 675 million in standby facilities. These facilities allow Petrobras to make disbursements maturing

in two years up to the limit of the amount contracted, with the principle to be paid back within one year.

In 2005, Petrobras returned to access the capital market in Brazil through the issuance of Certificates of Real

Estate Receivables (CRI) for the construction of new administrative buildings in Macaé (RJ). Valued at R$ 200

million with a 10-year maturity, the operation was structured by the Rio Bravo group and distributed to investors

by the Santander Banespa Bank. The issue was one of the largest ever conducted in the CRI market with

distribution aimed at individuals.

Project Finance

Through project finance operations, Petrobras raised funds on the Brazilian and overseas financial markets for oil

exploration and production and natural gas projects. The operations are conducted through Special Purpose

Companies (SPCs) created for each project.

The split changed the relationship of the shares with the ADRs. Each Petrobras receipt in the U.S. market now

represents four Brazilian shares. As a result, the trading price of ADRs in the U.S. was not affected.

During the year, Petrobras’ shareholders received dividends relative to 2004 totaling R$ 4.77 gross per pre-split

ON or PN share – an amount that corresponds to R$ 1.19 per post-split share.

Corporate financing

The recognition of the quality of Petrobras’ credit by banks, capital market investors and official credit agencies

provided favorable conditions enabling the Company to raise funds for financing its activities. The highlight was the

upgrading, in October, of the Company’s risk rating by Moodys Investor Services, which moved Petrobras up to

investment grade level Baa2. Besides reducing the cost of financing, this resulted in expansion of the number of

investors in the Company.

As a result of the high liquidity of Petrobras, the total of the new funds that were raised was lower than during

2004, obtained at more favorable conditions not only regarding costs but also in terms of maturities. Also due to

its strong cash generation, the Company realized debt pre-payment operations totaling approximately US$ 406

million, and renegotiated financing contracts, improving the profile of its debt and reducing financial expenses.

In operations with official and multilateral credit agencies, approximately US$ 525 million was used from loans

guaranteed by the Export Credit Agency (ECA) in contracts signed in 2005 and previous years. Petrobras Netherlands

B.V. (PNBV) signed a US$ 40 million contract with the Nordic Investment Bank to finance goods and services

acquired from Nordic countries for the construction of the P-51 and P-52 platforms. PIFCo signed a contract with

the Sumitomo Mitsui Banking Corporation, guaranteed by Nippon Export and Investment Insurance (Nexi), an official

agency of the Japanese government, in the amount of US$ 300 million for financing the Pegaso project.

The Company used about US$ 211 million from the financing contract signed by PNBV with the Brazilian

National Economic and Social Bank (BNDES) for the purchase of Brazilian goods and services used in construction

of the P-52 platform. In 2005, PNBV signed another contract with the bank, worth US$ 403 million, earmarked for

the acquisition of nationally produced goods and services for the P-51 platform.

The volume of bank guarantees contracted by Petrobras and its subsidiaries was US$ 1.985 billion – 3.1%

more than during 2004, when a total of US$ 1.926 billion was contracted. Of the guarantees obtained in 2005,


The recognition of

the quality of

Petrobras’ credit by

banks, investors and

official credit

agencies led to

favorable conditions

for the Company to

obtain funds to

finance its activities.

management


In March, the Company signed the contracts for the financial structuring of the Master Plan for the Delivery and

Treatment of Campos Basin Oil (PDET). The US$ 910 million funding comes through the Japan Bank for

International Cooperation (JBIC), commercial bank consortia and Mitsubishi and Marubeni of Japan.

Another exploration and production financing operation was signed in November. Through the specific purpose

company Charter Development Company (CDC), Petrobras raised US$ 500 million from a syndicate of overseas

banks for the construction of the FPSO P-53 platform, which will be used in the Marlim Leste field.

In the gas area, two bridge loans in the amount of R$ 800 million each were signed in November with the

Brazilian National Economic and Social Development Bank (BNDES) for construction of the Southeast-Northeast

Gas Pipeline (Gasene) and the Urucu–Coari–Manaus Gas Pipeline (The Amazônia Project).

Thanks to an improvement of Brazil’s and Petrobras’ image on the international financial markets, the Company

also has been seeking to renegotiate some structured financing operations in order to adjust its costs to current

market levels. In September, refinancing of US$ 380 million balance due on a loan granted by commercial banks

to the Barracuda/Caratinga Project was concluded.

Risk management

T H E V A L U E O F P E T R O B R A S ’ I N S U R E D A S S E T S G R E W 2 3 % I N

2 0 0 5 , W I T H P A Y M E N T O F U S $ 2 9 . 3 M I L L I O N I N P R E M I U M S


Projects Value USD Million

Urucu-Coari-Manaus (Amazônia) Gas Pipeline and Manaus thermo power plant 1,300

Revap Refinery Expansion and Modernization 900

P-53 Platform Construction 1,030

GASENE 2,000

New Projects being Structured

Structured Projects Projects Year Structure Value USD Million

Marlim 1998 1,500

Albacora 2000 410

Barracuda / Caratinga 2000 3,100

Cabiúnas 2000 850

Espadarte, Voador e Marimbá (EVM) 2000 1,076

Novamarlim 2001 834

Pargo, Congo, Garoupa, Cherne e Carapeba (PCGC) 2001 86

Malhas 2003 1,000

Rental Company of oil equipament (Clep) 2004 1,250

Master Plan for Delivery and treatment of Oil from da Campos Basin (PDET) 2005 910

In its evaluation of risk, the Company takes into account the effect of the integration of its activities, adopting

guidelines and limits to activities throughout the entire Petrobras System. The Executive Board’s policies and

guidelines are previously discussed by the Risk Management Committee.

Containing a number of commissions, this committee centralizes the examination of risk management actions,

facilitating communication with the Executive Board and the Board of Directors.

The Company is exposed to a series of market risks deriving from its operations. The risks mainly involve the

fact that eventual variations in the price of oil and oil products, exchange or interest rates could negatively affect

the value of its financial assets and liabilities or the Company’s future cash flow and profits.

In view of this, the risk management policy seeks to contribute to an appropriate balance between Petrobras’

growth objectives and returns and its level of exposure to risks, whether inherent to its activities or stemming from

the context in which it operates. Thus, through the effective allocation of its resources — physical, financial and

human — the Company is able to meet its strategic objectives.

