**As filed with the Securities and Exchange Commission on October 7,2005.**

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 20-F**

 

**(Mark One)**

**o****          ****Registrationstatement pursuant to Section 12(b) or 12(g) of the SecuritiesExchange Act of 1934**

 

**ý****          ****Annualreport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934**

**For thefiscal year ended December 31, 2003**

 

**o****          ****Transitionreport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934**

**For thetransition period from                             to                       **

 

**Commission File No. 001-12142**

 
| **PETRÓLEOS  DE VENEZUELA, S.A.**                                         |
|--------------------------------------------------------------------------------|
| (Exact Name of Registrant as Specified in Its  Charter)                        |
|                                                                           |   |   |
| **Venezuelan National Petroleum Company**                                      | ** ** | **Bolivarian Republic of Venezuela** |
| (Translation of Registrant’s Name into English)                           |   | (Jurisdiction of Incorporation or Organization) |
|                                                                           |   |   |
| **Avenida Libertador, La  Campiña, Apdo. 169, Caracas 1010-A, Venezuela** |
| (Address of Principal Executive Offices)                                       |

 

Securities registered or to be registered pursuant to Section 12(b) ofthe Act:  **None.**

 

Securities registered or to be registered pursuant to Section 12(g) ofthe Act:  **None.**

 

Securities for which there is a reporting obligationpursuant to Section 15(d) of the Act:

 
| PDVSA  Finance Ltd. 6.650% Notes due 2006 | PDVSA Finance  Ltd. 9.375% Notes due 2007 |
|-------------------------------------------|-------------------------------------------|
| PDVSA  Finance Ltd. 6.800% Notes due 2008 | PDVSA Finance  Ltd. 9.750% Notes due 2010 |
| PDVSA  Finance Ltd. 8.500% Notes due 2012 | PDVSA Finance  Ltd. 7.400% Notes due 2016 |
| PDVSA  Finance Ltd. 9.950% Notes due 2020 | PDVSA Finance  Ltd. 7.500% Notes due 2028 |

 

Indicate the number of outstanding shares of each ofthe issuer’s classes of capital or common stock as of the close of the periodcovered by the annual report:  51,204shares of the common stock of PETRÓLEOS DE VENEZUELA, S.A. were outstanding asof December 31, 2003.

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

| Yes | o | No | ý |
|-----|---|----|--------|

 

Indicate by check mark which financial statement itemthe registrant has elected to follow.

 

| Item 17 | o | Item 18 | ý |
|---------|---|---------|--------|

 

If this is an annualreport, indicate check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  which financial statement item the registranthas elected to follow.

 

| Yes | o | No | ý |
|-----|---|----|--------|

 

 

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**TABLE OF CONTENTS**

 

**Table of Contents**

 
| INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE |                                                                          |
|-------------------------------------------------|-------------------------------------------------------------------------------|
|                                            |                                                                          |   |
| FACTORS AFFECTING FORWARD-LOOKING STATEMENTS    |                                                                          |
|                                            |                                                                          |   |
| PART I                                     |                                                                          |   |
|                                            |                                                                          |   |
| Item 1.                                         | Identity  of Directors, Senior Management and Advisers                        |   |
| Item 2.                                         | Offer  Statistics and Expected Timetable                                      |   |
| Item 3.                                         | Key  Information                                                              |   |
| Item 4.                                         | Information  on the Company                                                   |   |
| Item  5.                                        | Operating  and Financial Review and Prospects                                 |   |
| Item  6.                                        | Directors,  Senior Management and Employees                                   |   |
| Item  7.                                        | Major  Shareholders and Related Party Transactions                            |   |
| Item 8.                                         | Financial  Information                                                        |   |
| Item 9.                                         | The Offer and  Listing                                                        |   |
| Item  10.                                       | Additional  Information                                                       |   |
| Item  11.                                       | Quantitative  and Qualitative Disclosures about Market Risk                   |   |
| Item  12.                                       | Description  of Securities Other than Equity Securities                       |   |
|                                            |                                                                          |   |
| PART II                                    |                                                                          |   |
|                                            |                                                                          |   |
| Item  13.                                       | Defaults,  Dividend Arrearages and Delinquencies                              |   |
| Item  14.                                       | Material  Modifications to the Rights of Security Holders and Use of Proceeds |   |
| Item  15.                                       | Controls and  Procedures                                                      |   |
| Item 16.                                        | [Reserved]                                                                    |   |
| Item  16A.                                      | Audit  Committee Financial Expert                                             |   |
| Item 16B.                                       | Code of  Ethics                                                               |   |
| Item  16C.                                      | Principal  Accountant Fees and Services                                       |   |
| Item  17.                                       | Financial  Statements                                                         |   |
| Item  18.                                       | Financial  Statements                                                         |   |
| Item 19.                                        | Exhibits                                                                      |   |
|                                            |                                                                          |   |
| ANNEX A                                         |                                                                          |   |
|                                                 |                                                                               |  |  |

 

i

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# **INCORPORATION OFCERTAIN DOCUMENTS BY REFERENCE**

 

With respect to our obligations as co-registrant ofPDVSA Finance Ltd.’s 6.650% Notes due 2006, 9.375% Notes due 2007, 6.800% Notesdue 2008, 9.750% Notes due 2010, 8.500% Notes due 2012, 7.400% Notes due 2016,9.950% Notes due 2020 and 7.500% Notes due 2028 (collectively, the “PDVSAFinance Notes”), PDVSA Finance Ltd.’s annual report on Form 20-F for theyear ended December 31, 2003, as first filed with the U.S. Securities andExchange Commission (Commission file No. 333-09678) on October 7,2005 is incorporated herein by reference.

 

# **FACTORS AFFECTINGFORWARD-LOOKING STATEMENTS**

#  

This annual report on Form 20-F contains “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended.  Specifically, certainstatements under the caption “Item 4.B. Business overview” and under thecaption “Item 5.  Operating and FinancialReview and Prospects” relating to the expected results of exploration, drillingand production activities, refining processes, petrochemicals, gas, Orimulsion®and coal activities, and related capital expenditures and investments, theexpected results of joint venture projects, the anticipated demand for new orimproved products, environmental compliance and remediation and related capitalexpenditures, sales, taxes, dividends and contributions to Venezuela, areforward-looking statements.  Words suchas “anticipate,” “estimate,” “prospect” and similar expressions are used toidentify forward-looking statements. Forward-looking statements are subject to risks and uncertaintiesrelated to Venezuelan and international markets, inflation, the availability ofcontinued access to capital markets and financing on favorable terms,regulatory compliance requirements, changes in import controls or importduties, levies or taxes and changes in prices or demand for our products as aresult of actions of our competitors or economic factors.  Those statements are also subject to therisks of costs and anticipated performance capabilities of technology, andperformance by third parties of their contractual obligations.  Exploration activities are subject to risksarising from the inherent difficulty of predicting the presence, yield andquality of hydrocarbon deposits, as well as unknown or unforeseen difficultiesin extracting, transporting or processing any hydrocarbons found or doing so onan economic basis.  Should one or more ofthese risks or uncertainties materialize, actual results may vary materiallyfrom those estimated, anticipated or projected. Specifically, but without limitation, capital costs could increase,projects could be delayed, and anticipated improvements in capacity orperformance may not be fully realized. Although we believe that the expectations reflected by suchforward-looking statements are reasonable based on information currentlyavailable, readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date of this annual report.  We undertake no obligation to publiclyrelease any revision to these forward-looking statements to reflect events orcircumstances after the date of this annual report.

 

The annual report on Form 20-F of PDVSA FinanceLtd., our wholly-owned subsidiary, for the year ended December 31, 2003incorporated by reference herein also contains forward-looking statements.  For a discussion of the factors affectingthese statements contained in PDVSA Finance’s annual report, see “FactorsAffecting Forward-Looking Statements” on page 1 thereof.

 

ii

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*As used in this annual report, references to “dollars”or “$” are to the lawful currency of the United States and references to “bolivars”or “Bs” are to the lawful currency of Venezuela.  A unit conversion table and a glossary ofcertain oil and gas terms, including abbreviations for certain units, used inthis annual report are contained in Annex A. When used in this annual report, the term “Petróleos de Venezuela”refers to Petróleos de Venezuela, S.A. and the terms “we,” “our,” “us,”  “the Company” and “PDVSA” refer to Petróleos deVenezuela, S.A. and its consolidated subsidiaries.*

 

**Other miscellaneous terms**

 

Unless the context indicates otherwise, the followingterms have the meanings shown below:

 

“Amerada Hess” – Amerada HessCorporation

 

“BCV” – Banco Central deVenezuela

 

“Bitor” – Bitúmenes Orinoco, S.A.

 

“BOPEC” – Bonaire Petroleum Corporation N.V.

 

“BORCO” – The Bahamas Oil Refining CompanyInternational Limited

 

“BP” – British Petroleum

 

“BP RP” – British Petroleum Refining &Petrochemical GmbH

 

“Carbozulia” – Carbones delZulia, S.A.

 

“Chalmette Refining” – Chalmette Refining, L.L.C.

 

“ChevronTexaco” – ChevronTexacoCorporation

 

“CIED” – Centro Internacional deEducación y Desarrollo

 

“CITGO” – CITGO PetroleumCorporation

 

“CITGO Latin America” – CITGOInternational Latin America, Inc.

 

“ConocoPhillips” – ConocoPhillips

 

“CVP” – Corporación Venezolanadel Petróleo, S.A.

 

“Deltaven” – Deltaven, S.A.

 

“ExxonMobil” – ExxonMobilCorporation

 

“FEM” – Fondo para laEstabilización Macroeconómica (Macroeconomic Stabilization Fund)

 

“FONDESPA” – Fondo para elDesarrollo Económico y Social del País

 

“Fortum Oil and Gas” – Fortum Oil and Gas OY

 

“Hovensa” – Hovensa, L.L.C.

 

“ENI” – Eni B.V.

 

1

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“Intevep” – Intevep, S.A.

 

“Isla Refinery” – Refinería Isla (Curaçao), S.A.

 

“Lyondell” – Lyondell Petrochemical Corporation

 

“LYONDELL-CITGO” – LYONDELL-CITGO Refining Company,L.P.

 

“Merey Sweeny” – Merey Sweeny, L.P.

 

“Neste Oil Corporation” – Neste Oil

 

“Nynäs” – AB Nynäs Petroleum

 

“OPEC” – Organization of Petroleum Exporting Countries

 

“PDV America” – PDV America, Inc.

 

“PDV Chalmette” – PDV Chalmette, Inc.

 

“PDV Europa” – PDV Europa B.V.

 

“PDV Holding” – PDV Holding, Inc.

 

“PDV Marina” – PDV Marina, S.A.

 

“PDVMR” – PDV Midwest Refining, L.L.C.

 

“PDV VI” – PDVSA Virgin Island, Inc.

 

“PDVSA Cerro Negro” – PDVSA CerroNegro, S.A.

 

“PDVSA Finance” – PDVSA FinanceLtd.

 

“PDVSA Gas” – PDVSA Gas, S.A.

 

“PDVSA Petróleo” – PDVSAPetróleo, S.A.

 

“PDVSA Sincor” – PDVSA Sincor,S.A.

 

“PDVSA-P&G” – PDVSA Petróleoy Gas, S.A.

 

“Pequiven” – Petroquímica deVenezuela, S.A.

 

“Petrozuata” – Petrolera Zuata,C.A.

 

“Phillips Petroleum” – Phillips Petroleum Corporation

 

“Ruhr” – Ruhr Oel GmbH

 

“SEC” – Securities and Exchange Commission

 

“Statoil” – Statoil Sincor AS

 

“Total Fina” – Total FinaVenezuela, S.A.

 

2

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“Veba Oel” – Veba Oel AG

 

“Venezuela” – The Bolivarian Republic of Venezuela

 

3

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# **PART I**

#  

## **Item 1.**            Identity of Directors, SeniorManagement and Advisers

## ** **

Not Applicable.

 

## **Item 2.**            Offer Statistics and ExpectedTimetable

## ** **

Not Applicable.

 

## **Item 3.**            Key Information

## ** **

### **3.A**          Selected financial data

### ** **

The selected data presented below for, and as of theend of, each of the years in the five-year period ended December 31, 2003,are derived from the audited consolidated financial statements of PDVSA.  See “Item 18. Financial Statements.”

 
| ** **                                                                                     | ** ** | **At or for the Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2003**                                       | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
| ** **                                                                                     | ** ** | **($ in millions)**                       | ** ** |
| **Income  Statement Data:**                                                                    |       |                                           |       |   |   |   |   |   |   |   |   |
| Sales of crude  oil and products                                                               |       |                                           |       |   |   |   |   |   |   |   |   |
| Exports and  international markets                                                             |       | 44,178                                         |       | 39,875 |   | 42,682 |   | 49,780 |   | 30,369 |   |
| In Venezuela                                                                                   |       | 961                                            |       | 1,236 |   | 1,701 |   | 2,230 |   | 1,450 |   |
| Petrochemical  and other sales                                                                 |       | 1,071                                          |       | 1,201 |   | 1,403 |   | 1,224 |   | 781 |   |
| Net sales                                                                                      |       | 46,210                                         |       | 42,312 |   | 45,786 |   | 53,234 |   | 32,600 |   |
| Equity in  earnings of non-consolidated investees                                              |       | 379                                            |       | 268 |   | 464 |   | 446 |   | 48 |   |
| Total revenues                                                                                 |       | 46,589                                         |       | 42,580 |   | 46,250 |   | 53,680 |   | 32,648 |   |
| Total costs and  expenses                                                                      |       | 41,400                                         |       | 39,073 |   | 37,977 |   | 40,029 |   | 26,636 |   |
| Operating income                                                                               |       | 5,189                                          |       | 3,507 |   | 8,273 |   | 13,651 |   | 6,012 |   |
| Financing  expenses                                                                            |       | 627                                            |       | 763 |   | 509 |   | 672 |   | 662 |   |
| Income before  income taxes and minority interests and cumulative effect of accounting  change |       | 4,562                                          |       | 2,744 |   | 7,764 |   | 12,979 |   | 5,350 |   |
| Provision for  income taxes                                                                    |       | (1,602                                         | )          | (149 | ) | (3,766 | ) | (5,748 | ) | (2,521 | ) |
| Minority  interests                                                                            |       | (6                                             | )          | (5 | ) | (5 | ) | (15 | ) | (11 | ) |
| Income before  cumulative effect of accounting change                                          |       | 2,954                                          |       | 2,590 |   | 3,993 |   | 7,216 |   | 2,818 |   |
| Cumulative  effect of accounting change for the cost of asset retirement obligations           |       | (234                                           | )          | — |   | — |   | — |   | — |   |
| Net income                                                                                     |       | 2,720                                          |       | 2,590 |   | 3,993 |   | 7,216 |   | 2,818 |   |
| **Balance  Sheet Data:**                                                                       |       |                                           |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                                                     |       | 2,938                                          |       | 1,703 |   | 925 |   | 3,257 |   | 1,079 |   |
| Notes and  accounts receivable                                                                 |       | 4,955                                          |       | 3,515 |   | 3,280 |   | 4,435 |   | 3,820 |   |
| Total assets                                                                                   |       | 55,355                                         |       | 54,939 |   | 57,200 |   | 57,600 |   | 49,990 |   |
| Current portion  of long-term debt(1)                                                          |       | 750                                            |       | 1,817 |   | 1,000 |   | 596 |   | 910 |   |
| Long-term debt  and capital lease obligations (excluding current portion).                     |       | 6,265                                          |       | 6,426 |   | 7,544 |   | 7,187 |   | 7,892 |   |
| Stockholder’s  equity                                                                     |       | 37,418                                         |       | 37,288 |   | 37,098 |   | 37,932 |   | 32,894 |   |
| Capital stock                                                                                  |       | 39,094                                         |       | 39,094 |   | 39,094 |   | 39,094 |   | 39,094 |   |
| **Other  Financial Data:**                                                                     |       |                                           |       |   |   |   |   |   |   |   |   |
| Net cash  provided by operating activities                                                     |       | 5,746                                          |       | 4,880 |   | 6,965 |   | 10,285 |   | 4,633 |   |
| Net cash used in  investing activities                                                         |       | (902                                           | )          | (1,226 | ) | (5,263 | ) | (5,360 | ) | (3,326 | ) |
| Net cash used in  financing activities                                                         |       | (3,609                                         | )          | (2,836 | ) | (4,034 | ) | (2,747 | ) | (913 | ) |
| Capital  expenditures                                                                          |       | 1,969                                          |       | 2,743 |   | 3,781 |   | 3,185 |   | 3,041 |   |
| Depreciation and  depletion                                                                    |       | 2,824                                          |       | 3,038 |   | 2,624 |   | 3,001 |   | 2,821 |   |
| Debt/Equity(2)                                                                                 |       | 19                                             | %          | 22 | % | 23 | % | 21 | % | 27 | % |
| Total payments  to shareholder                                                                 |       | 9,585                                          |       | 9,474 |   | 12,097 |   | 11,641 |   | 6,549 |   |
| Dividends(3) (5)                                                                          |       | 2,326                                          |       | 2,652 |   | 4,862 |   | 1,732 |   | 1,719 |   |
| Production tax                                                                                 |       | 5,944                                          |       | 5,911 |   | 3,792 |   | 4,954 |   | 2,654 |   |
| Income taxes(4)                                                                                |       | 1,315                                          |       | 911 |   | 3,443 |   | 4,955 |   | 2,176 |   |

 

4

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(1)           Excludes current portion ofcapital lease obligations, which amounted to $20 million, $30 million, $62million, $122 million and $117 million in 2003, 2002, 2001, 2000 and 1999,respectively.

(2)           Calculated as total debt(long-term debt, including current portion of long-term debt and capitalleases) divided by stockholder’s equity.

(3)           During 1999, special taxrecovery certificates, or CERTs, amounting to $1,291 million were used to paydividends.

(4)           During 2001, 2000 and 1999,we used CERTs amounting to $84 million, $255 million and $22 million,respectively, to pay income taxes.

(5)           During 2003, $251million oftrade notes receivable were distributed as a dividend.

 
| ** **                                                                        | ** ** | **At or for the Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2003**                                       | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
| ** **                                                                        | ** ** | **(MBPD, unless otherwise indicated)**         | ** ** |
| **Operating  Data:**                                                              |       |                                           |       |   |   |   |   |   |   |   |   |
| **Production**                                                                    |       |                                           |       |   |   |   |   |   |   |   |   |
| Condensate                                                                        |       | 22                                             |       | 46 |   | 48 |   | 50 |   | 43 |   |
| Light crude oil  (API gravity of 30° or more)                                |       | 727                                            |       | 774 |   | 1,135 |   | 1,174 |   | 1,189 |   |
| Medium crude oil  (API gravity of between 21° and 30°)                  |       | 914                                            |       | 962 |   | 1,018 |   | 1,047 |   | 1,095 |   |
| Heavy crude oil  (API gravity of less than 21°)                              |       | 788                                            |       | 877 |   | 893 |   | 814 |   | 623 |   |
| Total crude oil                                                                   |       | 2,451                                          |       | 2,659 |   | 3,094 |   | 3,085 |   | 2,950 |   |
| Liquid petroleum  gas                                                             |       | 144                                            |       | 173 |   | 173 |   | 167 |   | 177 |   |
| Total crude oil  and liquid petroleum gas                                         |       | 2,595                                          |       | 2,832 |   | 3,267 |   | 3,252 |   | 3,127 |   |
| Net natural gas  (MMCFD)(1)                                                       |       | 3,432                                          |       | 3,672 |   | 4,093 |   | 3,979 |   | 3,766 |   |
| Total crude oil,  liquid petroleum gas and net natural gas (BOE)(2)               |       | 3,187                                          |       | 3,464 |   | 3,973 |   | 3,938 |   | 3,776 |   |
| **Sales  volumes exported**                                                       |       |                                           |       |   |   |   |   |   |   |   |   |
| Exports of crude  oil with 30° or greater API                                |       | 657                                            |       | 672 |   | 659 |   | 716 |   | 1,010 |   |
| Exports of crude  oil with less than 30° API                                 |       | 991                                            |       | 1,092 |   | 1,406 |   | 1,282 |   | 913 |   |
| Exports of  refined petroleum products                                            |       | 502                                            |       | 647 |   | 697 |   | 825 |   | 861 |   |
| Total                                                                             |       | 2,150                                          |       | 2,411 |   | 2,762 |   | 2,823 |   | 2,784 |   |
| **Average  export prices per unit ($ per barrel)**                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Exports of crude  oil with 30° or greater API                                |       | $                                              | 27.16      |   | $ | 23.46 |   | $ | 22.47 |   | $ | 28.20 |   | $ | 17.08 |   |
| Exports of crude  oil with less than 30° API                                 |       | $                                              | 22.56      |   | $ | 20.24 |   | $ | 17.29 |   | $ | 23.12 |   | $ | 13.45 |   |
| Exports of  refined petroleum products                                            |       | $                                              | 26.53      |   | $ | 24.23 |   | $ | 23.94 |   | $ | 28.40 |   | $ | 17.80 |   |
| Weighted average  export prices(3)                                                |       | $                                              | 24.89      |   | $ | 21.94 |   | $ | 20.21 |   | $ | 25.91 |   | $ | 16.04 |   |
| **Average  production costs ($ per BOE)**                                    |       |                                           |       |   |   |   |   |   |   |   |   |
| Production cost  per BOE of production, excluding operating service agreements(4) |       | $                                              | 2.06       |   | $ | 2.42 |   | $ | 2.17 |   | $ | 2.22 |   | $ | 2.00 |   |
| Production cost  per BOE of production (4)                                        |       | $                                              | 3.85       |   | $ | 3.92 |   | $ | 3.38 |   | $ | 3.48 |   | $ | 2.72 |   |
| Depreciation and  depletion cost per BOE of production                            |       | $                                              | 0.53       |   | $ | 0.54 |   | $ | 0.38 |   | $ | 0.46 |   | $ | 0.37 |   |
|                                                                              |       |                                           |       |   |   |   |   |   |   |   |   |
| **Proved  reserves(5)**                                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Crude oil (MMB)                                                                   |       |                                           |       |   |   |   |   |   |   |   |   |
| Condensate                                                                        |       | 1,919                                          |       | 1,900 |   | 1,723 |   | 1,772 |   | 1,847 |   |
| Light crude oil  (API gravity of 30° or more)                                |       | 10,078                                         |       | 10,012 |   | 10,345 |   | 10,244 |   | 10,258 |   |
| Medium crude oil  (API gravity of between 21° and 30°)                  |       | 12,340                                         |       | 12,450 |   | 12,891 |   | 12,804 |   | 12,195 |   |
| Heavy crude oil  (API gravity of between 11° and 21°)                   |       | 17,617                                         |       | 17,414 |   | 17,266 |   | 17,177 |   | 16,861 |   |
| Extra-heavy  crude oil (API gravity of less than 11°)(6)                     |       | 35,186                                         |       | 35,381 |   | 35,558 |   | 35,688 |   | 35,701 |   |
| Total crude oil                                                                   |       | 77,140                                         |       | 77,157 |   | 77,783 |   | 77,685 |   | 76,862 |   |
| Of which,  relating to Operating Service Agreements(7)                            |       | 5,446                                          |       | 5,501 |   | 5,600 |   | 5,479 |   | 5,450 |   |
| Natural gas  (BCF)(8)                                                             |       | 150,043                                        |       | 147,109 |   | 148,295 |   | 147,585 |   | 146,611 |   |
| Proved reserves  of crude oil and natural gas (MMBOE) (6)                         |       | 103,009                                        |       | 102,521 |   | 103,351 |   | 103,131 |   | 102,140 |   |
| Remaining  reserve life of proved crude oil reserves (years)(9)                   |       | 74                                             | x          | 70 | x | 64 | x | 64 | x | 70 | x |
| **Net  crude oil refining capacity (MBPD) (10)**                                  |       |                                           |       |   |   |   |   |   |   |   |   |
| Venezuela  (including Isla Refinery)                                              |       | 1,628                                          |       | 1,628 |   | 1,628 |   | 1,620 |   | 1,620 |   |
| United States                                                                     |       | 1,205                                          |       | 1,205 |   | 1,205 |   | 1,198 |   | 1,224 |   |
| Europe                                                                            |       | 259                                            |       | 252 |   | 252 |   | 252 |   | 252 |   |
| Total                                                                             |       | 3,092                                          |       | 3,085 |   | 3,085 |   | 3,070 |   | 3,096 |   |

 

5

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(1)           Amounts indicated are net ofnatural gas used for reinjection purposes.

(2)           Natural gas is converted tobarrels of oil equivalent (BOE) at a ratio of 5.8 thousand cubic feet ofnatural gas per one barrel of crude oil.

(3)           Weighted average sales priceof crude oil, refined petroleum products and liquid petroleum gas exports.

(4)           Calculated by dividing totalcosts (excluding depreciation and depletion) and expenses of crude oil, naturalgas and liquid natural gas producing activities by total crude oil, liquidpetroleum gas and net natural gas (BOE) produced.

(5)           Proved reserves include bothproved developed and undeveloped reserves.

(6)           Proved reserves ofextra-heavy oil located in the Orinoco Belt have a low development grade.  Of the total gross proved reserves to beexploited under our Orinoco Belt project at December 31, 2003, approximately10,483 MMB reserves are being developed under four association agreements inwhich PDVSA has an equity interest of less than 50%.  See “Item 4.B Business overview—InitiativesInvolving Private Sector Participation—Orinoco Belt Extra-Heavy Crude Oil Projects.”

(7)           Includes portion of provedcrude oil reserves in fields relating to operating service agreements as of December 31of the year in which each of such agreements went into effect.  Such agreements may not necessarily result inthe exploitation of 100% of these reserves during their term.  See “Item 4.B Business overview—InitiativesInvolving Private Sector Participation—Operating Service Agreements.”

(8)           Includes 12,427 BCF, 12,454BCF, 12,476 BCF, 12,505 BCF and 12,400 BCF in each of 2003, 2002, 2001, 2000and 1999, respectively, associated with extra-heavy crude oil reserves.

(9)           Based on crude oil productionfrom the top of wells for each period and total proved crude oil reserves atthe end of each period.  Proved reservesof extra-heavy crude oil are substantially undeveloped.  Proved reserves of extra-heavy crude oil inthe Orinoco Belt are being developed in association with third parties.  See “Item 4.B Business overview—InitiativesInvolving Private Sector Participation—Orinoco Belt Extra-Heavy Crude OilProjects.”

(10)         Amounts represent PDVSA’sinterest in the refining capacity of all refineries in which it holds an equityor leasehold interest.  See “Item 4.BBusiness overview—Refining and Marketing.”

 

**Exchange rates**

 

The following table sets forth certain informationconcerning the exchange rate of the bolivar to the dollar based on daily ratesof exchange established by the BCV pursuant to a foreign exchange agreementbetween Venezuela’s Ministry of Finance and the BCV.  See notes 2, 3 and 22(b) to our consolidatedfinancial statements, included under “Item 18. Financial Statements.”

 
| ** **                           | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **Period End**                   | ** ** | **Average (1)** | ** ** | **High** | ** ** | **Low** | ** ** |
| 1999                                 |       | 647.53                           |       | 609.29 |   |   |   |   |   |
| 2000                                 |       | 698.23                           |       | 679.80 |   |   |   |   |   |
| 2001                                 |       | 770.09                           |       | 722.01 |   |   |   |   |   |
| 2002                                 |       | 1,403.00                         |       | 1,163.91 |   |   |   |   |   |
| 2003                                 |       | 1,600.00                         |       | 1,611.32 |   |   |   |   |   |
| 2004(2)                              |       | 1,920.00                         |       | 1,893.00 |   |   |   |   |   |
| February, 2005                       |       |                             |       |   |   | 1,920.00 |   | 1,915.20 |   |
| March 2005—August, 2005(3) |       |                             |       |   |   | 2,150.00 |   | 2,144.60 |   |

 

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(1)           Represents the averageexchange rate for each full month during the year, calculated based on theaverage daily exchange rate established by the BCV pursuant to the foreignexchange agreement referred to above.

 

(2)           The exchange rate for thesale and purchase of the bolivar relative to the dollar was fixed by theVenezuelan government pursuant to a new foreign exchange regime of Bs. 1,920.00to $1 and Bs. 1,915.20 to $1, respectively, commencing February 7, 2004.

 

(3)           The exchange rate for thesale and purchase of the bolivar relative to the dollar was fixed by theVenezuelan government pursuant to a new foreign exchange regime at Bs. 2,150.00to $1 and Bs. 2,144.60 to $1, respectively, commencing March 2, 2005.

 

On February 13, 2002, the Venezuelan governmentand the BCV adopted a floating exchange rate system in place of the bandsystem.  On January 21, 2003, theVenezuelan government and the BCV adopted temporary measures to restrict theconvertibility of the Bolivar, and on February 5, 2003, the Venezuelangovernment

 

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established a foreign exchange regime, setting the exchange rates forthe sale and purchase of foreign currency at Bs. 1,600.00 to $1 and Bs.1,596.00 to $1, respectively.  It alsocreated the Commission for the Administration of Foreign Exchange (CADIVI) andestablished rules for the administration and control of foreigncurrency.  On February 7, 2004 a newforeign exchange rate for the sale and purchase of foreign currency wasestablished at Bs. 1,920.00 to $1 and Bs. 1,915.20 to $1, respectively.  On March 2, 2005 a new foreign exchangerate for the sale and purchase of foreign currency was established at Bs.2,150.00 to $1 and Bs. 2,144.60 to $1, respectively.

 

Notwithstanding the new regime, the foreign exchangeagreement between Venezuela’s Ministry of Finance and the BCV containsprovisions that are specific to PDVSA, which have been in effect since1982.  Among other things, the foreignexchange agreement effectively exempts PDVSA and its affiliates from theexchange controls described above, up to a specified dollar limit.  As a result, we believe that the exchangecontrols will not have a significant impact on PDVSA’s operations.

 

**3.D**          Risk factors

 

**Ourbusiness depends substantially on international prices for oil and oil productsand such prices are volatile.  A decreasein such prices could materially and adversely affect our business.**

 

PDVSA’s business, financial condition, results ofoperations and prospects depend largely on international prices for crude oiland refined petroleum products.  Pricesof oil and refined petroleum products are cyclical and highly volatile, andhave, historically, fluctuated widely due to various factors that are beyondour control, including:

 

•      changesin global supply and demand for crude oil and refined petroleum products;

 

•      politicalevents in major oil producing and consuming nations;

 

•      agreementsamong OPEC members;

 

•      theavailability and price of competing products;

 

•      actionsof commodity markets participants and competitors;

 

•      internationaleconomic trends;

 

•      technologicaladvancements and developments in the industry;

 

•      currencyexchange fluctuations; and

 

•      inflation.

 

Historically, OPEC members have entered intoagreements to reduce their production of crude oil.  Such agreements have sometimes increasedglobal crude oil prices by decreasing the global supply of crude oil.  Venezuela is a party to and has complied withsuch production agreement quotas, and we expect that Venezuela will continue tocomply with such agreements in the future. Since 1998, OPEC’s production quotas have contributed to substantialincreases in international crude oil prices.

 

Any reduction in our crude oil production or exportactivities that could occur as a result of changes in OPEC’s production quotoasor a decline in the prices of crude oil and refined petroleum products for asubstantial period of time may materially and adversely affect our results ofoperations, cash flows and financial results.

 

**Risks related to the ownership, regulationand supervision of PDVSA.**

 

The Bolivarian Republicof Venezuela is the sole owner of Petróleos de Venezuela.  The Venezuelan government, through theMinistry of Energy and Petroleum, establishes national petroleum policies andalso

 

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regulates andsupervises PDVSA’s operations.  ThePresident of Venezuela appoints the president of Petróleos de Venezuela and themembers of its board of directors by executive decree.  Since November 2004, the Minister ofEnergy and Petroleum has also served as our President.  However, the Bolivarian Republic of Venezuelais not legally liable for the obligations of Petróleos de Venezuela, includingour guarantees of indebtedness of our subsidiaries, or the obligations of oursubsidiaries.

 

Petróleos de Venezuela has been operated as anindependent commercial entity since our formation; however, recent changes tothe Venezuelan law regarding the oil sector impose significant socialcommitments upon PDVSA, which will affect our saving capacity, and, indirectly,our commercial affairs.  Given that PDVSAis controlled by the Venezuelan government, we cannot assure you that theVenezuelan government will not in the future impose further material commitmentsupon PDVSA or intervene in our commercial affairs in a manner that willadversely affect our business.  Forinstance, through Petróleos de Venezuela, the government could cause PDVSAPetróleo to reduce production or limit future capital expenditure to levelsthat would limit PDVSA Petróleo’s ability to generate the necessary flow ofreceivables to support payments on our indebtedness.  In addition, despite recent precautions takenby the Company, we cannot assure you that opponents of the Venezuelan governmentwill not seek to disrupt our activities through actions such as the work stoppages thatoccurred in late 2002 and early 2003, which in PDVSA’s opinion constitutedsabotage.

 

**We do not own any of the hydrocarbon reservesthat we develop and operate.**

 

Under Venezuelan law, the hydrocarbon reserves that wedevelop and operate belong to Venezuela. The exploration of these hydrocarbon reserves are reserved toVenezuela.  PDVSA was formed tocoordinate, monitor and control operations related to Venezuela’s hydrocarbonreserves.

 

While Venezuelan law requires that Venezuela retainexclusive ownership of PDVSA, it does not require the country to continue toconduct its crude oil exploration and exploitation activities through us.  If the government elects to conduct itshydrocarbon activities other than through us, our operations will be materiallyand adversely affected.  We can offer noassurance that changes in Venezuelan law or the implementation of policies bythe Venezuelan government will not adversely affect our operations.  See also “Item 7.A Major Shareholders andRelated Party Transactions.”

 

**Our business requires substantial capitalexpenditures.**

 

The exploration and development of hydrocarbonreserves, production, processing and refining and the maintenance of machineryand equipment require substantial capital investments.  We must continue to invest capital tomaintain or to increase the number of hydrocarbon reserves that we operate andthe amount of crude oil that we produce and process.  We cannot assure you that we will maintainour production levels or generate sufficient cash flows or that we will haveaccess to sufficient investments, loans or other financing alternatives tocontinue our refining, exploration and development activities at or above ourpresent levels.

 

**We are subject to production, equipment,transportation and other risks that are common to oil and gas companies.**

 

As an integrated oil and gas company, we are exposedto production, equipment and transportation risks that are common to oil andgas companies, including fluctuations in production volume due to changes inreserve levels, production accidents, mechanical difficulties, adverse naturalconditions, unforeseen production costs, condition of pipelines and thevulnerability of other modes of transportation and the adequacy of ourequipment and production facilities.  See“Item 4.B Business overview – Operations.”

 

These risks may lower our production levels, increaseour production costs and expenses, or cause damage to our property or personalinjury to our employees or others.  Wemaintain insurance to cover certain losses and exposure to liability.  However, consistent with industry practice,we are not fully insured against the risks described above.  These risks may materially and adverselyaffect our operations and financial results. We cannot assure you that our insurance coverage is sufficient to coverall of our losses or our exposure to liability that may result from theserisks.

 

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## **Item 4.**            Information on the Company

## ** **

### **4.A**          History and development of the company

### ** **

PDVSA is the national oil and gas company ofVenezuela.  PDVSA was formed by theVenezuelan government in 1975 pursuant to the Organic Law Reserving to theState, the Industry and Commerce of Hydrocarbons (the “Nationalization Law”),and its operations are supervised by Venezuela’s Ministry of Energy andPetroleum (formerly the Ministry of Energy and Mines).  Through its subsidiaries, PDVSA supervises,controls and develops the petroleum, petrochemical, gas, coal and Orimulsion®industries in Venezuela.  Theseactivities are complemented by PDVSA’s operating companies established abroad,which are responsible for refining and marketing activities in North America,Europe and the Caribbean.  See also “Item7.A Major Shareholders and Related Party Transactions.”

 

PDVSA’s oil-related activities are governed by theOrganic Hydrocarbons Law, which came into effect in January 2002.  PDVSA’s gas-related activities are regulatedby the Organic Law of Gas Hydrocarbons of September 1999 and itsRegulations dated June 2000.

 

Since its formation, PDVSA has been operated as acommercial entity, vested with commercial and financial autonomy.  PDVSA and its domestic subsidiaries areorganized under the Commercial Code of Venezuela, which sets forth the basiccorporate legal framework applicable to all Venezuelan companies.

 

Furthermore, the National Constitution of theBolivarian Republic of Venezuela and the Organic Hydrocarbons Law mandates thatPDVSA contribute to social programs developed and administered by theVenezuelan government.  For example,PDVSA and its subsidiaries Palmeven and CVP contribute management as well asfinancial resources in support of social programs related to education,healthcare, job creation, and subsidized food distribution.

 

PDVSA is domiciled in Venezuela and its registeredoffice is located at Avenida Libertador, La Campiña, Apdo. 169, Caracas 1010-A,Venezuela, and our telephone number is 011-58-212-708-4111.  Our website is: www.pdvsa.com.  Information contained on our website is notincorporated by reference into this annual report.

 

### **4.B**          Business overview

### ** **

PDVSA is engaged in various aspects of the petroleumindustry, including:

 
| • |   | the exploration, production and upgrading of crude  oil and natural gas or upstream operations;                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| • |   | the exploration, production of natural gas from  offshore sources, including the possibility for LNG export;                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| • |   | the refining, marketing and transportation of crude  oil and refined petroleum products and the processing, marketing and  transporation of natural gas, or downstream operations;                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| • |   | the production and marketing of petrochemicals. For  our main petrochemical business unit “Pequiven,” the Venezuelan government  decided in June 2005 to transfer the activities, assets and shares held  by PDVSA in Pequiven (the company’s shareholder) to the Ministry of Energy  and Petroleum and to submit this transfer for approval by the Shareholder of  PDVSA. The transfer is subject to the reform of the Petrochemical Act and the  resolution of other legal and administrative issues; |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| • |   | the development and marketing of Orimulsion®,  Venezuela’s derivative of heavy and extra-heavy crude, which will be produced  until expiration of the current supply agreement.                                                                                                                                                                                                                                                                                                                                   |

 

Our crude oil and natural gas reserves and ourupstream operations are located in Venezuela, while our downstream operationsare also located in Venezuela as well as the Caribbean, North America, andEurope.

 

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PDVSA has been structured in three verticallyintegrated geographic divisions to manage its upstream operations,including:  exploration, production, andupgrading.  These divisions are:  Eastern, Southern and the WesternDivision.  Since August 2003, CVP, asubsidiary, assumed from PDVSA Petróleo the management of the third partycontracts (operating and profit sharing agreements), the Orinoco Belt jointventures and ultimately offshore natural gas licenses.

 

Our downstream operations include:

 

•      operationof refineries, marketing of crude oil and refined petroleum products inVenezuela under the PDV brand name and under the CITGO brand name for theeastern and midwestern regions of the United States;

 

•      conductof most of our business in the Caribbean through the Isla Refinery (a refineryand storage terminal which we lease in Curaçao);

 

•      operationof the storage terminals in Bonaire and the Bahamas in the Caribbean;

 

•      ownershipof equity interests in three refineries (one 50%-owned by ExxonMobil, one58.75%-owned by Lyondell and one 50%-owned by Amerada Hess) and in acoker/vacuum crude distillation unit (50%-owned by ConocoPhillips) throughjoint ventures in the United States;

 

•      ownershipof equity interests in eight refineries and market petroleum products inGermany, United Kingdom, Belgium and Sweden through two joint ventures (one50%-owned by BP RP and one 50%-owned by Neste Oil, which currently owns FortumOil and Gas);

 

•      processing,marketing and transport of all natural gas in Venezuela; and

 

•      conductof shipping activities.

 

In the United States, we conduct our crude oilrefining operations and refined petroleum product marketing through our whollyowned subsidiary, PDV Holding, which owns through PDV America, 100% ofCITGO.  CITGO also owns 41.25% ofLyondell-Citgo Refining LP.  CITGOrefines, markets and transports gasoline, diesel fuel, jet fuel,petrochemicals, lubricants, asphalt and other refined petroleum products in theUnited States.  CITGO’s transportationfuel customers include primarily CITGO branded independent wholesale marketers,major convenience store chains and airlines located mainly along the east ofthe Rocky Mountains.  Asphalt isgenerally marketed to independent paving contractors on the East Gulf and theMidwest Coasts of the United States. Lubricants are sold primarily in the United States to independentmarketers, mass marketers and industrial customers.  During 2003 CITGO sold lubricants, gasoline,and distillates in various Latin American markets, including Puerto Rico,Brazil, Ecuador, Chile, Argentina, Dominican Republic, Mexico, Panama andGuatemala, however, these activities were recently transferred to another PDVSAaffiliate.  Petrochemical feedstocks andindustrial products are sold to various manufacturers and industrial companiesacross the United States.  Petroleum cokeis sold essentially in international markets. In 2004, CITGO sold a total of 26,811 millions gallons of petroleumproducts compared to 27,704 millions in the year 2003.

 

PDV Holding owns 50% of Chalmette Refining LLC(through PDV Chalmette) and 50% of Merey Sweeny L.P. (through PDV Sweeny).  These joint ventures with Exxon Mobil andConocoPhillips, respectively, process crude oil in the United States.  PDVSA also owns 50% of Hovensa, a jointventure with Amerada Hess that processes crude oil in the U.S. VirginIslands.  We are, through our U.S.subsidiaries, one of the largest refiners of crude oil in the United States,based on our aggregate net ownership interest in crude oil refining capacity atDecember 2004, equivalent to 1,205 MBPD.

 

Within Europe, we conduct our crude oil refining andrefined petroleum product activities through PDV Europa, which owns our 50%interest in Ruhr, a company based in Germany and jointly owned with BP.  PDVSA also owns a 50% interest in Nynäs, acompany with operations in Belgium, Sweden and the United Kingdom and jointlyowned with Neste Oil, which currently owns Fortum Oil and Gas.  Through Ruhr, we refine crude oil and

 

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market and transport gasoline, diesel fuel, heating oil,petrochemicals, lubricants, asphalt and other refined petroleum products.  Through Nynäs, we refine crude oil and marketand transport asphalt, specialty products, lubricants and other refinedpetroleum products.

 

In Venezuela we have been conducting our petrochemicalactivities mainly through Pequiven, which has three petrochemical complexes inVenezuela and 17 joint ventures with private sector partners.  However, as previously discussed, theVenezuelan Government decided in June 2005 to transfer Pequiven to theMinistry of Energy and Petroleum and Pequiven is currently evaluating the saleand transfer of its 17 joint ventures. Nevertheless, PDVSA will supply the feedstocks required by Pequiven. Seealso “Item 4.B Business overview – Marketing – Marketing in Venezuela –Petrochemicals.”

 

The gas business is conducted by the previouslymentioned divisions (east and west exploration and production divisions), whilethe gas downstream operations and LNG segments are conducted by PDVSA Gas.  CVP manages offshore gas natural projects.

 

Since 1997, Deltaven, a local retailing subsidiary,has marketed and distributed retail gasoline and other refined petroleumproducts in Venezuela, under the PDV brand. Deltaven also is promoting the development of the commercialinfrastructure and services for retail clients together with the privatesector.

 

Furthermore, PDVSA Finance was established in 1998 toserve as our principal vehicle for corporate financing through the issuance ofunsecured debt.

 

Another important subsidiary is Intevep, through whichwe manage our research and development activities.  PDVSA also has an educational center, CIED,which is responsible for the training and development of our personnel.  CIED is currently under a restructuringprocess to better suit current PDVSA’s needs.

 

See “Item 4.C Organizational structure” for a list ofour significant subsidiaries.