In the management of the oil and oil products market risks, according to the premise of considering only the

consolidated net exposure to the risk of oil and oil products prices, operations with derivatives are, in general,

limited to protecting the result of specific short-term transactions (up to six months). In these hedges, futures, swap

and option contracts are used, always linked to physical market operations. From January-December 2005, hedge

operations for 23.30% of the total volume sold (imports and exports) were realized.

In a specific business, Petrobras exceptionally conducted a long-term hedge operation, which is still ongoing,

involving the sale of 52 million barrels of WTI oil from 2004 to 2007. The operation seeks to establish a price

protection for this volume of oil in order to guarantee a minimum margin for the financing agents of the

Barracuda/Caratinga Project to cover the debt service.


Like other oil companies, in the light of its investments in Health, Safety

and environment (HSE) and Quality, Petrobras retains a significant portion of the

risk, which includes increasing deductibles to as much as US$ 40 million.

Consequently, the Company does not insure against lost profits, wellhead controls

or its pipeline network.

Platforms, refineries and other facilities are covered by insurance policies against

major fire/operational risk, petroleum risk and named risk. Freight movement is

covered through transportation policies while ships are insured by hull and engine

insurance. Civil liability and environmental risks, depending upon the case, are

covered by one or more policies. Projects and facilities under construction are insured against engineering risk

through a policy taken out by Petrobras or the contractors.

For insurance purposes, the Company’s assets are valued at replacement cost, as appraised by Petrobras

and/or appraisal companies. In order to stipulate the maximum probable damage at each installation, this appraisal

serves as a basis to set a maximum indemnity limit for the major fire/operational risk policies, today fixed at US$

600 million.

The majority of Petrobras’ overseas activities are insured or reinsured by the captive insurance company Bear

Insurance Co. Ltd., domiciled in Bermuda. Bear retains none of the risk, completely laying it off on the market.

Due to the size of its activities, Petrobras is subject to legal actions in the commercial, labor and tax spheres. In

order to minimize these risks, the Company strictly complies with all the legal provisions of the various aspects

related to its businesses. In the case of legal actions currently in progress, the Company has recourse to the courts

in order to assure its defense and to seek the reversal of unfavorable decisions.

0

10.000

20.000

30.000

40.000

50.000

60.000

Prêmio US$ M Valores segurados US$ MM

2005200420032002200120001999

Petrobras Energía S.A. (Pesa), an indirect subsidiary of Petrobras, also makes use of derivative financial instruments

to mitigate its exposure to the oil and oil products market risks. From January to December of 2005, Pesa had 7.3

million barrels of oil covered.

Because a considerable portion of Petrobras’ debt and future operating cash flow is in dollars or strongly tied to

the U.S. currency, the Company does not have too large an exposure to exchange risk. Depending upon specific

analyses, the use of derivatives is limited to reducing exposure regarding other currencies, such as the euro or the

Japanese yen.

The company does not currently make use of derivative financial instruments to manage its exposure to swings

in interest rates, which is only used by its indirect subsidiary Petrobras Energía S.A. (Pesa).

Insurance

The Company increased the final premium paid on its main policies in 2005 — major fire/operational risk,

petroleum risk and named risks. The premium rose from US$ 25.2 million in 2004 to US$ 29.3 million in 2005,

an increase of 16%. During the period, the value of insured assets rose 23%, going from US$ 26.6 billion to

US$ 32.7 billion.

The greater part of Petrobras’ risk is laid off in the international reinsurance market. To this end, the Company

has a permanent policy in Brazil and overseas of disclosing the quality and practices of its risk management.

Relevant information, such as accidents, their causes and improvements that have been introduced, are promptly

and transparently passed along to the insurance market.

Oil Risks | Operating Risks | Named Risks

In 2005, the Company

increased the final

premium paid on its

main policies — major

fire/operational risk,

petroleum risk and

named risk.

Premium US$ M Values insured US$ MM

managementbusiness management

c o r p o r a t e g o v e r n a n c e

Petrobras constantly strives to improve its corporate governance practices and relationships with shareholders,

customers, suppliers, employees and other stakeholders. The Company adopts management procedures that are

compatible with the rules governing market activities in Brazil and other countries, which requires constant effort

in order to monitor and implement the practices established in the various nations in which it operates.

In Brazil, Petrobras is subject to the rules of the Brazilian Securities and Exchange Commission (CVM) and the

São Paulo Stock Exchange (Bovespa). Abroad, it submits itself to the regulations of the Securities and Exchange

Commission (SEC) and the New York Stock Exchange (NYSE) in the United States; of the Latibex market of the

Madrid Stock Exchange in Spain; and the Buenos Aires Stock Exchange in Argentina.

Since changes were made to its bylaws in 2002, Petrobras has been in compliance with the practices and

regulations of the São Paulo Stock Exchange, and its process of formal adhesion to the differentiated corporate

governance levels of the Bovespa continuing to be a subject of permanent analysis by the Company.

The corporate governance executive training program continued to be run during the year. Besides disseminating

the best governance practices adopted in Brazil and abroad within the Company, the program fosters awareness

about the importance of this topic to both senior management and employees in general. In 2005, training focused

on the alignment between the holding company and the other Petrobras System companies.

Sarbanes-Oxley Law

Petrobras has been working in a fully integrated manner since 2002 to adjust its procedures to the U.S. Sarbanes-

Oxley Act (SOX), which introduced new standards of corporate governance for companies listed on the New York

Stock Exchange and subject to SEC regulations.

In 2005, the Board of Directors chose to constitute an Audit Committee comprised of independent members

of the Board to satisfy the requirements of SOX Section 301 and its relevant regulations. In this manner,

adjustments were made to the Board’s jurisdiction in order to include, among its attributes, those required by the

U.S. law in a way that did not conflict with Brazilian legislation.

Petrobras’ Ombudsman’s Office, linked to the Board of Directors, was formally included in the Company’s

organizational chart. This body is responsible for being a channel to receive and process accusations regarding accounting,

internal controls and auditing questions, including confidential and anonymous submissions from employees.

The Company published in its 2005 Form 20-F filing (Annual Report document required by the SEC) relative to the

2004 fiscal year, among the nine members of the Board of Directors elected by the Ordinary General Shareholders’

Meeting held on March 31, 2005, one of them is a financial specialist, as called for under Section 407 of the SOX.