 

According to a comparative study published byPetroleum Intelligence Weekly on December 13, 2004, based on a combinationof operating criteria and other data for 2003, such as: reserves, production,refining capacity and refined petroleum product sales, PDVSA is the world’sfourth largest vertically integrated oil and gas company, ranked fifth in theworld in production, fifth in proved reserves of crude oil, fourth in refiningcapacity and eighth in product sales. Venezuela has been exporting crude oil, primarily to the United States,continously since 1914.  At the end of2003, we exported to the US market approximately 1,183 MBPD of crude oil andpetroleum products and by December 2004, we were exporting to the USmarket approximately 1,367 MBPD of crude oil and petroleum products.

 

The oil sector has a great impact on the Venezuelaneconomy.  In 2003, PDVSA accounted forapproximately 18% of Venezuelan gross domestic product, 67% of its exports and57% of government revenues.  In 2004, PDVSAaccounted for approximately 27% of Venezuelan gross domestic product, 83% ofits exports and 48% of government revenues.

 

**Business Strategy**

 

Our business strategy is focused on the development ofVenezuela’s hydrocarbon resources on behalf of the country with the support ofboth national and foreign private capital. This strategy aims to maximize the value of oil and gas resources andalso to ensure our financial strength and stability, within the context of thedynamics of the energy market.  Since oilis a nonrenewable resource with an expected imbalance between oil demand and supplyfor the mid-term, we continue to participate actively in the world oil marketin order to receive a fair and stable oil price.  Investments have to be made to avoid thisexpected imbalance, especially considering that it is predicted that an imbalancebetween the installed refining capacity and the market for refined productsalso exists.

 

This core strategy has been ratified in the 2005-2010Corporate Business Plan.

 

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PDVSA plans to intensively invest in both upstream anddownstream projects in order to satisfy the current and expected increasingenergy demand.

 

According to this plan for 2005-2010, operations inVenezuela will focus on:

 

•      Theexploration of condensate, light and medium crude oil.  PDVSA financial resources will be mainlyconcentrated on the backyard areas.  Allother exploration regions either onshore or offshore are opened for third partyparticipation, under the umbrella of the Venezuelan Organic Hydrocarbon Law,Gaseous Hydrocarbon Organic Law and, of course, the National Constitution.

 

•      Theproduction and marketing of the heavy and extra-heavy crude oil, including thehuge reserves in the Orinoco Belt. According to the laws mentioned above, PDVSA is willing to develop newbusiness opportunities with third parties in order to manufacture high qualityproducts.

 

•      Thegas sector development.  PDVSA isplanning thefast track development of this business segment with third partyparticipation in either onshore or offshore and under the framework ofVenezuela’s Gaseous Hydrocarbon Law.

 

•      Inthe downstream business we are looking for the right balance between ouroverseas and local assets in order to assure the domestic supply and qualityfor customers, in line with the strategy of maximizing the value of Venezuelanoil and gas resources.

 

•      Anew strategic objective consists of developing a sustainable social plan oflarge dimensions, aligned with the Social Plan of the VenezuelanGovernment.  PDVSA’s social plan includeseducation, agricultural, infrastructure and local/regional developmentprojects, which will generate about 1.7 million direct and indirect jobs andbenefit 8.4 million people in Venezuela.

 

•      Weestimate that our business plan will require about $49 billion (excludingPequiven) to achieve a sustainable production capacity of 5,109 MBPD by2010.  We expect to provide about 70% ofthe funds required for this Plan from our own resources and 30% by means ofdifferent financing sources.  Thefollowing chart shows a summary of actual and estimated capital expenditures:

 

**Capital Investment Plan 2005 – 2010 forVenezuela($ in millions)**

 
| ** **                    | ** ** | **Actual  2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Total  2005-  2010** | ** ** |
|-------------------------------|------------|------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|------------------------|------------|
| **Exploration**               |       | 134              |       | 314      |       | 443      |       | 459      |       | 426      |       | 413      |       | 247      |       | 2,302                  |       |
| **Production (1)**            |       | 1,438            |       | 2,381    |       | 2,658    |       | 2,783    |       | 2,326    |       | 2,174    |       | 2,100    |       | 14,422                 |       |
| **Production Agreements**     |       | 478              |       | 628      |       | 688      |       | 492      |       | 355      |       | 302      |       | 228      |       | 2,693                  |       |
| **Orinoco Belt**              |       | 64               |       | 809      |       | 647      |       | 587      |       | 338      |       | 450      |       | 336      |       | 3,167                  |       |
| **Profit Sharing Agreement**  |       | 46               |       | 340      |       | 291      |       | 177      |       | 348      |       | 352      |       | 183      |       | 1,691                  |       |
| **Gas**                       |       | 443              |       | 973      |       | 2,248    |       | 2,213    |       | 1,753    |       | 1,168    |       | 581      |       | 8,936                  |       |
| **Refining**                  |       | 177              |       | 328      |       | 576      |       | 3,217    |       | 3,476    |       | 3,475    |       | 3,061    |       | 14,133                 |       |
| **Proesca (2)**               |       | 89               |       | 12       |       | 27       |       | 66       |       | 67       |       | 248      |       | 721      |       | 1,141                  |       |
| **Supply & trading** |       | 121              |       | 84       |       | 91       |       | 201      |       | 55       |       | 33       |       | 21       |       | 485                    |       |
| **Total:**                    |       | 2,990            |       | 5,869    |       | 7,669    |       | 10,195   |       | 9,144    |       | 8,615    |       | 7,478    |       | 48,970                 |       |

 

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(1) 2005 includes $96 million for completion of the OrifuelsSinoven Joint Venture plant.

(2) The 2004 expenditure corresponds to Pequiven.

 

We also are committed to maintaining high safety andhealth standards across all operations and we aim to achieve effective andtimely integration of business technologies in our operational activities todevelop a sustainable competitive advantage. We also endeavor to provide quality training for our personnel; finally,the

 

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business plan seeks to help to strengthen the national economy and tocontribute to social programs such as education, healthcare and job creation.

 

We invested $2,990 million in operating assets in2004.  This expenditure was 42% lowerthan we had anticipated in our previous business plan.  This was due to technical difficultiesresulting from sabotage against the Venezuelan oil industry in December 2002and the first quarter of 2003. Additionally, in 2004 PDVSA expensed $4,355 million as a contribution tosocial programs in Venezuela.

 

Furthermore, we will support the process of LatinAmerica and Caribbean energy and economic integration promoted by theVenezuelan Government.  We will alsocontribute effectively to put into practice the governmental initiative ofbuilding a new worldwide multipolar system of international relations based onjustice, mutual respect and social equity. This initiative will allow Venezuelan people to achieve a betterstandard of living with less poverty and sustainable development.

 

These new social commitments have not, to date,materially or adversely impacted PDVSA Petróleos’s ability to generate thenecessary flow of eligible receivables to support payments on our indebtedness.

 

As part of our business strategy, we intend to:

 

*With respect to exploration, production andupgrading activities –*

 

•      incorporatereserves of light and medium gravity crude oil;

 

•      increase ouroverall recovery factor;

 

•      continue thedevelopment of our Orinoco Belt extra-heavy crude oil projects; and

 

•      leverageexisting technology in order to maximize the return on our investments.

 

*With respect to refining and marketing –*

 

•      assure productenhancement and environmental compliance in Venezuela and abroad;

 

•      expand anddiversify our markets into Latin America, Caribbean and Asia, including Chinaand India; and

 

•      improve theefficiency of our refining processes and marketing activities.

 

*With respect to natural gas* –

 

•      activelypromote the national and international private sector participation in onshoreand offshore non-associated gas reserves exploitation and processing;

 

•      enhance ourdistribution processes in order to increase the breadth of our domestic andinternational markets; and

 

•      assureparticipation in the liquified natural gas (LNG) markets.

 

*With respect to petrochemicals –*

 

•      providefeedstocks and other raw material to Pequiven in a timely manner and continueto evaluate opportunities for petrochemical product development in ourrefineries abroad.

 

The execution of PDVSA’s Corporate Plan includes thefollowing initiatives or business:

 

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•      Exploration,production and upgrading.  Theexploration and production strategy focuses on increasing our efforts to searchfor new light and medium gravity crude oil reserves and the systematicreplacement of such reserves in back yard areas, developing new productionareas, adjusting our production activities to cater market demands andagreements reached among OPEC members and other oil producing countries.  For this purpose we will acquire 4,150 Km of2D seismic lines, 20,593 Km2 of 3D seismic lines and drill about 91exploratory wells.  PDVSA will drill some3,751 production wells and perform maintenance (Ra/Rc) on 7,663 wells, amongother activities, in order to reach a production capacity of 5,109 MBPD by2010.  PDVSA is also making efforts tomaintain competitive production costs by using state-of-the-arttechnology.  The first four Orinoco Beltprojects have been completed and are in full operation: Hamaca (a PDVSA –ConocoPhillips & Chevron Texaco Joint Venture), Petrozuata (a jointventure between PDVSA and ConocoPhillips), Cerro Negro (a PDVSA – ExxonMobil –BP joint venture), Sincor (a PDVSA – TotalFina – Statoil joint venture).  These strategic alliances are currentlyproducing more than 600 MBPD of heavy and extra-heavy crudes.  PDVSA will start a project to quantify and tocertify proved hydrocarbons reserves in the Orinoco Belt, in order to determinethe economic prospects and thus, properly direct future business in that area.

 

•      Refining.  Our refining strategy focuses on improvingthe efficiency of our downstream operations. In Venezuela, we will construct three new refineries: Cabruta (400MBPD), Barinas (50 MBPD) and Caripito (50 MBPD).  Also, we will add deep conversion capacity tothe Puerto La Cruz, CRP (Amuay and Cardón) and El Palito refineries in order toincrease the efficiency of heavy crude oil processing.  In our refineries in the United States,Europe and the Caribbean we will invest in order to comply with qualitystandards demanded by those markets. Additionally, we will invest in the refineries of Kingston-Jamaica andCienfuegos-Cuba, and develop a new refinery with Petrobras in the north ofBrazil and in a deep conversion project in La Teja refinery in Uruguay.  We continue to aim to achieve a higher marginon refined petroleum products and to comply with all applicable environmentalquality standards. (See “Item 4.B. Business overview — Refining and Marketing”).

 

•      Marketing.  The plan considers continuing the expansionof our international marketing operations to ensure market share growth for ourcrude oil and refined petroleum products and to increase brand recognition forthe products.  Also, we seek to diversifyour customer portfolio by entering new markets such as China and India.  PDVSA will expand its operations in theCaribbean and South America through the Petroamerica initiative, which includesthe Petrosur, Petrocaribe and Petroandina initiatives, in order to promoteregional integration and a fair energy distribution among the Latin Americannations.  We aim to maintain our marketposition in the U.S. through a more efficient distribution system of CITGO andits refined petroleum products.  CITGOInternational Latin America, Inc. “CILA”, which sells lubricants, gasolineand distillates in various Latin American countries, was recently transferredto Interven Venezuela and is currently evaluating the operation of its varioussubsidiaries. (See “Item 4.B. Business overview — Refining and Marketing”).  Additionally, in order to improve ourlogistic and marine transportation capabilities, PDVSA will construct 42tankers through strategic agreements with Argentina, Brazil, China and Spain,to increase from 21 to 58 the number of ships owned and operated by oursubsidiary PDV Marina.

 

•      In Venezuela,we plan to continue to promote a reliable supply of our products and the use ofunleaded gasoline (a process started during the fourth quarter of 1999) toimprove the competitive position of our network of service stations,lubrication centers and macro-stores, to continue the development of our commercialnetwork through business relationships and other associations and to increaseour product supply to high-traffic airports. Also, we are developing an ethanol production project in order tosubstitute octane enhancement additives such as TEL and MTBE in the productionof gasoline.  With the use of ethanol, wewill have environmentally friendlier products and at the same time, we will bepromoting agricultural and social development in rural areas, due to the fact thatethanol is produced from agricultural feedstocks such as sugarcane.

 

•      Gas.  The development of the gas business is one ofour major goals.  We plan to focus oncreating attractive investment opportunities for the private sector innon-associated gas production, expanding

 

14

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ourtransmission and distribution systems and natural gas liquids extraction,processing and fractioning capacity, and developing new gas export ventures,including exports of LNG.  We intend tooperate most of the existing associated natural gas production fields,currently assigned to us by the Ministry of Energy and Petroleum.  We will continue to explore and developnon-associated gas reserves with the support of private investment.  We expect to support the activities relatedto our gas business using our existing gas transmission and distributionsystems.

 

•      The Ministry ofEnergy and Mines, currently known as the Ministry of Energy and Petroleum,completed a round of onshore non-associated gas licensing bids for explorationand production activities in 11 new onshore areas in 2001.  Six of those areas were awarded to foreignand domestic investors:  Yucal-PlacerNorte and Yucal-Placer Sur (both development areas), Barrancas, Tinaco, Tiznadoand Barbacoas (each exploratory areas). The Yucal-Placer areas produced 44 MMCFD in 2004, and approximately 300MMCFD are expected to be in production by 2010. During the first quarter of 2003, the Venezuelan Government assigned twoblocks within the Deltana Platform area (eastern Venezuela and on the maritimeborder with Trinidad & Tobago) to Statoil and ChevronTexaco andConocoPhillips.  More recently it hasassigned another block to ChevronTexaco. Additionally, we have under way a new bidding round to explore anddevelop offshore resources in the west and northeast of Venezuela; suchdevelopments will principally include projects for the production of LNG, oncethe local demand in Venezuela has been satisfied.  We have defined an offshore natural gasproject called Rafael Urdaneta located in the Venezuelan Gulf and northeast ofFalcon State, with an area of 30,000 Km2, split into 29 blocks to beoffered in two phases.  Phase one wasinitiated beginning the second quarter of 2005, when the Venezuelan Governmentoffered the first six blocks to 37 national and foreign oil companies.  Of this offer, blocks Urumaco I and II wereawarded to the Russian company Gazprom, while block Cardon III was awarded toChevronTexaco.

 

•      We anticipatethat development of our gas business segment will require approximately $9billion in capital from 2005 to 2010.  Weexpect that such capital expenditures will be obtained primarily from theprivate sector, including partners.

 

•      We believe thatour natural gas resources and Venezuela’s geographical location at the centerof the Atlantic Basin puts us in an advantageous position to achieve our goalsby 2010.  We intend to capitalize on ouradvantages by promoting an increased and more diverse use of natural gas withinthe country.

 

•      At this time,the Orimulsion® production is operated just to meet the needs of our clients inEurope, Asia and the United States. During 2003 we conducted a full review of this business.  The outcome of such analysis showed that areevaluation of our strategy was necessary within the framework of the newCorporate Strategy in order to maximize the value of Venezuelan naturalresources.  Since that reassessment, weproduce only enough Orimulsion® to comply with our existing contracts.  A new production module (Sinovensa) will bein place by the end of 2005 in order to supply the existing agreements.

 

**Exploration and Production**

 

Venezuela’s proved crude oil reserves have continuedto increase over the years, with a cumulative production of crude oil from 1914through December 31, 2003 totaling approximately 56.7 billionbarrels.  Venezuela’s commercialproduction of crude oil is concentrated in the Western Zulia Basin and theWestern Barinas – Apure Basin in Western Venezuela and in the Monagas andAnzoategui states in the Eastern Basin. The large number of fields in production in these three basins arebroadly distributed geographically and, as a result, substantially diversifiesour production risk.  The impact of aloss of production in any one field would be relatively minor when compared toVenezuela’s total production.  TheWestern and Eastern basins have produced 41.0 billion and 15.7 billion barrels,respectively, of crude oil to date. Substantial portions of the sedimentary basins in Venezuela have not yetbeen explored.

 

15

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**Principal Oil-Producing Basins in Venezuela**

 

****

 

16

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The following table shows our proved reserves, provedand developed reserves, 2003 production and the ratio of proved reserves toannual production in each of the principal basins at December 31, 2003:

 

**PDVSA’s Proved Reserves and Production byBasin**

 
| ** **                                                | ** ** | **Proved  reserves(1)**                                      | ** ** | **Proved/  developed  reserves**                             | ** ** | **2003 Production**                         | ** ** | **Ratio of proved**                     | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                | ** ** | **(MMB at Dec.  31, 2003, except  as otherwise  indicated)** | ** ** | **(MMB at Dec.  31, 2003, except  as otherwise  indicated)** | ** ** | **(MBPD, except  as otherwise  indicated)** | ** ** | **reserves/annual production  (years)** | ** ** |
| **Basin**                                                 |       |                                                         |       |                                                         |       |                                        |       |                                    |       |
|                                                      |       |                                                         |       |                                                         |       |                                        |       |                                    |       |
| **Western Zulia:**                                        |       |                                                         |       |                                                         |       |                                        |       |                                    |       |
| Crude Oil                                                 |       | 21,509                                                       |       | 6,477                                                        |       | 1,144                                       | (2)        | 52                                      |       |
| Natural Gas  (BOE)                                        |       | 6,238                                                        |       | 4,367                                                        |       | 177                                         | (3)        | 97                                      |       |
| **Western Barinas – Apure:**                         |       |                                                         |       |                                                         |       |                                        |       |                                    |       |
| Crude Oil                                                 |       | 1,842                                                        |       | 927                                                          |       | 86                                          | (2)        | 59                                      |       |
| Natural Gas  (BOE)                                        |       | 40                                                           |       | 28                                                           |       | 1                                           | (3)        | 110                                     |       |
| **Eastern:**                                              |       |                                                         |       |                                                         |       |                                        |       |                                    |       |
| Crude Oil (4)                                             |       | 53,789                                                       |       | 8,884                                                        |       | 1,616                                       | (2)        | 91                                      |       |
| Extra–Heavy  Crude Oil included in previous quantity |       | 35,186                                                       |       | 3,010                                                        |       | 455                                         |       | 212                                     |       |
| Natural Gas  (BOE)                                        |       | 19,591                                                       | (5)        | 13,714                                                       |       | 414                                         | (3)        | 130                                     |       |
| Total Crude Oil  (4)                                      |       | 77,140                                                       | (1)        | 16,288                                                       |       | 2,846                                       | (2)        | 74                                      |       |
| Total Natural  Gas (BOE)                                  |       | 25,869                                                       | (5)        | 18,109                                                       |       | 592                                         |       | 120                                     |       |

 

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(1)           Developed and undeveloped.

(2)           Includes condensate.  Production obtained from the top of wells.

(3)           Net natural gas production(gross production less natural gas reinjected).

(4)           Includes proved reserves ofheavy, extra-heavy crude oil and bitumen in the Orinoco Belt, estimated to be35.2 billion barrels at December 31, 2003. See “Item 4.B Business overview—Initiatives Involving Private SectorParticipation.”

(5)           Includes proved reserves ofnatural gas in the Orinoco Belt, estimated to be 2.45 billion BOE at December 31,2003.

 

The following table shows the location, 2003production volume, discovery year, proved reserves and the ratio of provedreserves to annual production for each of PDVSA’s eleven largest oil fields asof December 31, 2003:

 

**PDVSA’s Proved Reserves and Production byField**

 
| **Name of field** | ** ** | **Location**    | ** ** | **2003 production** | ** ** | **Year of  discovery** | ** ** | **Proved  reserves**              | ** ** | **Ratio of proved  reserves/annual  production** | ** ** |
|-------------------|------------|-----------------|------------|---------------------|------------|------------------------|------------|-----------------------------------|------------|--------------------------------------------------|------------|
| ** **        | ** ** | **(State of)**  | ** ** | **(MBPD)**          | ** ** | ** **             | ** ** | **(MMB at   Dec. 31, 2003)** | ** ** | **(years)**                                      | ** ** |
| Tía Juana    |       | Zulia           |       | 201                 |       | 1925                   |       | 5,113                             |       | 70                                               |       |
| Lagunillas        |       | Zulia           |       | 139                 |       | 1925                   |       | 2,464                             |       | 49                                               |       |
| Bachaquero        |       | Zulia           |       | 141                 |       | 1930                   |       | 2,264                             |       | 44                                               |       |
| Bloque VII Ceuta  |       | Zulia           |       | 104                 |       | 1956                   |       | 1,747                             |       | 46                                               |       |
| Urdaneta Oeste    |       | Zulia           |       | 121                 |       | 1955                   |       | 1,501                             |       | 34                                               |       |
| Boscán       |       | Zulia           |       | 99                  |       | 1946                   |       | 1,257                             |       | 35                                               |       |
| Mulata            |       | Monagas         |       | 214                 |       | 1941                   |       | 2,106                             |       | 27                                               |       |
| El Furrial        |       | Monagas         |       | 343                 |       | 1986                   |       | 1,999                             |       | 16                                               |       |
| Santa Barbara     |       | Monagas         |       | 131                 |       | 1941                   |       | 1,570                             |       | 33                                               |       |
| Bare              |       | Anzoátegui |       | 40                  |       | 1950                   |       | 1,249                             |       | 86                                               |       |
| Jobo              |       | Monagas         |       | 22                  |       | 1956                   |       | 1,077                             |       | 134                                              |       |

 

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***Reserves***

 

We use geological and engineering data to estimate ourproved crude oil and natural gas reserves, including proved developed andundeveloped reserves.  Such data iscapable of demonstrating with reasonable certainty whether such reserves arerecoverable in future years from known reservoirs under existing economic andoperating conditions.  We expect torecover proved crude oil and natural gas reserves principally from new wells andacreage that has not been drilled using currently available equipment andoperating methods.  Our estimates ofreserves are not precise and are subject to revision.  We review these crude oil and natural gasreserves annually to take into account, among other things, production levels,field reviews, the addition of new reserves from discoveries, year-end pricesand economic and other factors.  Provedreserve estimates may be materially different from the quantities of crude oiland natural gas that are ultimately recovered.

 

Crude oil and natural gas represented 75% and 25%,respectively, of our total estimated proved crude oil and natural gas reserveson an oil equivalent basis at December 31, 2003.

 

*Crude Oil*.  We had estimated proved crude oil reserves atDecember 31, 2003 totaling approximately 77.1 billion barrels (includingan estimated 35.2 billion barrels of heavy, extra-heavy crude oil and bitumenin the Orinoco Belt).  We also hadestimated proved reserves of natural gas totaling approximately 150,043 BCF(including an estimated 12,427 BCF in the Orinoco Belt).  The average API gravity of our estimatedproved crude oil reserves was 17.3° as compared to an average API gravity of23° for our crude oil produced in 2002; the API gravity of the up-graded oilproduced by the Orinoco Belt projects ranges from 16° to 32°.  Based on 2003 production levels, estimatedproved reserves of crude oil, including heavy and extra-heavy crude oilreserves that will require significant future development costs to produce andrefine, have a remaining life of approximately 74 years.

 

From December 31, 1995 to December 31, 2003,our estimated proved reserves of crude oil increased by 10.8 billion barrelsand our estimated proved reserves of natural gas increased by 1.12 billionbarrels of oil equivalent (“BOE”).  In2003, 2002, 2001 and 2000, our proved crude oil reserve replacement ratio was100%, 104%, 108% and 169%, respectively. These variations resulted from revisions to the expected recovery rateof oil in place and the application of secondary recovery technology toexisting crude oil deposits.

 

*Natural Gas*.  We have substantial proved developed reservesof natural gas amounting to 150,043 BCF (or 25,869 MMBOE) at December 31,2003.  Our natural gas reserves arecomprised of associated gas that is developed incidental to the development ofour crude oil reserves.  A largeproportion of our proved natural gas reserves are developed.  During 2003, approximately 42% of the naturalgas that we produced was reinjected for well pressure maintenance purposes.

 

The following table shows our proved crude oil andnatural gas reserves and proved developed crude oil and natural gas reserves,all located in Venezuela (See note 23 to our consolidated financial statements,included under “Item 18.  FinancialStatements”):

 

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**PDVSA’s Proved Reserves**

 
| ** **                                                            | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **2003**                         | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
| **Proved  Reserves(1):**                                              |       |                             |       |   |   |   |   |   |   |   |   |
| Crude oil (MMB)                                                       |       |                             |       |   |   |   |   |   |   |   |   |
| Condensate                                                            |       | 1,919                            |       | 1,900 |   | 1,723 |   | 1,772 |   | 1,847 |   |
| Light (API  gravity of 30° or more)                              |       | 10,078                           |       | 10,012 |   | 10,345 |   | 10,244 |   | 10,258 |   |
| Medium (API  gravity of between 21° and 30°)                |       | 12,340                           |       | 12,450 |   | 12,891 |   | 12,804 |   | 12,195 |   |
| Heavy (API  gravity of between 11° and 21°)                 |       | 17,617                           |       | 17,414 |   | 17,266 |   | 17,177 |   | 16,861 |   |
| Extra-heavy (API  gravity of less than 11°)(2)                   |       | 35,186                           |       | 35,381 |   | 35,558 |   | 35,688 |   | 35,701 |   |
| Total crude oil                                                       |       | 77,140                           |       | 77,157 |   | 77,783 |   | 77,685 |   | 76,862 |   |
| Of which,  assigned to Operating Service Agreements(3)                |       | 5,446                            |       | 5,501 |   | 5,600 |   | 5,479 |   | 5,450 |   |
| Natural gas  (BCF)(4)                                                 |       | 150,043                          |       | 147,109 |   | 148,295 |   | 147,585 |   | 146,611 |   |
| Proved reserves  of crude oil and natural gas (MMBOE)(3)(5)           |       | 103,009                          |       | 102,521 |   | 103,351 |   | 103,131 |   | 102,140 |   |
| Remaining  reserves life of crude oil (years)(6)                      |       | 74                               | x          | 70 | x | 64 | x | 64 | x | 70 | x |
| **Proved  Developed Reserves:**                                       |       |                             |       |   |   |   |   |   |   |   |   |
| Crude oil (MMB)                                                       |       |                             |       |   |   |   |   |   |   |   |   |
| Condensate.                                                           |       | 416                              |       | 419 |   | 747 |   | 814 |   | 1,009 |   |
| Light (API  gravity of 30° or more)                              |       | 2,760                            |       | 2,716 |   | 3,590 |   | 3,803 |   | 3,827 |   |
| Medium (API  gravity of between 21° and 30°)                |       | 5,419                            |       | 5,533 |   | 5,568 |   | 5,928 |   | 6,480 |   |
| Heavy (API  gravity of between 11° and 21°)                 |       | 4,683                            |       | 4,877 |   | 5,504 |   | 5,453 |   | 5,738 |   |
| Extra-heavy (API  gravity of less than 11°)(2)(7)                |       | 3,010                            |       | 2,154 |   | 1,963 |   | 1,375 |   | 1,070 |   |
| Total crude  oil(7)                                                   |       | 16,288                           |       | 15,699 |   | 17,372 |   | 17,373 |   | 18,124 |   |
| Of which,  assigned to Operating Service Agreements(3)                |       | 1,267                            |       | 1,935 |   | 1,523 |   | 1,413 |   | 1,329 |   |
| Percentage of  proved crude oil reserves(8)                           |       | 21                               | %          | 20 | % | 22 | % | 22 | % | 24 | % |
| Natural gas  (BCF)                                                    |       | 105,030                          |       | 102,191 |   | 103,807 |   | 103,310 |   | 102,628 |   |
| Percentage of  proved natural gas reserves(9)                         |       | 70                               | %          | 69 | % | 70 | % | 70 | % | 70 | % |
| Proved developed  reserves of crude oil and natural gas (MMBOE)(2)(3) |       | 34,396                           |       | 33,318 |   | 35,270 |   | 35,185 |   | 35,818 |   |

 

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(1)           Proved reserves include bothproved developed and undeveloped reserves.

(2)           Proved reserves ofextra-heavy oil located in the Orinoco Belt have a low development grade.  Of the total proved reserves to be exploitedunder the Orinoco Belt Project, at December 31, 2003, approximately 1,751MMB were developed under four association agreements in which we have an equityinterest of less than 50%.See “Item 4.B Business overview—Initiatives Involving Private SectorParticipation—Orinoco Belt Extra-Heavy Crude Oil Projects.”

(3)           Portion of reserves in fieldsassigned to operating service agreements as of December 31 of the year inwhich each such operating agreement went into effect.  Such agreements will not necessarily resultin the exploitation of 100% of those reserves during their term.  See “Item 4.B Business overview—InitiativesInvolving Private Sector Participation—Operating Service Agreements.”

(4)           Includes 12,427 BCF, 12,454BCF, 12,476 BCF, 12,505 BCF and 12,400 BCF in each of 2003, 2002, 2001, 2000and 1999, respectively, associated with extra-heavy crude oil reserves.

(5)           Natural gas is converted toBOE at a ratio of 5.8 thousand cubic feet of natural gas per one barrel ofcrude oil.

(6)           Based on crude oil productionand total crude proved reserves.  Provedreserves of extra-heavy crude oil in the Orinoco Belt are being developed inassociation with third parties.  See note(2) above.

(7)           Includes proved developedreserves of extra-heavy crude oil utilized in the production of Orimulsion®.

(8)           Proved developed crude oilreserves divided by total proved crude oil reserves.

(9)           Proved developed natural gasreserves divided by total proved natural gas reserves.

 

*New Hydrocarbon Reserves Findings*

 

In 2003, the Eastern PDVSA Division discovered newhydrocarbon reserves of approximately 159 million barrels of crude oil and1,675 BCF of associated gas. Specifically in the North-East of Monagas State, near to Maturín wellCHL-6X was discovered with 47 million barrels of crude oil and 350 BCF ofassociated gas. Currently, we are in the process of drilling the exploratorywell CHL-7X, located near to well CHL-6X, with estimated hydrocarbon reservesof 255 million barrels of crude oil and 1,300 BCF of associated gas.  In the North West of Monagas State, at theTacata Field, the well TAC-2X with 118 million barrels of crude oil and 2,457BCF

 

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of associated gas was discovered. Further exploration activities include wells TAG-19 and TRAVI ESTE 1X inprogress, with estimated reserves of 191 million barrels of crude oil and 629BCF of associated gas.

 

In the Western part of the country, we continue ourexploration activities at Franquera, Pauji and Misoa Formations of Eocene.  Currently, we are drilling the Franquera 1-Xexploratory well and we expect this reservoir to yield new reserves of 789million barrels of crude oil and 378 BCF of associated gas.

 

**Operations**

 

We maintain an active exploration and developmentprogram designed to increase our proved crude oil reserves and productioncapacity.  We have been successful in ourefforts to increase our proved crude oil and natural gas reserves in each ofthe last 20 years.  Beginning in 1992, wecommenced a program designed to attract and incorporate private sectorparticipation into our exploration and production activities.  We currently conduct our exploration anddevelopment activities in the Western Zulia Basin, the Western Barinas – ApureBasin and the Eastern Basin in the Monagas and Anzoátegui states.  We are currently conducting extensiveexploration and development activities in the Orinoco Belt of the Eastern Basinand in the other basins, either independently or together with foreign partnersthrough joint ventures.  See “Item 4.BBusiness overview—Initiatives Involving Private Sector Participation.”

 

In 2003, our exploration expenditures were used mainlyto fund the drilling of 7 exploratory wells and the acquisition of 280 squarekilometers of 3D seismic lines.  Noadditional exploratory wells were drilled and no seismic lines were acquiredpursuant to our operating service agreements. 250 MMB proved crude oil reserves were added in 2003 (162 MMB from newlydiscovered reserves and 88 MMB from development wells) compared to 238 MMB in2002 (135 MMB from newly discovered reserves and 103 MMB from developmentwells), 357 MMB in 2001 (46 MMB from newly discovered reserves and 311 MMB fromdevelopment wells) 209 MMB in 2000 (5 MMB from newly discovered reserves and204 MMB from development wells) and 184 MMB in 1999 (84 MMB from newlydiscovered reserves and 100 MMB from developed wells) (These proved crude oilreserves do not include extensions of existing reserves, secondary extractions,or other factors.  See note 23(a) tothe financial statements, included under “Item 18. Financial Statements”).  In 2003, we invested $526 million in 206development wells and other facilities.

 

The following table summarizes our drilling activitiesfor the periods indicated:

 

**PDVSA’s Exploration and Development**

 
| ** **                     | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| ** **                     | ** ** | **2003**                         | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
| **Exploration:**               |       |                             |       |   |   |   |   |   |   |   |   |
| Wells spud                     |       | 2                                |       | 3 |   | 6 |   | 5 |   | 5 |   |
| Wells carry-over               |       | 5                                |       | 7 |   | 5 |   | 9 |   | 7 |   |
| Total                          |       | 7                                |       | 10 |   | 11 |   | 14 |   | 12 |   |
| Wells completed                |       | 3                                |       | 3 |   | 3 |   | 2 |   | 0 |   |
| Wells suspended                |       | 1                                |       | 2 |   | 0 |   | 2 |   | 5 |   |
| Wells under  evaluation        |       | 0                                |       | 0 |   | 3 |   | 5 |   | 1 |   |
| Wells in progress              |       | 3                                |       | 3 |   | 3 |   | 1 |   | 4 |   |
| Dry or abandoned  wells        |       | 0                                |       | 2 |   | 2 |   | 4 |   | 2 |   |
| Total                          |       | 7                                |       | 10 |   | 11 |   | 14 |   | 12 |   |
| **Development:**               |       |                             |       |   |   |   |   |   |   |   |   |
| Development  wells drilled (1) |       | 206                              |       | 366 |   | 479 |   | 474 |   | 349 |   |

 

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(1)           Includes wells in progress,even if they were wells spud in previous years, and injector wells.  Does not include 26 development wells fromPDVSA Gas and 62 development wells (including 2 injector wells) attributable toour operating service agreements located in the Eastern Division.  See “Item 4.B Business overview—InitiativesInvolving Private Sector Participation—Operating Service Agreements.”

 

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Pursuant to the Orinoco Belt Extra-heavy Crude OilProjects, no exploration wells and 64 development wells were drilled in 2003,17 exploration wells and 144 development wells were drilled in 2002, 9exploration wells and 349 development wells were drilled in 2001 and 15exploration wells and 453 development wells were drilled in 2000.

 

In 2003, our crude oil production averaged 2,451 MBPD(including 122 MBPD attributable to our participation in the Orinoco Beltprojects) with API gravity between 16° and 32°. This production level represented approximately 69% of PDVSA’s estimated2003 year end crude oil production capacity of 3,529 MBPD (including 525 MBPDof crude oil production capacity attributable to our Orinoco Beltprojects).  During 2003, our averageproduction costs of crude oil was approximately $3.85 per BOE, or $2.06 per BOEexcluding the production and costs attributable to our operating serviceagreements, and the average of our depreciation and depletion costs was $0.53per BOE.  See “Item 3.A Selectedfinancial data.”

 

At December 31, 2003, we operated approximately15,782 oil wells.  At such date, we had37,659 gross kms2 of undeveloped acreage and 177,829 gross kms2of acreage under development, including 49,194 kms2 developedpursuant to our operating service agreements.

 

On average, during 2003, our natural gas productionwas 5,938 MMCFD (or 1,024 MBPD on an oil equivalent basis), of which 2,506MMCFD, or 42%, was reinjected for purposes of maintaining reservoirpressure.  The net natural gas productionof 3,432 MMCFD was consumed in production of LNG (9%), as fuel in refinery andproduction operations (24%), in petrochemical operations (14%) and theremainder (53%) is sold to third parties for power generation, aluminum, ironand other manufacturing industries and domestic uses.  Approximately 70% of the 2003 natural gasproduction and 76% of the total estimated proved net natural gas reserves arelocated in the Eastern Basin.  Asignificant portion of this production is transported through our pipelinesystems for use by industries in the coastal and central regions of Venezuela.

 

The following table summarizes our historical averagenet daily crude oil and natural gas production by type and by basin and theaverage sales price and production cost for the periods specified:

 

**PDVSA’s Average Production, Sales Price andProduction Cost**

 
| ** **                                                           | ** ** | **Year Ended December 31,**          | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                           | ** ** | **2003**                                  | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
| ** **                                                           | ** ** | **(MBPD, except as otherwise indicated)** | ** ** |
|                                                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| **Crude  oil:**                                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Condensate                                                           |       | 22                                        |       | 46 |   | 48 |   | 50 |   | 43 |   |
| Light (API  gravity of 30° or greater)                          |       | 727                                       |       | 774 |   | 1,135 |   | 1,174 |   | 1,189 |   |
| Medium (API  gravity of between 21° and 30°)               |       | 914                                       |       | 962 |   | 1,018 |   | 1,047 |   | 1,095 |   |
| Heavy (API  gravity of less than 21°)                           |       | 788                                       |       | 877 |   | 893 |   | 814 |   | 623 |   |
| Total crude oil                                                      |       | 2,451                                     |       | 2,659 |   | 3,094 |   | 3,085 |   | 2,950 |   |
| Of which,  assigned to Operating Service Agreements(1)               |       | 465                                       |       | 481 |   | 502 |   | 466 |   | 404 |   |
| Liquid petroleum  gas                                                |       | 144                                       |       | 173 |   | 173 |   | 167 |   | 177 |   |
| **Total  crude oil and liquid petroleum gas**                        |       | 2,595                                     |       | 2,832 |   | 3,267 |   | 3,252 |   | 3,127 |   |
| **Natural  gas:**                                                    |       |                                      |       |   |   |   |   |   |   |   |   |
| Gross production  (MMCFD)                                            |       | 5,938                                     |       | 6,023 |   | 6,000 |   | 5,946 |   | 5,685 |   |
| Less:                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Reinjected  (MMCFD)                                                  |       | 2,506                                     |       | 2,351 |   | 1,907 |   | 1,967 |   | 1,919 |   |
| Net natural gas  (MMCFD)                                             |       | 3,432                                     |       | 3,672 |   | 4,093 |   | 3,979 |   | 3,766 |   |
| **Total  crude oil, liquid petroleum gas and net natural gas (BOE)** |       | 3,187                                     |       | 3,464 |   | 3,973 |   | 3,938 |   | 3,776 |   |
| **Crude  oil production by basin:**                                  |       |                                      |       |   |   |   |   |   |   |   |   |
| Western Zulia  Basin                                                 |       | 1,121                                     |       | 1,332 |   | 1,567 |   | 1,536 |   | 1,450 |   |
| Western Barinas –  Apure Basin                                  |       | 86                                        |       | 93 |   | 109 |   | 115 |   | 131 |   |
| Eastern Basin                                                        |       | 1,244                                     |       | 1,234 |   | 1,418 |   | 1,434 |   | 1,369 |   |
| **Total  crude oil production**                                      |       | 2,451                                     |       | 2,659 |   | 3,094 |   | 3,085 |   | 2,950 |   |

 

21

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| ** **                                                                               | ** ** | **Year Ended December 31,**          | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                               | ** ** | **2003**                                  | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
| ** **                                                                               | ** ** | **(MBPD, except as otherwise indicated)** | ** ** |
|                                                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| **Natural  gas gross production by basin (MMCFD):**                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Western Zulia  Basin                                                                     |       | 1,031                                     |       | 1,261 |   | 1,408 |   | 1,665 |   | 1,801 |   |
| Western Barinas –  Apure Basin                                                      |       | 6                                         |       | 8 |   | 7 |   | 7 |   | 7 |   |
| Eastern Basin                                                                            |       | 4,901                                     |       | 4,754 |   | 4,585 |   | 4,274 |   | 3,877 |   |
| **Total  gross natural gas production**                                                  |       | 5,938                                     |       | 6,023 |   | 6,000 |   | 5,946 |   | 5,685 |   |
| **Average  sales price(2):**                                                             |       |                                      |       |   |   |   |   |   |   |   |   |
| Crude oil ($ per  barrel)                                                           |       | 24.39                                     |       | $ | 21.35 |   | $ | 18.95 |   | $ | 24.94 |   | $ | 15.35 |   |
| Gas ($ per MCF)                                                                     |       | 0.61                                      |       | $ | 0.71 |   | $ | 0.88 |   | $ | 0.90 |   | $ | 0.73 |   |
| **Average  production cost ($ per BOE)(3)**                                         |       | 3.85                                      |       | $ | 3.92 |   | $ | 3.38 |   | $ | 3.48 |   | $ | 2.72 |   |
| **Average  production cost ($ per BOE), excluding operating service agreements(3)** |       | 2.06                                      |       | $ | 2.42 |   | $ | 2.17 |   | $ | 2.22 |   | $ | 2.00 |   |

 

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(1)           See “Item 4.B Businessoverview—Initiatives Involving Private Sector Participation—Operating ServiceAgreements.”

(2)           Including sales tosubsidiaries and affiliates.

(3)           The combined averageproduction cost per barrel (for crude oil, natural gas and liquid petroleumgas), is calculated by dividing the sum of all direct and indirect productioncosts (including our own consumption but not including depreciation anddepletion); by the combined total production volumes of crude oil, natural gasand liquid petroleum gas.

 

**Initiatives Involving Private SectorParticipation**

 

As part of the process encouraging private initiativesand investment in the oil industry, and pursuant to Article 5 of theNationalization Law, with the approval of the National Congress, we arepermitted to enter into operating and association agreements with privateentities.  Since 1992, we have undertakenprojects with the private sector in connection with our exploration anddevelopment activities.

 

In August 2003, to streamline our businessoperations and reduce our administrative costs, the administration of ourbusiness ventures with private sector entities was assigned to our subsidiary,CVP.  In this regard, CVP assumedadministrative responsibility within PDVSA with respect to our operatingservice agreements, strategic associations and profit sharing agreementsdescribed below.  In addition to itsadministrative responsibilities, CVP will continue to promote PDVSA’s relationswith third parties and private sector participation in the petroleumindustry.  However, any dividends andprofits from production activities conducted pursuant to our operating serviceagreements and our other strategic associations continue to be paid to PDVSA,except for dividends from our profit sharing agreements, which are paid to CVP.

 

22

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***Operating Service Agreements***

 

During 1992, 1993 and 1997, PDVSA auctioned the rightsto and entered into agreements with several international companies.  The purpose of these agreements was toreactivate the operation of thirty-three oil fields which no longer met our minimumrate of return on investment threshold, using secondary and tertiary recoverytechniques.  The auctions conductedduring 1992 and 1993 are referred to in this annual report as the “first andsecond rounds” and the auction conducted in 1997 is referred to in this annualreport as the “third round.”

 

The terms of the operating agreements entered intorequire the international oil company investors to make capital investments inthe form of assets necessary to increase production in the relevant oil fields.  These investors would then recover theirinvestments by collecting operating fees and stipends from PDVSA, amounts to bedetermined based on pricing formulas derived from the amount of crude oildelivered to PDVSA during the term of the operating agreement.  The operating agreements also provide thatPDVSA would own the capital assets employed in the production, retain title tothe hydrocarbons produced and have no further obligations as to any remainingvalue of the assets existing in the fields. See note 10(c) to our consolidated financial statements, includedunder “Item 18.  Financial Statements.”

 

•      *The First and Second Rounds*. A total of 27 oil companies (grouped in different consortiums) wereawarded rights to drill 15 oil fields. Since then, some companies have changed their participation in thedifferent consortiums.  In 2003, Anadarkobought the participation of Union Pacific in the Oritupano-Leona field;ExxonMobil bought the participation of Ampolex in Quiamare-La Ceiba field andRepsol-YPF bought the participation of Union Pacific in the West Falconfield.  An average of 313 MBPD of crudeoil was produced from these fields in 2003, and it is expected that suchproduction will be approximately 405 MBPD when the fields are in substantially fulloperation by 2005.  As of December 31,2003, these fields had estimated proved reserves of approximately 3.83 billionbarrels of crude oil.  Under thisinitiative, foreign companies have invested $5,535 million since 1992.

 

23

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•      *The Third Round*.  Weauctioned the right to reactivate, rehabilitate, develop and additionallyexplore certain hydrocarbon reservoirs in 18 fields, one of which is currentlyinactive.  In 2003, ENI bought theparticipation of Lasmo in the Dación field. An average of 150 MBPD of crude oil was produced from these fields in2003.  As of December 31, 2003,these fields had estimated proved reserves of approximately 1.62 billionbarrels of crude oil.  Our business plancurrently contemplates daily production from these fields of 225 MBPD by 2005under our operating service agreements. Under this initiative, the operator companies have invested $3,548million since 1997.

 

The following table sets forth information withrespect to the contracts awarded to reactivate the fields under the operatingservice agreements:

 

**PDVSA’s Operating Service Agreementsas of December 31, 2003**

 
| **Area**                     | ** ** | **Consortium (Operator)**                                                                                 | ** ** | **Proved Crude  Oil Reserves  (MMB) (1)** | ** ** |
|------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **First  and Second Rounds** | ** ** | ** **                                                                                                | ** ** | ** **                                | ** ** |
| Boscán                  |       | Chevron Global Technology Services Co.                                                                    |       | 1,372.3                                   |       |
| Urdaneta/West                |       | Shell Venezuela S.A.                                                                                      |       | 872.3                                     |       |
| DZO                          |       | B.P. Venezuela Holdings, Ltd.                                                                             |       | 368.8                                     |       |
| Oritupano/Leona              |       | Petrobras Energía Venezuela,  Servicios Corod de Venezuela, Anadarko                                 |       | 296.1                                     |       |
| Colón                   |       | Tecpetrol Venezuela, CMS Oil and Gas, Coparex                                                             |       | 157.2                                     |       |
| Quiamare/LA  Ceiba           |       | Repsol–YPF Venezuela, S.A., Tecpetrol Venezuela,  ExxonMobil                                         |       | 95.5                                      |       |
| Quiriquire                   |       | Repsol–YPF Venezuela, S.A.                                                                           |       | 63.8                                      |       |
| Pedernales                   |       | Perenco                                                                                                   |       | 116.2                                     |       |
| Monagas Sur                  |       | Benton Oil & Gas, Vinccler                                                                       |       | 153.3                                     |       |
| Sanvi/Güere             |       | Teikoku Oil De Sanvi Güere, C.A.                                                                     |       | 81.9                                      |       |
| Guárico East            |       | Teikoku Oil De Venezuela C.A.                                                                             |       | 66.8                                      |       |
| Jusepín                 |       | Total Oil and Gas de Venezuela, B.V., B.P. Venezuela  Holding, Ltd.                                       |       | 132.4                                     |       |
| Guárico West            |       | Repsol–YPF Venezuela, S.A.                                                                           |       | 42.3                                      |       |
| Falcón East             |       | Vinccler                                                                                                  |       | 8.8                                       |       |
| Falcón West             |       | West Falcon Samson                                                                                        |       | 2.7                                       |       |
| **Subtotal**                 | ** ** | ** **                                                                                                | ** ** | **3,830.4**                               | ** ** |
| **Third  Round**             | ** ** | ** **                                                                                                | ** ** | ** **                                | ** ** |
| Boquerón                |       | B.P. Venezuela Holding, Ltd., Preussag Energie GmbH                                                       |       | 86.1                                      |       |
| LL-652                       |       | Chevron Global Technology, Statoil, B.P. Venezuela  Holding, Ltd., Petróleo y Gas Inversiones, C.A.  |       | 354.3                                     |       |
| Dación                  |       | ENI                                                                                                       |       | 206.1                                     |       |
| Intercampo norte             |       | China National Petroleum Corp.                                                                            |       | 67.2                                      |       |
| Caracoles                    |       | China National Petroleum Corp.                                                                            |       | 106.9                                     |       |
| B2X 68/79                    |       | Nimir Petroleum Company  Limited, Ehcopek Petróleo, S.A., Cartera de Inversiones Petroleras II, C.A. |       | 107.4                                     |       |
| Mene grande                  |       | Repsol–YPF Venezuela, S.A.                                                                           |       | 122.5                                     |       |
| Mata                         |       | Inversora Mata, Petrobras  Energía de Venezuela, S.A., Petrolera Mata                                |       | 89.8                                      |       |
| B2X 70/80                    |       | Pancanadian Petroleum Venezuela, S.A., Nimir  Petroleum Company Limited                                   |       | 77.2                                      |       |
| Kaki                         |       | Inemaka, Inversiones Polar, Petróleo y Gas  Inversiones, C.A.                                        |       | 37.8                                      |       |
| Ambrosio                     |       | Perenco, Petróleo y Gas Inversiones, C.A.                                                            |       | 52.5                                      |       |
| Onado                        |       | Compañía General Combustibles, Carmanah Resources,  Korea Petroleum, Bco Popular Del Ecuador    |       | 52.6                                      |       |
| La Concepción           |       | Petrobras Energía de Venezuela, S.A., Williams  Companies, Inc.                                 |       | 119.6                                     |       |

 

24

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| **Area**     | ** ** | **Consortium (Operator)**                                                                                               | ** ** | **Proved Crude  Oil Reserves  (MMB) (1)** | ** ** |
|--------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| Cabimas      |       | Preussag Energy GmbH, Suelopetrol                                                                                       |       | 56.9                                      |       |
| Casma Anaco  |       | Cosa-Ingenieros Consultores, Cartera de Inversiones  Venezolanas, Phoenix International, C.A., Rosewood North Sea, Open |       | 11.4                                      |       |
| Maulpa       |       | Inemaka, Inversiones Polar, Petróleo y Gas  Inversiones, C.A.                                                      |       | 32.4                                      |       |
| Acema        |       | Coroil, Petrobras Energía de  Venezuela, S.A.                                                                      |       | 35.1                                      |       |
| **Subtotal** | ** ** | ** **                                                                                                              | ** ** | **1,615.8**                               | ** ** |
| ** **   | ** ** | ** **                                                                                                              | ** ** | ** **                                | ** ** |
| **Total**    | ** ** | ** **                                                                                                              | ** ** | **5,446.2**                               | ** ** |

 

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(1)           These proved crude oilreserves correspond to the fields assigned to each of the operating serviceagreements and are included in our total proved crude oil reserves.  Such operating service agreements will notnecessarily result in the exploitation of 100% of those reserves during theirterm.  See “Item 4.B Businessoverview—Exploration and Production—Reserves.” The proved reserves disclosed at December 31, 2003 do not includeany additional reserves which may ultimately be proved based on recoveryprojects to be implemented by the operators of the service agreements.

 

During 2005, the Ministry of Energy and Petroleum hasinstructed PDVSA to convert the Operating Service Agreements to a scheme ofjointly owned enterprises, where PDVSA will hold a minimum of 51% stockownership, according to the Organic Hydrocarbons Law of Venezuela.  CVP is analyzing each Operating ServiceAgreement and by the end of 2005, CVP is expecting to complete the conversionprocess.

 

***Exploration and Production in New Areas under Profit Sharing Agreements***

 

In July 1995, the Venezuelan Congress approvedprofit sharing arrangements pursuant to which private sector oil companies wereoffered the right to explore, drill and develop light and medium crude oil, onan equity basis in ten designated blocks with a total area of 13,774 squarekilometers, pursuant to the terms of the profit sharing agreements entered intoby such companies and CVP, our subsidiary appointed to coordinate, control andsupervise these agreements.  Under theprofit sharing agreements, CVP has the right to participate, at its option,with an ownership interest of between 1% and 35% in the development of anyrecoverable reserves with commercial potential. Eight oil fields were awarded to 14 companies in 1996.  The awards were based on the percentage ofpretax earnings ranging up to 50% that the bidders were willing to share withthe Venezuelan government.  Our businessplan currently contemplates an aggregate average daily production from thefields in these new areas of 460 MBPD by 2010. The profit sharing agreements provide for the creation of a ControlCommittee, as the ultimate authority for approval and control, and which shallmake fundamental decisions of national interest for Venezuela in connectionwith the execution of these agreements.

 

In 2003, these companies invested approximately $55million in activities related to the discovery, well evaluation, developmentand exploration efforts in Eastern Paria Gulf, La Ceiba and particularly inWestern Paria Gulf, where the commercial stage of production has beenreached.  See note 10(b) to ourconsolidated financial statements, included under “Item 18.  Financial Statements.”

 

CVP is entitled to hold shares representing a maximumof 35% participation in the joint ventures that could be formed pursuant toprofit sharing agreements in the following oil fields:

 
| **Field**           | ** ** | **CVP Partners**                             | ** ** | **Mixed companies**                                   | ** ** |
|---------------------|------------|----------------------------------------------|------------|-------------------------------------------------------|------------|
| Western Paria  Gulf |       | ConocoPhillips -  ENI B.V. - OPIC (1)        |       | Compañía Agua Plana, S.A.                   |       |
| Eastern Paria  Gulf |       | Ineparia -  ConocoPhillips - ENI B.V. - OPIC |       | Administradora del Golfo de Paria Este, S.A.          |       |
| La Ceiba            |       | ExxonMobil -  PetroCanada                    |       | Administradora Petrolera La Ceiba, C.A.               |       |
| San Carlos (2)      |       | Petrobras Energía de Venezuela S.A.     |       | Compañía Anónima Mixta San Carlos S.A. |       |

 

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(1)           Profit sharing agreementunder phase I (development).

(2)           Changed to a gas license in2002.

 

25

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The profit sharing agreement with Punta Pescador wasterminated in 2000, and agreements with Guanare, Guarapiche and Delta Centrowere terminated in 2001.  The San Carlosagreement was converted into a gas license in 2002.

 

A recent evaluation plan confirmed large hydrocarbonand gas reserves in the Western Paria Gulf field.  It is anticipated that the field containsover two billion barrels of crude oil. On April 3, 2003, we approved phase I of the development plan forthis field, involving a capital investment of approximately $557 million byinvestors and an expected production level of 250 million barrels of crude oilover the next 20 years.  Phase I of thisdevelopment will be conducted using a wellhead platform, a floating productionunit with a separate accommodations platform, pipeline to a floating storageofftake vessel (FSO), and a mooring buoy for loading arriving tankers.  Phase I also will include water injection forpressure maintenance.  The producedassociated gas will be stored in an aquifer zone wholly contained within theoverall Corocoro gas column.  Theoperator will manage the facilities design, construction installation andsubsequent production operations.  Atotal of 24 wells will be drilled comprising 11 producers, 10 water injectors,2 gas injectors and one utility well.  Weestimate an average production of 55 MBPD in 2005, increasing to 120 MBPD in orafter 2008.

 

It is currently projected that phase II (expected tocommence in 2008) would involve a further $487 million of investments torecover additional reserves of up to 450 million barrels of crude oil from thefield.  We believe that we can make anefficient transition from phase I to phase II by using existing productionfacilities in the second phase.  Thetotal project cost for phase I and phase II is estimated at $4.3 per barrel,comprising $2.3 per barrel for development and $2.0 per barrel for operations.

 

In 2002 we invested $2.8 million for exploratoryactivities related to the Western Paria Gulf field.  Additionally, in 2003 we drilled fourdevelopment wells in that field, which required a total investment of $7.8million.  In the La Ceiba field we begandrilling wells La Ceiba 3X and La Ceiba 6X and, depending on the evaluation ofthe results of those wells, a declaration of commercial operation will be issuedto then begin the construction of production facilities to handle the earlycrude oil production, with an estimated investment of approximately $11million.

 

***Orinoco Belt Extra-Heavy Crude Oil Projects***

 

The Venezuelan Congress approved the creation of fourvertically integrated joint venture projects in the Orinoco Belt for theexploitation and upgrading of extra-heavy crude oil of average API gravity of9° and marketing of the upgraded crude oil with API gravities ranging from 16°to 32°.  These joint venture projectshave been implemented through association agreements between the variousparticipating entities and PDVSA.  Theterm of each association agreement is approximately 35 years after commencementof commercial production, and, upon termination, the foreign participant’sownership is transferred to PDVSA.  Eachof the projects is assigned an area that is expected to contain sufficientrecoverable extra-heavy oil to meet planned output during the life of theassociation.  For the foreign partners,the projects represent a significant opportunity to increase production andproved crude oil reserves.  For us, theprojects represent an opportunity to develop the Orinoco Belt’s extra-heavycrude oil reserves.

 

Each of these associations are required to pay thestandard Venezuelan corporate tax rate of 34% (as compared to a tax rate of 50%that is applicable to our Venezuelan subsidiaries engaged in the production ofhydrocarbons).  In addition, they pay aproduction tax ranging between 1% to 16 2/3%, measured depending on accumulatedrevenues and total investment.  These taxconditions were modified in October 2004. See note 23(a) to our consolidated financial statements, includedunder “Item 18.  Financial Statements.”  Also, these strategic associations benefitfrom a 10% investment tax credit on capital investments made after December 31,2001, plus an additional 10% on capital investments that contribute to theenvironmental preservation of their operational areas.

 

The four joint venture projects in the Orinoco Beltare as follows:

 

•      *The Petrozuata Joint Venture*.  Petrozuata is a company owned by PDVSAPetróleo (a subsidiary of PDVSA) and ConocoPhillips.  The construction of facilities at Petrozuatabegan in 1997.  Initial production ofextra-heavy crude oil commenced in August 1998.  Upgraded facilities were completed

 

26

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in2001.  During 2003, Petrozuata produced104 MBPD of extra-heavy crude oil and 86 MBPD of upgraded crude oil with anaverage API gravity ranging from 16° to 24°. Under the terms of the joint venture agreement, ConocoPhillips hasagreed to undertake the refining process at its Lake Charles refinery, in LakeCharles, Louisiana.  By December 2003,total investments in this project amounted to $3,478 million.

 

•      *The Sincor Joint Venture*. Sincrudos de Oriente is a joint venture owned by PDVSA Sincor (asubsidiary of PDVSA), TotalFina and Statoil. In 2003, this joint venture produced 158 MBPD of extra-heavy crude oiland 137 MBPD of upgraded crude oil with an average API gravity ranging from 24°to 32°.  We anticipate that this jointventure will reach a production level of 180 MBPD of upgraded crude oil by2007.  By December 2003, totalinvestments in this project amounted to $4,654 million.

 

•      *The Hamaca Joint Venture*. Petrolera Hamaca is a company owned by Corpoguanipa (a subsidiary ofPDVSA), ChevronTexaco and ConocoPhillips. Hamaca started producing upgraded crude oil in October 2004,achieving by the end of that year a production of 101 MBPD, with an average APIgravity of 25° to 27°.  In 2003, averageproduction of extra-heavy crude oil was 67 MBPD and average production ofdiluted crude oil was 125 MBPD with an average gravity of 16° API.  By December 2003, total investments inthis project amounted to $2,544 million, of which, $472 million was invested in2003.

 

•      *The Cerro Negro Joint Venture*.  Petrolera Cerro Negro is a company owned byPDVSA Cerro Negro, S.A. (a subsidiary of PDVSA), ExxonMobil and BP (formerlyVeba Oel).  Pursuant to the terms of thisjoint venture agreement, we have agreed to sell our share of upgraded crude oilproduced by this joint venture (approximately 80% of total production) toChalmette Refining, a refinery in Chalmette, Louisiana, which is an equal sharejoint venture between PDVSA and ExxonMobil. During 2003, this joint venture produced 101 MBPD of extra-heavy crudeoil and 92 MBPD of upgraded crude oil with an average API gravity of 16°.  By December 2003, total investments inthis project amounted to $2,823 million. See “Item 4.B Business overview—Refining and Marketing—Refining” andnote 10(a) to our consolidated financial statements, included under “Item18.  Financial Statements.”

 

The Orinoco Belt projects differ primarily by thequantity and quality of output.  For theHamaca and Sincor joint ventures, the projects are designed to produce upgradedcrude oil that can be sold to third-party refiners who would otherwise processlight sweet conventional crude oil.  Forthe Petrozuata and Cerro Negro joint ventures, the projects are designed toproduce upgraded crude oil that is suitable for a dedicated refinery.

 

The following table sets forth for each association inthe Orinoco Belt, the parties estimated proved reserves in the areas associatedwith the projects and estimated production:

 

**PDVSA’s Orinoco Belt Proved Reserves**

 
| **Project** | ** ** | **Private Sector Participants** | ** ** | **PDVSA’s  Interest** | ** ** | **Gross  Proved  Reserves** | ** ** | **Estimated  Production of  Upgraded  Crude Oil** | ** ** | **Expected  Average API  of Upgraded  Crude Oil** | ** ** |
|-------------|------------|---------------------------------|------------|----------------------------|------------|-----------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **  | ** ** | ** **                      | ** ** | **(%)**                    | ** ** | **(MMB)**                   | ** ** | **(MBPD)**                                        | ** ** | **(degrees)**                                     | ** ** |
|        |       |                            |       |                       |       |                        |       |                                              |       |                                              |       |
| Petrozuata  |       | ConocoPhillips                  |       | 49.90                      |       | 2,567                       |       | 120                                               |       |                                              | 16-19      |   |
| Sincor      |       | TotalFina, Statoil              |       | 38.00                      |       | 3,497                       |       | 210                                               |       |                                              | 30-32      |   |
| Hamaca      |       | ChevronTexaco, ConocoPhillips   |       | 30.00                      |       | 1,046                       |       | 190                                               | (1)        |                                              | 25-27      |   |
| Cerro Negro |       | ExxonMobil, BP (2)              |       | 41.67                      |       | 3,373                       |       | 120                                               |       |                                              | 16         |   |

 

----

(1) The upgrading facilities were not operating in 2003

(2) Formerly Veba Oel

 

27

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***Operating Service Agreement with National Universities***

 

In October 2000, we entered into operatingservice agreements with three National Universities:  Universidad de Oriente (Eastern University),Universidad del Zulia (Zulia University), and Universidad Central de Venezuela(Central University of Venezuela).  Inthese agreements, we auctioned the right to reactivate, rehabilitate anddevelop fields located in three geographical areas.  The purpose of these agreements with theNational Universities is to provide training and industry experience toVenezuelan university students, especially geophysics, petroleum engineers andgeology students.

 

Each field will be developed by separate entities thatare 51% owned by us and 49% owned by the respective universities.  These fields are:  Socororo, located in Anzoátegui State,operated by Petroucv, S.A., with an assigned surface of 257 square Km; MaraEste, located in the Zulia State, operated by Oleoluz, S.A., with an assignedsurface of 246 square Km; and Jobo, located in Monagas State, operated byPetroudo, S.A. with an assigned surface of 19.57 square Km.  The total assigned area for all these fieldsis approximately 523 square kilometers. As of December 31, 2003, these fields have estimated provedreserves of approximately 234 MMB of crude oil (consisting of 50.5 MMB atSocororo, 69.3 MMB at Mara Este and 114.2 MMB at Jobo, respectively), with anaverage API gravity of 8° to 22° API. During 2003, the total oil production under these operating serviceagreements was 2.5 MBPD.  We expect thesefields to produce approximately 35 MBPD by 2007.  We also anticipate investing a total ofapproximately $202 million in these fields over the next 20 years.  By December 2004, total expendituresamounted to $25.8 million.

 

**Overview of Main Projects with Private SectorParticipation**

 

***The Plataforma Deltana Project***

 

The Plataforma Deltana area is located 250 km offshoreEast of the Orinoco River Delta and Southeast of the territorial border withthe Republic of Trinidad and Tobago (Trinidad and Tobago).  For bidding and business purposes, the zonehas been divided into five blocks mainly prospective for non-associatedgas.  The main objective of the projectis to confirm and develop new non-associated natural gas reserves to meetdomestic market requirements as well as for export, mainly to the AtlanticBasin.

 

The first exploration phase, with disbursementamounting to $180 million, was completed by PDVSA on July 9, 2003 in anarea of 1,000 square kilometers next to the territorial border with Trinidad &Tobago.  Such exploration activityresulted in an increase of the non-associated natural gas reserves estimates to5.6 Trillion cubic feet as audited by the specialized firm Ryder Scott.  A 10 TCF short term proven reserves objectiveis being considered as part of the second exploratory phase being executed inthe period 2004-2005 by the companies working in the area under the grantedlicenses, to assure the commercial development of the Plataforma Deltanaarea.  Total investment in this projecthas been estimated at approximately $4 billion.

 

Licenses for exploration and development for blocks 2and 4 were granted by the Ministry of Energy and Petroleum to threeinternational oil and gas companies in February 2003 (ChevronTexaco andConocoPhillips in Block 2 and Statoil in Block 4).  The international companies are committed toa minimum exploratory program, with an estimated investment of $150 million(drilling activities started in August 2004), and to subsequentinvestments for development if commercial viability is confirmed.  PDVSA’s participation in the partnership,which could range from 1% to 35%, will be determined upon declaration ofcommercial viability.

 

The selection process of partners for block 3 wascompleted in 2003.  In February 2004the Ministry of Energy and Petroleum granted the license for exploration anddevelopment to ChevronTexaco.  Block 1 isreserved for business opportunities, subject to an unitization agreement withTrinidad and Tobago.  On August 2003a memorandum of understanding was signed between the two countries to manageall common reservoirs along the territorial border.  The exploratory program for this block willcost approximately $27 million. Block 5 remains for future growthopportunities.

 

The natural gas produced offshore will be processedonshore in a new industrial complex to be located near the city of Guiria, inSucre State in the North East of Venezuela. It is planned that this industrial complex will also

 

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serve the LNG Mariscal Sucre and other gas projects in the region.  The application of international health,safety and environment standards and sustainable development practices are keystrategies for the development of this area. This project will contribute to Venezuela’s natural gas businessexpansion, and will further diversify the country’s energy sources.

 

***Mariscal Sucre Project***

 

The main purpose of this project is the development ofNorth Paria fields, at the North East of Venezuela to produce non-associatednatural gas to supply both local and international markets. The projectinvolves production of 1,070 million cubic feet of natural gas per day (MMCFD);the construction of a gas liquefaction train with a design capacity of 4.7million metric tons per year (MMTY).  Asa reference, one of the development scenarios for the four Mariscal SucreProject’s fields consist of a total of 45 reservoirs that are going to bedrained with 36 wells and drilled in 4 development phases over a period ofabout 20 years.

 

The first drilling phase comprises 14 platform wells –average of 31 days to drill and 14 days to complete if no downhole chemicalinjection is needed – and will all be completed with the use of a deepwatercantilever jack-up rig.  The initialwells will be at Río Caribe (6 wells) and Mejillones (8 wells) from fourplatforms.  The Central ProductionFacility (CPF) for the entire development will be located at Mejillones andinitially, it will gather all production. The export pipeline will initiate from this platform, and the offshorecentral control room will be located on this structure.  There are no processing facilities on theCPF.  The gas, condensate, and producedwater will be routed to the LNG plant at Güiria by a multi-phase exportpipeline.  All platforms will containpower generation and associated utilities.

 

Estimated initial production will be 17,000 BPD ofstabilized condensate from Rio Caribe and 1,070 MMCFD of gas from allfields.  During this phase, the bulk ofcondensate will come from Rio Caribe.

 

The total estimated investment is $2,700 million.  First stage activities include basicservices, dock services, port services, general services, corridors services,roads and security, residential area and relocation of city airport.

 

**Refining and Marketing**

 

***Refining***

 

Our downstream strategy has been focused on theexpansion and upgrading of our refining operations in Venezuela, the UnitedStates and Europe, allowing us to increase our production of refined petroleumproducts and upgrade our product slate toward higher-margin refined petroleumproducts.  We have also increased thecomplexity of our refining capacity in Venezuela and made extensive investmentsto convert our worldwide refining assets from simple conversion to deepconversion capabilities.  Deep conversioncapabilities in our Venezuelan refineries have enabled us to improve yields byallowing a greater percentage of higher value products to be produced.  Such capabilities have resulted in an increasein our gasoline and distillate yield from 35% in 1976 to 70% in 2003, and hasallowed us to reduce our fuel oil production from 60% to 23% during the sameperiod, resulting in an improved export product portfolio.

 

We conduct refining activities in Venezuela, theCaribbean, the United States and Europe. Our net interest in refining capacity has grown from 2,362 MBPD in 1991to 3,092 MBPD at December 31, 2003. The following diagram presents a summary of PDVSA’s refining operationsin 2003:

 

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**PDVSA’s Refining System**

 

 

**PDVSA’s Refining Capacity**

 

The following table sets forth the refineries in whichwe hold an interest, the rated crude oil refining capacity and our net interestat December 31, 2003:

 
| ** **                                   | ** ** | **Owner**          | ** ** | **PDVSA  Interest** | ** ** | **Total Rated  Crude Oil  Refining  Capacity** | ** ** | **PDVSA  Net Interest in  Refining Capacity** | ** ** |
|----------------------------------------------|------------|--------------------|------------|---------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                   | ** ** | ** **         | ** ** | **(%)**             | ** ** | **(MBPD)**                                     | ** ** | **(MBPD)**                                    | ** ** |
|                                         |       |               |       |                |       |                                           |       |                                          |       |
| **Venezuela**                                |       |               |       |                |       |                                           |       |                                          |       |
| Paraguaná Refining Complex, Falcón |       | PDVSA              |       | 100                 |       | 940                                            |       | 940                                           |       |
| Puerto La Cruz, Anzoátegui              |       | PDVSA              |       | 100                 |       | 203                                            |       | 203                                           |       |
| El Palito, Carabobo                          |       | PDVSA              |       | 100                 |       | 130                                            |       | 130                                           |       |
| Bajo Grande, Zulia                           |       | PDVSA              |       | 100                 |       | 15                                             |       | 15                                            |       |
| San Roque, Anzoátegui                   |       | PDVSA              |       | 100                 |       | 5                                              |       | 5                                             |       |
| **Total Venezuela**                          |       |               |       |                |       | 1,293                                          |       | 1,293                                         |       |
| **Netherlands  Antilles (Curaçao)**     |       |               |       |                |       |                                           |       |                                          |       |
| Isla (1)                                     |       | PDVSA              |       | 100                 |       | 335                                            |       | 335                                           |       |
| **United  States**                           |       |               |       |                |       |                                           |       |                                          |       |
| Lake Charles, Louisiana                      |       | CITGO              |       | 100                 |       | 320                                            |       | 320                                           |       |
| Corpus Christi, Texas                        |       | CITGO              |       | 100                 |       | 157                                            |       | 157                                           |       |
| Paulsboro, New Jersey                        |       | CITGO              |       | 100                 |       | 84                                             |       | 84                                            |       |
| Savannah, Georgia                            |       | CITGO              |       | 100                 |       | 28                                             |       | 28                                            |       |
| Houston, Texas(2)                            |       | LYONDELL-CITGO     |       | 41                  |       | 265                                            |       | 109                                           |       |
| Lemont, Illinois                             |       | CITGO              |       | 100                 |       | 167                                            |       | 167                                           |       |
| Chalmette, Louisiana(3)                      |       | Chalmette Refining |       | 50                  |       | 184                                            |       | 92                                            |       |
| Saint Croix, U.S. Virgin Islands(4)          |       | Hovensa            |       | 50                  |       | 495                                            |       | 248                                           |       |
| **Total United States**                      |       |               |       |                |       | 1,700                                          |       | 1,205                                         |       |
| **Europe**                                   |       |               |       |                |       |                                           |       |                                          |       |
| Gelsenkirchen, Germany(5)                    |       | Ruhr               |       | 50                  |       | 230                                            |       | 115                                           |       |
| Schwedt, Germany(5)                          |       | Ruhr               |       | 19                  |       | 240                                            |       | 45                                            |       |
| Neustadt, Germany(5)                         |       | Ruhr               |       | 13                  |       | 260                                            |       | 33                                            |       |
| Karlsruhe, Germany(5)                        |       | Ruhr               |       | 12                  |       | 312                                            |       | 37                                            |       |
| Nynäshamn, Sweden(6)                    |       | Nynäs         |       | 50                  |       | 29                                             |       | 15                                            |       |
| Gothenburg, Sweden(6)                        |       | Nynäs         |       | 50                  |       | 11                                             |       | 5                                             |       |
| Dundee, Scotland(6)                          |       | Nynäs         |       | 50                  |       | 9                                              |       | 4                                             |       |
| Eastham, England(6)                          |       | Nynäs         |       | 25                  |       | 18                                             |       | 5                                             |       |
| **Total Europe(7)**                          |       |               |       |                |       | 1,109                                          |       | 259                                           |       |
| **Total outside Venezuela**                  |       |               |       |                |       | 3,144                                          |       | 1,799                                         |       |
| **Worldwide Total**                          |       |               |       |                |       | 4,437                                          |       | 3,092                                         |       |

 

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(1)           Leased in1994.  The lease expires in 2019.

(2)           A joint venturewith Lyondell Chemical Company.

(3)           A joint venturewith ExxonMobil

(4)           A joint venturewith Amerada Hess.

(5)           A joint venturewith BP RP.

(6)           A joint venturewith Neste Oil, which currently owns Fortum Oil and Gas.

(7)           Antwerp, Belgiumwas divested in 2003

 

In order to maintain our competitiveness withininternational markets, we expect to invest approximately $14,133 million from2005 through 2010 in Venezuela to improve our refining systems and to adapt oursystems to meet environmental regulations and domestic and internationalproduct quality requirements.  Therefining plan includes projects aimed at manufacturing gasoline.  On March 13, 2001, we entered into acontract for approximately $300 million with a Venezuelan-Japanese Consortiumled by the Japanese JGC Corporation (formed by the Japanese Chiyoda Corporationand the Venezuelan companies, Jantesa and Vepica) to construct naphthahydrotreating facilities and diesel hydro-desulphurization and environmentalunits in a refinery located in Puerto La Cruz, referred to in this annualreport as the VALCOR project.  Theprimary objective of this project was to produce unleaded gasoline to meet thedemands of the local market and to produce distillates of low sulphur contentfor export to international markets.

 

The facilities and processing units were completed in December 2004at a cost of $545 million.  VALCOR is currentlyin production mode, producing 45 MBPD of gasoline and 30 MBPD of dieselblending components.

 

Additionally, the two fluid catalytic cracking unitslocated at our Amuay and Cardón refineries (Paraguaná Refining Complex - PRC),are being modified to manufacture more gasoline.  A low sulfur gasoline production unit(currently in the engineering phase) based on our own technology (ISAL®developed by Intevep, a wholly-owned subsidiary of PDVSA) is expected to be operationalin the Amuay refinery by 2006 and another similar unit will be installed at theIsla refinery in Curacao sometime in the refining plan period.  We also plan to increase the heavy cruderefining capacity, and we foresee the expansion of our delayed coking plantslocated at the refining complex in Paraguaná, Venezuela, and we are alsoperforming studies to increase Venezuela’s refining capacity.

 

*Venezuela and the Caribbean*

 

Our refineries in Venezuela are located atAmuay-Cardón (PRC), Puerto La Cruz, El Palito, Bajo Grande and San Roque, withrated crude oil refining capacities of 635- 305 MBPD, 203 MBPD, 130 MBPD, 15MBPD and 5 MBPD, respectively.  We alsooperate the Isla Refinery in Curaçao, which we lease on a long-term basis fromthe Netherlands-Antilles government.  Thelease expires in 2019.  Through theserefineries, we produce reformulated gasoline and distillates to meet the U.S.and other international market requirements.

 

*United States*

 

Through our wholly owned subsidiary, CITGO, we producelight fuels and petrochemicals primarily through our refineries in LakeCharles, Louisiana; Corpus Christi, Texas; and Lemont, Illinois.  Our asphalt refining operations are carriedout through refineries in Paulsboro, New Jersey; and Savannah, Georgia.

 

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CITGO’s largest supplier of crude oil is PDVSA.  CITGO has entered into long-term crude oilsupply agreements with PDVSA with respect to the crude oil requirements foreach of CITGO’s Lake Charles, Corpus Christi, Paulsboro and Savannah refineries.  These crude oil supply agreements requirePDVSA to supply minimum quantities of crude oil and other feedstocks to CITGO,usually from 20 to 25 years.  These crudesupply agreements contain force majeure provisions that entitle the supplier toreduce the quantity of crude oil and feedstocks delivered under the crudesupply agreements under specified circumstances.

 

The Lake Charles refinery has a rated refiningcapacity of 320 MBPD and is capable of processing large volumes of heavy crudeoil into a flexible slate of refined products, including significant quantitiesof high-octane unleaded gasoline and reformulated gasoline.  A project to increase the crude oildistillation capacity by 105 MBPD was completed and became operative by February 2005,so this refinery is currently the fourth largest in the U.S. with a totalrefining capacity of 425 MBPD.  The LakeCharles refinery’s main petrochemical products are propylene, benzene and mixedxylenes.  Its industrial products includesulphur, residual fuels and petroleum coke. This refinery has one of the highest capacity levels for highervalue-added products production in the United States, with a multiple streamcapacity that allows it to continue operating with one or more units shutdown.  This refinery has a SolomonProcess Complexity Rating of 18.2 (as compared to an average of 14.0 for U.S.refineries in Solomon Associates, Inc.’s most recently availablesurvey).  The Solomon Process ComplexityRating is an industry measure of a refinery’s ability to produce higher valueproducts.  A higher Solomon ProcessComplexity Rating indicates a greater capability to produce such products.

 

The Corpus Christi refinery has a refining capacity of157 MBPD and a processing technology that enables it to produce premium gradesof gasoline that exceed that of most of its U.S. competitors and to reducesulfur levels in refined petroleum products. This refinery has a Solomon Process Complexity Rating of 16.5.  The Corpus Christi refinery’s mainpetrochemical products include cumene, cyclohexane, and aromatics (includingbenzene, toluene and xylenes).

 

The Lemont refinery processes heavy crude oil into aflexible slate of refined products.  Therefinery has a rated refining capacity of 167 MBPD and has a Solomon ProcessComplexity Rating of 11.7.  This refineryis one of the most recently designed and constructed refineries in the UnitedStates.  It is a flexible deep conversionfacility that produces primarily gasoline, diesel, jet fuel and petrochemicals.

 

The refineries in Paulsboro, New Jersey and Savannah,Georgia are specialized asphalt refineries. The Paulsboro refinery, which is particularly suited to processingasphalt, also has facilities to process low sulfur, light crude oil wheneverfavorable conditions exist.

 

Through LYONDELL-CITGO, a joint venture owned 41.25%by PDVSA and 58.75% by Lyondell, we have a net interest in refining capacity of109 MBPD in a refinery located in Houston, Texas with a refining capacity of265 MBPD.  PDVSA supplies a substantial amountof the crude oil processed by this refinery under a long-term crude oil supplyagreement that expires in the year 2017. Under this agreement, LYONDELL-CITGO purchased approximately $1.7billion of crude oil and feedstocks at market related prices from PDVSA in2003.  CITGO purchases substantially allof the gasoline, diesel and jet fuel produced at this refinery under along-term contract.

 

Various disputes exist between LYONDELL-CITGO and itspartners and their respective affiliates concerning the interpretation ofagreements between the parties relating to the operation of the refinery.

 

PDVSA Petróleo, pursuant to its contractual rightsunder the crude oil supply agreement with LYONDELL-CITGO, declared a forcemajeure situation in April 1998, and again in February 1999 through October 2000,as well as from February 2001 to March 2003.  PDVSA, pursuant to its contractual rightsunder the supplemental supply agreement with LYONDELL-CITGO, which guaranteesPDVSA Petróleo’s obligations under the crude oil supply agreement, invoked itsright to declare a force majeure situation during the same time periods.  As a result of these declarations PDVSAPetróleo and PDVSA were relieved of their obligations to deliver crude oilunder both agreements and LYONDELL-CITGO purchased crude oil from alternatesources.  LYONDELL-CITGO received noticeof force majeure from PDVSA Petróleo and/or PDVSA in December 2002.  LYONDELL-CITGO purchased crude oil in thespot market to replace the volume not delivered under contract.  The force majeure was lifted on March 6,2003.  In February 2002,LYONDELL-CITGO commenced an action against PDVSA and PDVSA Petróleo, in theUnited States District Court for the Southern District of New York seekingdamages for

 

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alleged breaches of the long-term crude oil supply agreement betweenLYONDELL-CITGO and Lagoven (subsequently merged into PDVSA Petróleo) and thesupplemental supply agreement, between LYONDELL-CITGO and PDVSA.  Both agreements are dated May 5, 1993and expire in 2017.  On May 31,2002, PDVSA and PDVSA Petróleo filed a motion to dismiss the case.  On August 6, 2003, the judge dismissedone of the ten counts in the complaint, allowing the remaining counts toproceed through early stages of litigation. The parties engaged in extensive discovery beginning in November 2003.  In the course of expert discovery, on September 30,2004, one of LYONDELL-CITGO’s retained experts filed a report listing theamount of liquidated damages owed by PDVSA and PDVSA Petróleo to LYONDELL-CITGOthrough September 2004 as $125,117,465. For the same period, LYONDELL-CITGO’s expert calculated the amount ofactual damages as $258,447,787 to $259,743,967, depending on the method used tocalculate interest.  LYONDELL-CITGO alsoclaims additional unspecified amounts for attorneys’ fees and costs.  Discovery was formally concluded on October 1,2004.  On October 1 and October 6,2004, the magistrate judge issued orders directing PDVSA and PDVSA Petróleo toproduce all Board of Directors minutes and related documents toLYONDELL-CITGO.  PDVSA informed themagistrate judge that it could not comply with his order because grantingLYONDELL-CITGO unrestricted access to PDVSA’s Board of Directors materialsviolated Venezuelan law.  The magistratejudge entered an adverse inference sanction against PDVSA and PDVSA Petróleo,ordering that the court may infer that the Board of Directors’ documents wereunfavorable to PDVSA and favorable to LYONDELL-CITGO.  The magistrate judge also ordered that thecourt may give the strongest weight to the evidence already in the case infavor of LYONDELL-CITGO, but may also consider any evidence presented by PDVSAto explain why it did not produce the Board of Directors materials.  The judge affirmed the magistrate judge’sadverse inference instruction on April 29, 2005.  Meanwhile, on October 22, 2004, bothparties filed motions for summary judgment with the court, which have beenfully briefed.  These motions are stillpending.  Management of the companiesintends to contest vigorously LYONDELL-CITGO’s claims.  See “Item 8.A.7 Legal Proceedings.”

 

Through Chalmette Refining, an equal-share jointventure between PDVSA and ExxonMobil, we have a net interest in refiningcapacity of 92 MBPD in a refinery located in Chalmette, Louisiana.  The Chalmette refinery processes upgradedextra-heavy crude oil to be produced by our Cerro Negro joint venture.  PDVSA (through PDV Chalmette) has an optionto purchase up to 50% of the refined products produced at the Chalmetterefinery. PDVSA did not exercise or assign this option to CITGO for 2001 or2002 or 2003.  ExxonMobil, which operatesboth the Cerro Negro joint venture and the Chalmette refinery, purchased substantiallyall of the refined products produced by the Chalmette refinery at market pricesduring 2002 and 2003.  See “Item 4.BBusiness overview—Initiatives Involving Private Sector Participation—OrinocoBelt Extra-Heavy Crude Oil Projects.”

 

PDV Holding and ConocoPhillips own an integrated 58MBPD coker and 110 MBPD vacuum crude distillation unit within an existingrefinery owned by ConocoPhillips in Sweeny, Texas.  Each party owns a 50% equity interest in thisfacility.  ConocoPhillips has enteredinto a long-term crude oil supply agreement with us to supply the Sweenyrefinery with heavy sour crude oil. Revenues from the Sweeny joint venture will consist of fees paid byConocoPhillips to the joint venture under the processing agreement and anyrevenues from the sale of coke to third parties.  Effective December 6, 2002, PDVSAdeclared force majeure under the Crude Oil Supply Agreement and stoppedshipment of heavy sour crude oil to the Conoco Sweeny refinery.  During the period of force majeure,ConocoPhillips obtained heavy, sour crude oil from alternative sources.  PDVSA lifted the force majeure on March 6,2003, at which time ConocoPhillips resumed receipt of minimal crudevolumes.  By July 2003, the crudesupply deliveries were back to normal.

 

We own a 50% interest in the Hovensa refinery in theU.S. Virgin Islands, previously owned by Hess Oil Virgin Islands Corporation,with a current refining capacity of approximately 495 MBPD.  The joint venture has entered into long-termsupply contracts with PDVSA for up to 60% of its crude oil requirements.  During 2002, Hovensa completed constructionof a delayed coker unit and related facilities that it had been building inconnection with the formation of the joint venture.

 

*Europe*

 

Through Ruhr, a joint venture owned 50% by PDVSA andBP RP, we have equity interests in four German refineries (Gelsenkirchen,Neustadt, Karlsruhe and Schwedt) in which our net interest in crude oilrefining capacity at December 31, 2003 was 115 MBPD, 33 MBPD, 37 MBPD and45 MBPD, respectively.  Ruhr also ownstwo petrochemical complexes (Gelsenkirchen and Münchmünster).  The Gelsenkirchen complex, which includes

 

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modern, large-scale units that are integrated with the crude oilrefineries located in the same complex, primarily produces olefins, aromaticproducts, ammonia and methanol.  TheMünchmünster complex, integrated with the nearby Bayernoil refinery, primarilyproduces olefins.  Ruhr’s petrochemicalcomplexes have an average production capacity of approximately 3.8 millionmetric tons per year of olefins, aromatic products, methanol, ammonia andvarious other petrochemical products.

 

Through Nynäs, a joint venture owned 50.001% by PDVEuropa and 49.999% by Neste Oil, we own interests in three specializedrefineries:  Nynäshamn and Gothenburg inSweden and Dundee in Scotland.  Our netinterest in crude oil refining capacity in each of these refineries at December 31,2003 was 15 MBPD, 5 MBPD and 4 MBPD, respectively.  The Nynäs refineries are specially designedto process heavy sour crude oil.  Nynäsalso owns a 25% interest in a refinery in Eastham, England.  The Eastham refinery is a specialized asphaltrefinery in which our net interest crude oil refining capacity at December 31,2003 was 5MBPD.

 

The Nynäs refineries in Nynäshamn produce asphalt andnaphthenic specialty oils.  The Dundee,Gothenberg and Eastham refineries are specialized asphalt refineries.  Nynäs purchases crude oil from us andproduces asphalt and naphthenic specialty oils, two products for whichVenezuelan heavy sour crude oil is particularly well suited feedstock due toits proportions of naphthenic, paraffinic and aromatic compounds.  Asphalt products are used for roadconstruction and various industrial purposes, while naphthenic specialty oilsare used principally in electrical transformers, as mechanical process oils andin the rubber and printing ink industries.

 

The following table sets forth our aggregate refinerycapacity, input supplied by us (out of our own production or bought in the openmarket), product yield and utilization rate for the three-year period ended December 31,2003.