The review of the Petrobras System’s Code of Ethics, with the participation of the employees, was another

initiative adopted in 2005, designed to update and enhance it in view of the SOX’s requirements.

Controls and Procedures for Disclosing Information

Petrobras has an internal document that formalizes its Controls and Procedures for Disclosing Information (CPDI). The CPDI

establishes the rules to be followed by the Company’s staff to ensure that the information released to the market can be

registered, processed, prepared and disseminated within the timeframes and regulations of the prevailing legislation.

According to SOX Section 302 and SEC Rule 13a-14, the filing of the Annual Report through Form 20-F must be

accompanied by certifications signed by the Company’s President and CEO and the Chief Financial Officer (CFO)

attesting their responsibility for the preparation and maintenance of the CPDI.

They must supervise the conception and updating of these controls and disclosure

procedures, which is carried out by the Investor Relations Department.

The process described in the document allows the collection, control, analysis

and tracking of all of the information periodically released by Petrobras in its

quarterly and annual reports, including through the Form 20-F. The use of a

responsibility matrix makes it possible to identify the origin of each piece of

information and who was responsible for generating it, subsequently certified by the

executive managers involved in the process. Thus, it is possible to know where

and in what corporate system information is recorded and who was responsible

for processing, summarizing and registering the information in the reports.

The controls and procedures for disclosing information applies to the

preparation of the following documents: Annual Report, Annual Information

Report to the CVM, Form 20-F Annual Report, Form 6-K reports, Prospectuses

for the issue of securities filed with the regulatory agencies for

each issue in Brazil and abroad, Announcements of Material

Facts, publishing of information on the Company’s Internet

site and other announcements to the public.

Corporate Governance

T H E T R A I N I N G O F E X E C U T I V E S A N D I M P R O V E M E N T O F I N T E R N A L C O N T R O L S

H A S B E E N F O C U S E D O N M A N A G E M E N T T R A N S P A R E N C Y A N D E F F I C I E N C Y


business managementc o r p o r a t e g o v e r n a n c e

Auditors

The Internal Auditors plan, execute and appraise Petrobras’ internal auditing activities and advise senior

management and external control bodies. The Company also has an outside auditor, appointed by the Board

of Directors, which is restricted regarding the consulting services it can provide. It is mandatory that the external

auditor is rotated among the various auditing companies every five years.

Board Advisory Committees

There are three: Audit; Environment; and Compensation and Succession. These committees are a part of the

Board of Directors and they assist the Board carrying out its responsibilities to provide the Company with overall

guidance and direction.

Business Committee

This committee is a forum for integration. It seeks to align business development, Company management and

the Strategic Plan’s guidelines, supporting Senior Management’s decision-making process.

Management Committees

These committees are forums for delving deeper into the issues to be presented to the Business Committee,

with which it closely works. Such integration also exists between the Management Committees and their

relationships with the Board of Directors’ committees.

Currently, the company has the following management committees: E&P, Downstream, Gas and Energy;

HR, HSE; Organization and Management analysis; Information Technology; Internal Controls; Risks;

Petrobras Technology; Social and Environmental Responsibility; and Marketing and Brands, which was

established in 2005.


Petrobras’ corporate governance structure is made up of the Board of Directors and its committees, the Executive Board,

the Statutory Audit Committee, the Internal Auditors, the Business Committee and the Management committees.

Board of Directors

A collegial and autonomous body in accordance with its legal powers and responsibilities established by law

and through the Company’s bylaws, the Board of Directors’ main functions are to set the strategic guidelines

of Petrobras and to supervise the acts of the Executive Board. There are nine members of the Board of

Directors, all elected at Ordinary General Shareholders Meetings to one-year terms, with reelection permited.

Seven members represent the controlling shareholder; one represents the minority common shareholders and

one represents the preferred shareholders.

Executive Board

The Executive Board manages the Company’s businesses in compliance with the mission, objectives, strategies

and guidelines established by the Board of Directors. It is made up of the president and CEO and six directors

elected by the Board of Directors to three-year terms, with re-election permitted. They may be removed at any

time. Only the president is a member of the Board of Directors without, however, presiding over this body.

Fiscal Council

The committee is permanently installed and independent of management and the external auditors,

as required by under the Brazilian Corporate Law. It is made up of five members, with one-year

terms, with re-election permitted. One of these members represents the minority shareholders;

another represents the preferred shareholders; and three represent the Federal government,

one of whom is appointed by the Minister of Finance as representative of the National Treasury.

It is incumbent on the Fiscal Council to represent the shareholders as part of its supervisory

function, monitoring the actions of management to ensure compliance with their legal and

statutory duties as well as to defend the interests of the Company and the shareholders.

C O R P O R A T E G O V E R N A N C E S T R U C T U R E

business managementc o r p o r a t e g o v e r n a n c e

Petrobras’ Organization

Petrobras’ organizational model, approved by the Board of Directors in October 2000, is constantly being improved

to adjust it to the 2015 Strategic Plan. Besides formalizing the establishment of the Office of the Ombudsman,

changes in the general structure of the Company in 2005 resulted in the reorganization of its Finance Area.

Fiscal Council

Board of Directors

Ombudsman Internal Auditors

Executive Board

President & CEO

Business Strategy & Performance

New Business

Human Resources

Business Committee

CEO’s Cabinet

General Secretariat

Management System Development

Legal

Institutional Communication

Finance

Corporate

Production Engineering

Services

Exploration

North/Northeast

South/Southeast

E&P (Upstream)

Corporate

Logistics

Refining

Marketing & Trading

Petrochemicals& Fertilizers

Downstream

Corporate

Technical Supportfor the Businesses

BusinessDevelopment

Southern Cone

Americas, Africa& Eurasia

International

Health, Safety& Environment

Materials

Research & Development

(Cenpes)

Engineering

Information Technology

Shared Services

Services

Corporate

Marketing & Trading

Power Development

Gas & Energy

Operations& Holdings

Corporate

Financial Planning & Risk Management

Finance

Accounting

Tax

InvestorRelations


Internal Controls

The work to satisfy Section 404 of the Sarbanes-Oxley Act was continued during the year in an effort to maintain

the structure of the internal controls and procedures for properly preparing the consolidated financial reports, with

a first filing relative to the 2006 fiscal year to be made with the SEC scheduled for June 30, 2007. Petrobras made

advances in monitoring, standardization and integrated management of these controls, with emphasis on those

that have an impact on its financial reports.