 

**PDVSA’s Refinery Production**

 
| ** **                                            | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **2003**                         | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                            | ** ** | **MBPD**                         | ** ** | **% of Total** | ** ** | **MBPD** | ** ** | **% of Total** | ** ** | **MBPD** | ** ** | **% of Total** | ** ** |
| **Total  refining capacity**                          |       | 4,437                            |       |   |   | 4,368 |   |   |   | 4,368 |   |   |   |
| **PDVSA’s  net interest in refining capacity**   |       | 3,092                            |       |   |   | 3,085 |   |   |   | 3,085 |   |   |   |
| **Refinery  input(1):**                               |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Crude oil                                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| PDVSA(2)                                              |       | 1,856                            |       | 67 |   | 1,848 |   | 70 |   | 2,018 |   | 72 |   |
| Light (API gravity of 30o or greater)            |       | 560                              |       | 20 |   | 565 |   | 21 |   | 551 |   | 20 |   |
| Medium (API gravity of between 21o and 30o) |       | 821                              |       | 30 |   | 850 |   | 32 |   | 983 |   | 35 |   |
| Heavy (API gravity of less than 21o)             |       | 475                              |       | 17 |   | 433 |   | 17 |   | 484 |   | 17 |   |
|                                                  |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Other                                                 |       | 533                              |       | 19 |   | 440 |   | 16 |   | 483 |   | 17 |   |
| Light (API gravity of 30o or greater)            |       | 308                              |       | 11 |   | 330 |   | 12 |   | 356 |   | 13 |   |
| Medium (API gravity of between 21o and 30o) |       | 137                              |       | 5 |   | 84 |   | 3 |   | 120 |   | 4 |   |
| Heavy (API gravity of less than 21o)             |       | 88                               |       | 3 |   | 26 |   | 1 |   | 7 |   | 0 |   |
| Crude oil subtotal                                    |       | 2,389                            |       | 86 |   | 2,288 |   | 86 |   | 2,501 |   | 89 |   |
|                                                  |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Other feedstocks                                      |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| PDVSA                                                 |       | 242                              |       | 9 |   | 250 |   | 9 |   | 168 |   | 6 |   |
| Other                                                 |       | 147                              |       | 5 |   | 120 |   | 5 |   | 139 |   | 5 |   |
| Other feedstocks subtotal                             |       | 389                              |       | 14 |   | 370 |   | 14 |   | 307 |   | 11 |   |
|                                                  |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Total refinery input(3)                               |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| PDVSA                                                 |       | 2,098                            |       | 76 |   | 2,098 |   | 79 |   | 2,186 |   | 78 |   |
| Other                                                 |       | 680                              |       | 24 |   | 560 |   | 21 |   | 622 |   | 22 |   |
| **Total**                                             |       | 2,778                            |       | 100 |   | 2,658 |   | 100 |   | 2,808 |   | 100 |   |
| ** **                                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| **Product  yield(4):**                                |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Gasoline/Naphtha                                      |       | 969                              |       | 36 |   | 951 |   | 37 |   | 1,006 |   | 35 |   |
| Distillate                                            |       | 874                              |       | 32 |   | 817 |   | 31 |   | 947 |   | 33 |   |
| Low sulfur residual                                   |       | 47                               |       | 2 |   | 30 |   | 1 |   | 34 |   | 1 |   |
| High sulfur residual                                  |       | 339                              |       | 13 |   | 273 |   | 11 |   | 339 |   | 12 |   |
| Asphalt/Coke                                          |       | 182                              |       | 7 |   | 177 |   | 7 |   | 211 |   | 8 |   |
| Naphthenic specialty oil                              |       | 9                                |       | 0 |   | 12 |   | 1 |   | 9 |   | 0 |   |
| Petrochemicals                                        |       | 110                              |       | 4 |   | 92 |   | 3 |   | 92 |   | 3 |   |
| Other                                                 |       | 170                              |       | 6 |   | 225 |   | 9 |   | 225 |   | 8 |   |
| **Total product yield**                               |       | 2,700                            |       | 100 |   | 2,577 |   | 100 |   | 2,863 |   | 100 |   |
| ** **                                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| **Utilization(5)**                                    |       | 77                               | %          |   |   | 74 | % |   |   | 81 | % |   |   |

 

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(1)           Our refineriessourced 78%, 81% and 81% of our total crude oil requirements from crude oilproduced by us in 2003, 2002 and 2001, respectively.

(2)           Sourced by us(including supplies from entities that are not subject to our control).

(3)           Includes ourinterest in crude oil and other feedstocks.

(4)           Our interest in productyield.

(5)           Crude oilrefinery input divided by the net interest in refining capacity.

 

In 2003, we supplied substantially all of the crudeoil requirements to our Venezuelan refineries (approximately 857 MBPD), 177MBPD of crude oil to our leased refinery in Curaçao and an aggregate of 1,355MBPD of crude oil to refineries owned by our international subsidiaries or inwhich we otherwise have an interest.  Ofthe total volumes supplied by us to our international affiliates, 210 MBPD werepurchased by PDVSA in the global market and supplied to our Europeanaffiliates.  Additionally, CITGOpurchased a total of 336 MBPD of crude oil from PDVSA for processing in their refineries.

 

***Marketing***

 

In 2003, we exported 1,648 MBPD of crude oil or 67% ofour total crude oil production and 502 MBPD of refined petroleum productsproduced in Venezuela.  Of total exportsof crude oil and refined petroleum products, 1,183 MBPD (55%) were sold to theUnited States and Canada.  During theperiod from January through December 2003, according to the PetroleumSupply Monthly dated April 2004, we were the fourth largest aggregatesupplier of crude oil and refined petroleum products in the United States.

 

Of our total crude oil exports in 2003, an aggregateof 923 MBPD (56%) were exported to the United States and Canada; 572 MBPD (35%)to the Caribbean and Central America; 88 MBPD (5%) to Europe and 65 MBPD (4%)to South America and other destinations.

 

Of our total refined petroleum products produced inVenezuela in 2003, approximately 432 MBPD were used in the domestic market and502 MBPD were exported.  Of the totalexports of refined petroleum products in 2003, 260 MBPD (52%) were sold to theUnited States and Canada; 103 MBPD (20%) to the Caribbean and Central Americaand 139 MBPD (28%) to South America and other destinations.

 

The following tables set forth the composition andaverage prices of our exports of crude oil and refined petroleum products forthe three-year period ended December 31, 2003:

 

**PDVSA’s ExportVolumes**

 
| ** **                                                 | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **2003**                         | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                 | ** ** | **MBPD**                         | ** ** | **% of Total** | ** ** | **MBPD** | ** ** | **% of Total** | ** ** | **MBPD** | ** ** | **% of Total** | ** ** |
| **Crude  oil(1):**                                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Light (API gravity of 30o or more)                    |       | 657                              |       | 40 |   | 672 |   | 38 |   | 659 |   | 32 |   |
| Medium (API gravity of between 21o and 30o)      |       | 299                              |       | 18 |   | 360 |   | 20 |   | 585 |   | 28 |   |
| Heavy and extra-heavy (API gravity of less  than 21o) |       | 692                              |       | 42 |   | 732 |   | 42 |   | 821 |   | 40 |   |
| Subtotal                                                   |       | 1,648                            |       | 100 |   | 1,764 |   | 100 |   | 2,065 |   | 100 |   |
|                                                       |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| **Refined  products:**                                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Gasoline/Naphtha                                           |       | 108                              |       | 22 |   | 137 |   | 21 |   | 165 |   | 24 |   |
| Distillate(2)                                              |       | 167                              |       | 33 |   | 231 |   | 36 |   | 241 |   | 35 |   |
| Low sulfur residual                                        |       | —                           |       | — |   | — |   | — |   | 3 |   | — |   |
| High sulfur residual                                       |       | 134                              |       | 27 |   | 149 |   | 23 |   | 189 |   | 27 |   |
| Liquid petroleum gas                                       |       | 51                               |       | 10 |   | 56 |   | 9 |   | 44 |   | 6 |   |
| Other                                                      |       | 42                               |       | 8 |   | 74 |   | 11 |   | 55 |   | 8 |   |
| **Subtotal**                                               |       | 502                              |       | 100 |   | 647 |   | 100 |   | 697 |   | 100 |   |
| **Total exports**                                          |       | 2,150                            |       |   |   | 2,411 |   |   |   | 2,762 |   |   |   |

 

35

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(1)           Includes salesof crude oil to subsidiaries and affiliated refineries (including to the IslaRefinery in Curaçao) of 1,117 MBPD, 1,028 MBPD and 1,143  MBPD in 2003, 2002 and 2001, respectively.

(2)           Includeskerosene.

 

The following table sets forth the average prices ofour exports of crude oil and refined petroleum products from Venezuela for thethree-year period ended December 31, 2003:

 

**PDVSA’s Average Export Prices**

 
| ** **               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **2003**                         | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **               | ** ** | **($ per barrel)**          | ** ** |
| Crude oil(1)             |       | 24.35                            |       | 21.19 |   | 18.95 |   |
| Refined  products        |       | 26.53                            |       | 24.23 |   | 23.94 |   |
| Liquefied  petroleum gas |       | 18.84                            |       | 17.65 |   | 19.55 |   |
| Average for  the year    |       | 24.89                            |       | 21.94 |   | 20.21 |   |

 

----

(1)           Includes salesof crude oil to affiliates.

 

The following table sets forth the geographic breakdownof our exports by types of crude oil, identifying sales to affiliates and thirdparties for the three-year period ended December 31, 2003:

 

**PDVSA’sTotal Crude Oil and Refined Products Export Volumes**

 
| ** **                                                  | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                  | ** ** | **2003**                         | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                  | ** ** | **(MBPD)**                       | ** ** | **(% of  Total)** | ** ** | **(MBPD)** | ** ** | **(% of  Total)** | ** ** | **(MBPD)** | ** ** | **(% of  Total)** | ** ** |
| **Crude  oil:**                                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| **All  types**                                              |       | 1,648                            |       | 100 |   | 1,764 |   | 100 |   | 2,065 |   | 100 |   |
| United  States and Canada                                   |       | 923                              |       | 56 |   | 1,053 |   | 60 |   | 1,190 |   | 58 |   |
| Affiliates                                                  |       | 579                              |       | 35 |   | 678 |   | 38 |   | 694 |   | 34 |   |
| Third  parties                                              |       | 344                              |       | 21 |   | 375 |   | 22 |   | 496 |   | 24 |   |
| Europe                                                      |       | 88                               |       | 5 |   | 134 |   | 8 |   | 151 |   | 7 |   |
| Affiliates                                                  |       | 65                               |       | 4 |   | 61 |   | 4 |   | 63 |   | 3 |   |
| Third  parties                                              |       | 23                               |       | 1 |   | 73 |   | 4 |   | 88 |   | 4 |   |
| Caribbean  and Central America                              |       | 572                              |       | 35 |   | 500 |   | 28 |   | 573 |   | 28 |   |
| Affiliates                                                  |       | 473                              |       | 29 |   | 360 |   | 20 |   | 386 |   | 19 |   |
| Third  parties                                              |       | 99                               |       | 6 |   | 140 |   | 8 |   | 187 |   | 9 |   |
| South  America and others                                   |       | 65                               |       | 4 |   | 77 |   | 4 |   | 151 |   | 7 |   |
| Third  parties                                              |       | 65                               |       | 4 |   | 77 |   | 4 |   | 151 |   | 7 |   |
| **Light**(API  gravity of 30o or greater)(1)           |       | 657                              |       | 40 |   | 672 |   | 38 |   | 659 |   | 32 |   |
| United  States and Canada                                   |       | 273                              |       | 17 |   | 256 |   | 14 |   | 273 |   | 13 |   |
| Others                                                      |       | 384                              |       | 23 |   | 416 |   | 24 |   | 386 |   | 19 |   |
| **Medium/Heavy**(API gravity of less than 30o)(2)      |       | 991                              |       | 60 |   | 1,092 |   | 62 |   | 1,406 |   | 68 |   |
| United  States and Canada                                   |       | 651                              |       | 40 |   | 797 |   | 45 |   | 913 |   | 44 |   |
| Others                                                      |       | 340                              |       | 20 |   | 295 |   | 17 |   | 493 |   | 24 |   |
| **Refined  petroleum products:**                            |       | 502                              |       | 100 |   | 647 |   | 100 |   | 697 |   | 100 |   |
| United  States and Canada                                   |       | 260                              |       | 52 |   | 216 |   | 33 |   | 307 |   | 44 |   |
| Others                                                      |       | 242                              |       | 48 |   | 431 |   | 67 |   | 390 |   | 56 |   |
| **Total crude oil and refined petroleum  products exports** |       | 2,150                            |       |   |   | 2,411 |   | n.a. |   | 2,762 |   | n.a. |   |
| **Average  sales price per barrel**(in $):                  |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Light (API  gravity of 30o or greater)                 |       | $                                | 27.16      |   |   |   | $ | 23.46 |   |   |   | $ | 22.47 |   |   |   |
| Medium/Heavy  (API gravity of less than 30o)           |       | $                                | 22.56      |   |   |   | $ | 20.24 |   |   |   | $ | 17.29 |   |   |   |
| Refined  petroleum products                                 |       | $                                | 26.53      |   |   |   | $ | 24.23 |   |   |   | $ | 23.94 |   |   |   |

 

36

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----

(1)           Includescondensate.

(2)           Crude oils canalso be classified by sulfur content (by weight).  “Sour” crudes contain 0.5% or greater sulfurcontent (by weight) and “sweet” crudes contain less than 0.5% sulfur content(by weight).  Substantially all of ourexports are classified as sour crude.

 

The following table sets forth our consolidated salesvolume of crude oil and refined petroleum products for the three-year periodended December 31, 2003:

 

**PDVSA’sConsolidated Sales Volume**

 
| ** **                       | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **2003**                         | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                       | ** ** | **(MBPD)**                       | ** ** | **(% of  Total)** | ** ** | **(MBPD)** | ** ** | **(% of  Total)** | ** ** | **(MBPD)** | ** ** | **(% of  Total)** | ** ** |
| Refined  petroleum products      |       | 2,371                            |       | 63 |   | 2,583 |   | 59 |   | 2,586 |   | 58 |   |
| Crude oil                        |       | 1,413                            |       | 37 |   | 1,782 |   | 41 |   | 1,892 |   | 42 |   |
| **Total**                        |       | 3,784                            |       | 100 |   | 4,365 |   | 100 |   | 4,478 |   | 100 |   |
| Average  Price/Barrel ($/barrel) |       | 32.08                            |       |   |   | 26.56 |   |   |   | 28.21 |   |   |   |

 

*Marketing in the United States*

 

*Sales of Crude Oil to Affiliates*.  We supply our international refiningaffiliates with crude oil and feedstocks either produced by us or purchased inthe open market.  Some of our U.S.affiliates have entered into long-term supply contracts with us that require usto supply minimum quantities of crude oil and other feedstocks to suchaffiliates, usually for 20 to 25 years. These contracts are scheduled to expire in or after 2006.

 

Such contracts incorporate price formulas based on themarket value of a slate of refined petroleum products deemed to be producedfrom each particular grade of crude oil or feedstock, less certain deemedrefining costs, certain actual costs, including transportation charges, importduties and taxes, and a deemed margin, which varies according to the grade ofcrude oil or other feedstock delivered. Deemed margins and deemed costs are adjusted periodically by a formulaprimarily based on the rate of inflation. Because deemed operating costs and the slate of refined petroleumproducts deemed to be produced for a given barrel of crude oil or otherfeedstock do not necessarily reflect the actual costs and yields in any period,the actual refining margin earned by the purchaser under the various contractswill vary depending on, among other things, the efficiency with which suchpurchaser conducts its operations during such period.  These contracts are designed to reduce theinherent earnings volatility of the refining and marketing operations of ourinternational refining affiliates.  Othersupply contracts between us and our U.S. affiliates provide for the sale ofcrude oil at market prices.

 

Some of the above contracts provide that, undercertain circumstances, if supplies are interrupted, we are required tocompensate the affected affiliate for any additional costs incurred in securingcrude oil or other feedstocks.  Thesecrude oil supply contracts may be terminated by mutual agreement, by eitherparty in the event of

 

37

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a material default, bankruptcy or similar financial hardship on thepart of the other party or, in certain cases, if we no longer hold, directly orindirectly, 50% or more of the ownership interests in the related affiliate.

 

*Sales of Crude Oil to Third Parties*.  Most of our export sales of crude oil tothird parties, including customers in the United States with which we maintainlong-standing commercial relationships, are made at market prices pursuant toour general terms and conditions, and priced in dollars.  Among our customers are major oil companiesand other medium-sized companies. Although our general terms and conditions do not require specifiedvolumes to be bought or sold, historically, a majority of our customers havetaken shipments on a regular basis at a relatively constant volume throughoutthe year.

 

*Sales of Refined Products*.  We conduct all our retail sales in the UnitedStates through CITGO.  CITGO’s majorproducts are light fuels (including gasoline, jet fuel and diesel fuel),industrial products and petrochemicals, asphalt, and lubricants and waxes.  Gasoline sales accounted for 57% of CITGO’stotal sales in 2003.  CITGO marketsCITGO-branded gasoline through approximately 14,000 independently owned andoperated retail outlets, located throughout the United States, primarily eastof the Rocky Mountains.

 

CITGO also markets jet fuel directly to airlinecustomers at over 25 airports, diesel fuel in wholesale rack sales todistributors and in bulk through contract sales (primarily as heating oil inthe Northeast region of the United States) or on a spot basis, petrochemicalsin bulk to a variety of U.S. manufacturers as raw materials for finished goods,including sulfur, cycle oils, liquid petroleum gas, petroleum coke and residualfuel oil, asphalt to independent contractors for use in the construction andresurfacing of roadways, and many different types, grades and container sizesof lubricant and wax products.

 

*Crude Oil and Refined Product Purchases*.  CITGO owns no crude oil reserves orproduction facilities and must therefore rely on purchases of crude oil andfeedstocks for its refinery operations. We are CITGO’s largest supplier of crude oil, and CITGO has entered intolong-term crude oil supply agreements with us with respect to the crude oilrequirements for each of CITGO’s refineries. CITGO also purchases crude oil in the market.  In addition, because CITGO’s refineryoperations do not produce sufficient refined petroleum products to meet thedemands of its branded distributors, CITGO purchases refined petroleumproducts, primarily gasoline, from third party refiners.  CITGO also purchases refined petroleumproducts from various other affiliates, including LYONDELL-CITGO, ChalmetteRefining and Hovensa, pursuant to long-term contracts.  In 2003, CITGO purchased 371 MBPD of refinedpetroleum products under these contracts. In addition, CITGO occasionally purchases on a spot basis refinedpetroleum products from our Venezuelan refineries.

 

*Marketing in Europe*

 

We supply crude oil to our European affiliates pursuantto various supply agreements.  The crudeoil that we supply to our European affiliates exceeds, as a percentage of totalsupply, our aggregate net ownership interest in such entities’ combinedrefining capacity.  In 2003, we suppliedto the European refineries in which we held an interest, 268 MBPD of crude oil,of which 58 MBPD were exported from Venezuela and 210 MBPD were purchased inworld markets.

 

The crude oil processed at the Ruhr Oel refineries issupplied 50% by us and 50% by Deutsche BP pursuant to a joint venture agreementand a long-term supply contract. Pursuant to these agreements, Ruhr does not acquire title to any crudeoil or refined petroleum products.  Instead,the crude oil supplied by us or Deutsche BP remains owned by us or Deutsche BP,as applicable, throughout the refining process. Our share of the refined petroleum products processed at the Ruhr Oelrefineries is distributed through Deutsche BP’s marketing network.  The operating costs of the Ruhr Oelrefineries are shared equally by us and Deutsche BP.

 

We receive 50% of the revenues from Deutsche BP’ssales of the refined petroleum products processed at the Ruhr Oel refineries,less attributable operating and marketing costs.  This arrangement effectively provides RuhrOel with constant break-even results.  Wesupply crude oil to the Ruhr Oel refineries and receive revenues from the saleof refined petroleum products attributable to such crude oil.

 

38

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Nynäs purchases crude oil from PDVSA and producesasphalt and naphthenic specialty oils, two products for which Venezuelan heavysour crude oil is a particularly well suited feedstock due to its content ofnaphthenic, paraffinic and aromatic compounds. Asphalt products are used for road construction and various industrialpurposes, while naphthenic specialty oils are used principally in electricaltransformers, as mechanical process oils and in the rubber and printing inkindustries.  Nynäs does not own crude oilreserves or production facilities and, therefore, must purchase crude oil forits refining operations.  Nearly allcrude oil purchased by Nynäs is supplied by us pursuant to long-term supplycontracts.  We supply Nynäs only withhigh sulfur, extra-heavy Venezuelan crude oil.

 

Nynäs markets asphalt products through an extensivemarketing network in several European countries.  Scandinavia, the United Kingdom andContinental Europe are the source of 19%, 29% and 14%, respectively, of Nynäs’consolidated revenues for 2003.  Nynäsmarkets its naphthenic specialty oils throughout Europe, Africa, the MiddleEast and Australia, and the distillates that it produces are either sold asfuel or further processed into naphthenic specialty oils.  Nynäs distributes its refined products primarilyby a terminal network, specialized bitumen ships, rail tanks and trucks.

 

*Marketing in Latin America and Caribbean*

 

PDVSA has been strengthening a commercial strategy ofintegration that will allow the completion of several projects in the countriesof the region, within the scope of the PetroAmerica initiative which is beingpromoted by Venezuela, based on the establishment of cooperation andintegration mechanisms and the utilization of the resources and potentials ofLatin America and the Caribbean, in order to support the socio- economicimprovement of its population.

 

The implementation of this initiative is based onbilateral negotiations, with the intention of transferring financial resourcesto the people through the joint action of the states.  It is also based on cost rationalizationthrough tax and port services cost reductions and on cooperation agreements,not only for energy issues, but for education, health and infrastructure, aswell.

 

During 2004, PDVSA supplied under special terms, crudeoil and refined products to the Caribbean and Central America by means of theSan José and Caracas Agreements. Furthermore, in 2005 we created PDVSA-Cuba in order to promote refiningand marketing businesses in the area.  Inthe South American market, PDVSA has been making efforts towards thestrengthening of the commercial relationships with Argentina, Brazil, Uruguay,Paraguay, Ecuador and Bolivia, through the endorsement of memoranda ofunderstanding with their national oil enterprises, with the intention ofstudying crude oil and refined products supply opportunities.

 

*Marketing in Venezuela*

 

The following table shows our sales of refinedpetroleum products and natural gas of the Venezuelan domestic market:

 

**PDVSA’s Local Market Sales**

 
| ** **                            | ** ** | **Year Ended December 31,**          | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **2003**                                  | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                            | ** ** | **(MBPD, except as otherwise indicated)** | ** ** |
| **Refined  Products:**                |       |                                      |       |   |   |   |   |
| Liquefied petroleum gas               |       | 58                                        |       | 59 |   | 67 |   |
| Motor gasoline                        |       | 209                                       |       | 207 |   | 225 |   |
| Diesel                                |       | 98                                        |       | 91 |   | 98 |   |
| Other                                 |       | 67                                        |       | 63 |   | 68 |   |
| Total                                 |       | 432                                       |       | 420 |   | 458 |   |
| **Natural  gas (BOE)**                |       | 302                                       |       | 324 |   | 307 |   |
| **Natural  gas (MMCF)**               |       | 1,751                                     |       | 1,879 |   | 1,780 |   |
| **Unit  Sale Prices:**                |       |                                      |       |   |   |   |   |
| Refined  products ($ per barrel) |       | $                                         | 6.61       |   | $ | 6.73 |   | $ | 8.74 |   |
| Natural gas  ($/BOE)                  |       | $                                         | 3.20       |   | $ | 4.34 |   | $ | 5.35 |   |
| Natural gas  ($/MCF)                  |       | $                                         | 0.61       |   | $ | 0.71 |   | $ | 0.88 |   |

 

39

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Since December 1993, the Venezuelan governmenthas permitted private sector participants to market lubricants in Venezuela.

 

Through our subsidiary Deltaven, we market anddistribute retail gasoline and other refined petroleum products under the PDVbrand in the Venezuelan local market. Deltaven is also promoting the development of the commercialinfrastructure and services for retail clients with the participation of theprivate sector.

 

The retail price for gasoline is set by the Venezuelangovernment and represents approximately 13% of the export price for gasoline in2003.

 

Since the end of 2001, three private domesticparticipants, Grupo Trebol, Llanopetrol and CCMonagas, and four privateinternational participants, Shell, ChevronTexaco, ExxonMobil and BritishPetroleum, have been marketing their products in Venezuela.  These companies market their brands through830 retail outlets owned or operated by them, and have a market share in thegasoline and diesel sector of 53% compared to Deltaven’s 47%.

 

**Gas**

 

Venezuela has abundant natural gas fields.  According to BP AMOCO Statistical Review ofWorld Energy 2005, at November 2004 Venezuela was the ninth largest ownerof proved reserves in the world and the largest owner of proved reserves inLatin America.  These reserves wereestimated at 226,000 BCF at the end of 2003, of which 150,043 BCF are provedreserves.  91% of these are associatedwith crude oil deposits and 9% are in the form of free gas.  Our total sales of methane gas in theVenezuelan market amounted to 2,068 MMCFD by December 2003.

 

**Petrochemicals**

 

The Venezuelan government decided in June 2005 totransfer the activities, assets and shares held by PDVSA in Pequiven (thecompany’s shareholder) to the Ministry of Energy and Petroleum and to submitthis transfer for approval by the Shareholder of PDVSA.  The transfer is subject to the reform of thePetrochemical Act and the resolution of other legal and administrative issues.

 

Pequiven was established in 1977 to produce andcommercialize petrochemical products in the domestic and internationalmarkets.  Pequiven is organized intobusiness units focused on three production lines:

 

•      olefins and derivative products;

 

•      fertilizers; and

 

•      industrial products.

 

Pequiven is party to 17 joint ventures with domesticand international business partners. Most of the production facilities of these joint ventures are located atPequiven’s complexes.  We estimate thatthe combined production capacity of these complexes is approximately eightmillion tons per year.

 

Pequiven operates three petrochemical complexes inVenezuela:

 

•      the Zulia–El Tablazo complex, in westernVenezuela, which produces mainly olefins, chlorine or caustic soda, fertilizers,industrial feedstocks and thermoplastic resins;

 

•      the Morón Complex, in central Venezuela, whichproduces fertilizers and sulfuric acid; and

 

40

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•      the Jose Complex, in eastern Venezuela, whichproduces methanol, fertilizers, industrial products and methyl terbutyl-ether(MTBE).

 

In addition to the three petrochemical complexes,Pequiven also has facilities to produce aromatics in the PDVSA El Palitorefinery, located in the central north region of Venezuela.  The gross production of Pequiven’s whollyowned plants and complexes in 2003 and 2002 was approximately 2.3 millionmetric tons and 3.7 million metric tons, respectively.  The gross production of Pequiven’s jointventures in 2003 and 2002 was approximately 3.9 million metric tons and 3.23million metric tons, respectively. Products of these joint ventures include methanol, MTBE, polyethylenes,polypropylenes, ethylene oxide, ethylene glycols, caustic soda, chlorine,fertilizers, caprolactam and other specialty products.

 

Pequiven’s goals are to increase the production of ourpetrochemical products and promote growth in this sector by increasing thesales of petrochemical products domestically. It is expected to achieve an annual combined production capacity of 12.0million metric tons by 2006 at Pequiven’s plants and through Pequiven’s jointventures.  Pequiven also will continue tofocus on improving competitiveness (especially in the Latin American market)and profitability of the natural chemical and petrochemical sector.

 

In this regard, Pequiven continuously explores newprojects and joint ventures with third parties. Currently there are indiscussions with potential partners regarding the development of the JoseComplex.  To date, Pequiven’s jointventures have allowed it to establish a significant and growing presence inregional and international markets.  In2003, North America remained Pequiven’s largest export destination followed bySouth America, Europe and Asia, and Central America and the Caribbean.

 

The following table sets forth Pequiven’s sales,consolidated revenues, net property, plant and equipment and capitalexpenditures in its wholly owned plants for each of the years indicated:

 

**Pequiven’s Sales, Consolidated Revenues, NetProperty, Plant and Equipment and Capital Expenditures**

 
| ** **                                     | ** ** | **Year ended December 31,**                        | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                     | ** ** | **2003**                                                | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                     | ** ** | **($ in millions, except as otherwise indicated)** | ** ** |
| Sales volume  (thousands of metric tons)       |       | 2,734                                                   |       | 4,127 |   | 4,167 |   |
| Consolidated  revenues (1)                     |       | 784                                                     |       | 919 |   | 1,070 |   |
| Net  property, plant and equipment at year end |       | 1,808                                                   |       | 1,925 |   | 2,221 |   |
| Capital  expenditures                          |       | 48                                                      |       | 53 |   | 46 |   |

 

----

(1)           Includes$492 million, $268 million and $351 million of sales to affiliates for 2003,2002 and 2001, respectively; and sales to PDVSA’s subsidiaries, which areeliminated in our consolidated financial statements.

 

**Extra-heavy Crude Oil**

 

Previously our subsidiary Bitor was developingreserves of approximately 429 million of metric tons of extra-heavy crude oil(or approximately 2,690 million barrels) principally through a process ofemulsifying natural extra-heavy crude oil in water to create an alternativeliquid fuel to generate electricity, which we refer to as Orimulsion®.  However, PDVSA decided to apply most of thesereserves to the production of commercial crude oil, minimizing the productionof Orimulsion®.  This new scheme is partof an effort to develop a financially balanced strategy for our naturalextra-heavy crude oil production.

 

In December 2001, Bitor, China National Oil andGas Exploration and Development Corporation and Petrochina Fuel Oil CompanyLimited formed a joint venture called Orifuels Sinoven, S.A. with the view tobuilding and operating a production facility capable of producing up to 6.5million metric tons by 2006.  OrifuelsSinoven, S.A. is developing production facilities in two locations inVenezuela; Morichal facilities were approximately 30% complete and the Joseplant was approximately 80% complete by June 2005.

 

41

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Due to this new approach to the extra-heavy crude oilbusiness, we have decided to call off all other production facilitiesdevelopment plans.  We expect to completethe Orifuels Sinoven complex by October 2005 and once it is operational,this will be our exclusive Orimulsion® manufacturing facility.  From the production of this complex, Bitorwill supply directly its Orimulsion® supply agreements.

 

Our Orimulsion® production capacity is currently 6.5million metric tons per year (or approximately 41 million barrels peryear).  Our net production in 2003 wasapproximately 5.2 million metric tons (or 35 million barrels), as compared to5.4 million metric tons (or 37 million barrels) in 2002.

 

PDVSA’s 2003 production was sold as follows:

 
| **Geographic location** | ** ** | **% of sales** | ** ** |
|-------------------------|------------|----------------|------------|
| Italy                   |       | 36             |       |
| China                   |       | 30             |       |
| Canada                  |       | 13             |       |
| Japan                   |       | 10             |       |
| Korea                   |       | 7              |       |
| Others                  |       | 4              |       |

 

The following table sets forth certain production,revenue and capital expenditure figures relating to our Orimulsion® businessfor the periods indicated:

 
| ** **                                              | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **2003**                         | ** ** | **2002** | ** ** | **2001** | ** ** |
| Raw material  production (thousands of metric tons)     |       | 3,426                            |       | 4,041 |   | 4,257 |   |
| Production  (thousands of metric tons)                  |       | 5,175                            |       | 5,451 |   | 6,226 |   |
| Orimulsion  sales volume (thousands of metric tons)     |       | 5,201                            |       | 5,575 |   | 6,173 |   |
| Consolidated  revenues ($ in millions)             |       | 186                              |       | 186 |   | 200 |   |
| Net  property, plant and equipment ($ in millions) |       | 537                              |       | 544 |   | 561 |   |
| Capital  expenditure ($ in millions)               |       | 18                               |       | 9 |   | 43 |   |

 

**Coal**

 

At a PDVSA Board of Directors’ Meeting held on October 3,2003, it was decided to accept the terms for transferring activities, assetsand shares held by PDVSA in Carbozulia to Corporacíon de Desarrollo de laRegión Zuliana (Corpozulia).  Thetransfer of all rights of ownership to shares that PDVSA held in Carbozulia toCorpozulia was published in Official Gazette dated February 2, 2004.

 

The following table sets forth Carbozulia’s share ofcoal production, sales and revenues for each of the periods indicated:

 

**Carbozulia’s Production, Sales andConsolidated Revenues**

 
| ** **                                  | ** ** | **Year Ended December 31,**                              | ** ** |
|---------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                  | ** ** | **2003**                                                      | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                  | ** ** | **(thousands of metric tons, except as otherwise indicated)** | ** ** |
|                                        |       |                                                          |       |   |   |   |   |
| Coal  production                            |       | 6,808                                                         |       | 7,859 |   | 7,571 |   |
| Coal sales  volume                          |       | 7,570                                                         |       | 7,361 |   | 7,627 |   |
| Consolidated  revenues ($ in millions) |       | 145                                                           |       | 160 |   | 164 |   |

 

Carbozulia’s total coal production is exported,primarily to the United States, Canada, Italy, France, Holland, Sweden,Germany, Puerto Rico and Brazil.

 

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**Overview of Main Projects 100% Owned by PDVSA**

 

***The Anaco Gas Project***

 

The objective of the Anaco Gas Project is to satisfythe internal demand for gas.  Thisproject includes designing and building the facilities anticipated to yield aproduction of 2,400 MMCFD of gas and 35 thousand barrels per day of associatedlight crude oil when completed.  Theproject is being developed in two phases, with start up operations (Phase I)capable of producing 2,016 MMCFD of gas, anticipated to commence in 2007.  We expect the production capacity of thisproject to reach 2,400 million MMCFD of gas by 2008 (Phase II).  The total estimated capital investment forthis project is $732 million.

 

In a probable Phase III, project installations willreach a production capacity of 2,700 MMCFD of gas, according to PDVSA’sOpportunities Portfolio 2003-2022.

 

***The ICO Project***

 

The objective of this project is to connect Venezuela’scentral and eastern (Anaco-Barquisimeto) and western (Ule-Amuay) natural gastransmission systems with a view to:

 

•      facilitate the supply of gas to the westernregion of Venezuela;

 

•      expand the delivery of gas to other regions andcities within the country; and

 

•      promote industrial and commercial development inthe areas along the gas transmission pipeline to be built in connection withthis project.

 

We expect to construct 300 km of gas pipeline of 36-inch &30-inch, running from Morón to Río Seco and three compression stations.  This project has two phases; Phase I includesconstruction of 70 km of a 36-inch diameter gas pipeline running from Quero toRío Seco and five (5) automatic valve stations; Phase II includesconstruction of 230 km of a 30-inch diameter gas pipeline running from Quero toEl Manglar and three (3) compression stations located at Altagracia, LosMorros and Morón.  The engineering ofPhase I was completed by the end of the third quarter 2003; the construction ofthis Phase was completed by the end of the first quarter of 2005.  With respect to Phase II, the construction of112 km of a 30-inch diameter gas pipeline will be completed by the end of 2005;the construction of the compression stations will start in the fourth quarterof 2005.  This infrastructure allows agas supply ranging between 450 and 520 MMCFD, with an installed capacity of155,000 Horse Power ISO at different levels of discharge pressure between 1,000and 1,200 pounds per square inch.

 

We expect to invest approximately $413 million in thisproject, anticipating its completion by December 2007.

 

***The Jose 250 Project***

 

The main purpose of this project is to provide all therequired infrastructure for gas conditioning and processing of the associatedgas produced from the operational Eastern Areas of Anaco (San Joaquín) andNorth of Monagas (Jusepín and Pirital), to satisfy domestic market demand andsupply injection gas for secondary oil recovery processes of North Monagas oilfields.

 

We expected to build three new Liquid ExtractionPlants with a total capacity to process 2,350 MMSCFD, one fractionation unitwith capacity to fraction 50,000 BPD of LNG, expansion of the marine terminalof the Jose Condominium and construction and expansion of LNG pipelines.  Phase I of the project will be completed in2007 and Phase II in 2008.  We will havean additional production of 32 MBPD of LNG in 2007, reaching a total of 75 MBPDof LNG in year 2008.  In 2005 theengineering studies continue to progress. The estimated total investment for the project is $664 million.

 

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***The Western Cryogenic Project***

 

The development of the Western Cryogenic Complex (WCC)is one of the main projects included in the 2005 - 2010 Business Plan ofPDVSA-Western Division.  Its objective isto optimize the natural gas scheme processing in the Western region ofVenezuela by increasing the ethane and LNG production.  This project is expected to reducesignificantly the operation and maintenance costs of current plants, allowing abetter expansion of the gas business in the area.

 

The proposed scheme will yield a production of 35 MBPDof Ethane for Pequiven – El Tablazo and 70 MBPD of LNG, decreasingsubstantially the country’s western processing cost and promoting the LNGbusiness growth.

 

The estimated capital investment for the project is$600 million.  Main facilities includetwo extraction trains, each with a capacity of 475 MMSCFD of gas, one gasfractionating train with installed capacity of 35 MBPD and offsite facilities.

 

***The Integral Ceuta-Tomoporo Project***

 

The main purpose of the Integral Ceuta - Tomoporoproject is to maximize the recoverable crude oil reserves value of Ceuta – Tomoporo,through exploiting the B-superior Eocene formation, which has estimatedreserves of 1,000 million barrels of 23.6° API crude oil.  The reservoir was discovered in 1988.

 

This project also has an impact on the sustainableeconomic development of its area of influence. Our 2005-2010 business plan activities include drilling 6 vertical and47 inclined producing wells, together with 21 injector wells.  In 2004 we drilled 3 vertical and 7 inclinedwells.  In 2005 we will construct oneflow station, 21 Km of crude oil and gas pipelines, roads and a clusterplatform.  Total investment coststhroughout project life (2004-2021) will be approximately $1,200 million, withan average crude oil production of 90 to 277 MBPD.  Net present value expected from this projecttotals $3,257 million.  By December 2003,total investments totaled $28 million.

 

**Transportation and Infrastructure**

 

***Pipelines and Storage***

 

*Venezuela and the Caribbean*.  We have an extensive transportation networkin Venezuela consisting of approximately 3,113 km in total of crude oilpipelines (over 28 pipelines), with a throughput capacity of approximately6,340 MBPD of crude oil.  These pipelinesconnect production areas to terminal facilities and refineries.  We have a network of gas pipelines inVenezuela totaling approximately 3,781 km, with a throughput capacity of 2,748MM3D.  Our network is comprised of theWestern and East Central systems, stretching from Lake Maracaibo, in the Zuliastate to Punto Fijo, in the Falcón state and from Puerto Ordaz, in the Bolívarstate to Barquisimeto, in the Lara state. We also have a network of 1,179 km of products pipelines with a totalflow capacity of approximately 831 MBPD.

 

We maintain total crude oil and refined productsstorage capacity of approximately 30 MMB and 74 MMB in Venezuela, respectively,including tank farms, refineries and shipping terminals, of which approximately16.3 MMB is available at our refineries. Our terminal facilities are comprised of nine maritime ports as well astwo river ports.  A new terminal facilitywas completed at the Jose Complex in 2003.

 

In addition to the storage and terminal facilities inVenezuela, we maintain storage and terminal facilities in the Caribbean,located in Bonaire, the Bahamas, Trinidad, Curaçao and St. Eustatius, with anaggregate storage capacity of 50 MMB as of December 31, 2003.  The Curaçao oil terminal, which is leasedfrom the Netherlands Antilles government, had a storage capacity ofapproximately 15 MMB at December 31, 2003.

 

*United States*.  CITGO owns and operates a crude oil pipelineand three products pipeline systems. CITGO also has equity interests in three crude oil pipeline companiesand six refined product pipeline companies. CITGO’s pipeline interests provide it with access to substantialrefinery feedstocks and reliable transportation to the refined

 

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product markets, as well as cash flows from dividends.  One of the refined product pipelines in whichCITGO has an interest, Colonial Pipeline, is the largest refined productpipeline in the United States, transporting refined products form the GulfCoast to mid-Atlantic and Eastern seaboard states.

 

*Europe*.  Through equity interests in five Europeanpipeline companies, we have interests in four crude oil terminals and fourcrude oil pipelines in northwestern Europe, including two pipelines from theMediterranean coast to Germany.  We alsoown three port facilities in the Rhine-Herne Canal providing barge access toRhine and North Sea coastal ports.

 

**Shipping**

 

At December 31, 2003, PDV Marina, a wholly ownedsubsidiary of PDVSA, owned and operated 21 tankers with a total capacity ofapproximately 1,347 MDWT and an average age at December 31, 2003 ofapproximately 14 years.

 

During 2003, average shipments of crude oil andrefined petroleum products amounted to approximately 1,111 MBPD, of which 436MBPD were shipped by our own tankers and the remainder by chartered tankers.

 

PDVSA achieved the certification of its ships anddocks to the International Safety Code of Ships and Port Installations, whichentered in effect on July 1, 2004. Accordingly, we carried out a project which included risk evaluations,training, and equipment procurement, among other tasks and have spent about $5million to date.  The certifications canbe seen at http://www2.imo.org/ISPSCode.

 

**Research and Development**

 

Intevep is our wholly owned subsidiary responsible forresearch and technology support.  Itsoverall mission is to create and sustain a competitive advantage for PDVSAthrough efficient and effective development, adaptation and application oftechnology.  Intevep contributessubstantially, through application of technology, toward exploration for newoil and gas reserves, better utilization of existing reserves, increasingproduction, reduction in operational costs, greater productivity, upgradingprocesses for heavy and extra-heavy crude oil, improvements in product quality,improvements in health and safety standards and the development of newpetroleum-derived products and innovative processes.

 

During 2003, we continued to develop products andtechnologies such as DISOL® (Gas-to-Liquid technology) and new improvements inthe DISOL catalyst were obtained.  Additionally,a pilot plant was designed to be built at Intevep next year.  AQUADIESEL®, a low emission diesel for publictransportation, was successfully tested in Houston, Texas, US.  Additionally, cost reductions in thismicro-emulsion formulation were achieved. Further progress was made in thedevelopment of AQUACONVERSION®, a catalytic process used to produce syntheticcrude from Morichal heavy oil.  Twocommercial units of ISAL® technology started up in the USA.  The basic engineering of two DHDV units for reducingsulfur in diesel and the visualization study of a HDHPLUS® unit at the PuertoLa Cruz refinery were completed.

 

**Environmental and Safety Matters**

 

***Environmental***

 

The majority of PDVSA’s subsidiaries, both inVenezuela and abroad, are subject to various environmental laws and regulationsunder which they may be required to make significant investments andexpenditures to modify their facilities and to prevent or remedy theenvironmental effects of waste disposal and spills of pollutants.  In the United States and Europe, ouroperations are subject to various federal, state and local environmental lawsand regulations, which may require them to take action to remedy or minimizethe effects on the environment from our operations of earlier plant decommissioningor leakage of pollutants.

 

PDVSA is taking important steps to prevent risks tothe environment, people’s health, and the integrity of its installations.  In 2003, PDVSA continued implementing itsIntegral Risk Management System (SIR-PDVSA®)

 

45

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throughout the company and full deployment of this System is expectedto be completed by 2006.  This managementsystem is based on international practices and standards, such as ISO 14001 forEnvironmental Management; ISO 18000 and British Standard BS 8800 for health andOccupational Safety, and OSHA’s and American Petroleum Institute (API)’s 750for process safety.  PDVSA has alreadyinvested $16 million and is expected to invest an additional $30 million to completefull implementation of its Risk Management System.  In addition, PDVSA has an investment plan tocomply with the applicable environmental regulations in Venezuela.  This investment plan contemplatesapproximately $2,255 million in capital expenditures from 2004 through 2009,including the following:  $1,150 millionfor product quality; $911 million for risk control at operating sites; $162million for environmental compliance projects; and $32 million for otherenvironmental-related investments.  Also,there is a plan to remediate a total of 13,973 oil pits to temporality storeoil sludge and/or drilling cuts.  Theplan has an expected duration of 12 years and started in 2001.  As of December 2003, a total of 3,417petroleum pits have been remediated.  Theoverall plan is to recover and to recycle the disposed waste, includingabandoned installations, and to transform those areas into useful assets.  PDVSA will spend approximately $408 millionto complete the project from 2004-2012. (See note 20 to our consolidated financial statements, included in Item18. Financial Statements).

 

CITGO estimates expenditures of approximately $785million for environmental and regulatory capital projects from 2004 through2008.  During 2003, PDVSA spentapproximately $59 million in Venezuela and CITGO spent approximately $253million for environmental and regulatory capital improvements in itsoperations.

 

The oil industry sabotage and operational stoppage inDecember 2002 and the first months of 2003 caused effects on theenvironment which, although difficult to quantify and to evaluate, did impactnegatively the surroundings of our wells, plants and other facilities, with aneconomic impact due to damage remediation actions.  (See note 21 to our consolidated financialstatements, included in Item 18. Financial Statements).

 

During 2003, the Water Treatment Plant at El TablazoComplex, Maracaibo, Zulia state became operational.  This water is to be used as industrial waterfor El Tablazo, avoiding the discharge of 1,300 lts/sec of sewage water to theMaracaibo Lake.  Those amounts represent13% of the total sewed water discharged from the City of Maracaibo,contributing to the remediation of the Maracaibo Lake.

 

CITGO has received various notices of violation fromthe Environmental Protection Agency (EPA) and other regulatory agencies, whichinclude notices under the federal Clean Air Act, and could be designated asPotentially Responsible Parties (“PRPs”) jointly with other industrialcompanies with respect to sites under the Comprehensive Environmental Response,Compensation, and Liability Act (CERCLA). These notices are being reviewed and, in some cases, remedial actionsare being undertaken, and in others, CITGO is engaged in settlementnegotiations.

 

Conditions that require additional expenditures mayexist at various sites including, but not limited to, our operating complexes,closed refineries, service stations and crude oil and petroleum storageterminals.  Based on currently availableinformation we cannot determine the amounts of any such expenditure.  Management believes that these matters, inthe normal course of operations, will not have a material effect on thefinancial position, liquidity or operations of PDVSA.

 

***Safety***

 

Due to the nature of our business, our operatingsubsidiaries and joint ventures are subject to stringent occupational healthand safety laws in the jurisdictions in which they operate.  As such, each of our subsidiaries and jointventures maintains comprehensive safety, training and maintenance programs withthe help of international and recognized leading authorities in this area.  Our management believes that our activitiesare conducted substantially in compliance with all applicable laws.

 

### **4.C**          Organizational structure

### ** **

PDVSA was formed by the Venezuelan government in 1975,and conducts its operations through its Venezuelan and internationalsubsidiaries.

 

46

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Through December 31, 1997, we conducted ouroperations in Venezuela through three main operating subsidiaries, Corpoven,S.A., Lagoven, S.A. and Maraven, S.A.  In1997, we established a new operating structure based on business units.  Since then, we have been involved in aprocess of transforming our operations with the aim of improving ourproductivity, modernizing our administrative processes and enhancing the returnon capital.  The transformation processinvolved the merger of Lagoven, S.A. and Maraven, S.A. into Corpoven S.A.,effective January 1, 1998, and renaming the combined entityPDVSA-P&G.  In May 2001, werenamed PDVSA-P&G “PDVSA Petróleo” and by the end of 2002, certain of ournonassociated gas assets were transferred to PDVSA Gas.

 

Additionally, we have also made several adjustmentswithin our organization in order to enhance internal control of our operations,to improve on our governance model and to align our operating structure withthe long-term strategies of our shareholder. These adjustments consist primarily of the adoption of a new frameworkof operating structure that increases the involvement of our board of directorsin our activities, and, at the same time, enhances PDVSA’s operationalindependence.

 

Below is a summary of the significant changes thathave ocurred within our main subsidiaries and affiliates:

 

***PDVSA Petróleo***:This is the core business of PDVSA.  Itsoperations have not suffered changes and only its administrative structure hasbeen adjusted.  The most significantchanges for this affiliate is the restructuring of the corporate units ofExploration, Production, Refining, and Marketing and Supply.

 

***Carbozulia***:In February 2004 net assets of this company amounting to $91 milllion weretransferred to Corpozulia “Corporación de Desarrollo de la Región Zuliana”, afund promoting regional development.  PDVSAstill holds some guarantees related to two joint venture agreements (Carbonesdel Guasare and Carbones de la Guajira) previously established by Carbozulia.

 

***Palmaven***:This affiliate was completely transformed. Its new role is to promote the national social development througheducational, health and job creating initiatives, directed to the poorestsectors of the Venezuelan society.  Itsprevious activities related to environmental services were transferred to theHSE (health, safety and environment) organizations of other operatingaffiliates and the participation of Palmaven in 14 agricultural joint venturesare being evaluated in order to be sold or transferred.

 

***Bitor***:Its Board of Directors has been instructed to minimize the production ofOrimulsion®, to complete the production facilities of its joint ventureOrifuels Sinoven, to comply with its supply agreements and to close itsinternational marketing joint ventures. Its personnel are being transferred to PDVSA Petróleo.  PDVSA from now on will apply most of thesereserves to the production of extra-heavy crude oil.

 

***Cied***:This non-profit association used to provide training services to the differentaffiliates of PDVSA.  Currently, thisfunction has been decentralized and affiliates are free to contract theirtraining services.  Its personnel wereredistributed to other organizations within PDVSA.

 

***PDVSA Trading***:This affiliate was created to manage commodity price risk associated with crudeand refined products businesses.  It hasbeen deactivated due to a redefinition of PDVSA’s refining and marketingstrategy.  Some administrative steps arebeing taken prior to its definitive closure.

 

***PDVSA Gas***:Since August 2003 the gas production activities and the strategic projectsPlataforma Deltana, Mariscal Sucre and Cigma have been delegated to the PDVSA’sExploration and Production division, whereas the LNG activities have beendelegated to PDVSA’s Refining division. Some administrative and operating activities and personnel of PDVSA Gasare being moved to the eastern region of the country.

 

***CVP***:This affiliate continues managing all matters related to mixed enterprises suchas The Orinoco Belt Joint Ventures, Risk Sharing Agreements, OperatingAgreements and P&GI Investments. Additionally, it has a new responsibility regarding the administrationof “FONDESPA”, a trust created to finance social projects, which will be fundedby extraordinary revenues coming from higher oil prices.

 

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***Interven***:This affiliate was reorganized in order to manage all business derived from theCooperation Agreement signed between Argentina and Venezuela.  PDVSA began working with the Argentineanenergy company Enarsa, to evaluate upstream and downstream businessopportunities in Argentina. Additionally, the Board of Directors of PDVSA in its April 7, 2005meeting decided to transfer the businesses of Citgo Latinoamerica (CILA) toInterven in order to support a strategy of regional integration.  The day-to-day activities of CILA are beingperformed by the international sales management of our corporate supply andmarketing division.

 

***Pequiven***:According to a Presidential Decree published on June 2005, Pequiven willbe transferred to the Ministry of Energy and Petroleum.  The completion of this transfer will dependon the reform of the Ley De Estimulo Al Dearrollo De Las ActividadesPetroquimica, Carboquimica y Similares, or the Petrochemical Law, and otherlegal and administrative issues.

 

***Isla Refinery***:PDVSA has initiated studies to determine the profitability of this business,investments required to improve the process capacity and to meet regulatory andproduct quality demands.  These studiesare being utilitzed to align the performance of Isla Refinery with nationalstrategic guidelines and PDVSA’s business plan and to streamline its businessprocesses.

 

***Deltaven***:This affiliate distributes refined products within the domestic market.  It maintains its own distribution network andhas positioned itself well with wholesalers and retailers.  Its strategy includes gaining better positionwithin the distribution chain through improvements of its service stations andtruck float.

 

***International subsidiaries***:We are currently reviewing our international assets strategic and financialperformance.  In this sense, we areevaluating the net contribution to PDVSA of our affiliates CITGO, Ruhr Oel,Nynas, BORCO, BOPEC, Isla Refinery, in order to optimize the return of ourinternational portfolio.  This evaluationof our international subsidiaries might lead to restructurings, merges,divestures or acquisitions in the near future.

 

For the time being, PDVSA’s board of Directors is notconsidering any further changes of its organizational structure.

 

Our most important subsidiaries and affiliates at December 31,2003 and our percentage of equity capital (to the nearest whole number) are setout below.  The principal country ofoperation is generally indicated by the companies country of incorporation:

 
| **Companies**                                       | ** ** | **%  Ownership** | ** ** | **Principal Activities**                | ** ** | **Country of Incorporation** | ** ** |
|-----------------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|------------------------------|------------|
| AB Nynäs  Petroleum                            |       | 50               |       | Refining and  marketing                 |       | Sweden                       |       |
|                                                |       |             |       |                                    |       |                         |       |
| Bonaire  Petroleum Corporation N. V.                |       | 100              |       | Storage                                 |       | The  Netherlands Antilles    |       |
|                                                |       |             |       |                                    |       |                         |       |
| Chalmette  Refining, L.L.C.                         |       | 50               |       | Refining                                |       | United  States               |       |
|                                                |       |             |       |                                    |       |                         |       |
| CITGO  Petroleum Corporation                        |       | 100              |       | Refining,  marketing and transportation |       | United  States               |       |
|                                                |       |             |       |                                    |       |                         |       |
| Corpoguanipa,  S.A.                                 |       | 100              |       | Production,  upgrading and marketing    |       | Venezuela                    |       |
|                                                |       |             |       |                                    |       |                         |       |
| Corporación Venezolana del Petróleo, S.A. |       | 100              |       | Exploration and  production             |       | Venezuela                    |       |
|                                                |       |             |       |                                    |       |                         |       |
| Deltaven,  S.A.                                     |       | 100              |       | Marketing  (in Venezuela)               |       | Venezuela                    |       |
|                                                |       |             |       |                                    |       |                         |       |
| Hovensa,  L.L.C.                                    |       | 50               |       | Refining                                |       | U.S. Virgin  Islands         |       |
|                                                |       |             |       |                                    |       |                         |       |
| Intevep,  S.A.                                      |       | 100              |       | Research and  development               |       | Venezuela                    |       |
|                                                |       |             |       |                                    |       |                         |       |
| LYONDELL-CITGO  Refining Company, L.P.              |       | 41               |       | Refining                                |       | United  States               |       |

 

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| PDV  America, Inc.                                 |   | 100    |   | Refining,  marketing and transportation      |   | United  States      |   |
|---------------------------------------------------------|--------|--------|--------|----------------------------------------------|--------|---------------------|--------|
|                                                    |   |   |   |                                         |   |                |   |
| PDV Europa  B.V.                                        |   | 100    |   | Refining and  marketing                      |   | The  Netherlands    |   |
|                                                    |   |   |   |                                         |   |                |   |
| PDV  Holding, Inc.                                 |   | 100    |   | Refining,  marketing and transportation      |   | United  States      |   |
|                                                    |   |   |   |                                         |   |                |   |
| PDV  Insurance Company Ltd.                             |   | 100    |   | Insurance                                    |   | Bermuda             |   |
|                                                    |   |   |   |                                         |   |                |   |
| PDV Marina,  S.A.                                       |   | 100    |   | Shipping                                     |   | Venezuela           |   |
|                                                    |   |   |   |                                         |   |                |   |
| PDV Midwest  Refining, L.L.C.                           |   | 100    |   | Refining and  marketing                      |   | United  States      |   |
|                                                    |   |   |   |                                         |   |                |   |
| PDVSA Cerro Negro, S.A.                                 |   | 100    |   | Production,  upgrading and marketing         |   | Venezuela           |   |
|                                                    |   |   |   |                                         |   |                |   |
| PDVSA  Finance Ltd.                                     |   | 100    |   | Financing                                    |   | The Cayman  Islands |   |
|                                                    |   |   |   |                                         |   |                |   |
| PDVSA Gas,  S.A.                                        |   | 100    |   | Gas  production, processing and distribution |   | Venezuela           |   |
|                                                    |   |   |   |                                         |   |                |   |
| PDVSA  Petróleo, S.A.                              |   | 100    |   | Integrated  oil operations                   |   | Venezuela           |   |
|                                                    |   |   |   |                                         |   |                |   |
| PDVSA  Sincor, S.A.                                     |   | 100    |   | Production,  upgrading and marketing         |   | Venezuela           |   |
|                                                    |   |   |   |                                         |   |                |   |
| Petroquímica de Venezuela, S.A.                    |   | 100    |   | Chemicals  and petrochemicals                |   | Venezuela           |   |
|                                                    |   |   |   |                                         |   |                |   |
| Petrozuata,  C.A.                                       |   | 49.9   |   | Production,  upgrading and marketing         |   | Venezuela           |   |
|                                                    |   |   |   |                                         |   |                |   |
| Ruhr Oel  GmbH                                          |   | 50     |   | Refining and  marketing                      |   | Germany             |   |
|                                                    |   |   |   |                                         |   |                |   |
| The Bahamas Oil Refining Company International  Limited |   | 100    |   | Storage                                      |   | The Bahamas         |   |

 

**Item 4.D****         Property, plants andequipment**

 

Seegenerally our discussion in “Item 4.B Business overview.”

 

## **Item5.**            Operating and Financial Reviewand Prospects

## ** **

**Effects,Losses and Damages resulting from the Work Stoppage and Other Events inthe Petroleum Sector**

 

During December 2002and the first months of 2003, a series of national events significantlyinterrupted the economic activities in Venezuela.  Concurrently, a substantial group of workersfrom PDVSA and its Venezuelan subsidiaries abruptly initiated a work stoppage thatinterrupted the Company’s normal, ongoing operations in Venezuela, whichcontinued despite requests made by management of the Company in the local mediafor them to return to their positions. PDVSA is of the opinion that this interruption of the activities, andrelated actions, constituted sabotage, and accordingly the Company has referredthe matter to the competent authorities, including the General Prosecutor ofthe Republic, to establish responsibility for the damage resulting from theseactions.

 

As stated,these events resulted in losses and damages, as well as a reduction in thecountry’s economic activities.  Theeconomic performance of PDVSA significantly affects some of the economicvariables of the country, among others the gross domestic product (GDP), thegeneration of foreign exchange and the collection of taxes and othercontributions (approximately 18%; 67% and 57%, approximately, of the nationaltotals for the year ended December 31, 2003). Studies performed by theMinistry of Finance and the Central Bank of Venezuela (BCV) indicate that the

 

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reduction inactivities of the country had an impact on the economy during the abovementionedperiod, including among others:

 

•      GDP decreased by 15.8% during the fourth quarterof 2002, and by 24.9% during the first quarter of 2003. In both quarters, theprincipal effect on the local economy was in the petroleum sector, where GDPfell by 25.9% and 39.3%, respectively.

 

•      There was a significant reduction in the country’sfiscal income, which limited the capacity of the National Executive to executeits plans and programs.

 

•      There was a reduction in international reservesand funds held with the FIEM. After this reduction the National Executive,together with the BCV, implemented exchange controls, with a view to limitingthe negative effects on the local economy.

 

Theinterruption of the activities of PDVSA and its Venezuelan subsidiaries from December 2002,due to the absence of its workers, in spite of the numerous requests bymanagement of PDVSA for them to return to their positions, resulted in anabrupt and significant interruption to PDVSA’s operations, resulting in lossesand damages to PDVSA’s installations and affecting the various activities ofthe Company.

 

Also, theseevents resulted in a significant reduction in PDVSA’s production of oil andnatural gas, mainly in its principal subsidiary, PDVSA Petróleo; as well as areduction in the exports of crude oil and products from Venezuela. Presentedbelow is a comparison of the export volumes of PDVSA Petróleo for 2003, 2002and 2001:

 

***(a)******           Comparisonof PDVSA’s Export Volumes:***

 
| **Month** | ** ** | **2003 (1)** | ** ** | **2002 (1)** | ** ** | **2001(2)** | ** ** |
|-----------|------------|--------------|------------|--------------|------------|-------------|------------|
| January   |       | 15,535       |       | 81,841       |       | 93,580      |       |
| February  |       | 30,380       |       | 73,424       |       | 82,980      |       |
| March     |       | 62,055       |       | 74,527       |       | 92,567      |       |
| April     |       | 66,734       |       | 59,595       |       | 82,843      |       |
| May       |       | 51,481       |       | 66,501       |       | 86,470      |       |
| June      |       | 108,028      |       | 74,467       |       | 82,833      |       |
| July      |       | 65,973       |       | 85,352       |       | 90,853      |       |
| August    |       | 70,344       |       | 89,638       |       | 86,880      |       |
| September |       | 62,610       |       | 82,691       |       | 79,035      |       |
| October   |       | 82,475       |       | 87,754       |       | 83,981      |       |
| November  |       | 68,326       |       | 74,823       |       | 81,191      |       |
| December  |       | 76,777       |       | 19,860       |       | 83,058      |       |
| Total     |       | 760,718      |       | 870,473      |       | 1,026,271   |       |

 

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(1)   The workstoppage commenced in December 2002 and continued into 2003.

 

(2)   The management of PDVSA has determined that 2001 isthe base year, as it was not affected by the work stoppage.

 

***(b)******           AveragePrice per Barrel of Exports***

 
| ** **                           | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Average  price (US$ per barrel) |       | 24.78    |       | 21.84    |       | 20.14    |       |

 

50

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During theperiod that operations were interrupted, the Venezuelan government authorizedPDVSA to purchase petroleum and diesel on the international market in order tomeet the needs of the local market. These purchases were made at international prices, which weresubstantially higher than sales prices in the local market.  The difference between the internationalpurchase prices and the related sales prices realized in Venezuela resulted inan unfavorable effect for the Company in 2003 of approximately $504 million.

 

The previouslydescribed events resulted from an unprogrammed interruption of the majority ofthe basic operations of PDVSA and its subsidiaries in Venezuela.  These events caused damages to the upstreamand downstream installations requiring repair and remediation, and causedsignificant losses, particularly with respect to the condition of oilreservoirs and wells and also refineries, pipelines and terminals that neededto be repaired or remedied.  Based uponan evaluation made by PDVSA, the total costs indentified with these damages andlosses were approximately $209 millon.

 

All costs andexpenses relating to these events, identified on the basis of the informationavailable, were charged to PDVSA’s results of operations in 2003.

 

Below is asummary of some of the damages to the installations and equipment, based onreports prepared by the Company’s management and approved by the Board ofDirectors.

 

**Exploration,Production and Improvement**

 

Some of theprincipal effects on PDVSA’s infrastructure were: damages to some informationsystems controlling certain operating activities related to productive oilwells; deterioration of operating equipment as well as instrumentation systems,well automation booths, electrical flow, dashboards and pumping systems, whichinterrupted production activities and delayed the restoration of operations.Some of these damages required the acquisition of new equipment and theimplementation of special procedures to restore the production of crude oil andgas.

 

**Refining,Supply and Marketing**

 

Theunscheduled stoppage of refineries caused damages and the malfunctioningof some equipment, which delayed their start-up and affected their operatingcapacity, mainly in the refineries located in the state of Falcon. Among theaffected equipment was the sulphur recovery unit No. 3 at the Amuayrefinery, the catalytic cracking plant at the Cardon refinery and theflexicocker unit at the Amuay refinery. Also, losses resulted from the payment of demurrage and penaltiesresulting from the anchoring of owned vessels and third party vessels atVenezuelan ports.

 

**OtherEffects on the Operations of PDVSA and its Venezuelan Subsidiaries**

 

The work stoppage ofoperations also caused other effects that, although they cannot be quantifiedor valued accurately significantly affected the operations of PDVSA and itsVenezuelan subsidiaries.  Among othersthere were delays to the environmental remediation plans; the loss of sensitiveoperating information; interruption of the information systems; delays incompliance with obligations with creditors; a deterioration of PDVSA as areliable supplier of oil; failure to comply with financial, legal andcontractual obligations; loss of market share; delays in the execution of plansand projects; and the loss of human resources and intellectual capital with anaverage specialized experience of 15 years.

 

In addition tothe effects and loss from damages resulting from the work stoppage on theCompany’s operations, the financial and administrative systems in general weresignificantly affected. Consequently, there were weaknesses in the internalcontrols which affected the processing of financial and operational informationof PDVSA and its Venezuelan subsidiaries, during December 2002 and animportant part of 2003. During the affected period, PDVSA

 

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implementedalternative control systems and, among other actions, concentrated its effortson filling key managerial positions and hiring and training new personnel totake charge of the information, financial, administrative and operatingsystems. The above resulted in delays in certain important accountingprocesses, impeding and delaying the delivery of financial reports bothinternally and externally.

 

The Company’smanagement has as one of its principal objectives, continuing the plan to fullyrestore the Company’s operations, and resolving other outstanding mattersresulting from these events.  Measurestaken include, among others, strengthening the Company’s Exploration,Production and Improvement, Refining, Supply and Marketing activities;strengthening the management structure of domestic and internationalbusinesses; executing a training plan for personnel working in the operating,administrative and financial areas; creating teams specialized in technology inorder to implement an integrated financial information system; implementing aplan for the comprehensive evaluation and improvement of the internal controlstructure, as well as hiring external advisors for those activities required tosupport PDVSA’s operations.

 

**Overview and Trends**

 

Our consolidated financial results depend primarily onthe volume of crude oil produced and the price levels for hydrocarbons.  The level of crude oil production and thecapital expenditures needed to achieve such level of production have been amongthe principal factors determining our financial condition and results of operationssince 1990, and are expected to continue to be the principal factors indetermining our financial condition and results of operations for theforeseeable future.

 

Historically, members of the OPEC have entered intoagreements to reduce their production of crude oil.  Such agreements have sometimes increasedglobal crude oil prices by decreasing the global supply of crude oil.  Venezuela is a party to and has complied withsuch agreements, and we expect that Venezuela will continue to comply with suchproduction agreements with other OPEC members. Since 1998, OPEC’s production quotas have resulted in a worldwidedecline in crude oil production and substantial increases in internationalcrude oil prices.

 

During 2003, the OPEC basket increased by $3.74 perbarrel, or 15%, from $24.36 per barrel in 2002 to $28.10 per barrel in2003.  The average price of our exports,including refined products, increased by $1.74 per barrel, or 14%, from $21.94per barrel in 2002 to 24.89 per barrel in 2003.

 

Our total OPEC production quota increased from 2,497MBPD in December 2002 to 2,647 MBPD in December 2003.  Venezuela’s OPEC production quota increasedby 460 MBPD to 3,107 MBPD at December 2004.  By December 2004, the average price ofthe OPEC basket was $36.04 per barrel and the average price of the Venezuelanbasket was $32.61 per barrel.  In July 2005our quota was raised to 3,223 MBPD and the OPEC basket reached $53.82 perbarrel and the average price for six months of the Venezuelan basket reached$48.94 per barrel.

 

**Impact of Inflation and Devaluation**

 

While more than 95% of our revenues and a significantportion of our expenses are in dollars, some of our operating costs (includingincome tax liabilities) are incurred in bolivars.  As a result, our financial condition andresults of operations are affected by the Venezuelan inflation rate and thetiming and magnitude of any change in the $/Bs exchange rate during a givenfinancial reporting period.

 

Since 1998, the Venezuelan government has usedexchange rates to moderate inflation, by devaluing the bolivar within apre-determined band.  Effective February 13,2002, however, the Venezuelan government and the BCV adopted a floatingexchange rate system, as opposed to the band system previously in effect.  As a result of the adoption of a floatingexchange rate system, the bolivar devalued substantially against the dollar andinflation accelerated in 2002.  During2002 and 2001, we experienced devaluation of the bolivar at an annual rate of82% and 10%, respectively, and an annual inflation rate of 31% and 12%,respectively.

 

On February 5, 2003, the Venezuelan governmentestablished an exchange control regime, and fixed the exchange rates for thesale and purchase of foreign currency at Bs1,600.00 to $1 and Bs1,596.00 to $1,respectively.

 

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The annualdevaluation rate for 2003 was 14% and the inflation rate was 27%.  On February 7, 2004 a new foreignexchange rate for the sale and purchase of foreign currency was established atBs. 1,920.00 to $1 and Bs. 1,915.20 to $1, respectively.  The new exchange controls do not have asignificant impact on PDVSA’s operations because we and our affiliates areexempt from foreign exchange controls, up to a specified dollar limit.  See notes 3 and 22 to our consolidatedfinancial statements, included under “Item 18. Financial Statements.”

 

**Summary of Exchange Rates (Bs/$1)**

 
| ** **                                                                                                                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                              | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Exchange rates at year-end derived from  exchange agreement with the BCV (Bs/$1) (see note 2 to our consolidated  financial statements) |       | 1,920.00              |       | 1,600.00 |   | 1,403.00 |   | 770.09 |   |
| Average  annual exchange rates (Bs/$1)                                                                                                  |       | 1,920.00              |       | 1,611.32 |   | 1,163.91 |   | 722.01 |   |
| Interannual  increments in the exchange rate (%)                                                                                        |       | 20.00                 |       | 14.04 |   | 82.18 |   | 10.29 |   |
| Interannual  increments in the CPI* (%)                                                                                                 |       | 19.18                 |       | 27.10 |   | 31.22 |   | 12.29 |   |

 

----

*              Consumer PriceIndex

 

**Impact of Taxes on Net Income and Cash Flows**

 

In accordance with Venezuelan income tax law, ourincome tax expense is based on our Bolivar accounting records.  For fiscal purposes, Venezuelan companies arerequired to reflect the impact of inflation and the variations in the rate ofthe bolivar relative to the dollar and other foreign currencies by adjustingnon-monetary assets and stockholder’s equity on their fiscal balancesheets.  The Venezuelan income tax lawconsiders any gain resulting from this adjustment as taxable income and anyloss as a deductible expense.  Suchadjustments affect our taxable income and therefore the amount of our incometax liability in bolivars.  When such taxliabilities are translated into dollars, the adjustments may create a materialdifference between the effective tax rate paid when expressed in dollars andthe statutory rate in bolivars.

 

The following is a summary of the changes included inthe new Organic Hydrocarbons Law that affect taxes levied on PDVSA’soperations:

 

•      *Production tax*.  Venezuela’s new Organic Hydrocarbons Law thatcame into effect in January 2002, which, among other things, increased theproduction tax rate from 162/3 % to 30% based on thevolume of extracted hydrocarbons.  Formature reservoirs or extra-heavy crude oil from the Orinoco Belt, a tax ratewithin a 20% to 30% band was established. For natural bitumen, a tax rate within a 162/3 %to 30% band was established, based on the profitability of reservoirs.  This tax is fully deductible in determiningnet taxable income.

 

•      *Surface tax*.  This tax is calculated at the annual rate of100 tax units for each square kilometer or fraction thereof.  Surface tax is determined based on theconcession area not under production, with an annual increase of 2% for fiveyears and 5% in subsequent years.

 

•      *General consumption tax*.  This tax is determined at a rate rangingbetween 30% and 50% of the price paid by the final customer, is applicable toeach liter of hydrocarbon-derived product sold in the domestic market.  The consumption tax rate is determinedannually.

 

•      PDVSA also is taxed on its own consumption, equivalent to 10% of the value ofeach cubic meter of hydrocarbon-derived product consumed as fuel oil in itsoperations, calculated based on the final sale price.

 

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*Income taxes*.  In January 2002, an amendment to theVenezuelan income tax law came into effect, reducing the income tax rateapplicable to our Venezuelan subsidiaries engaged in the production ofhydrocarbons and related activities from 67.7% to 50%.

 

By August 2004, Venezuela levied a wholesale tax(a form of value added tax) on domestic sales transactions of 16%, however,until October 1, 2005 this tax was levied at a rate of 15% and currentlythe rate is 14%.

 

As an exporter, each of our Venezuelan operatingsubsidiaries is entitled to a refund for a significant portion of such taxespaid, which we classify on our balance sheet as recoverable value addedtax.  The Venezuelan governmentreimburses taxes through special tax recovery certificates, or CERTS.  In 2001, we recovered $209 million of CERTs,and none during 2002 and 2003.

 

PDVSA and some of its Venezuelan subsidiaries areentitled to a tax credit for new investments in property, plant and equipmentof up to 12% of the amounts invested.  Inthe case of PDVSA Petróleo, such credits, however, may not exceed 2% of itsannual net taxable income and, in all cases, the carryforward period may notexceed three years.

 

Venezuela also levies a tax on corporate assets at arate of 1% of the average value of a company’s assets, as adjusted forinflation at the beginning and at the end of each year.  The tax is in effect a minimum income tax, asit is only paid if the amount that would be due thereunder is greater than theincome tax otherwise payable.  However,this tax was repealed on August 10, 2004 and will not be required to bepaid from that date on.  See note 12 toour consolidated financial statements, included under “Item 18. FinancialStatements.”

 

Effective March 2002, and for the term of oneyear, the Venezuelan government introduced a tax on certain bankingtransactions to be levied at a rate of 0.75%. On March 2003, the term was extended for one more year, and thistax was raised to a rate of 1.00% until June 2003, when the rate wasreduced to 0.75%.  The tax rate wasreduced to 0.50% from December 2003 through March 2004.

 

In conformity with the Venezuelan tax law, taxpayerssubject to income tax who carry out import, export and loan operations withrelated parties domiciled abroad are obliged to determine their income, costsand deductions by applying transfer pricing rules.  PDVSA has obtained studies supporting itstransfer pricing methodology.  Theresulting effects are included as a taxable item in the determination of incometax.  PDVSA undertakes significantoperations regulated by transfer pricing rules.

 

A summary of the tax effects on PDVSA’s consolidatedoperations for the years ended 2003, 2002 and 2001, are as follows:

 
| ** **                  | ** ** | **Year ended December 31** | ** ** |
|-----------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **2003**                        | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                  |       | **($ in  millions)**       |       |
| Income taxes                |       | 1,602                           |       | 149 |   | 3,766 |   |
| Production  and other taxes |       | 6,428                           |       | 5,748 |   | 3,760 |   |
|                        |       | 8,030                           |       | 5,897 |   | 7,526 |   |

 

For the year ended 2003, PDVSA expensed $8,030 millionin taxes, compared to $5,897 million in 2002, representing an increase of 36%in the amount of taxes.  Also, theeffective income tax rate increased from 5.4% in 2002 to 35.1% in 2003.  This increase was due principally to theinflation adjustment for tax purposes and effects of remeasurement frombolivars to dollars net of the reversal of a valuation allowance in 2003corresponding to tax credits utilized during 2003.  See note 12 to our consolidated financialstatements, included under “Item 18. Financial Statements.”

 

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**Basis of Presentation**

 

The economic environment of our operations involvesmainly the international market for crude oil and refined products.  As such, the dollar is our reportingcurrency.  See note 1(b) to ourconsolidated financial statements, included under “Item 18.  Financial Statements.”

 

### **5.A**          Management’s Discussion andAnalysis of Financial Condition and Results of Operations

### ** **

**Executive Summary**

 

PDVSA is vertically integrated in the petroleum, gas,refining and marketing businesses.  Weexplore and produce hydrocarbons in Venezuela and mainly, sell crude oil to theUnited States and Canada, the Caribbean, Europe, South America, and Asia.  Also, we refine crude oil and otherfeedstocks in Venezuela and abroad, into a variety of products which includegasoline, diesel, fuel oil, and jet fuel, petrochemicals and industrialproducts, lubricants and waxes, and asphalt. Products are transported from our refineries primarily by tankers,pipeline and barge and then through terminals to our customers.  These products are sold to wholesalemarketers, convenience stores, airlines and to other manufacturers asfeedstock.

 

We evaluate our operating performance of our upstreambusiness based on the number of active rigs, production levels by field,recovery factors, the incorporation of crude oil and gas reserves, reservoirsenergy levels and quantity and quality of key professionals such as petroleumengineers and geologists.  Regarding ourdownstream business, we look at utilization rates of the refinery andpetrochemical equipment, the yield of products from crude oil input and thecost of other key components such as natural gas and electricity.  We evaluate our financial performance byfocusing on return on capital employed and economic value added, free cashflow, operational costs per barrel of oil produced, gross margins, etc.  We evaluate the performance of our specialtyproducts such as petrochemicals and lubricants against the alternate use valueof the hydrocarbons used to produce these products.  In most cases, this alternate use valuerelates to the price of gasoline.  Alsowe take into consideration our international and domestic markets supplypercentages.

 

PDVSA’s financial results are a function of oilprices, supplying an optimal crude oil mix to customers and to our refineries,making profitable capital investments and using fully our refining capacity,maintaining margins on the products sold, operating our facilities in a safeway and keeping low operational costs. We assess our financial condition by means of financial ratios includinginterest coverage, debt coverage, debt-to-capitalization, return on capital employed,economic value added and available borrowing capacity.

 

PDVSA’s primary opportunities are based currently onincreasing reserves of light and medium gravity crude oil, increasing theoverall recovery factor, continuing the development of extra-heavy crude oilprojects, and improving existing technology in order to maximize the return onour investments.

 

Regarding our downstream business, we are investing inincreasing refining capacity, product enhancement and environmental compliancewithin Venezuela and abroad, expanding our markets in Latin America, theCaribbean and Asia, and improving the efficiency of our refining processes andmarketing activities.

 

With respect to our gas business, we are activelypromoting the national and international private sector participation innon-associated gas reserves and processing, enhancing our distributionprocesses in order to increase our domestic and international marketshares, andincreasing our focus on the liquefied natural gas (LNG) markets.

 

With respect to petrochemicals from our refineries, weare supporting the development of new lines of business with natural gas andrefining streams.

 

The most difficult challenges for PDVSA management inthe medium term are the optimum maintenance of oil reservoirs and productionfacilities, investing in exploration programs to increase reserves, increasingavailability of gas in western Venezuela and changes in product qualityspecifications.  Tier II Gasoline, UltraLow Sulfur Diesel, Group II and III Lube base oils and high performanceasphalts are all being required by the market place over the next four to sixyears.  Some of these products are beingdirectly mandated by regulatory agencies,

 

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others are the indirect result of regulations, but ultimately ourcustomers will require all of these products plus possibly others not currentlydefined.

 

The challenges to being able to supply this newgeneration of products include: planning and executing multi-million dollarcapital projects, primarily for refinery and oil and gas projects, financingthese projects, and adjusting operating practices and procedures to assurereliable, high quality supplies to our customers.  All this must be done without impacting ourprofit and efficiency improvement initiatives.

 

PDVSA continues to evaluate technology improvements,and believes that by increasing our implementation of high technology offshoredrilling and production, 4D exploration and new quality fuels productioncapabilities, we will benefit from technology improvements over time.

 

The crude oil and refined products businesses areinherently volatile, and the primary business risk for any company engaged inthe business is a sudden and radical movement in market prices.  Another major risk in the oil business isoperational risk, which is the risk of mechanical failure and or human errorrelated to any operating asset.  A finalarea of risk is political risk.  In theshort term, geopolitical actions could upset the supply-demand equation,affecting prices of crude oil or products and thus creating market upsets.  Over the longer term, changes in laws orregulations could radically increase the cost of being in the oil business.  Political risk associated with increased regulationcan only be addressed on an issue specific basis.  PDVSA is constantly monitoring statutory andregulatory trends which might affect the business in the countries where itoperates.

 

Operating risk is first addressed at PDVSA by anadvanced risk management system and by stringent operating practices andprocedures.  However, in addition tostriving for operational excellence, PDVSA carries significant levels ofproperty damage and business interruption insurance.

 

Political risk is an issue that must be accepted andmanaged, once a business has committed capital investments in a certaincountry.  However, PDVSA’s large anddiverse production, refining and distribution system provides the flexibilityto react to crude and product shortages or surpluses, should they occur.  For example, CITGO’s Gulf Coast refineriesare complex and flexible enough to process almost any type of crude oil tradedon the world market.  PDVSA operatesimportant crude oil and product storage facilities and terminals in Venezuela,Europe, the Caribbean and in various locations in the United States, in case itbecomes necessary to further supplement the supply of crude oil orproducts.  Additionally, PDVSA isreducing its political and commercial risk by diversifying its customerportfolio and by investing in refining capacity in new markets.  In this regard we are evaluating businessopportunities in Asia (India and China), South America (Brazil and Argentina),the Caribbean (Jamaica and Cuba) including important opportunities.

 

In Venezuela, PDVSA is addressing the risk ofoperating in an economy characterized by years of improper wealth distribution,which in turn created several accumulated economical imbalances, bycontributing to the general social wellbeing through various programs designedto complement the governmental action on social issues, such as strategic foodsupply, education, housing, health and job creation.  For such programs, PDVSA expensedapproximately $546 million and $4,355 million in 2003 and 2004, respectively.

 

The refined products business continues to be verycompetitive.  Industry analysts predictdemand growth at 1% to 2% per year in the U.S. for the next 5 to 10 years,creating expansion opportunities for U.S. refineries, which are currentlyoperating at near capacity throughput. While this growth trend would appear to be positive for refining andmarketing companies, the industry has always exhibited strong competitivetendencies, and recent corporate consolidations have resulted in cost reductionsynergies and economies of scale that translated into competitive pricing inthe market place.

 

As noted above, the production of lower sulfurscontent fuels and higher quality lubricant base stocks and asphalts isdefinitely a trend for the future.  Thehigh capital requirements associated with facilities equipped to produce theseproducts may lead to further consolidation of refining capacity into the handsof financially strong companies.  PDVSAwill continue to monitor these trends and will take advantage of economicopportunities as they occur.

 

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Major uncertainties for PDVSA generally coincide withmarket and political risks.  While PDVSAcannot forecast the future of the crude oil and refined product markets andpolitical actions, which may affect it, the Company can prepare itself forpotential contingencies.  PDVSA believesit is prepared to adjust to most market contingencies in ways that will nothave a significant negative impact on its performance or future by maintainingadequate levels of financial liquidity and debt, by assuring that its assetsdistribution are flexible and by having multiple sources of supply, adiversified customer portfolio and by monitoring and analyzing the market on acontinuous basis.

 

Even though PDVSA went through great difficultiesimposed by a work stoppage-sabotage that paralyzed operations, financialsystems and caused significant losses, financially, 2003 and 2004 were goodyears for PDVSA as a result of a positive recuperation effort, sustainedproduction capacity, a high utilization rate of refining capacity, excellentsafety performance and favorable market conditions.

 

As PDVSA continues to emphasize the importance ofefficient operations and its commitment to safety, we will again take advantageof expected favorable market conditions in 2005.  However, PDVSA operates in an industrysubject to volatility in earnings. Conditions can change quickly and results may differ substantially frommanagement’s expectations.  In addition,reactions to perceived credit risks by PDVSA’s suppliers and creditors couldaffect the Company’s liquidity should credit lines or payment terms berestricted.

 

PDVSA has sufficient liquidity (defined as cash fromoperations, available borrowing capacity and access to accounts receivablesales facilities) to maintain its current operations, to complete capitalprojects that are underway and reduce its outstanding debt.  Estimated capital expenditures for 2005 areapproximately $5,869 million.  Liquidity,defined as cash and cash equivalents, at 2003 year-end was approximately $2,938million.  PDVSA reduced its net financialdebt in 2003 and 2004 in order to have less stringent covenants on its crudeoil sales and in order to improve its overall financial risk management.  PDVSA is not planning to issue new debt in2005.

 

**Results of Operations 2003 Compared to 2002**

 

**Production**

 

Our production of crude oil and liquid petroleum gasaveraged 2,595 MBPD in 2003, a 8% decrease from 2,832 MBPD produced in 2002 duebasically to the work stoppage that affected PDVSA in December 2002and the first months of 2003.  By November 2002we were producing about 3,300 MBPD and by January 2003, our production hadfallen to an average of 800 MBPD.  Ofthis total of 2,595 MBPD, 29% was light crude oil and condensates, 35% wasmedium crude oil, 30% was heavy and extra-heavy crude oil and the remaining 6%was liquid petroleum gas.  Our productionof natural gas (net of amounts re-injected) was 3,432 MMCFD in 2003 compared to3,672 MMCFD in 2002.  In 2003, ournatural gas production capacity reached 7,453 MMCFD and natural gas liquidproduction capacity totaled 270 MBPD. Our crude oil production capacity was 3,529 MBPD in 2003 compared to3,674 MBPD in 2002.  All of our crude oiland natural gas production operations are located in Venezuela.

 

In 2003, the net output of refined petroleum products(including output representing our equity interest in refineries held by ouraffiliates in the United States and in Europe) was 2,700 MBPD, compared to2,577 MBPD in 2002.  Of this total, 1,033MBPD (38%) were produced in our Venezuelan refineries (including the IslaRefinery in Curaçao), 1,291 MBPD (48%) was produced by the refineries in theUnited States, and the remaining 376 MBPD (14%), was produced by our interestsin the European joint ventures.

 

***Total Revenues***

 

Total revenues increased $4,009 million, or 9%, from$42,580 million in 2002 to $46,589 million in 2003, due to the increase inexport sales prices, partially offset by a decline in production due to theoperational and administrative turmoil caused by the work stoppage.

 

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***Net Sales***

 

Net sales increased $3,898 million, or approximately9%, from $42,312 million in 2002 to $46,210 million in 2003.  This was due mainly to an increase in averagesales price of approximately 21%, from an average price per barrel of $26.56 in2002 to $32.08 in 2003, partially offset by a 13% decrease in sales volume,from a total of 4,365 MBPD in 2002 to a total of 3,784 MBPD in 2003.  See “Item 3.A Selected Financial Data” andthe table captioned “PDVSA’s Consolidated Sales Volume” under “Item 4.BBusiness overview.”

 

*Export Revenues of Crude Oil and Refined Products*.  Exports represented 57% of our salesvolumes.  Our exports decreased in volumeby approximately 11% from 2,411 MBPD in 2002 to 2,150 MBPD in 2003, duebasically to the work stoppage that affected PDVSA during the firstquarter 2003.  PDVSA declared a ForceMajeure on its supply contracts in December 2002, which was lifted in March 2003.  The average export price per barrel forVenezuelan crude oil, refined petroleum products and liquid petroleum gas was$24.89 in 2003, compared to $21.94 in 2002, representing a 13% increase.

 

The following table sets forth the primary markets forVenezuelan crude oil, refined petroleum products and liquid petroleum gas for2003 and 2002.

 

**PDVSA’s Export Sales—Geographical Breakdown**

 
| ** **                     | ** ** | **2003**                                  | ** ** | **2002** | ** ** | **Increase   (Decrease)** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|----------|------------|---------------------------|------------|
| ** **                     | ** ** | **(MBPD, except as otherwise indicated)** | ** ** |
|                           |       |                                      |       |     |       |                      |       |
| United  States and Canada      |       | 1,183                                     |       | 1,269    |       | (7                        | )%         |
| Caribbean  and Central America |       | 675                                       |       | 739      |       | (9                        | )%         |
| South  America                 |       | 204                                       |       | 269      |       | (24                       | )%         |
| Europe                         |       | 88                                        |       | 134      |       | (34                       | )%         |

 

We export all of the crude oil that we produce that isnot processed in our Venezuelan refineries (including at the Isla Refinery inCuraçao).  Of our total exports of 2,150MBPD in 2003, 1,648 MBPD were exported (including to the Isla Refinery inCuraçao) as crude oil and 502 MBPD were exported as refined petroleumproducts.  For the purpose of calculatingexport volumes, we treat crude oil processed in the Isla Refinery in Curaçao asan export of crude oil from Venezuela and do not treat the sale of refinedpetroleum products from the Isla Refinery as an export of refined petroleumproducts from Venezuela.

 

*Sales Revenues of International Subsidiaries*.  In 2003, the total volumes of crude oil andrefined petroleum products that we sold exceeded our total production of crudeoil and liquid petroleum gas.  In 2003,our total production of crude oil and liquid petroleum gas was 2,595 MBPD,compared to 3,784 MBPD of total sales of such products.  PDV America, through its wholly ownedsubsidiaries (primarily CITGO), generates most of the sales in excess of ourcrude oil and liquid petroleum gas production, because it purchases crude oiland refined petroleum products from third parties (including affiliates) forsupply to refining and marketing network in the United States.  Total sales of refined petroleum products byPDV America were approximately 1,807 MBPD in 2003, compared to 1,658 MBPD in2002, and its purchases of crude oil from us totaled approximately 336 MBPD in2003, compared to 320 MBPD in 2002.  PDVAmerica’s revenues increased to $25,216 million in 2003 from $19,358 million in2002, due to an increase in average sales price of 19% and an increase in salesvolume of 9%.

 

*Domestic Sales*.  In 2003, we sold 432 MBPD of refinedpetroleum products (including liquid petroleum gas) domestically, compared to420 MBPD sold domestically in 2002.  Wealso sold 302 MBPD of oil equivalent of natural gas, compared to 324 MBPD soldin 2002.  Unit sales prices of refinedpetroleum products decreased 2%,

 

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from $6.73 per barrel in 2002 to $6.61 per barrel in 2003, and unitsales prices of natural gas decreased from $0.71 per MCF, or $4.34 per BOE, in2002 to $0.61 per MCF, or $3.20 per BOE, in 2003.  Between December 2002 and March 2003PDVSA imported and sold 14.5 million barrels of gasoline and diesel inVenezuela due to the shut down of our local refineries affected by the workstoppage.

 

*Petrochemical and Other Sales*.  Our net sales for 2003 included $1,071million from sales of petrochemicals, bitumen and coal, a 11% decrease comparedto $1,201 million of revenues from sales of these products in 2002.  This decrease in net sales is due primarilyto a 34% decrease in volumes produced, as a consequence of lower feeedstocksupply from PDVSA, which in turn was unable to deliver due to the 2003 workstoppage.

 

***Equity in Earnings of Non-consolidated Investees***

 

Equity in earnings of non-consolidated investeesincreased 41% to $379 million in 2003 from $268 million in 2002.  This resulted primarily due to higherearnings reported by the affiliates Hovensa, Petrozuata and Chalmette.