Through the evaluation of the Integrated Program for Systems and Methods and Internal Control (Prisma),

created in 2004, the Company further reinforced its commitments to corporate governance and the integrated

management of its internal controls. The Financial, Business and Services areas and internal auditors of the

Petrobras System participate in this program. With the involvement of specialized consultants, Prisma encompasses

32 companies, besides the methodological follow up of its subsidiary Petrobras Energía Participaciones S.A. –

PEPSA, which has its own certification.

Prisma’s scope is based on the permanent review of the Financial Statements and other information from the

consolidated financial reports. The methodology follows the guidelines of the Public Company Accounting

Oversight Board (PCAOB) and the Commitee of Sponsoring Organizations of the Treadway Commission (Coso) for

the best control practices applicable to the Company’s businesses and services, as well as Control Objectives for

Information and Related Technology (Cobit), for information technology.

In 2005, Prisma concluded the phases for designing the macroflows of the 16 macroprocesses and 183

processes, and the evaluation of approximately 10 thousand controls of processes and another approximately

7,400 information technology controls. In Phase 3, in conclusion, the internal auditors tested the applicable internal

controls of the processes for eventual vulnerabilities. A report on the principal problems was sent to management

at the end of the year offering solutions through remedial plans.

The internal control documentation is being recorded on a specific portal on the Company’s intranet to permit the

integrated management of the design of the processes, risks and controls. Through this, Senior Management, the

internal auditors and the Audit Committee are able to view the updated diagnosis of the certification of the Petrobras

System’s internal controls, participating in the continuous self-assessment of the business units and corporate areas.

JOSÉ SERGIO GABRIELLI DE AZEVEDO PRESIDENT AND CEO

C O R P O R A T E

OMBUDSMAN I MARIA AUGUSTA CARNEIRO RIBEIRO

INTERNAL AUDITING I GERSON LUIZ GONÇALVES

GENERAL SECRETARIAT I HÉLIO SHIGUENOBU FUJIKAWA

CEO’S CABINET I ROGÉRIO GONÇALVES MATTOS

STRATEGY AND BUSINESS PERFORMANCE I CELSO FERNANDO LUCCHESI

MANAGEMENT SYSTEM DEVELOPMENT I IRANI CARLOS VARELLA

NEW BUSINESS I JOSÉ LIMA DE ANDRADE NETO

INSTITUTIONAL COMMUNICATION I WILSON SANTAROSA

LEGAL I NILTON ANTONIO DE ALMEIDA MAIA

HUMAN RESOURCES I HEITOR CORDEIRO CHAGAS DE OLIVEIRA

F I N A N C E

ALMIR GUILHERME BARBASSA DIRECTOR

PROJECT FINANCE I PEDRO AUGUSTO BONÉSIO

FINANCIAL PLANNING AND RISK MANAGEMENT I JORGE JOSÉ NAHAS NETO

CORPORATE FINANCE AND TREASURY I DANIEL LIMA DE OLIVEIRA

ACCOUNTING I MARCOS ANTONIO SILVA MENEZES

TAX ADMINISTRATION I MARIA ALICE FERREIRA DESCHAMPS CAVALCANTI

INVESTOR RELATIONS I RAUL ADALBERTO DE CAMPOS

S E R V I C E S

RENATO DE SOUZA DUQUE DIRECTOR

HEALTH, SAFETY AND ENVIRONMENT I CLÁUDIO FONTES NUNES

MATERIALS I ARMANDO OSCAR CAVANHA FILHO

LEOPOLDO A. MIGUEZ DE MELLO RESEARCH AND DEVELOPMENT CENTER I CARLOS TADEU DA COSTA FRAGA

ENGINEERING I PEDRO JOSÉ BARUSCO FILHO

INFORMATION TECHNOLOGY I WASHINGTON LUIZ FARIA SALLES

SHARED SERVICES I RICARDO ANTONIO ABREU IANDA

business management


Executive Board

E X P L O R A T I O N A N D P R O D U C T I O N

GUILHERME DE OLIVEIRA ESTRELLA DIRECTOR

E&P CORPORATE I FRANCISCO NEPOMUCENO FILHO

E&P NORTH-NORTHEAST I SOLANGE DA SILVA GUEDES

E&P SOUTH-SOUTHEAST I JOSÉ ANTONIO DE FIGUEIREDO

E&P PRODUCTION ENGINEERING I JOSÉ MIRANDA FORMIGLI FILHO

E&P EXPLORATION I PAULO MANUEL MENDES DE MENDONÇA

E&P SERVICES I ERARDO GOMES BARBOSA FILHO

D O W N S T R E A M

PAULO ROBERTO COSTA DIRECTOR

DOWNSTREAM CORPORATE I VENINA VELOSA DA FONSECA

DOWNSTREAM LOGISTICS I PAULO MAURÍCIO CAVALCANTI GONÇALVES

DOWNSTREAM REFINING I ALAN KARDEC PINTO

DOWNSTREAM MARKETING AND TRADING I NILO CARVALHO VIEIRA FILHO

DOWNSTREAM PETROCHEMICALS AND FERTILIZERS I MARIA DAS GRAÇAS SILVA FOSTER

G A S A N D E N E R G Y

ILDO LUÍS SAUER DIRECTOR

GAS AND ENERGY CORPORATE I RAFAEL SCHETTINI FRAZÃO

GAS AND ENERGY POWER DEVELOPMENT I PAULO KAZUO TAMURA AMEMIYA

GAS AND ENERGY MARKETING AND TRADING I ROGÉRIO ALMEIDA MANSO DA COSTA REIS

GAS AND ENERGY OPERATIONS AND HOLDINGS I JOSÉ MARIA CARVALHO RESENDE

I N T E R N A C I O N A L

NESTOR CUÑAT CERVERÓ DIRECTOR

INTERNATIONAL CORPORATE I CLÁUDIO CASTEJON

INTERNATIONAL AMERICAS, AFRICA AND EURASIA I JOÃO CARLOS ARAÚJO FIGUEIRA

INTERNATIONAL SOUTHERN CONE I DÉCIO FABRÍCIO ODDONE DA COSTA

INTERNATIONAL BUSINESS DEVELOPMENT I LUÍS CARLOS MOREIRA DA SILVA

INTERNATIONAL TECHNICAL SUPPORT TO THE BUSINESSES I ABÍLIO PAULO PINHEIRO RAMOS

On November 30, 2005 the Executive Board approved a new structure for the Finance Area,comprised of the following Executive Departments: Corporate Finance, Financial Planning and RiskManagement, Finance, Accounting, Tax and Investor Relations. However, by the end of 2005 notall executive managers for the respective departments had been appointed.

e x e c u t i v e b o a r d


Board of Directors

DILMA VANA ROUSSEFF CHAIRWOMAN

MEMBERS

JOSÉ SERGIO GABRIELLI DE AZEVEDO

JORGE GERDAU JOHANNPETER

ANTONIO PALOCCI FILHO

FÁBIO COLLETTI BARBOSA

GLEUBER VIEIRA

JAQUES WAGNER

ARTHUR ANTONIO SENDAS

CLÁUDIO LUIZ DA SILVA HADDAD

Fiscal Council

MARIA LÚCIA DE OLIVEIRA FALCÓN CHAIRWOMAN

EFFECTIVE MEMBERS

NELSON ROCHA AUGUSTO

TÚLIO LUIZ ZAMIN

DENISE MARIA AYRES ABREU

MARCUS PEREIRA AUCÉLIO

ALTERNATES

EDUARDO COUTINHO GUERRA

CELSO BARRETO NETO

EDISON FREITAS DE OLIVEIRA

MARIA AUXILIADORA ALVES DA SILVA

OSWALDO PETERSEN FILHO

annexannex


AMERICAN DEPOSITARY RECEIPTS (ADR) | Negotiable

certificates in the United States and representing one or

more shares of a foreign company. A US depositary bank

issues the ADRs against a deposit of underlying shares, held

by a custodial institution in the country of origin of the shares

AMERICAN PETROLEUM INSTITUTE API DEGREE (°API) |

A measurement of the relative density of an oil or oil product.

The API scale, measured in degrees, varies inversely with the

relative density – in other words the greater the relative

density, the lower the API degree. Conversely, the lighter the

oil, the higher the API degree. Oils with an API of more than

30 degrees are considered light; between 22 and 30 degrees

API are medium; lower than 22 API degree are heavy while

an API degree equal or lower than 10 indicates an

extra–heavy oil. The higher the API degree, the greater the

product’s market value.

ASSOCIATED NATURAL GAS | Natural gas produced

together with oil. Crude petroleum is made up of three

states: oil, gas and water. In this respect, gas is obtained after

the physical separation of the liquid fraction of the

petroleum. Gas can also be of a non– associated nature and

produced from purely gas deposits. Under these

circumstances, there is no need for physical separation

during production. However, in both cases, after production

and/or separation, the gas is processed to the required

standards and quality before being sold.

BALANCED SCORECARD | Described by Kaplan and Norton,

is more than a tactical or operational measurement system. An

explicit strategy and a vision form the basis for four perspectives

(financial, customer, business process and learning and growth).

For each one, strategic objectives, measurements, specific

targets and action plans are formulated.

BLOCK | A small portion of a sedimentary basin where oil

and natural gas exploration and production is carried out.

BOVESPA INDEX (IBOVESPA) | Indicator of the price

changes of a variable share portfolio that is defined

periodically by the São Paulo Stock Exchange.

BRENT PETROLEUM | A blend of petroleum produced in

the North Sea from fields

BS 8800 | British Standard for implementing a health and

occupational (SMS) Management System.

BUNKER | Fuel for ships.

CARBON MARKET | Regulated trading system between

companies or other institutions of credits corresponding to

certified reductions in the emission of greenhouse gases, the

objective being to meet business, regional, national or global

targets for reducing the emission of these gases

CATALYST | Any substance that speeds up or retards a

chemical reaction but does not itself undergo any lasting

chemical alteration during the process

CATALYTIC CRACKING UNIT | Refining process whereby

heavier distilled oils are converted into lighter fractions of

greater commercial values, such as gasoline, liquefied

petroleum gas (LPG) and naphtha.

CERTIFICATES OF REAL ESTATE RECEIVABLES (CRI) | A

security linked to real estate loans, issued exclusively by

securitization companies. They are created to obtain funds

from institutional investors, with maturities compatible with

the characteristics of real estate loans

Glossáry, abbreviations and conversion table GlossARY, abBreviations and conversion table

CO–GENERATION | The simultaneous generation of

electricity and thermal energy (heat/steam from the

process), through the sequential and efficient use of

quantities of energy from a single source. This increases the

thermal efficiency of the thermodynamic system as a whole.

CONDENSATE | Natural gas liquids recovered in the normal

oilfield separation process and maintained in liquid state

under normal pressure and temperature conditions.

CONFERENCE CALL | A telephonic conference with market

analysts, institutional and individual investors that takes place

when the Company reports its most recent quarterly financial

results. The conference call normally also includes

information on the Company’s future prospects.

CORPORATE GOVERNANCE | The relationship between

economic agents (shareholders, executives, board

members) that can infl uence or determine the course and

performance of a company. Good corporate governance

assures stakeholders equitable treatment, transparency and

responsibility for the results.

CRUDE PETROLEUM (OR CRUDE OIL) | The oil that first

enters a refinery for processing.

DELAYED COKING UNIT (DCU) | This is the most extreme

form of thermal cracking, transforming vacuum residue into

lighter products, in addition to coke.

DERIVATIVE | A contract or security, the value of which is

related to the price of another security, instrument or

underlying index. It can be used as a hedge instrument.

DIFFERENTIATED CORPORATE GOVERNANCE SHARE

INDEX (IGC) | A share index calculated by the São Paulo

Stock Exchange that measures the performance of a

theoretical portfolio of shares of companies that present

good levels of corporate governance.

DISPATCH | Functioning (bringing into operation) of a

thermoelectric power station (UTE), when this begins

generating electricity for supply to consumers/ grid – “to

dispatch power from a thermoelectric power station” – means

bringing it into operation for producing electric power.

Currently, in Brazil with its predominantly hydroelectric

generating capacity, thermoelectric plants only dispatch

electricity at certain peak demand times (when hydro sources

are insufficient to supply demand), during hydrological

shortfalls (low rainfall) or whenever the National System

Operator (ONS) so determines to stabilize the system.