*** ***

***Purchase of Crude Oil and Products***

 

Our purchase of crude oil and products increased by17% from $17,956 million in 2002 to $21,016 million in 2003, primarily due toan increase of purchases from third parties as a consequence of the reductionin transfers from PDVSA Petroleo.  Wealso purchased an average of 55 MBPD and 61 MBPD of refined products and crudeoil for our Venezuelan operations, during 2003 and 2002, respectively.  Other purchases of crude oil were made tomeet our supply commitments.  ThroughCITGO, we purchase crude oil and refined petroleum products from third parties(including affiliates) to supply our refining and marketing networks in theUnited States.  As previously discussed,we imported 14.5 million barrels of gasoline and diesel at a cost of around$640 million to supply local market during the work stoppage that affectedour refineries during the first quarter of 2003.

 

***Operating Expenses***

 

Our operating expenses increased slightly by $39million or less than 1%, from $9,299 million in 2002 to $9,338 million in 2003due to an increase in refining costs for our subsidiary CITGO.

 

Total refining costs represented 42% and 39% of ourtotal operating expenses for 2003 and 2002, respectively.  Costs incurred at our Venezuelan refineries(including the Isla Refinery) represented 8% of our total operating expenses in2003 and 9% of our total operating expenses in 2002.

 

***Exploration Expenses***

 

Our total exploration expenses were $27 million in2003, compared to $133 million in 2002. The decrease in exploration expenses is attributable to a decrease inexploratory activities, particularly with respect to acquisition of 2D and 3Dseismic lines.  Nevertheless, we added162 MMB of proved crude oil reserves from newly discovered reserves in 2003compared to 135 MMB from newly discovered reserves in 2002.  We conducted exploratory drilling of sevenwells in 2003, compared to ten wells in 2002.

 

***Depreciation and Depletion***

 

Depreciation and depletion decreased 7% from $3,038million in 2002 to $2,824 million in 2003. This decrease is explained by the fact that most of our assets aresubject to the units-of-production depreciation method, which is affected bythe production level of each year. In 2003 the production level was lower thanin 2002. Additionally, the increase in provisions related to assets caused adecrease in the base of the assets depreciable costs.

 

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***Asset Impairment***

 

Asset impairment decreased by $426 million from $722million in 2002 to $296 million in 2003, principally because of the results ofthe asset impairment study of December 2003, which determined that it wasnecessary to increase the provision for the impairment of certain assets of thesouth west production division.  For therest of the assets, it was not necessary to change the December 31, 2002provision.

 

***Selling, Administrative and General Expenses***

 

Selling, administrative and general expenses decreased$375 million or 20% from $1,854 million in 2002 to $1,479 million in 2003, dueprincipally to a reduction of approximately $170 million in labor costs and adecrease of $126 million in pension plans, both of which were caused by thetermination of a large number of employees.

 

***Financing Expenses***

 

Financing expenses decreased by 18% to $627 million in2003 from $763 million in 2002, in each case, net of capitalized interest of$40 million and $51 million, respectively. The decrease in financing expenses resulted primarily from the decreasein the weighted average variable interest rate from 5.40% in 2002 to 2.94% in2003 and an a decrease in average indebtedness outstanding from $8,335 millionin 2002 to $7,629 million in 2003, offset by an increase in the weightedaverage fixed interest rate from 7.97% in 2002 to 8.25% in 2003.

 

**Results of Operations 2002 Compared to 2001**

 

***Production***

 

Our production of crude oil and liquid petroleum gas averaged2,832 MBPD in 2002, a 13% decrease from 3,267 MBPD produced in 2001.  Of this total, 29% was light crude oil andcondensates, 34% was medium crude oil, 31% was heavy and extra-heavy crude oiland the remaining 6% was liquid petroleum gas. Our production of natural gas (net of amounts re-injected) was 3,672MMCFD in 2002 compared to 4,093 MMCFD in 2001. In 2002, our natural gas production capacity reached 7,560 MMCFD and naturalgas liquid production capacity totaled 288 MBPD.  Our crude oil production capacity was 3,653MBPD in 2002 compared to 3,990 MBPD in 2001. All of our crude oil and natural gas production operations are locatedin Venezuela.

 

In 2002, the net output of refined petroleum products(including output representing our equity interest in refineries held by ouraffiliates in the United States and in Europe) was 2,577 MBPD, compared to2,863 MBPD in 2001.  Of this total, 1,182MBPD (46%) was produced in our Venezuelan refineries (including the IslaRefinery in Curaçao), 1,124 MBPD (43%) was produced by the refineries in theUnited States, and the remaining 271 MBPD (11%), was produced by our interestsin the European joint ventures.

 

***Total Revenues***

 

Total revenues decreased $3,670 million, or 8%, from$46,250 million in 2001 to $42,580 million in 2002.

 

***Net Sales***

 

Net sales decreased $3,474 million, or approximately8%, from $45,786 million in 2001 to $42,312 million in 2002.  This was due mainly to a 3% decrease in salesvolume, from a total of 4,478 MBPD in 2001 to a total of 4,365 MBPD in 2002,and a decrease in average sales price of approximately 6%, from an averageprice per barrel of $28.21 in 2001 to $26.56 in 2002.  See “Item 3.A Selected financial data” andthe table captioned “PDVSA’s Consolidated Sales Volume” under “Item 4.BBusiness overview.”

 

*Export Revenues of Crude Oil and Refined Products*.  Exports represented 55% of our salesvolumes.  Our exports decreased in volumeby approximately 13% from 2,762 MBPD in 2001 to 2,411 MBPD in 2002.  The average export price per barrel forVenezuelan crude oil, refined petroleum products and liquid petroleum gas was$21.94 in 2002, compared to $20.21 in 2001, representing a 9% increase.

 

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The following table sets forth the primary markets forVenezuelan crude oil, refined petroleum products and liquid petroleum gas for2002 and 2001.

 

**PDVSA’s Export Sales—Geographical Breakdown**

 
| ** **                     | ** ** | **2002**                                  | ** ** | **2001** | ** ** | **Increase (Decrease)** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|----------|------------|-------------------------|------------|
| ** **                     | ** ** | **(MBPD, except as otherwise indicated)** | ** ** |
|                           |       |                                      |       |     |       |                    |       |
| United  States and Canada      |       | 1,269                                     |       | 1,497    |       | (15                     | )%         |
| Caribbean  and Central America |       | 739                                       |       | 793      |       | (7                      | )%         |
| South  America                 |       | 269                                       |       | 321      |       | (16                     | )%         |
| Europe                         |       | 134                                       |       | 151      |       | (11                     | )%         |

 

We export all of the crude oil that we produce that isnot processed in our Venezuelan refineries (including to the Isla Refinery inCuraçao).  Of our total exports of 2,411MBPD in 2002, 1,764 MBPD were exported (including to the Isla Refinery inCuraçao) as crude oil and 647 MBPD were exported as refined petroleum products.  For the purpose of calculating exportvolumes, we treat crude oil processed in the Isla Refinery in Curaçao as anexport of crude oil from Venezuela and do not treat the sale of refinedpetroleum products from the Isla Refinery as an export of refined petroleumproducts from Venezuela.

 

*Sales Revenues of International Subsidiaries*.  In 2002, the total volumes of crude oil andrefined petroleum products that we sold exceeded our total production of crudeoil and liquid petroleum gas.  In 2002,our total production of crude oil and liquid petroleum gas was 2,832 MBPD,compared to 4,365 MBPD of total sales of such products.  PDV America, through its wholly ownedsubsidiaries (primarily CITGO), generates most of the sales in excess of ourcrude oil and liquid petroleum gas production, because it purchases crude oiland refined petroleum products from third parties (including affiliates) forsupply to refining and marketing network in the United States.  Total sales of refined petroleum products byPDV America were approximately 1,658 MBPD in 2002, compared to 1,610 MBPD in2001, and its purchases of crude oil from us totaled approximately 320 MBPD in2002, compared to 348 MBPD in 2001.  PDVAmerica’s revenues decreased to $19,358 million in 2002 from $19,601 million in2001, due to a decrease in average sales price of 4%, offset by an increase insales volume of 3%.

 

*Domestic Sales*.  In 2002, we sold 420 MBPD of refinedpetroleum products (including liquid petroleum gas) domestically, compared to458 MBPD sold domestically in 2001.  Wealso sold 324 MBPD of oil equivalent of natural gas, compared to 307 MBPD soldin 2001.  Unit sales prices of refinedpetroleum products decreased 23%, from $8.74 per barrel in 2001 to $6.73 perbarrel in 2002, and unit sales prices of natural gas decreased from $0.88 perMCF, or $5.35 per BOE, in 2001 to $0.71 per MCF, or $4.34 per BOE, in 2002.

 

*Petrochemical and Other Sales*.  Our net sales for 2002 included $1,201million from sales of petrochemicals, bitumen and coal, a 14% decrease comparedto $1,403 million of revenues from sales of these products in 2001.  This decrease in net sales is due primarilyto the effects of devaluation on petrochemical revenues denominated inbolivars.

*** ***

***Equity in Earnings of Non-consolidated Investees***

 

Equity in earnings of non-consolidated investeesdecreased 42% to $268 million in 2002 from $464 million in 2001.  This resulted primarily from the 84% decreasein PDV Holding’s equity in earnings from $225 million in 2001 to $36 million in2002, which was due to the $113 million decrease in our share in the earningsof Chalmette Refining from a $50 million gain in 2001 to a $(63) million lossin 2002.  Additionally, our share in theearnings of Merey Sweeny decreased $68 million, from a $66 million gain in 2001to a $(2) million loss in 2002. Finally, in 2002, PDV Holding experienced a $12 million reduction in itsearnings from other investments.  Thisdecrease in earnings was partially offset by a $4 million increase ofLYONDELL-CITGO’s earnings from $74 million in 2001 to $78 million in 2002.

 

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***Purchase of Crude Oil and Products***

 

Our purchase of crude oil and products decreased by 1%from $18,228 million in 2001 to $17,956 million in 2002, primarily due to adecrease in volumes.  We also purchasedan average of 61 MBPD and 55 MBPD of refined products and crude oil for ourVenezuelan operations, during 2002 and 2001, respectively.  Other purchases of crude oil were made tomeet our supply commitments.  ThroughCITGO, we purchase crude oil and refined petroleum products from third parties(including affiliates) to supply our refining and marketing networks in theUnited States.

 

***Operating Expenses***

 

Our operating expenses decreased by $1,583 million, or15%, from $10,882 million in 2001 to $9,299 million in 2002, due to lower oilproduction in 2002.

 

Total refining costs represented 39% and 36% of ourtotal operating expenses for 2002 and 2001, respectively.  Costs incurred at our Venezuelan refineries(including the Isla Refinery) represented 9% of our total operating expenses in2002 and 10% of our total operating expenses in 2001.

 

***Exploration Expenses***

 

Our total exploration expenses were $133 million in2002, compared to $174 million in 2001. The decrease in exploration expenses is attributable to our abandonmentof two dry wells in 2002 (thereby reducing our exploration expenses by $25million in 2002, compared to $9 million in 2001) and a decrease in exploratorydrilling costs.  We conducted exploratorydrilling of 10 wells in 2002, compared to 11 wells in 2001, principallyattributable to our joint ventures and association agreements in connectionwith our Orinoco Belt projects.

 

***Depreciation and Depletion***

 

Depreciation and depletion increased 16% from $2,624million in 2001 to $3,038 million in 2002, due to an increase in our property,plant and equipment resulting from the capitalization of new assets at the endof 2001, principally attributable to our joint ventures and associationagreements in connection with our Orinoco Belt projects.

 

***Asset Impairment***

 

Asset impairment increased by $465 from $257 in 2001to $722 in 2002, principally due to an increase in oil and gas wells includedunder oil and gas production assets, which PDVSA plans to retire.

 

***Selling, Administrative and General Expenses***

 

Selling, administrative and general expenses remainedat a similar level of $1,854 million in 2002 and $1,853 million in 2001.

 

***Financing Expenses***

 

Financing expenses increased by 50% to $763 million in2002 from $509 million in 2001, in each case, net of capitalized interest of $7million and $51 million, respectively. The increase in financing expenses resulted primarily from the increasein the weighted average variable interest rate from 4.73% in 2001 to 5.40% in2002 and an increase in average indebtedness outstanding from $8,013 million in2001 to $8,335 million in 2002, offset by a decrease in the weighted averagefixed interest rate from 8.13% in 2001 to 7.97% in 2002.

 

### **5.B**                             Liquidity and Capital Resources

### ** **

Our liquidity needs are attributable to ourexploration and development of hydrocarbon reserves, our production, processingand refining activities and our maintenance of machinery and equipment, each ofwhich

 

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require substantial capital investments.  We must continue to invest capital tomaintain or to increase the number of hydrocarbon reserves that we operate andthe amount of crude oil that we produce and process.  We generally rely on funds provided by ouroperations to meet these needs.  Weexpect to meet our capital expenditure requirements primarily through cashflows generated from our operations.  Wehave borrowings under our loan agreements and credit facilities and, from timeto time, we also may pursue financing alternatives in the international capitalmarkets.  In our opinion, we havesufficient working capital for our present requirements.

 

**Cash Flows from Operating Activities**

 

For the year ended December 31, 2003, PDVSA’s netcash provided by operating activities totaled $5,746 million, primarilyreflecting $2,720 million of net income, $2,824 million of depreciation anddepletion, $296 million of asset impairment, $240 million dividends receivedfrom non-consolidated investess, less equity in earnings of non-consolidatedinvestees of $379 million, less $244 million of payments for employeetermination, pension and other postretirement benefits, less $53 million ofdeferred income taxes and changes in working capital of $342 million.

 

The more significant changes in working capital werean increase in accounts receivable of approximately $1,691 million due to theincrease in prices of crude oil and refined products and an increase in taxespayable, accrued and other liabilities of $1,135 million, partially offset by adecrease in prepaid expenses and other assets of $892 million.

 

**Cash Flows from Investing Activities**

 

Net cash used in investing activities totaled $902million for 2003, resulting from $1,969 million of capital expenditures, lessnet movements on restricted cash of $1,146, which includes principallytransfers to the FEM fund, partially offset by the creation of a trust in theSocial and Economic Development Bank of Venezuela and reductions in the fundfor the Orinoco Belt joint ventures.

 

For the three-year period ended December 31,2003, our capital expenditures were as follows:

 
| ** **                  | ** ** | **2003**                 | ** ** | **2002** | ** ** | **2001** | ** ** |
|-----------------------------|------------|--------------------------|------------|----------|------------|----------|------------|
| ** **                  | ** ** | **($ in millions)** | ** ** |
| In  Venezuela:              |       |                     |       |     |       |     |       |
| Exploration  and Production |       | 1,364                    |       | $        | 1,556      |     | $          | 507 |   |
| Refining                    |       | 160                      |       | 365      |       | 2,809    |       |
| Petrochemicals  and others  |       | 102                      |       | 83       |       | 208      |       |
|                        |       | $                        | 1,626      |     | $          | 2,004    |       | $ | 3,524 |   |
| Foreign-Refining            |       | 343                      |       | 739      |       | 257      |       |
|                        |       | $                        | 1,969      |     | $          | 2,743    |       | $ | 3,781 |   |

 

The following table sets forth our planned capitalexpenditures by geographic locations for the period 2005-2007:

 
| ** **            | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Venezuela             |       | 2,990    |       | 5,869    |       | 7,669    |       | 10,195   |       | 7,478    |       |
| United  States        |       | 341      |       | 515      |       | 406      |       | 475      |       | 475      |       |
| Europe and  Caribbean |       | 154      |       | 223      |       | 203      |       | 203      |       | 203      |       |
|                  |       | 3.485    |       | 6,607    |       | 8,278    |       | 10,873   |       | 8,156    |       |

 

Our capital expenditures in Venezuela for 2004 were asfollows:  $2,096 million for explorationand production, $298 million for refining and marketing, $443 million fornatural gas projects, $89 million for petrochemicals and others and $64 millionfor equity investments in our Orinoco Belt associations.  Our planned capital expenditures for 2005 inVenezuela are as follows:  $3,663 millionfor exploration and production, $412 million for refining and marketing, $973million for natural gas projects, $12 million for petrochemicals and others

 

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and $809 million for equity investments in our Orinoco Belt.  The capital expenditures for ourinternational subsidiaries and affiliates are principally to comply withincreasingly stringent environmental laws affecting their operations.  The original 2005 capital expenditure budgetfor Venezuela of $5,971 million has been revised to $5,869 million.

 

**The FIEM and the FEM**

 

 In October 2001and 2002, and January and April 2003, the Venezuelan governmentintroduced reforms to the FIEM Law and, among other changes, suspended thecontributions for the last quarter of 2001 and the years 2002 and 2003.  In June 2002, the board of directors ofthe FIEM and the National Assembly authorized PDVSA to withdraw up to $2,445million.  During 2003, the NationalGovernment and the National Assembly (Congress) authorized PDVSA to withdraw$1,430 million from the funds deposited in the FIEM.  As of December 31, 2003, these fundshave been utilized completely by PDVSA.

 

In November 2003, the Venezuelan Governmentestablished the FEM (formerly the FIEM) to help stabilize national, state andmunicipal expenses resulting from fluctuations in ordinary income.  Through the BCV, the National Governmenttransferred the balance available of $698 million from the FIEM to theFEM.  FEM is funded by the government,state and municipal entities and PDVSA. FEM may receive additional funding from the privatization of publiccompanies, concessions, and strategic associations, if such funds have not beenused to pay public liabilities.  PDVSA isrequired to make contributions to the FEM equivalent to fifty percent (50%) ofthe difference between the income from its oil and by-products exports (in USdollars) and the average of such income collected during the last threecalendar years, after deducting the taxes caused in relation to such income.

 

The deposits made to the FEM may be used in the eventof a decrease in the fiscal income provided by petroleum, a decrease in theincome provided by the oil and by-products exports as compared to the averageof such income collected during the last three calendar years, or in the eventof a national state of emergency.  In theevent that funds from the FEM become available, PDVSA will be able to withdrawan amount that will not exceed seventy-five percent (75%) of the differencebetween the estimated income for that period and the average of such incomecollected during the last three calendar years, upon the approval of the Boardof Directors of the FEM and the opinion of the Permanent Finance Commission ofthe National Assembly.  Likewise, amaximum resources accrual level is established for PDVSA consisting of 30% ofthe average oil exports during the last three years.  Any excess fund will be transferred to theFondo de Ahorro Intergeneracional. However, if PDVSA is required to execute special investment plans forthe management and expansion of its operations, it may use part of such excess,upon the approval of the Stockholder’s Assembly.

 

In December 2004, the FEM had total funds of $705million, including $7 million of accrued interest.  See note 4 to our consolidated financialstatements, included under “Item 18. Financial Statements.”

 

**Cash Flows from Financing Activities**

 

Consolidated net cash used in financing activitiestotaled approximately $3,609 million, resulting primarily from payments ofdividends in the amount of $2,326 million, debt repayments of $2,245 millionand $962 million for issuance of debt.

 

As of December 31, 2003, PDVSA had an aggregateof $7,015 million of indebtedness outstanding that mature on various datesthrough 2033.  PDVSA and its subsidiariesalso have the following credit facilities available at December 31, 2003:

 
| **Source of Financing**      | ** ** | **($ in millions)** | ** ** |
|------------------------------|------------|--------------------------|------------|
| Loan  agreements - secured   |       | 163                      |       |
| Lines of  credit - secured   |       | 39                       |       |
| Lines of  credit - unsecured |       | 260                      |       |
|                         |       | 462                      |       |

 

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In 2002, we paid dividends of $2,652 million and wedeclared $2,752 million in dividends.  In2003, we declared $2,594 million in dividends and paid $2,326 million.  See note 15 to our consolidated financialstatements, included under “Item 18. Financial Statements.”

 

On February 27, 2003, CITGO issued $550 millionaggregate principal amount of 113/8 % unsecured seniornotes due February 1, 2011.  Inconnection with this debt issuance, CITGO repurchased $50 million principalamount of its 71/8 % senior notes due 2006.  On July 25, 2003, CITGO made a $500million dividend payment for the purpose of enabling its parent, PDV America,to make the principal repayment of $500 million, 77/8 %senior notes due August 1, 2003.  OnOctober 22, 2004, CITGO issued $250 million of 6% unsecured senior notesdue October 15, 2011.  In connectionwith this transaction, CITGO redeemed approximately $540 million principalamount of its 113/8 % senior notes due 2011.

 

In January 2003, CITGO’s debt rating was loweredwhich caused a termination event under CITGO’s accounts receivable salefacility existing at that time, which ultimately led to the repurchase of $125million of accounts receivable and cancellation of the facility on January 31,2003.  That facility had a maximum sizeof $225 million, of which $125 million was used at the time ofcancellation.  On February 28, 2003a new accounts receivable facility of $200 million was established.  This facility allows for the non-recoursesale of certain accounts receivable to independent third parties.  On August 1, 2003, $200 million was soldunder this facility.

 

On February 27, 2003, CITGO closed on athree-year $200 million senior secured term loan with a variable interest rate,which was retired on June 25, 2004.

 

On May 23, 2003, CITGO issued $39 million oftax-exempt environmental revenue bonds due 2031.  The proceeds from these bonds are being usedfor qualified projects at the Corpus Christi refinery.

 

On May 3, 2004, CITGO issued $25 million oftax-exempt environmental revenue bonds due 2032 through a governmental issuerthat refunded $25 million of taxable environmental revenue bonds due 2028 previouslyissued through that issuer.  Thetax-exempt bonds are supported by a letter of credit issued by a bank.

 

On August 2, 2004 PDVSA’s subsidiary PDVSAFinance completed its tender offer and consent solicitation for its outstandingnotes.  Holders of an aggregate of 96.34%of the $2.6 billion in principal amount of the notes, tendered and deliveredtheir consent pursuant to the tender offer and to an amendment to certainprovisions of the Senior Indenture.  Thetotal of the notes repurchased was $2,511,822,144.  This transaction provided PDVSA with morecapital flexibility in order to finance its Business Plan. The results of thetender offer and the consent solicitation were as follows:

 
| **Notes**                                                                   | ** ** | **CUSIP/ISIN No**                                                           | ** ** | **Outstanding  Principal  Amount before  Tender Offer** | ** **  | **Principal  Amount Validly  Tendered** | ** ** | **Outstanding  Principal  Amount after  Tender Offer** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|---------------------------------------------------------|-------------|-----------------------------------------|------------|--------------------------------------------------------|------------|
| 6.250% Euro  Notes due 2006                                                 |       | Xs0096444749                                                                |       | €                                                  | 88,400,000  |                                    | €     | 87,449,258                                             |       | € | 950,742 |   |
| 6.650% Notes  due 2006                                                      |       | 693300AE5 /  US693300AE52                                                   |       | $                                                       | 300,000,000 |                                    | $          | 291,693,000                                            |       | $ | 8,307,000 |   |
| 9.375% Notes  due 2007                                                      |       | 693300AP0/  US693300AP00 G6954PAJ9/ USG6954PAJ96                            |       | $                                                       | 250,000,000 |                                    | $          | 243,980,000                                            |       | $ | 6,020,000 |   |
| 6.800% Notes  Due 2008                                                      |       | 693300AF2 /  US693300AF28 693300AC9 / US693300AC96 G6954PAC4 / USG6954PAC44 |       | $                                                       | 300,000,000 |                                    | $          | 293,859,000                                            |       | $ | 6,141,000 |   |
| 9.750% Notes  Due 2010                                                      |       | 693300AR6 /  US693300AR65 G6954PAK6 / USG6954PAK69                          |       | $                                                       | 250,000,000 |                                    | $          | 225,810,000                                            |       | $ | 24,190,000 |   |
| 8.500% Notes  Due 2012                                                      |       | 693300AU9 /  US693300AU94                                                   |       | $                                                       | 500,000,000 |                                    | $          | 471,133,000                                            |       | $ | 28,867,000 |   |
| 7.400% Notes  Due 2016                                                      |       | 693300AJ4 /  US693300AJ40                                                   |       | $                                                       | 400,000,000 |                                    | $          | 387,335,000                                            |       | $ | 12,665,000 |   |
| 9.950% Notes  Due 2020                                                      |       | 693300AT2 /  US693300AT22 693300AS4 / US693300AS49                          |       | $                                                       | 100,000,000 |                                    | $          | 97,050,000                                             |       | $ | 2,950,000 |   |
| 7.500% Notes  Due 2028                                                      |       | 693300AK1 /  US693300AK13                                                   |       | $                                                       | 400,000,000 |                                    | $          | 394,790,000                                            |       | $ | 5,210,000 |   |
|                                                                        |       |                                                                        |       |                                                    |        |                                    |       |                                                   |       |   |   |   |
| Total  outstanding principal amount of notes: $2,607,326,440                |       |                                                                        |       |                                                    |        |                                    |       |
| Total  principal amount of notes validly tendered: $2,511,822,144           |       |                                                                        |       |                                                    |        |                                    |       |
| Percentage  of notes validly tendered, considered as a single class: 96.34% |       |                                                                        |       |                                                    |        |                                    |       |
|                                                                             |            |                                                                             |            |                                                         |             |                                         |            |                                                        |            |  |  |  |  |  |  |

 

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In conjunction with the repurchase of the notes, apremium and expenses totaling US$71.6 million was charged to the 2004 resultsof operations.

 

We currently have long-term debt ratings assigned bycertain internationally recognized credit rating agencies as follows:

 
| ** **                                        | ** ** | **CITGO**       | ** ** | **PDVSA Finance** | ** ** |
|---------------------------------------------------|------------|-----------------|------------|-------------------|------------|
| ** **                                        | ** ** | **(unsecured)** | ** ** | **(unsecured)**   | ** ** |
|                                              |       |            |       |              |       |
| Moody’s  Investors Service                   |       | Ba2             |       | B1                |       |
| Standard &  Poor’s Ratings Services |       | BB              |       | B+                |       |
| Fitch  Ratings                                    |       | BB              |       | BB                |       |

 

During 2003, PDVSA through CVP and as part of theprocess to support the social projects carried out by the National Government,donated to Venezuela $251 million in non-cash materials purchased from thecounterparty to the energy cooperation and integration agreement describedbelow.  This donation was expended during2003 and is included in costs and expenses. The debt created by CVP’s purchases from this counterparty was laterpaid through an offset of trade accounts receivable due from an affiliate ofthe counterparty.  The trade accountsreceivable that were offset were generated by sales made in connection with theCaracas energy cooperation and integration agreement, Convenio de Cooperación yde Integración Energética de Caracas,” that had been transferred from PDVSAPetróleo to CVP.  See notes 18 and 22(a) toour consolidated financial statements, included under “Item 18. FinancialStatements.”

 

As part of the support for diverse programsestablished by the National Government during 2003, PDVSA has madecontributions for donations and to several social programs for $22 million and$227 million, respectively, that are included as costs and expenses in thestatement of income.  See note 18 to ourconsolidated financial statements, included under “Item 18. FinancialStatements.”

 

**Contractual Obligations and CommercialCommitments**

 

Most of our export sales of crude oil to thirdparties, including customers in the United States with which we maintainlong-standing commercial relationships, are made at market prices pursuant toour general terms and conditions, and priced in dollars.  Among our customers are major oil companiesand other medium-sized companies. Although our general terms and conditions do not require specifiedvolumes to be bought or sold, historically, a majority of our customers havetaken shipments on a regular basis at a relatively constant volume throughoutthe year.

 

The following table summarizes future payments forPDVSA’s contractual obligations at December 31, 2003.

 

**Future Payments for PDVSA’s ContractualObligationsDecember 31, 2003**

 

**($ in millions)**

 
| ** **                                    | ** ** | **Total** | ** ** | **less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **more  than 5  years** | ** ** |
|-----------------------------------------------|------------|-----------|------------|-----------------------|------------|---------------|------------|---------------|------------|-------------------------|------------|
| **Long-term  debt**                           |       | 7,015     |       | 749                   |       | 1,600         |       | 1,370         |       | 3,296                   |       |
| **Capital  lease obligations**                |       | 60        |       | 25                    |       | 12            |       | 12            |       | 11                      |       |
| **Operating  leases**                         |       | 1,508     |       | 311                   |       | 515           |       | 448           |       | 234                     |       |
| **Estimated  crude purchase obligations (1)** |       | 12,342    |       | 2,057                 |       | 4,114         |       | 4,114         |       | 2,057                   |       |
| **Estimated  product purchase obligations**   |       | 22,838    |       | 5,182                 |       | 8,820         |       | 8,836         |       | (*)                     |       |
| **Other  commitments**                        |       | 4,396     |       | 715                   |       | 1,176         |       | 989           |       | 1,516                   |       |
| **Total  Contractual Cash Obligations**       |       | 48,159    |       | 9,039                 |       | 16,237        |       | 15,769        |       | 7,114                   |       |

 

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(1) Obligations for RuhrOel

(*) PDVSA, through CITGO,intends to continue purchasing a portion of its refined product supply fromrelated parties.

 

We also have various agreements for supplies withvarious companies, which are summarized as follows (thousands of barrels aday):

 
| **Company**           | ** ** | **Delivery  obligation** | ** ** | **Year of termination**                      | ** ** |
|-----------------------|------------|--------------------------|------------|----------------------------------------------|------------|
|                  |       |                     |       |                                         |       |
| Ruhr Oel              |       | 237                      |       | 2022                                         |       |
| Nynäs  Petroleum |       | 57                       |       | 2005                                         |       |
| LYONDELL-CITGO        |       | 230                      |       | 2017                                         |       |
| Chalmette  Refining   |       | 90                       |       | Duration of the strategic association period |       |
| ConocoPhillips        |       | 172                      |       | 2020                                         |       |
| Hovensa               |       | 270                      |       | Between 2008 and 2022                        |       |
|                  |       | 1,056                    |       |                                         |       |

 

**Critical Accounting Policies**

 

The preparation of financial statements in conformitywith Accounting Principles Generally Accepted in the United States of Americarequires that management apply accounting policies and make estimates andassumptions that affect results of operations and the reported amounts ofassets and liabilities.  Actual outcomescould differ from the estimates and assumptions used.  The following areas are those that managementbelieves are important to the financial statements and which requiresignificant judgment and estimation because of inherent uncertainty.

 

***Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed***

 

A reduction in our crude oil production or exportactivities or a decline in the prices of crude oil and refined petroleumproducts for a substantial period of time may materially and adversely affectour operations, cash flow, and financial results.  We review for impairment long-lived assetsand certain identifiable intangibles, to be held and used, whenever eventsindicate that the carrying amount of an asset may not be recoverable.

 

Our review of impairment of an asset is based on acomparison of the carrying amount of an asset to future net cash flows expectedto be generated by the asset.  If thecarrying amount of an asset exceeds its estimated future cash flow animpairment charge is required for the amount by which the carrying of the assetexceeds the fair value of the asset.

 

***Environmental Expenditures***

 

The costs to comply with environmental regulations aresignificant.  Environmental expendituresthat relate to current or future revenues are expensed or capitalized asappropriate.  Expenditures that relate toan existing condition caused by past operations and that do not contribute tocurrent or future revenue generation are expensed.  We constantly monitor our compliance withenvironmental regulations and respond promptly to issues raised by regulatoryagencies.  Liabilities are recorded whenenvironmental assessments and/or cleanups are probable and the costs can bereasonably estimated.  Environmentalliabilities are not discounted to their present value.  Subsequent adjustments to estimates, to theextent required, may be made as more refined information becomes available.

 

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***Litigation***

 

PDVSA and its subsidiaries and joint ventures areinvolved in various lawsuits and claims arising in the normal course of theirbusinesses.  External and internal legalcounsel continually review the status of these lawsuits and claims.  These reviews provide the basis for which wedetermine whether or not to record accruals for potential losses.  Accruals for losses are recorded when, inmanagement’s opinion, such losses are probable and reasonably estimable.  If known lawsuits and claims were to bedetermined in a manner adverse to PDVSA, and in amounts greater than ouraccruals, then such determinations could have a material adverse effect on ourresults of operations in a given reporting period.

 

***Oil and Gas Reserves***

 

All the crude oil and natural gas reserves located inVenezuela are owned by Venezuela.  Crudeoil and natural gas reserves are estimated by PDVSA and reviewed by theMinistry of Energy and Petroleum, using reserve criteria which are consistentwith those prescribed by the American Petroleum Institute (API) and the U.S.Securities and Exchange Commission.  Provedoil and gas reserves are the estimated quantities of crude oil, natural gas andnatural gas liquids which geological and engineering data demonstrate withreasonable certainty to be recoverable in future years from known reservoirsunder existing economic and operating conditions.  Accordingly, these estimates do not includeprobable or possible reserves.  Ourestimates of reserves are not precise and are subject to revision.  We review these crude oil and natural gasreserves annually to take into account, among other things, production levels,field reviews, the addition of new reserves from discoveries, year-end pricesand economic and other factors.  Provedreserve estimates may be materially different from the quantities of crude oiland natural gas that are ultimately recovered.

 

***Recently IssuedAccounting Standards***

 

In December 2003, the FASB issued FASBInterpretation No. 46 (revised December 2003), Consolidation ofVariable Interest Entities, which addresses how a business enterprise shouldevaluate whether it has a controlling financial interest in an entity throughmeans other than voting rights and accordingly should consolidate theentity.  The Company applies FIN 46R tovariable interests in VIEs created after December 31, 2003.  For variable interests in VIEs created beforeJanuary 1, 2004, the Interpretation will be applied beginning on January 1,2005.  For any VIEs that must beconsolidated under FIN 46R that were created before January 1, 2004, theassets, liabilities and noncontrolling interests of the VIE initially would be measuredat their carrying amounts with any difference between the net amount added tothe balance sheet and any previously recognized interest being recognized asthe cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value atthe date FIN 46R first applies may be used to measure the assets, liabilitiesand noncontrolling interest of the VIE. The Company expects that the adoption of FIN 46R will not have a materialimpact on its consolidated financial position or results of operations.

 

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities”.  The changes in SFAS No. 149 improvefinancial reporting by requiring that contracts with comparable characteristicsbe accounted for similarly.  Thosechanges will result in more consistent reporting of contracts as eitherderivatives or hybrid instruments. SFAS No. 149 is effective for contractsentered into or modified after June 30, 2003, except for certain issuesfrom SFAS No. 133 which have been effective for fiscal quarters that beganprior to June 15, 2003 and for hedging relationships designated after June 30,2003.  In addition, all provisions ofSFAS No. 149 should be applied prospectively.  The adoption of SFAS No. 149 did nothave a material effect on PDVSA’s consolidated financial position or results ofoperations.

 

The FASB’s Emerging Issues Task Force Abstract No. 01-8,“Determining Whether an Arrangement Contains a Lease” (“EITF 01-8”) issued in May 2003,requires that when PDVSA makes an evaluation of whether an arrangement containsa lease within the scope of SFAS No. 13, “Accounting for Leases”, such anassessment should be based on the substance of the arrangement and should bemade at inception of the arrangement based on all of the facts andcircumstances.  A reassessment of anarrangement should be based on the facts and circumstances as of the date ofreassessment, including the remaining term of the arrangement.  The consensus in EITF 01-8 should be appliedto (a) arrangements agreed to or committed to, if earlier, after thebeginning of an entity’s next reporting period beginning after May 28,2003, (b) arrangements modified after the beginning of an

 

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entity’s next reporting period beginning after May 28, 2003, and (c) arrangementsacquired in business combinations initiated after the beginning of an entity’snext reporting period beginning after May 28, 2003.  The Company is in the process of evaluatingthe effects, if any, of this standard on its consolidated financial positionand results of operations.

 

In December 2003, the FASB issued SFAS No. 132R(revised 2003), “Employers’ Disclosures about Pensions and Other PostretirementBenefits”.  It does not change themeasurement or recognition of those plans. The Statement retains and revises the disclosure requirements containedin the original FASB Statement No. 132 “Employers’ Disclosures aboutPensions and Other Postretirement Benefits”, which it replaces.  It requires additional disclosures to thosein the original Statement No. 132 about assets, obligations, cash flowsand net periodic benefit cost of defined benefit pension plans and otherdefined benefit postretirement plans.

 

In March 2004, the EITF reached a consensus onIssue 03-01, The Meaning of Other-Than-Temporary Impairment and Its Applicationto Certain Investments (EITF 03-01). EITF 03-01 provides a step model todetermine whether an investment, within the scope of the EITF Issue, isimpaired and if an impairment is other-than-temporary.  In addition, it requires that investorsprovide certain disclosures for cost method investments and, if applicable,other information related specifically to cost method investments.  The EITF 03-01 impairment model shall beapplied prospectively to all current and future affected investments, effectivein reporting periods beginning after June 15, 2004.  The disclosure requirements are effective forannual periods for fiscal years ending after June 15, 2004. PDVSA is inthe process of analyzing the effects of this statement.

 

In April 2004, the FASB issued FASB StaffPosition No. 141-1 and No. 142-2, “Interaction of FASB Statements No. 141,Business Combinations, and No. 142, Goodwill and Other Intangible Assets,and EITF Issue No. 04-2, “Whether Mineral Rights Are Tangible orIntangible Assets.”  (“FSP FAS 141-1 andFAS 142-2”). This FSP amends statements 141 and 142 to address theinconsistency between the consensus on EITF issue 04-02, that mineral rightsare tangible assets and the characterization of mineral rights as intangibleassets in statements 141 and 142.  Theguidance in this FSP should be applied to the first reporting period beginningafter April 29, 2004.

 

In September 2004, the FASB issued FASB StaffPosition EITF 03-1-1 “Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1”(FSP EITF 03-1-1). FSP EITF 03-1-1 delays the effective date for themeasurement and recognition guidance contained in paragraphs 10-20 of EITF 03-1.  The disclosure requirements of EITF 03-1remain effective for fiscal years ending after June 15, 2004. No effectivedate for the measurement and recognition guidance has been established in FSPEITF 03-1-1.  During the period of delay,FSP EITF 03-1-1 states that companies should continue to apply current guidanceto determine if an impairment is other-than-temporary.

 

In September 2004, the FASB’s Emerging IssuesTask Force issued EITF Abstract 03-13 “Applying the Conditions in Paragraph 42of FASB Statement No. 144, Accounting for the impairment or Disposal ofLong-Lived Assets, in Determining Whether to Report Discontinued Operations”(EITF 03-13) to provide guidance on applying SFAS 144, “Determining Whether toReport Discontinued Operations.” SFAS 144 discusses when an entity shoulddisclose a “component” as discontinued operations. Under SFAS 144, a componentshould be disclosed as discontinued operations when continuing cash flows areeliminated and when there is no significant continuing involvement with thecomponent. EITF 03-13 provides additional guidance on factors to consider inevaluating what constitutes continuing cash flows and continuing significantinfluence. This Statement is effective for fiscal periods beginning after December 15,2004.

 

In September 2004, the FASB issued FASB StaffPosition No. 142-2, “Application of FASB Statement No.142, Goodwill andOther Intangible Assets, to Oil-and Gas-Producing Entities” (“FSP FAS 142-2”).FSP FAS 142-2 believes that the scope exception of FASB Statement No 142includes the balance sheet classification and disclosures for drilling andmineral rights of oil-and gas-producing entities that are within the scope ofFASB Statement No. 19, Financial Accounting and Reporting by Oil-andGas-Producing Companies.  The guidance inthis FSP shall be applied to the first reporting period beginning after September 2004.

 

In October 2004, the FASB’s Emerging Issues TaskForce issued EITF Abstract EITF 04-1, “Accounting for Preexisting Relationshipsbetween the Parties to a Business Combination”. This Issue applies when twoparties that have a preexisting relationship enter into a business combination.Specifically, the Issue is whether a consummation of a business combinationbetween two parties that have a preexisting relationship should be

 

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evaluated to determine if a settlement of a preexisting relationshipexists, and the accounting for the preexisting relationship.  PDVSA is in the process of analyzing theeffects of this statement.

 

In December 2004, the FASB issued FASB StaffPosition No. 109-1, “Application of FASB Statement No. 109, “Accountingfor Income Taxes,” to the Tax Deduction on Qualified Production ActivitiesProvided by the American Jobs Creation Act of 2004” (“FSP FAS 109-1”). TheAmerican Jobs Creation Act introduces a special 9% tax deduction on qualifiedproduction activities. FSP FAS 109-1 clarifies that this tax deduction shouldbe accounted for as a special tax deduction in accordance with FASB Statement No. 109.  This FSP is effective upon issuance.  The Company does not expect the adoption ofthis new tax provision to have a material impact on its consolidated financialposition, results of operations or cash flows.

 

In December 2004, the FASB issued FASB StaffPosition No. 109-2, “Accounting and Disclosure Guidance for the ForeignEarnings Repatriation Provision within the American Jobs Creation Act of 2004”(“FSP FAS 109-2”).  The American JobsCreation Act introduces a special one-time dividends received deduction on therepatriation of certain foreign earnings to a U.S. taxpayer (repatriationprovision), provided certain criteria are met. FSP FAS 109-1 believes an enterprise is allowed time beyond thefinancial reporting period of enactment to evaluate the effect of the “repatriationprovision” on the plan for reinvestment or repatriation of foreign earnings forpurposes of applying FASB Statement No. 109.  This FSP is effective upon issuance.

 

In December 2004, the FASB issued SFAS No. 151,“Inventory Costs, an Amendment of ARB No. 43, Chapter 4”.  SFAS No. 151 amends the guidance inAccounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing”,to clarify the accounting for abnormal amounts of idle facility expense,freight, handling costs and spoilage. In addition, SFAS No. 151 requiresthat allocation of fixed production overheads to the costs of conversion bebased on the normal capacity of the production facilities.  SFAS No. 151 will be effective forinventory cost incurred on or after January 1, 2006.

 

In December 2004, the FASB issued SFAS No. 153,“Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29”.  SFAS No. 153 eliminates an exception inAPB No. 29 for non-monetary exchanges of similar productive assets andreplaces it with a general exception for exchanges of non-monetary assets thatdo not have commercial substance.  SFAS No. 153will be effective for non-monetary asset exchanges occurring on or after January 1,2006.

 

In March 2005, the FASB issued Interpretation No. 47,“Accounting for Conditional Asset Retirement Obligations” (“FIN 47”), whichclarifies the application of FASB Statement No. 143, “Accounting for AssetRetirement Obligations” (“SFAS No. 143”). FIN 47 clarifies (i) thatan entity is required to recognize a liability for the fair value of aconditional asset retirement obligation when incurred if the liability’s fairvalue can be reasonably estimated; and (ii) when an entity would havesufficient information to reasonably estimate the fair value of an assetretirement obligation. FIN 47 is effective no later than the end of fiscalyears ending after December 15, 2005. Retrospective application for interim financial information is permittedbut is not required.

 

In April 2005, the FASB issued FASB StaffPosition No. 19-1, “Accounting for Suspend Well Costs” (“FSP FAS 19-1”).FSP FAS 19-1 believes that the exploratory well costs should continue to becapitalized when the well has found a sufficient quantity of reserves to justifyits completion as a producing well and the enterprise is making sufficientprogress assessing the reserves and the economic operating viability of theproject.  The guidance in this FSP shallbe applied to the first reporting period beginning after April 2005.

 

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections” replacement of APB Opinion No. 20 and FASBStatement No. 3. Early adoption is permitted for accounting changes andcorrections of errors made in fiscal years beginning after the date thisStatement is issued. This Statement does not change the transition provisionsof any existing accounting pronouncements, including those that are in atransition phase as of the effective date of this Statement. This Statement shallbe effective for accounting changes and corrections of errors made in fiscalyears beginning after December 15, 2005.

 

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### **5.C**                             Research and development,patents and licenses

### ** **

As of December 31, 2003, the amounts that we havespent on our research and development activities have not been material.  See “Item 4.B Business overview – Researchand Development” and note 1(o) to our consolidated financial statements,included under “Item 18.  FinancialStatements.”