E&P | Exploration and production of oil and natural gas.

EBITDA | Earnings before interest, taxes, depreciation and

amortization expenses.

E–COMMERCE | Commercial transactions carried out

electronically through the exchange of bits. The relationship is

digital and therefore virtual. The sale of goods and services

involve a digital communication medium – the multimedia –

and the principal vehicles for this type of transaction are:

CD–Rom, kiosks, BBS and the Internet. Also known as virtual

commerce or electronic commerce.

EQUITY VALUE | This is the value of a company’s net equity,

ETHENE OR ETHYLENE | A basic petrochemical product of

the light olefin family (C2H4) produced from naphtha or

ethane. executives, board members) that can influence or

business management


determine the course and performance of a company. Good

corporate governance assures stakeholders equitable

treatment, transparency and responsibility for the results.

EXPLORATORY SUCCESS RATE | The number of exploratory

wells with commercially

FIELD | An oil or natural gas producing area from a continuous

reservoir or more than one reservoir at variable depths,

including the associated production installations and equipment.

FLOATING, PRODUCTION, STORAGE & OFFLOADING

(FPSO) | A floating unit for the production, storage and

transfer of hydrocarbons using a ship as platform

FUEL OIL | The heavier fractions from the atmospheric

distillation of petroleum, widely used as and industrial fuel in

boilers, ovens, etc.

GROSS MARGIN | Gross Profit ÷ Net Revenue.

HEDGE | A financial position or combination of positions for

the purpose of reducing some kind of risk.

IBRX | Brazil Index -This is a price index that measures the

return on a theoretical portfolio composed of 100 shares

selected from the most traded shares on the Bovespa, in terms

of trading volume and financial volume. They are weighted in

the portfolio by their respective number of shares available for

trading on the market in the Brent and Ninian Systems with a

39.4 (thirty–nine and four tenths percent) degree API and a

0.34% (zero decimal point thirty–four per cent)

INSTALLED CAPACITY | Project capacity of the unit

authorized by the ANP.

INVESTMENT GRADE | Risk classification level that

considers a company to have a low risk and, thus, its

securities can be acquired by more conservative investors.

ISO 14001 | An international standard, prepared and

managed by the International Organization for

Standardization, which specifies the requirements for

environmental management systems with a view to the

certification of these systems.

LIQUEFIED PETROLEUM GAS (LPG) | A mixture of

hydrocarbons and high pressure steam obtained from natural

gas at special processing units, which is kept in a liquid state

under special conditions for surface storage.

LIQUID NATURAL GAS (LNG) | Part of natural gas that is

found in the liquid phase at a given pressure and temperature

on the surface, obtained during field separation processes, in

natural gas processing units or in gas pipeline transfer operations.

LIQUEFIED NATURAL GAS (LNG) | Natural gas cooled

to temperatures below 160 C° for transfer and storage in a

liquid state.

LOCAL GOODS CONTENT | The percentage that is

equivalent to the coefficient between: The difference between

the total sale value of a good (excluding IPI and ICMS taxes)

and the value of the associated imported portion and; Its total

sale value (excluding IPI and ICMS taxes).

MARKET CAPITALIZATION | This is a company’s value

measured by the price of its shares in the market, according

to the following formula: (share price x number of shares).

MARKET SHARE | Percentage or participation of the market.

MERCHANT POWER PLANT | In general, merchant power

plants sell their power to the spot market. Under this form of

business structure, there are natural gas supply contracts with

clauses, which govern the division of gains and losses above

those set from the outset of the agreement among the parties.

NAPHTHA | A petroleum product, mainly used as feedstock

in the petrochemical industry to produce ethane and

propane together with other liquid fractions such as benzene,

toluene and xylene.

NATIONAL PETROLEUM, NATURAL GAS AND BIO-FUEL

AGENCY (ANP) | The Brazilian regulatory agency for the oil

and natural gas sector

NATURAL GAS | Any hydrocarbons or mixture of

hydrocarbons that remain in a gaseous state under normal

atmospheric conditions, extracted directly from reservoirs of

petroleum or gas, including moist, dry, residual and rare gases.

NATURAL GASOLINE | Natural gas liquids with a steam

pressure halfway between that of condensate and LPG,

obtained from natural gas through a process of compression,

distillation and absorption.

NET MARGIN | Net Profit ÷ Net Revenue.

NEW FRONTIERS | Areas of sedimentary basins or

sedimentary basins where exploration has occurred.

OFFSHORE | Located or operating in the sea.

OHSAS 18001 | A standard prepared and managed by BSI

Management Systems, which specifies the requirements for

the health and occupational safety management systems with

a view to certifying these systems among other purposes.

OIL | The portion of petroleum that exists in a liquid state

under original reservoir conditions and remains liquid under

surface pressure and temperature conditions.

ONSHORE | Located or operated on land.

OPEC BASKET PRICE | Saharan Blend (Algeria), Minas

(Indonesia), Bonny Light (Nigeria), Arab Light (Saudi Arabia),

Dukhan (Qatar), BCF-17 (Venezuela), Iranian Heavy, Kuwait

Crude, Es Sider (Libya), Murban (United Arab Emirates) and

Basrah (Iraq).

OPERATING MARGIN | Operating Profit ÷ Net Revenue.

OPTION | A type of derivative that gives the buyer the right

to purchase (call option) or sell (put option) an asset or

security for a given price (strike price) at a future date

ORGANIZATION OF PETROLEUM EXPORTING COUNTRIES

(OPEC) | Algeria, Indonesia, Iran, Iraq, Kuwait, Nigeria, Qatar,

Saudi Arabia, United Arab Emirates and Venezuela.

PETROLEUM | Any liquid hydrocarbon in its natural state

such as crude oil and condensate.

POLYETHYLENE | A petrochemical product used to make

casks, receptacles, film canisters, plastic packaging for

clothing and lightweight objects.

POLYMER | The generic designation for some second

generation petrochemicals such as plastics, rubber and

synthetic fibers.

POLYPROPYLENE | A petrochemical product with uses

similar to those of high–density polyethylene, such as film,

beverage crates and packaging, etc

PROCESSED CRUDE | Total volume processed in a refinery.

PROPENE OR PROPYLENE | A basic petrochemical product,

produced from naphtha propane that serves as feedstock for

making polypropylene.

PROVED RESERVE | Reserves of petroleum and/or natural

G L O S S a r y

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gas that, based upon analysis of geological and engineering

data, are estimated to be commercially recoverable from

discovered and evaluated reservoirs, to a high degree of

certainty, taking into account the prevailing economic

circumstances, the usually feasible operational methods and

the Brazilian petroleum and tax regulations.

RATING | Classification or rating of risk.

RECOVERABLE VOLUME | Volume of petroleum, expressed

under basic conditions which can be obtained from the

production of a reservoir from the time of its initial conditions

to the time of its abandonment using the best alternative

indicated by technical- economic studies carried out at the

time of appraisal. Formula: recoverable volume = original

volume x recovery factor.

RESERVE | Discovered oil and/or natural gas resources that

are commercially recoverable as of a given date.

RESERVE REPLACEMENT INDEX (IRR) | Variation in the

proved recoverable volume of reserves in relation to

aggregate production in a given year.

RESIDUE | There are two kinds of residue: firstly the

atmospheric (RAT) kind, the fraction of oil from an

atmospheric distillation unit, the distillation of which varies

from 420 degrees Celsius upwards; secondly – asphalt, the

refined products from de–asphalting residue, resulting from

the extraction of light fractions from vacuum residue using a

paraffin solvent (propane or butane).

ROCE (RETURN ON CAPITAL EMPLOYED) | Calculated by

using the following formula: Net earnings – financial results

(net of income tax (IR) and social contribution (CSSL)) /

average borrowings (loans and financing) + average

shareholders equity – financial investments.

SECOND GENERATION PETROCHEMICAL COMPANIES |

The companies that make up a petrochemical complex are

classified in three segments. The second generation

companies process basic petrochemicals (ethane, propane,

benzene, etc.) to manufacture intermediate products

(plastics, rubber and synthetic fibers)

SECURITIES AND EXCHANGE COMMISSION (SEC) | The

U.S. capital market oversight and regulatory agency, whose

equivalent in Brazil is the Comissão de Valores Mobiliários (CVM).

SPE | Society of Petroleum Engineers.

SWAP | Contract between two parties to exchange payment

flows. A typical oil swap consists of a contract in which one

party buys at a certain price and sells at a future floating price.

TOTAL PROCESSED THROUGHPUT | Total of crude oil, plus

reprocessing and intermediate products processed in the

distillation plants.

TOTAL THROUGHPUT | Total of crude oil processed in the

distillation plants viable oil and/or gas, as a proportion of the

total number of exploratory wells drilled and evaluated in any

given year.

VOLATILITY | Statistical measure of variation of a price or

rate over time. Normally calculated by variance or standard

deviation – the higher the price volatility, the more extensive

its variation above or below an average value.

WEST TEXAS INTERMEDIATE (WTI) | Petroleum with an

API degree between 38 and 40 and approximately 0.3% of

sulfur, the daily price of which reflects the price of a barrel of

oil delivered in Cushing, Oklahoma, in the United States.

WORK– RELATED ILLNESS | Illness arising from or triggered

by special conditions of work and related directly to it.

ABBREVIATIONS

BBL | Barrel.

BOE | Barrels of oil equivalent. Normally used to express

volumes of oil and natural gas in the same unit of

measurement (barrels) by converting Brazilian gas at the rate

of 1,000 cubic meters of gas to 1 cubic meter of oil. 1 cubic

meter of oil = 6.289941 barrels of oil. As an international

standard, one barrel of oil equivalent equals approximately

6,000 cubic feet of natural gas.

BOED | Barrels of oil equivalent per day.

BPD | Barrels per day.

DWT | Deadweight tonnage. Unit that measures the freight

transportation capacity of a ship.

CONVERSION TABLE

A) Cubic meters (m3) into barrels (b):

b = m3

0,158984

B) Barrels (b) into cubic meters (m3):

m3 = b x 0,158984

C) Cubic meters (m3) into tons (t):

t = m3 x D

D) Tons (t) into cubic meters (m3):

m3 = t

D

E) Barrels (b) into tons (t):

t = b x 0,158984 x D

F) Tons (t) into barrels (b):

b = t

D x 0,158984

G) 1 m3 = 1.000 liters = 6,28994113 b

H) 1 b = 158,984 liters = 0,158984 m3

I) 1.000 m3 natural gas= 1 m3 oil

(approximately)

J) D = M , where

V

D = Density

M = Mass

V = Volume

G L O S S a r y

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HEAD OFFICE

PETRÓLEO BRASILEIRO S.A. – PETROBRASAvenida República do Chile, nº 65 – Centro20031-912 – Rio de Janeiro – RJ – BrazilTel.: (21) 3224-4477

REPRESENTATIVE OFFICES IN BRAZIL

BRASÍLIASetor de Autarquias Norte – SAN – Quadra 1, bloco D,Edifício Petrobras – 2º andar70040-901 – Brasília – DF – BrazilTel.: (61) 3429-7131Fax: (61) 3226-6341

SÃO PAULOAvenida Paulista, 901 – 11º andar – Cerqueira César 01311-100 – São Paulo – SP – BrazilTel.: (11) 3523-6501Fax: (11) 3523-6488

SALVADORAvenida Antônio Carlos Magalhães, 1113 – sala 112 – Pituba41825-903 – Salvador – BA – BrazilTel.: (71) 3350-3700Fax: (71) 3350-3080

OVERSEAS REPRESENTATIVE OFFICES

NEW YORK570, Lexington Avenue 43rd Floor 10022-6837 – New York – NY – USATel.: (1) 212 829-1517Fax: (1) 212 832-5300

TOKYOTogin Building 5th Floor, Room 508 4-2 Marunouchi 1 – Chome Chiyoda–Ku Tokyo 100-0005 – JapanTel.: (81) 3 5208-5285Fax: (81) 3 5208-5288

CHINAPetrobras Beijing Representative OfficeChina World Trade Center Tower 1, Units 1221-1225Nº 1, Jian Guo Men Wai Avenue,Chao Yang District,Beijing 100004 – P.R. ChinaTel.: (86-10) 6505-9838Fax: (86-10) 6505-9850

SINGAPORE435 Orchard Road # 19-05/06 – Wisma AtraSingapore – 238877Tel.: (65) 6550-5080Fax: (65) 6734-908