 

## **Item6.**                                   Directors, Senior Management andEmployees

## ** **

### **6.A**                             Directors and senior management

### ** **

In accordance with our charter, we are managed by ourboard of directors and our president. Our board of directors is responsible for convening our shareholder’smeetings, preparing our year-end accounts and presenting them at ourshareholder’s meetings and reviewing and monitoring our economic, financial andtechnical strategies.

 

Our board of directors comprises eleven members:  a president, two vice presidents, fiveinternal directors and three external directors.  Our board of directors is directly appointedby the President of Venezuela for an initial term of two years, which may beextended indefinitely until a new board of directors is appointed.  Our board of directors meets weekly and, atother times, when summoned by the President of PDVSA.

 

Pursuant to our charter, the President of PDVSA hasbroad powers to act on behalf of PDVSA and to represent PDVSA in its dealingswith third parties, subject only to those powers expressly reserved to theboard of directors or reserved to be effected at our general shareholder’smeeting.  The President of PDVSAdetermines and is responsible for the implementation of the goals, strategiesand budgets (which must be approved at the general shareholder’s meeting) forour different businesses.  Such goals,strategies and budgets are reviewed and monitored by our board of directors.

 

In January 2005, the Venezuelan governmentappointed a new board of directors for PDVSA comprised of the President, twoVice-Presidents, five internal directors and three external directors.  These directors will serve until 2007, andthat two-year term may be extended indefinitely until a new board of directorsis appointed.  Our current directors andexecutive officers are:

 
| **Name**                          | ** ** | **Age** | ** ** | **Position with PDVSA**  | ** ** | **Date of Appointment** | ** ** |
|-----------------------------------|------------|---------|------------|--------------------------|------------|-------------------------|------------|
| Rafael  Ramírez Carreño |       | 42      |       | President                |       | 2005                    |       |
| Luis Vierma                       |       | 51      |       | Vice-President           |       | 2005                    |       |
| Alejandro  Granado                |       | 50      |       | Vice-President           |       | 2005                    |       |
| Eudomario  Carruyo                |       | 59      |       | Internal  Director       |       | 2005                    |       |
| Asdrubal  Chávez             |       | 50      |       | Internal  Director       |       | 2005                    |       |
| Eulogio del  Pino                 |       | 48      |       | Internal  Director       |       | 2005                    |       |
| Déster  Rodríguez       |       | 43      |       | Internal  Director       |       | 2005                    |       |
| Jesús  Villanueva            |       | 56      |       | Internal  Director       |       | 2005                    |       |
| Iván  Orellana               |       | 52      |       | External Director        |       | 2005                    |       |
| Carlos  Martínez Mendoza     |       | 50      |       | External  Director       |       | 2005                    |       |
| Bernard  Mommer                   |       | 62      |       | External  Director       |       | 2005                    |       |
| Antonio  Simancas Cardozo         |       | 57      |       | Chief  Financial Officer |       | 2005                    |       |

 

Certain information on our current directors andexecutive officers is set forth below:

 

**Rafael Ramírez CarreñoMinister of Energy and Petroleum of Venezuela and President of PDVSA**

 

Rafael Ramírez is aMechanical Engineer who graduated from the Los Andes University in 1989. Healso holds a MSc. in Energy Studies from the Universidad Central de Venezuela.He began his career in the oil industry with Intevep, PDVSA’s research anddevelopment center, where he was initially assigned to work on the handling ofOrinoco Belt extra-heavy crudes. Further assignments and postings to othersubsidiaries provided him with wide experience in the development, coordinationand management of engineering and construction projects. His

 

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secondments abroad included the development,in the United States, of the Cardón refinery’s upgrading and expansion projectand Nigeria’s Liquefied Natural Gas project, in France. Ramírez was thefounding president of Enagas, the national gas entity charged with theresponsibility of structuring the National Gas Plan and the design, developmentand promotion of the State policies for the sector.

 

In February 2002 he wasappointed external director of Petróleos de Venezuela, and in July thatyear was sworn in as Minister of Energy and Mines by the Bolivarian Republic ofVenezuela’s President Hugo Chávez. On 20th November 2004, underPresidential Decree 3264, he was named President of Petróleos de Venezuela, aposition which he holds concurrently with that of Minister of Energy andPetroleum.

 

**Luis Vierma**

**Vice-President of PDVSA**

 

Luis Vierma has a Bachelorin Chemistry, from the Universidad Central de Venezuela in 1979. He obtainedhis MSc. in Geology (Petroleum Geochemistry) in 1984, from Indiana Universityat Bloomington. Between 1975 and 1978 he taught chemistry at the CentralUniversity’s Chemistry Department. From 1978 to 1981 he held the position ofExploration Geochemist at PDVSA’s research and development center. He was laterappointed head of the Organic Geochemistry Laboratory, in which he becameleader of Hydrocarbons Exploration Projects and, later, head of the InorganicChemistry Unit.  In 1993 Vierma was namedManager of Annex XIII (Enhanced Recovery of Crudes using micro-organics) of theMinistry of Energy and Mines - US Department of Energy (DOE) Agreement. In 1995he was appointed head of the Organic Geochemicals Section and, in 1997,head of the Geology Section. In 1998 he was leader of the Bosque-Bucare Projectto implement the Shared Productivity Effort Strategy. In 1999 he becameExploration Business Manager, and in 2000 he was appointed Director of thePolicies and Plans Office of the Vice-Ministry of Hydrocarbons at the Ministryof Energy and Mines. At the beginning of 2003 he is sworn in as Deputy Ministerof Hydrocarbons, being also named external Director of Petróleos de Venezuelain March of that year, and later President of the Corporación Venezolanade Petróleo (CVP), Vice-President of PDVSA GAS, and a member of the CITGOPetroleum Corporation Board. In January 2005 he was appointed Vice-Presidentof Exploration and Production of PDVSA.

 

**Alejandro Granado**

**Vice-President of PDVSA**

 

Alejandro Granado is aRefining Processes Engineer and graduated in 1981 from the Institute ofPetroleum and Gas in Ploesti, Romania. He later obtained a Master of Sciencedegree in Refining and Petrochemicals from the same institute. Granado joinedthe Venezuelan oil industry in 1981 as a process engineer in the ProcessDevelopment department of INTEVEP, PDVSA’s research and development center. In1985 he was seconded to UOP in Chicago as resident engineer for the BTXproject. In 1987 he was appointed a member of the team assigned to Germany’sVeba Oel for the development of the HDH+® process, a heavy residue conversiontechnology. In 1990 he was seconded to British Petroleum in London to lead theprocess engineering group charged with the design of several the mixed ethersunits for the Venezuelan refinery system. From 1991 to 1997 he held severalmanagerial positions in the Process Engineering area at Intevep, and in 1997 hewas posted to CITGO Petroleum Corporation as Technology Manager of thatsubsidiary’s refinery at Lemont, Illinois. He returned to INTEVEP in 2000,being appointed manager of the Process Engineering department. Later, he was incharge of the Conceptual and Basic Engineering Management until December 2002,when he was named Deputy General Manager of the Puerto La Cruz refinery. In July 2003he was appointed Refining Director of PDVSA Eastern Division. In July 2004he was appointed International and National Refining Director of PDVSA and hehas been PDVMARINA Vice-President since 2004. In January 2005 he wasappointed Vice President of PDVSA, responsible for the refining area both at adomestic and international level.

 

**Eudomario Carruyo**

**Director of PDVSA**

 

Eudomario Carruyo received aPublic Accounting Degree from the Universidad del Zulia in 1972. He hascompleted several specialization and post-graduate courses in the areas ofFinance and Management in Columbia University, in New York, and Michigan University,in Ann Arbor. He had a training assignment in international banking at ChaseManhattan Bank, in New York. He has 38 years of experience in the domestic oiland

 

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petrochemical industry. He started his careerin the Corporación Venezolana del Petróleo (CVP), a PDVSA subsidiary, in 1964.Between 1964 and 1987 he held the following positions: Corporate TreasuryManager, Corporate Comptroller Manager, Corporate Budget and EconomicEvaluations Manager, Corporate Costs Manager, Finance Manager for the WesternDivision, Finance Manager for the San Tomé Area, Finance Manager for the ElPalito Refinery and President of the Bidding Committee. In 1991 he wastransferred to Palmaven, PDVSA’s affiliate, where he worked for six years (1992-1997),acting as Finance Manager and later as Director of this affiliate.  Simultaneously, and as a Palmavenrepresentative, he sat on the Boards of Directors of several of its businesses.  In 1997 he retired from the oil industry andthen re-entered as PDVSA’s Statutary Auditor from April 2000 until December 2002(first as assistant and then as principal). In January 2003, he was appointed Finance Executive Director forPDVSA and held this position until June of the same year when he wasdesignated Director of the following affiliates: CITGO Corporation, PDVSAFinance, PDVSA Insurance, PDV Holding, and APJ International.  Since July 2003, he has acted asPequiven Director, coordinating the closure of PDVSA and its affiliates’ fiscalyear 2002 and the preparation of operational financial reports both forinternal use and for the SEC. Simultaneously with his responsibilities atPequiven, he also acts as Director of the following businesses and affiliates:Fertinitro, Monómeros Colombo-Venezolanos, Metor International, Produven, SuperOctanos, Supermetanol, Tripoliven, Clorozulia, Coramer, Olefinas del Zulia,Polinter, Propilven, Pralca, Produsal, Servifertil, International PetrochemicalHolding LTD (IPHL), International Petrochemical Sales Limited (IPSL), Copequim,Grupo Zuliano and Sofilago. He was appointed Director of PDVSA in January 2005,serving concurrently as Director of CITGO Petroleum Corporation, Director ofPDVSA Petróleo S. A., Director of Deltaven S. A., Vice-President PDV Marina,President PDVSA Finance and President PDV Insurance.

 

**Asdrúbal Chávez**

**Director of PDVSA**

 

Asdrúbal Chávez graduated asa Chemical Engineer from Universidad de Los Andes in 1979. He joined thevenezuelan oil industry in 1979 at PDVSA’s El Palito refinery, as StartupEngineer for PAEX, the refinery’s major expansion project. He held variouspositions in areas such as Industrial Services, Distillation and Specialties,Conversion and Treatment, Crude and Products Movement, Programming and Economics,and Process Engineering. In 1989 he was assigned to UOP, in the USA. In 1990 hewas named Leader of the Project to expand El Palito’s Crude and VacuumDistillation units. From 1995 to 1999 he held various supervisory andmanagerial positions, and in 2000 PDVSA’s Presidency seconded him on atemporary basis to the Ministry of Production and Commerce to assist it, firstin the restructuring of the Ministry, and then in the Economic ConstituentProcess. In 2001 he was assigned to PDVSA’s Bitúmenes del Orinoco (BITOR)subsidiary as Human Resources Manager, and led the team that worked on therestructuring part of the company’s expansion project. In 2002 he was namedAssistant to the BITOR Board of Directors, and in January 2003 he wasappointed Manager of the El Palito Refinery. In August 2003 he was namedExecutive Director for Human Resources at PDVSA, and in March of 2004, hewas appointed Executive Director for Trading and Supply, having also beenleader of the team which negotiated the 2004-2006 Collective Labor Contract. InJanuary 2005 he was appointed Director of PDVSA, responsible for Commerceand Supply and President of PDV Marina and BITOR, PDVSA’s subsidiaries andDirector of CITGO Petroleum Corporation, PDVSA affiliate based in Houston, USA.

 

**Eulogio Del Pino**

**Director of PDVSA**

 

Eulogio Del Pino isGeophysical Engineer graduated from the Universidad Central de Venezuela in1979, and with a MS degree in Oil Exploration from Stanford University in 1985.In 1979 he started his career on venezuelan oil industry at INTEVEP, PDVSA’sTechnology and Research Center, were held different technical and supervisorspositions. In 1990 he was appointed Latin America Technical Manager for WesternAtlas Company. In 1991 he returned to Petróleos de Venezuela, where he heldseveral managerial positions at Corpoven, another of PDVSA’s affiliates in therecent past. In 1997 he was appointed Exploration and Delineation Manager ofPDVSA Exploration and Production. He had the responsibility to coordinate thePDVSA’s restart Offshore Exploration Campaign in the Plataforma Deltana in2001. Later in 2003 he was appointed General Manager of Strategic Associationsfrom de Corporación Venezolana de Petróleo, PDVSA’s affiliate, in charge ofrepresenting at the Strategic Association of the Orinoco Oil Belt and in 2005he was named Director of PDVSA and President of PDVSA CVP. Del Pino has beenelected for President and Vice President of the Venezuelan Society ofGeophysical

 

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Engineers (1990-1994), Vice-President of theUS’s Society of Exploration Geophysicists (1996-1997), and Founder andCoordinator of the Latin American Geophysical Union. Del Pino was a professoron both the pre-graduate and post-graduate level at the Universidad Central deVenezuela and the Universidad Simón Bolívar, in Caracas.

 

**Déster Rodríguez**

**Director of PDVSA**

 

Dester Rodríguez is an ArmyColonel with a bachelor’s degree in Military Science and Arts from the MilitaryAcademy of Venezuela. He completed Systems Engineering studies at theUniversidad Experimental de las Fuerzas Armadas (Experimental University of theArmed Forces). In 1997 he was appointed Head of Personnel of the MilitaryEngineering School of the Army. In 1998 he was named Head of the Army PersonnelRegistry and Control Division. In 1999 he was designated General Director ofthe Information Technology Ministerial Office at the Ministry of Education,Culture, and Physical Education, a position held simultaneously with that ofPresident of the Fundación Bolivariana de Informática y Telemática (BolivarianIT and Telecommunications Foundation) since 2001. In December 2002 he wasappointed a member of PDVSA’s Restructuring Committee. In March 2003 hewas named Director of Petróleos de Venezuela, serving concurrently as Directorof CITGO Petroleum Corporation, Vice-President of Refinería Isla, a member ofthe Board of PDV Holding and President of CIED and COMMERCHAMP.

 

**Jesús Villanueva**

**Director of PDVSA**

 

Jesús Villanueva is aLicentiate in Public Accounting and received a Master degree in HydrocarbonsEconomy and Management from Universidad Central de Venezuela in 1988. Hestarted his professional activities in 1974 as Assistant in the AuditingDivision of Espiñeira, Sheldon y Asociados (Price Waterhouse Coopers) where heworked until 1982. He joined the venezuelan oil industry in 1982 at Meneven,then a PDVSA subsidiary. During his professional career he has held differentsupervising and managerial positions in San Tomé, Anaco, Puerto La Cruz andCaracas, in Auditing and Finances for Meneven and Corpoven. Beginning in February 2002,he acted as Principal Director for PDVSA and later on went back to his formerposition as General Auditor. He was appointed Director of PDVSA in January 2005.He has been internationally certified as Internal Auditor by the Institute ofInternal Auditors (1999) and a Certified Fraud Examiner (2004).

 

**Iván Orellana**

**General Director for Hydrocarbonsof the Ministry of Energy and Petroleum Venezuelan Governor for OPEC**

**Director of PDVSA**

 

Iván Orellana is a ChemicalEngineer who graduated from Universidad Simón Bolívar (1975). He completedpost-graduate studies in Strategic Planning in Brunel University, London in1994; Oil and Natural Gas Supply and Trade in Oxford, UK in 1994; AdministrativeLaw in Universidad de Salamanca, Spain, in 2003; and Private International Lawin Universidad de Salamanca in 2004. He started his career in the hydrocarbonssector in 1975, holding different supervisory and engineering positions. In1988 he worked as consultant for the gas sector in the Exploration andProduction Coordinating Department of PDVSA Gas. In 1994 he was appointedPlanning Manager for PDVSA Gas and between 1997 and 2001 he worked as SeniorPlanning Consultant for Energy and Regulation of Energy Markets inside PDVSA’sCorporate Planning Management. Between 2002 and 2003, he acted as TradeEnvironment Analysis Manager in PDVSA’s Planning Executive Direction and he hasbeen the Venezuelan National Representative in Organization of the PetroleumExporting Countries (OPEC) Economic Commission since 2003. He is currently theVenezuelan Governor for OPEC and Chairman of OPEC’s Governors Board and as wellthe General Director for Hydrocarbons in the Ministry of Energy and Petroleum.He was appointed External Director for PDVSA’s Board of Directors in January 2005in the area of International Business. He has also been Coordinator for thestudies to establish PDVSA and Venezuela’s strategic positioning in theLiquefied Natural Gas (LNG) Business in the Atlantic Basin, Consultant to thePresident of the National Gas Agency and PDVSA’s president in the process ofEnergy Services Regulation for Venezuela and Consultant to the Ministry ofEnergy and Mines and PDVSA in the bidding process for the Mariscal Sucre LNGProject.

 

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**Carlos Martínez Mendoza**

**Director of PDVSA**

 

Carlos Martínez Mendozareceived a Licentiate in Military Sciences and Arts from the Military Academyof Venezuela in 1975 as a member of the “Simón Bolívar II” group.  He belongs to the Infantry branch of theArmy. He studied Command and Staff in the “Escuela Superior de Guerra delEjército” in Argentina in 1990 and also holds a Master Degree in Security andNational Defense. He took a postgraduate course on Strategic Planning andManagement, as well as a course on Defense Resource Management in the Centerfor Defense Hemispheric Studies in the USA. He has held positions complementaryto his military rank, such as Secretary of the Nation’s Defense Council andDirector of the Presidential Office of the Bolivarian Republic of Venezuela. Heis currently President of the Zulia Region Development Corporation (Corpozulia)and Carbozulia.  He is Vice-President ofthe “Sofioccidente” Investment Bank of Venezuela. In 2005 he was appointedexternal Director of PDVSA.

 

**Bernard Mommer**

**Director of PDVSA**

 

Bernard Mommer holds amasters degree in mathematics and a doctorate in social science, both from theUniversity of Tübingen, Germany. He has been a university teacher andresearcher for many years at different Venezuelan universities.  From 1991 to 1995 he was senior advisor toPetróleos de Venezuela and the Strategic Planning Co-ordinator. From 1995 to2001 he was a senior research fellow of the Oxford Institute for Energy Studiesand of St. Antony’s College, Oxford.  Healso acted as an advisor to the Venezuelan Minister of Energy and Mines from1999 to 2000, and as a consultant to the Secretary General of OPEC in Vienna in2002. Previous to his appointment at PDV UK he was advisor to the President ofPDVSA. Outstanding amongst his publications are Die Ölfrage [The PetroleumQuestion] (1983: Institut für Internationale Angelegenheiten der UniversitätHamburg, Nomos Verlagsgesellschaft Baden-Baden), El petróleo en el pensamientoeconómico venezolano - Un ensayo [Oil in the Economic Thought of Venezuela – AnEssay] (Co-author Asdrúbal Baptista; Prologue by Arturo Uslar Pietri. EdicionesIESA, Caracas, 1987); and The New Governance of Venezuelan Oil (1998: OxfordInstitute for Energy Studies), Global Oil and the Nation State that waspublished by Oxford University Press, on behalf of the Oxford Institute forEnergy Studies, in 2002.  In 2004, theMinistry of Energy and Mines published his book “El mito de la Orimulsión”. In2005, he was appointed Director of PDVSA and Deputy Minister of Hydrocarbons.

 

**Antonio Simancas Cardozo**

**Chief Financial Officer**

** **

Mr. Simancas is an accountant who graduated fromthe Central University of Venezuela in 1973. He holds a Master’s degree in economic sciences from Oklahoma StateUniversity and specializations in business law from Santa María University,Venezuela and in management and marketing from the University of Tennessee.

 

Mr. Simancas has worked as a business consultant,Finance Manager for a subsidiary of the Cisneros Group, General Director of theVenezuelan Institute of Social Security, Controller for the Social InvestmentFund of Venezuela, Technical Manager and General Manager for theSuperintendence of Banks, Controller for the National Council for Scientificand Technological Investigations.  AtPDVSA, he has been Petroleum Accounting Corporate Manager, Accounting andBudget Manager in a production division, Finance Manager in Bariven andFinancing Manager for PDVSA’s subsidiary Bariven.

 

### **6.B**                             Compensation

### ** **

For the year ended December 31, 2003, theaggregate amount paid by PDVSA as compensation to its directors and executiveofficers for services in all capacities was approximately $1.07 million (basedon the 2003 average exchange rate of Bs. 1,600.00 to $1).  For the year ended December 31, 2004,the aggregate amount paid by PDVSA as compensation to its directors andexecutive officers for services in all capacities was approximately $1.47million (based on the 2004 average exchange rate of Bs. 1,893.00 to $1).

 

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### **6.C**                             Board practices

### ** **

Our directors are appointed for an initial term of 2years, which may be extended indefinitely until a new board of directors isappointed.  We have not entered into anyservice or employment contracts with any of our directors and executiveofficers.

 

**Audit Committee Structure andObjectives**

 

**Basic Function**

 

The Audit Committee assists the Board of Directors ofPDVSA in the execution of its responsibilities, regarding the monitoring of thequality and sufficiency of the internal control system and the protection ofthe viability of PDVSA, both nationally and internationally.  The Committee carries out its basic functionthrough the knowledge, evaluation and follow up as follows:

 

•                  Risk analysis for the differentbusinesses.

 

•                  Follow up on the behavior andtendencies of the components of the internal control system, in the Venezuelanand international operations, and the capacity of the system to minimize risks.

 

•                  The performance, results and efficacyof PDVSA’s corporate control units.

 

•                  Meeting the requirements of laws andregulations, issued both in Venezuela and abroad, including the requirements ofthe Securities and Exchange Commission and the Sarbanes-Oxley Act and theInternal Norms and Procedures.

 

•                  The results of the internal andexternal audits.

 

•                  Corporate governance aspects,including following up and analying results of our accountability programs.

 

•                  Quality and integrity of CorporateFinancial Information.

 

**Authority**

 

The Board of Directors of PDVSA has granted the AuditCommittee full authority to execute its assigned responsibilities.  The Audit Committee may utilize the servicesof the corporate control units, the external auditors, independent consultants,or any other group or internal or external resource with the necessaryexpertise required to perform relevant studies or investigations.

 

**Organization**

 

The Audit Committee is comprised of six members, whoare appointed by the Board of Directors. The president of the Committee is the President of PDVSA, whereas theother two members are external directors of PDVSA.

 

The General Auditor of PDVSA is the secretary of theCommittee.  The president of theCommittee is responsible for setting the direction and priorities of the issuesseen by the Committee.  The Controller,the Loss Control Manager and the Corporate Legal Adviser assist in meeting on aregular basis.  Other corporateexecutives, including the CFO, attend the meetings on special occasions.

 

**Main Functions**

 

•                  to assure the adequacy andsufficiency of the internal control system including the control environment,structure and activities, and the processes of monitoring and information,

 

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•                  to recommend to PDVSA’s board ofdirectors any course of action regarding the main issues of the internalcontrol system, including actions required to improve corporate informationsystems,

 

•                  to orient and support the activitiesof the corporate control units of PDVSA,

 

•                  to approve the internal audit policyand norms, including the relationship between corporate internal audit and theaudit units within subsidiaries or joint ventures,

 

•                  to insure the application of generalauditing standards issued by the Venezuelan government,

 

•                  to insure and preserve theindependence and objectivity of the internal audit function,

 

•                  to know, review and approve thestructure, plans and results of the corporate control units of PDVSA,

 

•                  to know and establish various coursesof action regarding economic, legal, environmental, asset preservation and anyother issue that could affect the performance of PDVSA,

 

•                  to evaluate annually the performanceof the external auditors and to consider whether they should remain as externalauditors,

 

•                  to review along with the externalauditors their opinion on the financial statements of the company, the qualityof the internal control system, the main risk areas and the integrity of thefinancial and operating reports,

 

•                  to review the effectiveness of thecorporate governance and results accountability system,

 

•                  to review fraud and other such casesin the company, as well as to assure compliance of the conflict of interest andethical conduct policies of PDVSA, and

 

•                  to review annually the performance ofthe Committee and to submit its activity report to the board of directors.

 

### **6.D**                             Employees

### ** **

The number of PDVSA employees and their locations ofemployment for 2003, 2002 and 2001 are as follows:

 
| **At December 31** | ** ** | **Total Number   of Employees** | ** ** | **In Venezuela** | ** ** | **Abroad** | ** ** |
|-------------------------|------------|---------------------------------|------------|------------------|------------|------------|------------|
| 2003                    |       | 33,998                          |       | 28,841           |       | 5,157      |       |
| 2002                    |       | 45,683                          |       | 40,133           |       | 5,550      |       |
| 2001                    |       | 46,425                          |       | 40,945           |       | 5,480      |       |

 

At December 2004 approximately 27% of ourVenezuelan work force was unionized and belonged to one of four principalunions:  the Federación de TrabajadoresPetroleros, Químicos y Similares (63.0%), the Federación Nacional Bolivarianade trabajadores Petroleros, Petroquímicos, del Gas, sus similares y conexos deVenezuela (6.7%), the Sindicato Nacional de Trabajadores de la IndustriaPetrolera (13.4%), or the Federación de Trabajadores de la Industria de losHidrocarburos (16.9%).  Our management,our employees based in our headquarters and our security personnel are generallynot affiliated with any union.

 

For our non-unionized workers, we have a specialcompensation program.  This programestablishes a variable factor for a portion of the employees’ compensation,which is tied to individual performance based on predetermined targets andgoals, as well as on our financial results. However, for 2003 the compensation program was based on a bonus payment,which recognized individual performance.

 

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### **6.E**                               Share ownership

### ** **

PDVSA’s common stock is not publicly traded and, as ofOctober 7, 2005, we had 51,204 shares outstanding.  All of our issued and outstanding shares ofcommon stock are owned by the Bolivarian Republic of Venezuela.

 

## **Item7.**                                   Major Shareholders and RelatedParty Transactions

## ** **

### **7.A**                             Major Shareholders

### ** **

**Control of Registrant**

 

PDVSA is the national oil and gas company of theBolivarian Republic of Venezuela.  PDVSAwas formed by the Venezuelan government in 1975 pursuant to the Organic Lawthat reserves for the state the industry and trade of hydrocarbons (the “NationalizationLaw”), and its operations are supervised by Venezuela’s Ministry of Energy andPetroleum, who now also serves as the President of PDVSA.  The Ministry of Energy and Petroleumestablishes our general policies and approves our production levels, capitalexpenditures and operating budgets annually, while our board of directors isresponsible for implementing the policies established by the government ofVenezuela.

 

Since its formation, PDVSA has been operated as acommercial entity, vested with commercial and financial autonomy.  Venezuela is not legally liable for PDVSA’sobligations, including PDVSA’s guarantees of indebtedness or obligations of itssubsidiaries, nor for the debt or obligations of PDVSA’s subsidiaries.  Under the 1999 Constitution of Venezuela,Venezuela must retain exclusive ownership of the shares of PDVSA.  However, the Constitution does not requireVenezuela to retain ownership of the shares of PDVSA’s subsidiaries or of itsinterests in various exploration and joint venture arrangements.  Through its subsidiaries, PDVSA supervises,controls and develops the petroleum, petrochemical, gas, coal and Orimulsion®industries in Venezuela.  These activitiesare complemented by PDVSA’s operating companies established abroad, which areresponsible for refining and marketing activities in North America, Europe andthe Caribbean.  See note 1(a) to ofconsolidated financial statements, included under “Item 18.  Financial Statements.”

 

PDVSA’s oil-related activities are governed by theHydrocarbons Law, which came into effect in January 2002.  PDVSA is subject to regulations adopted bythe executive branch of the Venezuelan government and other laws of generalapplication, such as the Commercial Code of Venezuela.  PDVSA and its Venezuelan subsidiaries areorganized under the Commercial Code, which regulates the rights and obligationsof Venezuelan commercial companies. Under the Commercial Code, PDVSA and Venezuelan subsidiaries arepermitted to develop and execute their shareholder’s objectives as corporateentities rather than governmental agencies.

 

PDVSA’s gas-related activities are regulated by theOrganic Law of Gas Hydrocarbons of September 1999 and its regulationsdated June 2000.

 

PDVSA, its Venezuelan subsidiaries engaged in theconduct of activities reserved to the government pursuant to theNationalization Law, and its foreign subsidiaries are not subject to theauthorization process set forth in the Finance Administration for the PublicSector Law enacted on September 5, 2000, which establishes the regulationsapplicable to borrowing and other forms of financing by Venezuelan publicentities.

 

**Ownership of Reserves**

 

All oil and hydrocarbon reserves within Venezuela areowned by Venezuela and not by PDVSA. Under the Nationalization Law, every activity related to theexploration, exploitation, manufacture, refining, transportation by specialmeans and domestic and foreign sales of hydrocarbons and their derivatives isreserved to the government of Venezuela. PDVSA was created as the entity that coordinates monitors and controlsall operations related to hydrocarbons.

 

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### **7.B**                             Related party transactions

### ** **

See note 18 to our consolidated financial statements,included under “Item 18.  FinancialStatements.”

 

## **Item8.**                                   Financial Information

## ** **

### **8.A**                             Consolidated Statements andOther Financial Information

### ** **

#### **8.A.1**                   See“Item 18.  Financial Statements.”

#### ** **

#### **8.A.2**                   See“Item 18.  Financial Statements.”

#### ** **

#### **8.A.3**                   Seereport of the independent registered public accounting firms beginning onpage F-1.

#### ** **

#### **8.A.4**                   Substantiallyall of our revenues are derived from export sales.  See “Item 3.A Selected financial data,” andnote 18 to our consolidated financial statements, included under “Item 18.Financial Statements.”

#### ** **

#### **8.A.7**                   Legal proceedings

#### ** **

**Action by independent oil producers**

 

In August 1999, the U.S. Department of Commercerejected a petition filed by a group of independent oil producers to applyantidumping measures and countervailing duties against imports of crude oilfrom Venezuela and some other countries. The petitioners appealed this decision before the U.S. Court ofInternational Trade based in New York. On September 19, 2000, the Court of International Trade remandedthe case to the Department of Commerce with instructions to reconsider itsAugust 1999 decision.  TheDepartment of Commerce was required to make a revised decision as to whether ornot to initiate an investigation.  TheDepartment of Commerce appealed to the U.S. Court of Appeals for the FederalCircuit, which dismissed the appeal as premature on July 31, 2001.  The Department of Commerce issued its reviseddecision, which again rejected the petition, in August 2001.  The revised decision was affirmed by theCourt of International Trade on December 17, 2002.  In February 2003, the independent oilproducers appealed the Court of International Trade’s decision to the FederalCircuit Court.  On January 2004, theU.S. Court of Appeals for Federal Circuit affirmed the decision of the Court ofInternational Trade.

 

**LYONDELL-CITGO**

 

In February 2002, LYONDELL-CITGO commenced anaction against PDVSA and PDVSA Petróleo, in the United States District Courtfor the Southern District of New York seeking damages for alleged breaches ofthe long-term crude oil supply agreement between LYONDELL-CITGO and Lagoven(subsequently merged into PDVSA Petróleo) and the supplemental supplyagreement, between LYONDELL-CITGO and PDVSA. Both agreements are dated May 5, 1993 and expire in 2017.  On May 31, 2002, PDVSA and PDVSAPetróleo filed a motion to dismiss the case. On August 6, 2003, the judge dismissed one of the ten counts in thecomplaint, allowing the remaining counts to proceed through early stages of litigation.  The parties engaged in extensive discoverybeginning in November 2003.  In thecourse of expert discovery, on September 30, 2004, one of LYONDELL-CITGO’sretained experts filed a report listing the amount of liquidated damages owedby PDVSA and PDVSA Petróleo to LYONDELL-CITGO through September 2004 as$125,117,465.  For the same period,LYONDELL-CITGO’s expert calculated the amount of actual damages as $258,447,787to $259,743,967, depending on the method used to calculate interest.  LYONDELL-CITGO also claims additionalunspecified amounts for attorneys’ fees and costs.  Discovery was formally concluded onOctober 1, 2004.  On October 1and October 6, 2004, the magistrate judge issued orders directing PDVSAand PDVSA Petróleo to produce all Board of Directors minutes and relateddocuments to LYONDELL-CITGO.  PDVSAinformed the magistrate judge that it could not comply with his order becausegranting LYONDELL-CITGO unrestricted access to PDVSA’s Board of Directorsmaterials violated Venezuelan law.  Themagistrate judge entered an adverse inference sanction against PDVSA and PDVSAPetróleo, ordering that the court may infer that the Board of Directors’documents were unfavorable to PDVSA and favorable to LYONDELL-CITGO.  The magistrate judge also ordered that thecourt may give the strongest weight 

 

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to the evidence already in the case in favor of LYONDELL-CITGO, but mayalso consider any evidence presented by PDVSA to explain why it did not producethe Board of Directors materials.  Thejudge affirmed the magistrate judge’s adverse inference instruction onApril 29, 2005.  Meanwhile, onOctober 22, 2004, both parties filed motions for summary judgment with thecourt, which have been fully briefed. These motions are still pending. Management of the companies intends to contest vigorously LYONDELL-CITGO’sclaims.  See note 20 of our consolidatedfinancial statements, included in “Item 18. Financial Statements.”

 

**Action in Grenada**

 

In April 11, 2003, a legal action was filedagainst PDVSA and its subsidiaries PDVSA Petróleo, PDVSA Finance Ltd. andCITGO, in the federal district court of Denver, Colorado.  The plaintiff is a U.S. oil and gasexploration and production company that has allegedly entered into an exclusiveoffshore license agreement with the government of Grenada to explore, develop,produce and market oil and/or natural gas in 4.75 million offshore acresbetween Grenada and Venezuela.  Theplaintiff alleges that PDVSA has interrupted and otherwise interfered with itsability to develop and market Grenada’s oil and natural gas resources inviolation of the U.S. antitrust laws. The plaintiff seeks damages in an amount to be established at trial thatit believes should exceed $100 million. The companies deny the allegations and intend to contest the casevigorously if it proceeds.  OnNovember 2003, the plaintiff filed a Notice of Dismissal, withoutprejudice, with respect to PDVSA Finance, Ltd. On September 30, 2004, the court decided in favor of PDVSA.  Nevertheless, the plaintiff appealed thedecision and therefore the matter is still pending.  Management and their legal counsel believethat the companies have substantial defenses.

 

**Employment actions related to thework stoppage**

 

During December 2002 and first months of 2003,there was a work stoppage by a significant number of workers and employeesof PDVSA and its subsidiaries in Venezuela. This resulted in the termination of employment, effectiveJanuary 1, 2003, of approximately 18,000 employees (of our then totallabor force of 45,000).  Based on theopinion of PDVSA’s management and legal counsel, the terminations were inaccordance with Venezuelan labor law. All significant outstanding employee benefits in accordance with PDVSA’semployment benefits and Venezuelan labor law were accrued as ofDecember 31, 2003 and 2002.  Theabove-mentioned former PDVSA employees have filed a petition for reinstatementwith the labor courts.  Based on theirlegal counsel’s opinion, management believes that the resolution of this matterwill not have a material effect to the Company’s financial position or resultsof operations.  See note 20 to ourconsolidated financial statements, included in “Item 18. Financial Statements.”

 

**INTESA**

 

PDVSA previously outsourced its information technologyservices to INTESA based on a joint venture and a services agreement.  INTESA is a Venezuelan company owned 60% bySAIC Bermuda Ltd. and 40% by PDV IFT, a subsidiary of PDVSA.  On June 28, 2002, PDVSA gave notice oftermination of the services agreement, in accordance with the contract.  PDVSA has proposed a plan to jointlyliquidate INTESA and to honor all valid obligations with the employees andproviders.  PDVSA has been assigned andhas paid a significant portion of INTESA’s obligations with providers, whichwill be offset against the debt that PDVSA has with INTESA.  Management and their legal counsel believethat the liquidation of INTESA will not have a material effect on the Company’sfinancial position or results of operations.

 

**Action against PDVSA Petróleo**

 

In May 2003, an arbitration proceeding in theInternational Court of Arbitration was commenced against PDVSA Petróleo inconnection with a dispute arising under an alleged contract for the sale andpurchase of 50,000 metric tons of unleaded gasoline dated February 19,2003.  The plaintiffs are claimingdamages amounting to $14 million. Management and their legal counsel have denied the allegations and havecontested the claims vigorously. Management and their legal counsel believe that they have substantiallyresponded to the claims asserted.

 

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**Additional legal actions**

 

Additionally, the Company is involved in various otherclaims and legal actions in the ordinary course of business amounting to $2,900million.  In the opinion of management,the ultimate disposition of these matters will not have a material adverseeffect on the Company’s consolidated financial position, results of operations,or liquidity.

 

Based on an analysis of the available information, aprovision as of December 31, 2003 and 2002, amounting to $380 million and$46 million, respectively, is included in accrued and other liabilities relatedto all the contingencies described above (see note 17 to our consolidatedfinancial statements, included in “Item 18. Financial Statements.”)  If known lawsuits and claims were to bedetermined in a manner adverse to the Company, and in amounts greater than theCompany’s accruals, then such determinations could have a material adverseeffect on the Company’s results of operations in a given reporting period.  Although it is not possible to predict theoutcome of these matters, management, based in part on advice of its legalcounsel, does not believe that it is probable that losses associated with theproceedings discussed above that exceed amounts already recognized, will beincurred in amounts that would be material to the Company’s financial positionor results of operations.

 

#### **8.A.8**                   Dividend policy

#### ** **

See note 15 to our consolidated financial statements,included under “Item 18. Financial Statements.”

 

## **Item9.**                                   The Offer and Listing

## ** **

**9.A.4**

 

PDVSA’s common stock is not publicly traded and, as ofOctober 7, 2005, we had 51,204 shares outstanding.  All of our issued and outstanding shares ofcommon stock are owned by the Bolivarian Republic of Venezuela.

 

### **9.C**                             Markets

### ** **

PDVSA Finance’s senior notes are solely obligations ofPDVSA Finance and are not obligations of, or guaranteed by, PDVSA.  PDVSA Finance’s 6.650% Notes due 2006, 9.375%Notes due 2007, 6.800% Notes due 2008, 9.750% Notes due 2010, 7.400% Notes due2016, 9.950% Notes due 2020 and 7.500% Notes due 2028 are listed on theLuxembourg Stock Exchange.  PDVSA Finance’s8.500% Notes due 2012 are not listed on any securities exchange.

 

## **Item10.**                            Additional Information

## ** **

### **10.B**                      Memorandum and articles ofassociation

### ** **

PDVSA incorporates by reference its memorandum andarticles of association filed on Form F-1 on June 2, 1993 with theU.S. Securities and Exchange Commission.

 

### **10.D**                      Exchange controls

### ** **

**Foreign Exchange Agreements**

 

Article 89 of the regulations of the BCVstipulates that the BCV must sell non-Venezuelan currency to us on a prioritybasis to meet our foreign exchange requirements, subject to the annual foreigncurrency budget approved by the shareholders. We are the only entity accorded such priority under the regulations ofthe BCV, which was approved by the Venezuelan Congress in 1992, although thearticle establishing our priority to foreign exchange was originallyincorporated into the regulations of the BCV in 1983 and effectively reaffirmedin 1992.

 

The priority access has been formalized through aforeign exchange agreement between the Ministry of Finance and the BCV.  The agreement requires us to sell our foreignexchange receipts to the BCV within 48 hours of receipt, except that we maymaintain a foreign currency working capital fund of up to the amount authorizedby 

 

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the board of directors of the BCV (currently $600 million).  We may use amounts contained in this fund tocover our obligations and operating costs in foreign currency and external debtservice.

 

Current revenues and the working capital fund havealways proved sufficient to meet all foreign currency requirements as they becamedue, and we have never experienced payment delays as a result of foreignexchange controls.

 

**Foreign Exchange Budget**

 

We are required to submit a foreign exchange budgetfor approval by our shareholder each year. Foreign exchange inflows are based on projected export volumes andprices, as well as proceeds from any debt issuance, while outflows are based onprojected purchases of imported goods and services, as well as payments ofprincipal of and interest on foreign currency denominated debt.  In 2003, our foreign exchange inflows totaled$19,517 million, while outflows totaled $5,740 million.

 

**10.E        Taxation**

 

United States holders of PDVSA Finance Notes are notsubject to Venezuelan taxes, by reason of withholding or otherwise, on paymentsmade by PDVSA Finance pursuant to the PDVSA Finance Notes.

 

On January 25, 1999, representatives from theUnited States and Venezuela signed an income tax treaty for the avoidance ofdouble taxation.  Both countriesexchanged instruments of ratification on December 30, 1999.  The treaty has been fully in force since2000.

 

## **Item11.**                            Quantitative and QualitativeDisclosures about Market Risk

## ** **

**Introduction**

 

We are exposed to hydrocarbon price fluctuations,interest rate fluctuations and foreign currency exchange risks.  To manage these exposures, we have definedcertain benchmarks consistent with our preferred risk profile for theenvironment in which we operate and finance our assets.  We do not attempt to manage the price riskrelated to all of our inventories of hydrocarbon products.  As a result, at December 31, 2003, wewere exposed to the risk of broad market price fluctuations with respect to asubstantial portion of our hydrocarbon inventories.  The following disclosure does not attempt toquantify the price risk associated with such commodity inventories.  All matters related to market risk aremanaged by our international subsidiaries.

 

**Commodity Derivative Instruments**

 

We balance our crude oil and refined products supplyand demand and manage a portion of our price risk by entering into petroleumcommodity derivatives through CITGO. Generally, CITGO’s risk management strategies qualified as hedgesthrough December 31, 2000. Effective January 1, 2001, we decided not to elect hedgeaccounting.  Petroleum MarketingInternational, A.V.V., a direct trading subsidiary of PDVSA in Aruba, and PMIPanama, S.A., a direct trading subsidiary of PDVSA in Panama, have limitedinvolvement with commodity derivatives. Both these entities manage commodity price risks associated with crudeoil or refined products that arise out of their respective core businessactivities.  These entities do not usederivative financial instruments for trading or speculative purposes.

 

In December 1999, PDVSA Trading, S.A. wasincorporated as a direct subsidiary of PDVSA in Venezuela primarily to managecommodity price risk associated with derivatives.  This subsidiary began its operations inMarch 2000.  However, thissubsidiary has become inactive and since 2003, all our derivative instruments operations are being managedby CITGO.

 

The table below presents contractual amounts with openpositions at December 31, 2003, for commodity derivatives, and includesfutures purchased and futures sold.