SUBSIDIARIES

BRASPETRO OIL SERVICES COMPANY - BRASOIL4th Floor, Harbour Place, 103 south Church Street –Georgetown Grand Cayman – Cayman Island (BWI)P.O. Box 1034 GTTel.: 0.0021-1 (345) 814-1557Fax: 0.0021-1 (345) 814-1557

BRASPETRO OIL COMPANY Second Floor, Anderson Square BuildingGeorgetown Grand Cayman – Cayman Island (BWI)P.O. Box 714Tel.: 0.0021-1(345) 949.8888 / 8889Fax: 0.0021-1(345) 949.8899

PETROBRAS NETHERLANDS B.V.Rokin 551012 KK Amsterdam The NetherlandsTel.: 0021-31 20 521 4805Fax: 0021-31 20 521 4827

DOWNSTREAM PARTICIPAÇÕES S.A.Avenida República do Chile, 65 – 22º andar (parte) – Centro20031-912 – Rio de Janeiro – RJ – BrazilTel.: (21) 3224-4819Fax: (21) 2262-4228

PETROBRAS INTERNATIONAL FINANCE COMPANY 4th Floor, Harbour Place, 103 south Church Street Georgetown Grand Cayman – Cayman Island (BWI)P.O. Box 1034 GTTel.: (0.0021-1) (345) 814-1557Fax: (0.0021-1) (345) 814-1557

5283 PARTICIPAÇÕES LTDA.Avenida República do Chile, 65 – sala 1003 – Centro20031-912 – Rio de Janeiro – RJ – BrazilTel.: (21) 3224-7308

PETROBRAS INTERNATIONAL BRASPETRO B.V. Rokin 551012 KK Amsterdam P.O. Box 9901000 AZ AmsterdamThe NetherlandsTel.: (0021) 3120 521-4805Fax: (0021) 3120 521-4827

PETROBRAS COMERCIALIZADORA DE ENERGIA LTDA.Avenida República do Chile, 500 – 27º andar – Centro20031-170 – Rio de Janeiro – RJ – BrazilTel.: (21) 3212-6202Fax: (21) 3212-6205

USINA TERMELÉTRICA NOVA PIRATININGA LTDA.Avenida Paulista, 901 – 14º andar – Centro13111-000 – São Paulo – SP – BrazilTel.: (11) 5613-2700Fax: (11) 5614-9222

BAIXADA SANTISTA ENERGIA LTDA.Praça Mal. Stenio Caio de Albuquerque Lima, 1 (parte) – Jardim das Indústrias11555-900 – Cubatão – SP – BrazilTel.: (13) 3362-4004Fax: (13) 3362-4818

SFE – SOCIEDADE FLUMINENSE DE ENERGIA LTDA. Rodovia Presidente Dutra – KM 200, s/nº – Jardim Maracanã23890-000 – Seropédica – RJ – BrazilTel.: (21) 2665-9204Fax: (21) 2665-9249

FAFEN ENERGIA S.A.Rua Eteno, 2198 – Pólo Petroquímico42810-000 – Camaçari – BA – BrazilTel.: (71) 642-4706Fax: (71) 642-4300

TERMOCEARÁ LTDA. (MPX)Rodovia CE-422, Km 0 – Nihil61600-000 – Caucaia – CE – BrazilTel.: (85) 3372-2200Fax: (85) 3372-2212

TERMORIO S.A.Avenida Almirante Barroso, 63 – salas 815 a 817 (parte) – Centro – 20031-003 – Rio de Janeiro – RJ – BrazilTel.: (21) 2532-6572Fax: (21) 2532-1957

PETROBRAS QUÍMICA S.A. – PETROQUISAAvenida República do Chile, 65 – Salas 902/903 – Centro20031-912 – Rio de Janeiro – RJ – BrazilTel.: (21) 3224-6397Fax: (21) 2262-1918 / 2262-4728

PETROBRAS NEGÓCIOS ELETRÔNICOS S.A.Avenida República do Chile, 65 – 16º andar (parte) – Centro20031-912 – Rio de Janeiro – RJ – BrazilTel.: (21) 3224-3990 / 3224-7210Fax: (21) 3224-2703 / 3224-3558

PETROBRAS DISTRIBUIDORA S.A. – BRRua General Canabarro, 500 – 16º andar – Maracanã20271-900 – Rio de Janeiro – RJ – BrazilTel.: (21) 3876-4001Fax: (21) 3876-4977

PETROBRAS TRANSPORTE S.A. – TRANSPETROAvenida Presidente Vargas, 328 – 10º andar – Centro20091-060 – Rio de Janeiro – RJ – BrazilTel.: (21) 3211-9100Fax: (21) 3211-9121

PETROBRAS GÁS S.A. – GASPETROAvenida República do Chile, 500 – 28º andar – Centro20031-170 – Rio de Janeiro – RJ – BrazilTel.: (21) 3212-6053Fax: (21) 3212-6165

A D d R E S S E S


P-50 – Petrobras Image Bank

This oil and gas FPSO Platform (Floating, Production, Storage and Offloading) is the

milestone of the oil self-sufficiency conquest in Brazil. It is the greatest production

capacity unit in the country - 180 thousand bpd - and will operate in the Albacora

Leste Field in the Campos Basin.

PREPARATION, EDITING AND GENERAL COORDINATION

Investor relations and

Institutional communication

GRAPHIC PROJECT

Traço Design

GRAPHIC PROJECT

Soter Design

EDITORIAL PRODUCTION

Letra Viva Comunicação

TEXT EDITION

Ofício de Letras

TEXT

Escrita Fina

PHOTOGRAPHY

Ari Gomes, Banco de Imagens Petrobras, Bruno Veiga, Claudia Martins, Cris Isidoro,

Eliana Fernandes, Fabio Oliveira, Felipe Goifman, Geraldo Falcão, Geraldo Kosinski,

J. Valpereiro, Jônio Machado, José Caldas, Juarez Cavalcanti, Patrícia Santos, Paulo

Arthur, Paulo Rubens, Projeto Tamar, Publius Vergilius, Rogério Reis

PRINTING

Ipsis Gráfica e Editora

COVER PHOTOGRAPH

Annual Report 2005

Investor Relations

Transcript of Annual Report 2005