 

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**Non Trading Commodity DerivativesOpen Positions at December 31, 2003**

 
| **Commodity**     | ** ** | **Derivative**                 | ** ** | **Maturity Date** | ** ** | **Volumes of  Contracts (1)  Long/(Short** | ** ** | **Contract  Value (3)**  | ** ** | **Market  Value (2) (3)** | ** ** |
|-------------------|------------|--------------------------------|------------|-------------------|------------|--------------------------------------------|------------|--------------------------|------------|---------------------------|------------|
| ** **        | ** ** | ** **                     | ** ** | ** **        | ** ** | ** **                                 | ** ** | **Asset/(Liability)**    | ** ** |
| ** **        | ** ** | ** **                     | ** ** | ** **        | ** ** | ** **                                 | ** ** | **($ in millions)** | ** ** |
|              |       |                           |       |              |       |                                       |       |                     |       |                      |       |
| No Lead  Gasoline |       | Futures  Purchased             |       | 2004              |       | 315                                        |       | 12.2                     |       | 12.4                      |       |
|              |       | Futures Sold                   |       | 2004              |       | (396                                       | )          | (15.6                    | )          | (15.6                     | )          |
|              |       | Listed Call  Options Purchased |       | 2004              |       | 750                                        |       | —                   |       | 1.8                       |       |
|              |       | Listed Call  Options Sold      |       | 2004              |       | (750                                       | )          | —                   |       | (1.2                      | )          |
|              |       | Forward  Purchase Contracts    |       | 2004              |       | 2.117                                      |       | 80.2                     |       | 83.0                      |       |
|              |       | Forward Sale  Contracts        |       | 2004              |       | (1,842                                     | )          | (71.2                    | )          | (73.3                     | )          |
|              |       |                           |       |              |       |                                       |       |                     |       |                      |       |
| Distillates       |       | Futures  Purchased             |       | 2004              |       | 2.211                                      |       | 73.6                     |       | 82.7                      |       |
|              |       | Futures  Purchased             |       | 2005              |       | 4                                          |       | 0.1                      |       | 0.1                       |       |
|              |       | Futures Sold                   |       | 2004              |       | (400                                       | )          | (15.3                    | )          | (15.4                     | )          |
|              |       | OTC Call  Options Purchased    |       | 2004              |       | 6                                          |       | —                   |       | —                    |       |
|              |       | OTC Put  Options Purchased     |       | 2004              |       | 6                                          |       | —                   |       | —                    |       |
|              |       | OTC Call  Options Sold         |       | 2004              |       | (6                                         | )          | —                   |       | —                    |       |
|              |       | OTC Put  Options Sold          |       | 2004              |       | (6                                         | )          | —                   |       | —                    |       |
|              |       | Forward  Purchase Contracts    |       | 2004              |       | 1,643                                      |       | 60.5                     |       | 60.7                      |       |
|              |       | Forward Sale  Contracts        |       | 2004              |       | (1,273                                     | )          | (46.2                    | )          | (46.8                     | )          |
|              |       |                           |       |              |       |                                       |       |                     |       |                      |       |
| Crude Oil         |       | Futures  Purchased             |       | 2004              |       | 100                                        |       | 3.3                      |       | 3.3                       |       |
|              |       | Futures Sold                   |       | 2004              |       | (100                                       | )          | (3.3                     | )          | (3.3                      | )          |
|              |       | Forward  Purchase Contracts    |       | 2004              |       | 1,287                                      |       | 39.0                     |       | 39.4                      |       |
|              |       | Forward Sale  Contracts        |       | 2004              |       | (822                                       | )          | (27.0                    | )          | (26.7                     | )          |

 

----

(1)  1,000 barrels per contract

(2)  Based on actively quoted prices.

(3)  Fair value isrepresented by market value less contract value.

 

83

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**Non-Trading Commodity DerivativesOpen positions at December 31, 2002**

 
| **Commodity**     | ** ** | **Derivative**                          | ** ** | **Maturity date** | ** ** | **Volumes of  Contracts (1)  Long/(Short)** | ** ** | **Contract  Value (4) (6)** | ** ** | **Market  Value (5) (6)** | ** ** |
|-------------------|------------|-----------------------------------------|------------|-------------------|------------|---------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| ** **        | ** ** | ** **                              | ** ** | ** **        | ** ** | ** **                                  | ** ** | **Asset/(Liability)**       | ** ** |
| ** **        | ** ** | ** **                              | ** ** | ** **        | ** ** | ** **                                  | ** ** | **($ in millions)**    | ** ** |
|              |       |                                    |       |              |       |                                        |       |                        |       |                      |       |
| No Lead  Gasoline |       | Futures Purchased                       |       | 2003              |       | 564                                         |       | 19.9                        |       | 20.6                      |       |
|              |       | Futures Sold                            |       | 2003              |       | (1,023                                      | )          | (35.3                       | )          | (37.6                     | )          |
|              |       | Listed Options Purchased                |       | 2003              |       | 1,225                                       |       | —                      |       | 4.2                       |       |
|              |       | Listed Options Sold                     |       | 2003              |       | (2,225                                      | )          | —                      |       | (5.5                      | )          |
|              |       | Forward Purchase Contracts              |       | 2003              |       | 2,577                                       |       | 89.2                        |       | 92.5                      |       |
|              |       | Forward Sales Contracts                 |       | 2003              |       | (2,364                                      | )          | (81.3                       | )          | (86.2                     | )          |
|              |       |                                    |       |              |       |                                        |       |                        |       |                      |       |
| Distillates  (1)  |       | Futures Purchased                       |       | 2003              |       | 2,227                                       |       | 73.4                        |       | 78.7                      |       |
|              |       | Futures Purchased                       |       | 2004              |       | 31                                          |       | 0.8                         |       | 0.9                       |       |
|              |       | Futures Sold                            |       | 2003              |       | (2,953                                      | )          | 93.2                        |       | (96.7                     | )          |
|              |       | OTC Options Purchased                   |       | 2003              |       | 66                                          |       | —                      |       | 0.1                       |       |
|              |       | OTC Options Sold                        |       | 2003              |       | (66                                         | )          | —                      |       | (0.1                      | )          |
|              |       | OTC Swaps (Pay Fixed/Receive Float) (3) |       | 2003              |       | 12                                          |       | —                      |       | —                    |       |
|              |       | OTC Swaps (Pay Float/Receive Fixed) (3) |       | 2003              |       | (75                                         | )          | —                      |       | —                    |       |
|              |       | Forward Purchase Contracts              |       | 2003              |       | 3,134                                       |       | 106.5                       |       | 111.0                     |       |
|              |       | Forward Sale Contracts                  |       | 2003              |       | (2,944                                      | )          | (98.1                       | )          | (104.7                    | )          |
|              |       |                                    |       |              |       |                                        |       |                        |       |                      |       |
| Crude Oil         |       | Futures Purchased                       |       | 2003              |       | 1,986                                       |       | 51.2                        |       | 54.5                      |       |
|              |       | Futures Sold                            |       | 2003              |       | (1,476                                      | )          | (41.8                       | )          | (45.3                     | )          |
|              |       | Listed Options Purchased                |       | 2003              |       | 2,250                                       |       | —                      |       | 2.3                       |       |
|              |       | Listed Options Sold                     |       | 2003              |       | (3,150                                      | )          | —                      |       | (3.1                      | )          |
|              |       | OTC Swaps (Pay Float/Receive Fixed) (3) |       | 2003              |       | (3,500                                      | )          | —                      |       | (3.0                      | )          |
|              |       | Forward Purchase Contracts              |       | 2003              |       | 5,721                                       |       | 160.8                       |       | 174.4                     |       |
|              |       | Forward Sale Contracts                  |       | 2003              |       | (4,412                                      | )          | (129.8                      | )          | (137.2                    | )          |
|              |       |                                    |       |              |       |                                        |       |                        |       |                      |       |
| Natural Gas  (2)  |       | Listed Options Purchased                |       | 2003              |       | 85                                          |       | —                      |       | 0.1                       |       |
|              |       | Listed Options Sold                     |       | 2003              |       | (40                                         | )          | —                      |       | (0.1                      | )          |
|              |       |                                    |       |              |       |                                        |       |                        |       |                      |       |
| Propane           |       | OTC Swaps (Pay Fixed/Receive Float) (3) |       | 2003              |       | 75                                          |       | —                      |       | 0.5                       |       |
|              |       | OTC Swaps (Pay Float/Receive Fixed) (3) |       | 2003              |       | (300                                        | )          | —                      |       | (1.5                      | )          |

 

----

(1)                                  1,000 barrelsper contract.

(2)                                  Ten thousand ofmmbtu per contract.

(3)                                  Floating pricebased on market index designated in contract; fixed price agreed upon at dateof contract.

(4)                                  Weighted averageprice.

(5)                                  Based onactively quoted prices.

(6)                                  Fair value isrepresented by market value less contract value.

 

**Debt Related Instruments**

 

***Interest Rate Risk***

 

We enter into various interest rate swap agreements tomanage the risks related to interest rate fluctuations on our debt.

 

84

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On January 28, 2000, PDVSA Finance entered intoan interest rate swap agreement to manage the risks related to interest ratefluctuations in respect of its Euro 200 million 6.250% notes due 2002 through2006 issued on April 8, 1999.  Theagreement provides protection to PDVSA Finance in respect of interest andprincipal payments from a possible appreciation of the Euro relative to theU.S. dollar during the terms of the notes. The agreement contains a knock-in provision that eliminates protectionto PDVSA Finance, in respect of principal payments above a 1.09 U.S.dollar/Euro exchange rate if during the term of the agreement the U.S.dollar/euro exchange rate reaches or exceeds 1.2.

 

CITGO has fixed and floating U.S. currency denominateddebt.  CITGO uses interest rate swaps tomanage its debt portfolio toward a benchmark of 40% to 60% fixed rate debt tototal fixed and floating rate debt. These instruments have the effect of changing the interest rate with theobjective of minimizing CITGO’s long-term costs.  At December 31, 2003 and 2002, CITGO’sprimary exposures were to LIBOR and floating rates on tax exempt bonds.

 

For interest rate swaps, the table below presentsnotional amounts and interest rates by expected (contractual) maturitydates.  Notional amounts are used tocalculate the contractual payments to be exchanged under the contracts.

 

**Non-Trading Interest Rate DerivativesOpen positions at December 31, 2003**

 

| **Variable Rate Index** | ** ** | **Expiration Date** | ** ** | **Fixed Rate Paid (%)** | ** ** | **Notional  Principal Amount** | ** ** |
|-------------------------|------------|---------------------|------------|-------------------------|------------|-------------------------------------|------------|
| ** **              | ** ** | ** **          | ** ** | ** **              | ** ** | **($ million)**                | ** ** |
| J.J. Kenny              |       | February 2005  |       | 5.30                    |       | 12                                  |       |
| J.J. Kenny              |       | February 2005  |       | 5.27                    |       | 15                                  |       |
| J.J. Kenny              |       | February 2005  |       | 5.49                    |       | 15                                  |       |
|                    |       |                |       |                    |       | 42                                  |       |

 

The fair value of the interest rate swap agreements atDecember 31, 2003, based on the estimated amount that we would receive orpay to terminate the agreements as of that date and taking into account currentinterest rates was a loss of $2 million, the offset of which is recorded inother current liabilities.

 

Generally, we do not enter into interest rate swapswith respect to debt incurred by PDVSA, other than with respect to debt ofCITGO or PDVSA Finance.  The table belowpresents our principal cash flows and related weighted average interest ratesby expected maturity date.  Weightedaverage variable rates are based on implied forward rates in the yield curve atthe reporting date.

 

**Short-Term and Long-Term Debtat December 31, 2003**

 
| **Expected Maturities** | ** ** | **Fixed Rate Debt**      | ** ** | **Average Fixed Interest  Rate** | ** ** | **Variable Rate Debt**   | ** ** | **Average Variable  Interest Rate** | ** ** |
|-------------------------|------------|--------------------------|------------|----------------------------------|------------|--------------------------|------------|-------------------------------------|------------|
| ** **              | ** ** | **($ in millions)** | ** ** | **%**                            | ** ** | **($ in millions)** | ** ** | **%**                               | ** ** |
|                    |       |                     |       |                             |       |                     |       |                                |       |
| 2004                    |       | 376                      |       | 7.65                             |       | 373                      |       | 2.54                                |       |
| 2005                    |       | 417                      |       | 8.24                             |       | 335                      |       | 2.31                                |       |
| 2006                    |       | 417                      |       | 8.13                             |       | 432                      |       | 4.48                                |       |
| 2007                    |       | 296                      |       | 8.23                             |       | 340                      |       | 2.00                                |       |
| 2008                    |       | 397                      |       | 7.95                             |       | 334                      |       | 1.32                                |       |
| Thereafter              |       | 2,549                    |       | 8.41                             |       | 748                      |       | 3.68                                |       |
| Total                   |       | 4,452                    |       | 8.25                             |       | 2,562                    |       | 2.94                                |       |
| Fair Value              |       | 4,361                    |       |                             |       |                     |       |                                |       |

 

85

----

 

**Short-Term and Long-Term Debtat December 31, 2002**

 
| **Expected Maturities** | ** ** | **Fixed Rate Debt**      | ** ** | **Average Fixed Interest  Rate** | ** ** | **Variable Rate Debt**   | ** ** | **Average Variable  Interest Rate** | ** ** |
|-------------------------|------------|--------------------------|------------|----------------------------------|------------|--------------------------|------------|-------------------------------------|------------|
| ** **              | ** ** | **($ in millions)** | ** ** | **%**                            | ** ** | **($ in millions)** | ** ** | **%**                               | ** ** |
|                    |       |                     |       |                             |       |                     |       |                                |       |
| 2003                    |       | 1,064                    |       | 7.87                             |       | 753                      |       | 4.48                                |       |
| 2004                    |       | 372                      |       | 7.90                             |       | 387                      |       | 4.10                                |       |
| 2005                    |       | 411                      |       | 8.48                             |       | 535                      |       | 5.01                                |       |
| 2006                    |       | 463                      |       | 8.17                             |       | 283                      |       | 4.45                                |       |
| 2007                    |       | 296                      |       | 8.37                             |       | 263                      |       | 4.55                                |       |
| Thereafter              |       | 2,369                    |       | 7.86                             |       | 1,047                    |       | 7.22                                |       |
| Total                   |       | 4,975                    |       | 7.97                             |       | 3,268                    |       | 5.40                                |       |
| Fair Value              |       | 7,631                    |       |                             |       |                     |       |                                |       |

 

**Foreign Exchange Risk**

 

The dollar is our reporting currency, since asignificant portion of our revenues and debt, as well as the majority of ourcosts, expenses and investments are denominated in dollars.  We generally do not enter into foreign currencyderivative transactions to hedge against movements in exchange rates.  We are, however, exposed to foreign currencyexchange risk associated with our recoverable value added tax receivables,notes and accounts receivable, and long-term and short-term debt denominated incurrencies other than the dollar, as summarized below:

 
| ** **           | ** ** | **At December 31, 2003** | ** ** |
|----------------------|------------|-------------------------------|------------|
| **Currency**         | ** ** | **Assets**                    | ** ** | **Liabilities** | ** ** | **Net** | ** ** |
| ** **           | ** ** | **($ in millions)**      | ** ** |
|                 |       |                          |       |   |   |   |   |
| Venezuelan  bolivars |       | 6,260                         |       | 4,459 |   | 1,801 |   |
| Euros                |       | 52                            |       | 150 |   | (98 | ) |
| Other  currencies    |       | 78                            |       | 320 |   | (242 | ) |

 
| ** **           | ** ** | **At December 31, 2002** | ** ** |
|----------------------|------------|-------------------------------|------------|
| **Currency**         | ** ** | **Assets**                    | ** ** | **Liabilities** | ** ** | **Net** | ** ** |
| ** **           | ** ** | **($ in millions)**      | ** ** |
|                 |       |                          |       |   |   |   |   |
| Venezuelan  bolivars |       | 6,495                         |       | 5,272 |   | 1,223 |   |
| Euros                |       | 195                           |       | 172 |   | 23 |   |
| Other  currencies    |       | 5                             |       | 414 |   | (409 | ) |

 

At December 31, 2003, we had approximately $396million of short-term and long-term debt denominated in currencies other thandollars, as summarized below:

 

| **Currency** | ** ** | **At December 31, 2003** | ** ** |
|--------------|------------|-------------------------------|------------|
| ** **   | ** ** | **($ in millions)**      | ** ** |
|         |       |                          |       |
| Bolivars     |       | 3                             |       |
| Euros        |       | 113                           |       |
| Yen          |       | 280                           |       |

 

At December 31, 2002, we had approximately $464million of short-term and long-term debt denominated in currencies other thandollars, as summarized below:

 

86

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| **Currency** | ** ** | **At December 31, 2002** | ** ** |
|--------------|------------|-------------------------------|------------|
| ** **   | ** ** | **($ in millions)**      | ** ** |
|         |       |                          |       |
| Bolivars     |       | 42                            |       |
| Euros        |       | 172                           |       |
| Yen          |       | 250                           |       |

 

## **Item12.**                            Description of Securities Otherthan Equity Securities

## ** **

Not applicable.

 

87

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# **PART II**

#  

## **Item13.**                            Defaults, Dividend Arrearagesand Delinquencies

## ** **

PDVSA Finance is currently in the process offinalizing its unaudited financial statements for the quarter ended June 30,2005 and, accordingly, has not provided such financial statements to thetrustee within 90 days of the quarter end, as required by the terms of itssenior indenture, as supplemented. Failure to do so constitutes an event of default under the terms of itssenior indenture, which event of default would be cured upon the delivery ofsuch financial statements to the trustee.

 

Further, on October 4, 2005, PDVSA Finance wasadvised by its external auditors that its audited financial statements for theyear ended December 31, 2004 may have to be restated in order to reflect,as an expense, certain costs and premiums that were paid by its affiliate andour subsdiary, PDVSA Petroleo, S.A., in connection with the cash tender offerfor its outstanding notes in 2004.  It isunclear whether the restatement of its financial statements that werepreviously provided to the trustee on a timely basis would constitute an eventof default under the terms of its senior indenture, as supplemented.  Even if one were to conclude that suchrestatement would vitiate its earlier compliance with its reportingrequirements under its senior indenture, as supplemented, its delivery ofrestated financial statements to the trustee by December 3, 2005 would,under the terms of its senior indenture, as supplemented, cure any breach ofcovenant by PDVSA Finance in this respect, thus preventing an event ofdefault.  If its financial statements forthe year ended December 31, 2004 were to be restated, it is anticipatedthat such restatement will be completed promptly and, in any event, by December 3,2005.  See note 22(l) to our consolidatedfinancial statements, included under “Item 18. Financial Statements.”

 

## **Item14.**                            Material Modifications to theRights of Security Holders and Use of Proceeds

## ** **

Not applicable.

 

## **Item15.**                            Controls and Procedures

## ** **

Our President and Principal Executive Officer and ourPrincipal Financial Officer have evaluated the effectiveness of the design andoperation of the our disclosure controls and procedures (as defined under Rules 13a-15(e) and15d-15(e) of the Exchange Act) as of December 31, 2003.

 

Based upon that evaluation, our President andPrincipal Executive Officer and our Principal Financial Officer observed thatthere were certain weaknesses in our disclosure controls and procedures and ourinternal controls that temporarily impacted the timely processing of PDVSA’soperational and financial data.  Thecompany’s financial reporting systems continue to suffer delays in thegeneration and preparation of financial statements.  In particular, there were delays in closingthe year-end accounting records and in the analysis of accounts.  However, PDVSA has commenced a project tomeet the requirements of Section 404 of the Sarbanes Oxley Act, regardingthe evaluation and improvement of its Financial Internal Control Process.

 

Therefore, as of the date of this annual report, ourmanagement, including our President and Principal Executive Officer and ourPrincipal Financial Officer, have evaluated our disclosure controls andprocedures related to the recording, processing, summarization and reporting ofinformation in our periodic reports that we file with the Securities andExchange Commission (SEC) and concluded that such controls are adequate.  These disclosure controls and procedures havebeen designed to ensure that (a) material information relating to PDVSA,including its consolidated subsidiaries, is made known to our management,including these officers, by other employees of PDVSA and its subsidiaries, and(b) this information is recorded, processed, summarized, evaluated andreported, as applicable, within the time periods specified in the SEC’s rules andforms.  Due to the inherent limitationsof control systems, not all misstatements may be detected.  These inherent limitations include therealities that judgments in decision-making can be faulty and that breakdownscan occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people, or by management override ofthe control.  Our controls and procedurescan only provide reasonable, not absolute, assurance that the above objectiveshave been met.  Also, PDVSA does notcontrol or manage certain of its

 

88

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unconsolidated entitiesand as such, the disclosure controls and procedures with respect to suchentities are more limited than those it maintains with respect to itsconsolidated subsidiaries.

 

PDVSA, aware of its responsibility with the Securitiesand Exchange Commission concerning compliance with the Sarbanes Oxley Act, hasdecided to begin the evaluation of the Internal Control System of its FinancialReporting.  We hope to complete this taskand achieve external auditor’s certification by the beginning of 2007.

 

We intend to complete this project in order tostrengthen even further our Internal Control System and thus, improve thereliability of our financial data available to investors worldwide.  Additionally, we consider it an excellentopportunity to upgrade our financial management systems as has been done withother world class corporations.

 

## **Item16.**                            [Reserved]

## ** **

## **Item16A.**                   Audit Committee Financial Expert

## ** **

Jesús Villanueva serves as the Audit CommitteeFinancial Expert.  See “Item 6.ADirectors and senior management.”

 

## **Item16B.**                   Code of Ethics

## ** **

By December 2003 PDVSA had not updated its ethicscode.  However, by July 15, 2005 theInternal Audit Executive Direction had revised the ethics code, theresponsibilities of governance committee and the hot line procedure.  These documents are being evaluated by amultidisciplinary team, after which they will be submitted to the AuditCommittee and Board of Directors for approval.

 

## **Item16C.**                   Principal Accountant Fees andServices

## ** **

The following table presents fees for professionalaudit services rendered by Alcaraz Cabrera Vázquez KPMG LLP and PriceWaterhouse LLP for the audit of the Company’s financial statements for theyears ended December 31, 2003 and 2002, respectively, and fees billed forother services rendered by those firms during the period they served asauditors for the Company.

 
| ** **                                | ** ** | ** ** | ** ** | **2003**           | ** ** | **2002** | ** ** |
|-------------------------------------------|------------|------------|------------|--------------------|------------|----------|------------|
| ** **                                | ** ** | ** ** | ** ** | **(000s omitted)** | ** ** |
|                                      |       |       |       |               |       |     |       |
| Audit Fees (PDVSA, PDV Europe, Caribbean) |       |       |       |               | $          | 1,510    |       | $ | 2,468 |   |
| Audit Fees (CITGO)                        |       |       |       | 1,899              |       | 1,090    |       |
| Audit-Related Fees (1)                    |       |       |       | 450                |       | 84       |       |
| Tax Fees (2)                              |       |       |       | 127                |       | 157      |       |
| All Other Fees (3)                        |       |       |       | 0                  |       | 106      |       |
| Total                                     |       |       |       |               | $          | 3,986    |       | $ | 3,905 |   |

 

----

(1)  Audit Related Fees include fees related toCITGO’s registration of unsecured senior notes.

(2)  Fees related to the preparation of taxesrelated to our subsidiaries, CITGO, Nynäs, Bitor, and Pequiven.

(3) Fees related mainly to physical inventories and to the evaluation of PDVSA’s export processes.

 

89

----

 

**PART III**

 

## **Item17.**                            Financial Statements

## ** **

We have responded to Item 18 in lieu of this item.

 

## **Item18.**                            Financial Statements

## ** **

See pages F-1 through F-76 incorporated herein byreference.

 

The following financial statements, together with thereport of Alcaraz Cabrera Vázquez (a member firm of KPMG International) thereon,are filed as a part of this annual report:

 
| ** **                                                                                                                              | ** ** | **Page**   |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                                                                                              | ** ** | ** ** |
| Report of Independent Registered Public Accounting Firm  of Alcaraz Cabrera Vázquez (a member firm of KPMG International)          |       | F-1        |
|                                                                                                                                    |       |       |
| Independent Auditors’ Report of Deloitte & Touche LLP                                                                     |       | F-2        |
|                                                                                                                                    |       |       |
| Consolidated Balance Sheets at December 31, 2003 and 2002                                                                          |       | F-3        |
|                                                                                                                                    |       |       |
| Consolidated Statements of Income  for the years ended December 31, 2003, 2002 and 2001                                            |       | F-4        |
|                                                                                                                                    |       |       |
| Consolidated Statements of Stockholder’s Equity and Comprehensive  Loss  for the years ended December 31, 2003, 2002 and 2001 |       | F-5        |
|                                                                                                                                    |       |       |
| Consolidated Statements of Cash Flows  for the years ended December 31, 2003, 2002 and 2001                                        |       | F-6        |
|                                                                                                                                    |       |       |
| Notes to Consolidated Financial Statements                                                                                              |       | F-7        |

 

90

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**Report of Independent Registered PublicAccounting Firm**

 

To the Stockholder and Board of Directors of

Petróleos de Venezuela,S.A. (PDVSA):

 

We have audited the accompanying consolidated balancesheets of Petróleos de Venezuela, S.A. and subsidiaries (PDVSA) (wholly-ownedby the Bolivarian Republic of Venezuela) as of December 31, 2003 and 2002,and the related consolidated statements of income, stockholder’s equity andcomprehensive loss, and cash flows for each of the years in the three-yearperiod ended December 31, 2003. These consolidated financial statements are the responsibility of theCompany’s management.  Our responsibilityis to express an opinion on these consolidated financial statements based onour audits.  We did not audit the 2002and 2001 consolidated financial statements of PDV Holding, Inc. andsubsidiaries, a wholly-owned subsidiary, which statements reflect total assetsconstituting 13% as of December 31, 2002 and total revenues constituting46% and 43% for the years ended December 31, 2002 and 2001, respectively,of the related consolidated totals. Those statements were audited by other auditors whose report has beenfurnished to us, and our opinion, insofar as it relates to the amounts includedfor PDV Holding, Inc. and subsidiaries for 2002 and 2001, is based solelyon the report of the other auditors.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits and the report ofthe other auditors provide a reasonable basis for our opinion.

 

In our opinion, based on our audit and the report ofthe other auditors, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of Petróleosde Venezuela, S.A. and subsidiaries (PDVSA) as of December 31, 2003 and2002, and the results of their operations and their cash flows for each of theyears in the three-year period ended December 31, 2003, in conformity withaccounting principles generally accepted in the United States of America.

 

ALCARAZ CABRERA VÁZQUEZ

 

 
| /s/ David Arismendi N. |   |
|------------------------|--------|
| David Arismendi N.     |
| Public Accountant      |
| C.P.C. No 3424    |
| Caracas, Venezuela     |

 

 

September 15, 2005, except for note 22 (k) whichis dated October 7, 2005

 

F-1

----

 

 

**INDEPENDENT AUDITORS’ REPORT**

 

To theBoard of Directors and Shareholder of PDV Holding, Inc.:

 

Wehave audited the accompanying consolidated balance sheet of PDV Holding, Inc.and subsidiaries (the “Company”) as of December 31, 2002, and the relatedconsolidated statements of income and comprehensive income, shareholder’sequity and cash flows for the years ended December 31, 2002 and 2001.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with auditingstandards generally accepted in the United States of America.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includes consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express no such opinion.  An audit alsoincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In ouropinion, such consolidated financial statements present fairly, in all materialrespects, the financial position of PDV Holding, Inc. and subsidiaries at December 31,2002, and the results of their operations and their cash flows for the yearsended December 31, 2002 and 2001, in conformity with accounting principlesgenerally accepted in the United States of America.

 
| /s/  DELOITTE & TOUCHE LLP |   |
|-------------------------------------|--------|

 

Tulsa,OklahomaApril 11, 2003

 

F-2

----

 

**PETRÓLEOS DE VENEZUELA, S.A. AND SUBSIDIARIES(PDVSA)**

 

(Wholly-owned by the BolivarianRepublic of Venezuela)

 

ConsolidatedBalance Sheets

 

(In millions of U.S. dollars)

 
| ** **                                                                      | ** ** | **December 31** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                      | ** ** | **2003**             | ** ** | **2002** | ** ** |
| **Assets**                                                                      | ** ** | ** **           | ** ** | ** ** | ** ** |
| Current assets:                                                                 |       |                 |       |   |   |
| Cash and  cash equivalents (note 1(q))                                          |       | 2,938                |       | 1,703 |   |
| Restricted  cash (note 4)                                                       |       | 961                  |       | 1,772 |   |
| Notes and  accounts receivable (note 5)                                         |       | 4,955                |       | 3,515 |   |
| Inventories  (note 6)                                                           |       | 2,382                |       | 2,263 |   |
| Prepaid  expenses and other assets                                              |       | 777                  |       | 930 |   |
| Deferred  income taxes (note 12)                                                |       | 257                  |       | 476 |   |
| Total  current assets                                                           |       | 12,270               |       | 10,659 |   |
|                                                                            |       |                 |       |   |   |
| Restricted cash (note 4)                                                        |       | 698                  |       | 1,033 |   |
| Recoverable value added tax (note 12(d))                                        |       | 2,150                |       | 1,933 |   |
| Investments in non-consolidated investees (note  7)                             |       | 3,072                |       | 2,854 |   |
| Property, plant and equipment, net (note 8)                                     |       | 34,720               |       | 35,871 |   |
| Deferred income taxes (note 12)                                                 |       | 1,049                |       | 454 |   |
| Long-term accounts receivable and other  assets (note 9)                        |       | 1,396                |       | 2,135 |   |
|                                                                            |       | 55,355               |       | 54,939 |   |
| **Liabilities  and Stockholder’s Equity**                                  |       |                 |       |   |   |
| Current liabilities:                                                            |       |                 |       |   |   |
| Accounts  payable to suppliers (note 11)                                        |       | 3,365                |       | 2,850 |   |
| Current  portion of long-term debt (note 14)                                    |       | 750                  |       | 1,817 |   |
| Income taxes  payable (note 12)                                                 |       | 624                  |       | 327 |   |
| Deferred  income taxes (note 12)                                                |       | 28                   |       | — |   |
| Employee  termination, pension and other postretirement benefits (note 16) |       | 263                  |       | 431 |   |
| Accrued and  other liabilities (note 17)                                        |       | 2,293                |       | 1,757 |   |
| Total  current liabilities                                                      |       | 7,323                |       | 7,182 |   |
|                                                                            |       |                 |       |   |   |
| Long-term debt, net of current portion  (note 14)                               |       | 6,265                |       | 6,426 |   |
| Employee termination, pension and other  postretirement benefits (note 16)      |       | 1,908                |       | 2,395 |   |
| Deferred income taxes (note 12)                                                 |       | 1,066                |       | 946 |   |
| Accrued and other liabilities (note 17)                                         |       | 1,282                |       | 588 |   |
| Total  liabilities                                                              |       | 17,844               |       | 17,537 |   |
|                                                                            |       |                 |       |   |   |
| Minority interests                                                              |       | 93                   |       | 114 |   |
| Stockholder’s equity                                                       |       | 37,418               |       | 37,288 |   |
|                                                                            |       | 55,355               |       | 54,939 |   |

 

The accompanying notes form an integral part of theconsolidated financial statements.

 

F-3

----

 

**PETRÓLEOS DE VENEZUELA, S.A. AND SUBSIDIARIES(PDVSA)**

 

(Wholly-owned by the BolivarianRepublic of Venezuela)

 

Consolidated Statements of Income

 

(In millions of U.S. dollars)

 
| ** **                                                                                                                     | ** ** | **Years ended December 31** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                     | ** ** | **2003**                         | ** ** | **2002** | ** ** | **2001** | ** ** |
| Sales of crude oil and products:                                                                                               |       |                             |       |   |   |   |   |
| Exports and  international markets                                                                                             |       | 44,178                           |       | 39,875 |   | 42,682 |   |
| In Venezuela                                                                                                                   |       | 961                              |       | 1,236 |   | 1,701 |   |
| Petrochemical and other sales                                                                                                  |       | 1,071                            |       | 1,201 |   | 1,403 |   |
| Equity in earnings of non-consolidated  investees (note 7)                                                                     |       | 379                              |       | 268 |   | 464 |   |
|                                                                                                                           |       | 46,589                           |       | 42,580 |   | 46,250 |   |
|                                                                                                                           |       |                             |       |   |   |   |   |
| Costs and expenses:                                                                                                            |       |                             |       |   |   |   |   |
| Purchases of  crude oil and products                                                                                           |       | 21,016                           |       | 17,956 |   | 18,228 |   |
| Operating  expenses                                                                                                            |       | 9,338                            |       | 9,299 |   | 10,882 |   |
| Exploration  expenses                                                                                                          |       | 27                               |       | 133 |   | 174 |   |
| Depreciation  and depletion (note 8)                                                                                           |       | 2,824                            |       | 3,038 |   | 2,624 |   |
| Asset  impairment (note 8)                                                                                                     |       | 296                              |       | 722 |   | 257 |   |
| Selling,  administrative and general expenses                                                                                  |       | 1,479                            |       | 1,854 |   | 1,853 |   |
| Production  and other taxes (note 12)                                                                                          |       | 6,428                            |       | 5,748 |   | 3,760 |   |
| Financing  expenses                                                                                                            |       | 627                              |       | 763 |   | 509 |   |
| Other  (income) expenses, net                                                                                                  |       | (8                               | )          | 323 |   | 199 |   |
|                                                                                                                           |       | 42,027                           |       | 39,836 |   | 38,486 |   |
|                                                                                                                           |       |                             |       |   |   |   |   |
| Income  before income taxes, minority interests and cumulative effect of accounting  change                                    |       | 4,562                            |       | 2,744 |   | 7,764 |   |
| Income taxes (note 12)                                                                                                         |       | 1,602                            |       | 149 |   | 3,766 |   |
| Minority interests                                                                                                             |       | 6                                |       | 5 |   | 5 |   |
|                                                                                                                           |       |                             |       |   |   |   |   |
| Income  before cumulative effect of accounting change                                                                          |       | 2,954                            |       | 2,590 |   | 3,993 |   |
|                                                                                                                           |       |                             |       |   |   |   |   |
| Cumulative  effect of accounting change for asset retirement obligations, net of  deferred tax benefit of 175 (note 1(n)) |       | 234                              |       | — |   | — |   |
| Net income                                                                                                                     |       | 2,720                            |       | 2,590 |   | 3,993 |   |

 

The accompanying notes form an integral part of theconsolidated financial statements.

 

F-4

----

 

**PETRÓLEOS DE VENEZUELA, S.A. AND SUBSIDIARIES(PDVSA)**

 

(Wholly-owned by the BolivarianRepublic of Venezuela)

 

Consolidated Statements of Stockholder’sEquity and Comprehensive Loss

 

Years ended December 31, 2003,2002 and 2001

 

(In millions of U.S. dollars)

 
| ** **                                                              | ** ** | **Capital  stock** | ** ** | **Legal  reserves  and other** | ** ** | **Accumulated  losses** | ** ** | **Accumulated  other  comprehensive   loss** | ** ** | **Total  stockholder’s  equity** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------|------------|--------------------------------|------------|-------------------------|------------|----------------------------------------------|------------|---------------------------------------|------------|
| Balances at December 31, 2000                                      |       | 39,094             |       | 8,133                          |       | (8,971                  | )          | (324                                         | )          | 37,932                                |       |
| Comprehensive income:                                                   |       |               |       |                           |       |                    |       |                                         |       |                                  |       |
| Net income  2001                                                        |       | —             |       | —                         |       | 3,993                   |       | —                                       |       | 3,993                                 |       |
| Change in  additional minimum pension liability, net of tax of 110 |       | —             |       | —                         |       | —                  |       | (53                                          | )          | (53                                   | )          |
| Total  comprehensive income                                             |       |               |       |                           |       |                    |       |                                         |       | 3,940                                 |       |
|                                                                    |       |               |       |                           |       |                    |       |                                         |       |                                  |       |
| Transfer from reserves                                                  |       | —             |       | (151                           | )          | 151                     |       | —                                       |       | —                                |       |
| Cash dividends                                                          |       | —             |       | —                         |       | (4,711                  | )          | —                                       |       | (4,711                                | )          |
| Non-cash dividends                                                      |       | —             |       | —                         |       | (63                     | )          | —                                       |       | (63                                   | )          |
| Balances at December 31, 2001                                      |       | 39,094             |       | 7,982                          |       | (9,601                  | )          | (377                                         | )          | 37,098                                |       |
|                                                                    |       |               |       |                           |       |                    |       |                                         |       |                                  |       |
| Comprehensive income:                                                   |       |               |       |                           |       |                    |       |                                         |       |                                  |       |
| Net income  2002                                                        |       | —             |       | —                         |       | 2,590                   |       | —                                       |       | 2,590                                 |       |
| Change in  additional minimum pension liability, net of tax of 377 |       | —             |       | —                         |       | —                  |       | 352                                          |       | 352                                   |       |
| Total comprehensive  income                                             |       |               |       |                           |       |                    |       |                                         |       | 2,942                                 |       |
|                                                                    |       |               |       |                           |       |                    |       |                                         |       |                                  |       |
| Transfer to reserves                                                    |       | —             |       | 66                             |       | (66                     | )          | —                                       |       | —                                |       |
| Cash dividends                                                          |       | —             |       | —                         |       | (2,752                  | )          | —                                       |       | (2,752                                | )          |
| Balances at December 31, 2002                                      |       | 39,094             |       | 8,048                          |       | (9,829                  | )          | (25                                          | )          | 37,288                                |       |
|                                                                    |       |               |       |                           |       |                    |       |                                         |       |                                  |       |
| Comprehensive income:                                                   |       |               |       |                           |       |                    |       |                                         |       |                                  |       |
| Net income  2003                                                        |       | —             |       | —                         |       | 2,720                   |       | —                                       |       | 2,720                                 |       |
| Change in  additional minimum pension liability, net of nil tax    |       | —             |       | —                         |       | —                  |       | 4                                            |       | 4                                     |       |
| Total  comprehensive income                                             |       |               |       |                           |       |                    |       |                                         |       | 2,724                                 |       |
|                                                                    |       |               |       |                           |       |                    |       |                                         |       |                                  |       |
| Transfer to reserves                                                    |       | —             |       | 328                            |       | (328                    | )          | —                                       |       | —                                |       |
| Cash dividends                                                          |       | —             |       | —                         |       | (2,343                  | )          | —                                       |       | (2,343                                | )          |
| Non-cash dividends                                                      |       | —             |       | —                         |       | (251                    | )          | —                                       |       | (251                                  | )          |
| Balances at December 31, 2003                                      |       | 39,094             |       | 8,376                          |       | (10,031                 | )          | (21                                          | )          | 37,418                                |       |

 

The accompanying notesform an integral part of the consolidated financial statements.

 

F-5

----

 

**PETRÓLEOS DE VENEZUELA, S.A. AND SUBSIDIARIES(PDVSA)**

 

(Wholly-owned by the BolivarianRepublic of Venezuela)

 

Consolidated Statements of Cash Flows

 

(In millions of U.S. dollars)

 
| ** **                                                                                    | ** ** | **Years ended December 31** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                    | ** ** | **2003**                         | ** ** | **2002** | ** ** | **2001** | ** ** |
| Cash flows from operating activities:                                                         |       |                             |       |   |   |   |   |
| Net income                                                                                    |       | 2,720                            |       | 2,590 |   | 3,993 |   |
| Adjustment  to reconcile net income to net cash provided by operating activities:             |       |                             |       |   |   |   |   |
| Depreciation  and depletion                                                                   |       | 2,824                            |       | 3,038 |   | 2,624 |   |
| Asset  impairment                                                                             |       | 296                              |       | 722 |   | 257 |   |
| Cost of  asset retirement obligations                                                         |       | 234                              |       | — |   | — |   |
| Deferred  income taxes                                                                        |       | (53                              | )          | (552 | ) | 603 |   |
| Provision  for (reversal of) employee termination, pension and other postretirement  benefits |       | (407                             | )          | 1,340 |   | 1,479 |   |
| Equity in  earnings of non-consolidated investees                                             |       | (379                             | )          | (268 | ) | (464 | ) |
| Dividends  received from non-consolidated investees                                           |       | 240                              |       | 228 |   | 163 |   |
| Change in  operating assets:                                                                  |       |                             |       |   |   |   |   |
| Notes and  accounts receivable                                                                |       | (1,691                           | )          | (235 | ) | 1,155 |   |
| Inventories                                                                                   |       | (119                             | )          | (55 | ) | (33 | ) |
| Prepaid  expenses and other assets                                                            |       | 892                              |       | 374 |   | (554 | ) |
| Recoverable  value added tax                                                                  |       | (217                             | )          | 217 |   | (675 | ) |
| Change in  operating liabilities:                                                             |       |                             |       |   |   |   |   |
| Accounts  payable to suppliers                                                                |       | 515                              |       | (193 | ) | (500 | ) |
| Income taxes  payable, accrued and other liabilities and minority interests                   |       | 1,135                            |       | (1,266 | ) | (323 | ) |
| Payments of  employee termination, pension and other postretirement benefits                  |       | (244                             | )          | (1,060 | ) | (760 | ) |
| Net cash  provided by operating activities                                                    |       | 5,746                            |       | 4,880 |   | 6,965 |   |
| Cash flows from investing activities:                                                         |       |                             |       |   |   |   |   |
| Capital  expenditures, net                                                                    |       | (1,969                           | )          | (2,743 | ) | (3,781 | ) |
| Decrease  (increase) in restricted cash                                                       |       | 1,146                            |       | 1,472 |   | (1,666 | ) |
| Investments                                                                                   |       | (79                              | )          | 5 |   | 184 |   |
| Net cash  used in investing activities                                                        |       | (902                             | )          | (1,266 | ) | (5,263 | ) |
| Cash flows from financing activities:                                                         |       |                             |       |   |   |   |   |
| Proceeds  from issuance of debt                                                               |       | 962                              |       | 1,175 |   | 1,509 |   |
| Debt  payments                                                                                |       | (2,245                           | )          | (1,359 | ) | (681 | ) |
| Dividends  paid                                                                               |       | (2,326                           | )          | (2,652 | ) | (4,862 | ) |
| Net cash  used in financing activities                                                        |       | (3,609                           | )          | (2,836 | ) | (4,034 | ) |
| Net increase  (decrease) in cash and cash equivalents                                         |       | 1,235                            |       | 778 |   | (2,332 | ) |
|                                                                                          |       |                             |       |   |   |   |   |
| Cash and cash equivalents at beginning of  year                                               |       | 1,703                            |       | 925 |   | 3,257 |   |
| Cash and cash equivalents at end of year                                                      |       | 2,938                            |       | 1,703 |   | 925 |   |
|                                                                                          |       |                             |       |   |   |   |   |
| SUPPLEMENTAL DISCLOSURE:                                                                      |       |                             |       |   |   |   |   |
| Cash paid  during the year for:                                                               |       |                             |       |   |   |   |   |
| Interest,  net of capitalized amounts                                                         |       | 502                              |       | 615 |   | 699 |   |
| Income taxes                                                                                  |       | 1,315                            |       | 911 |   | 3,443 |   |
| Non-cash  activities:                                                                         |       |                             |       |   |   |   |   |
| Tax  certificates applied against income taxes payable                                        |       | —                           |       | — |   | 84 |   |
| Offset of  accounts                                                                           |       | 264                              |       | 57 |   | — |   |
| Payment of  dividends using trade notes receivable                                            |       | 251                              |       | — |   | 63 |   |

 

The accompanying notesform an integral part of the consolidated financial statements.

 

F-6

----

 

**PETRÓLEOS DE VENEZUELA, S.A. AND SUBSIDIARIES(PDVSA)**

(Wholly-owned by the BolivarianRepublic of Venezuela)

 

Notes to Consolidated FinancialStatements

 

December 31, 2003, 2002and 2001

 

# **(1)**                                 Operations and Summary ofSignificant Accounting Policies

#  

## ***(a)****                                **Operations*

## ** **

Petróleos de Venezuela,S.A. and its subsidiaries (PDVSA or the Company) are wholly-owned by theBolivarian Republic of Venezuela, which controls PDVSA through the Ministry ofEnergy and Petroleum (MEP) (formerly Ministry of Energy and Mines - MEM).  PDVSA is responsible for developing thenational petroleum, petrochemical, coal and Orimulsión® industries andplanning, coordinating, supervising and controlling the activities of itssubsidiaries, both in Venezuela and abroad (see note 22 (f)).  Most of the foreign companies are responsiblefor refining and marketing activities in North America, Europe and theCaribbean.

 

The main activities ofPDVSA are governed by the Organic Hydrocarbons Law, which came into effect in January 2002,repealing the Hydrocarbons Law of 1943, the Law of Assets Subject to Reversionin Hydrocarbon Concessions of 1971, the Organic Law that Reserves for the Statethe Exploitation of the Domestic Market for the Byproducts of Hydrocarbons of1973, the Organic Law that Reserves for the State the Industry and Trade ofHydrocarbons of 1975, the Organic Law of Domestic Market Opening for Gasolineand Other Hydrocarbon-derived Fuels for Use in Automobiles of 1998, and anyother legal provision that may be in conflict with this law.  Gas activities are regulated by the OrganicLaw of Gas Hydrocarbons of September 1999 and its Regulation dated June 2000.

 

The main changes in thenew Organic Hydrocarbons Law which affect the Company are as follows:

 

•                                          Productiontax or royalty increased from 16-2/3% to 30% of the volume of extractedhydrocarbons.  For mature reservoirs orextra-heavy crude oil from the Orinoco Belt, the percentage ranges from 20% to30%, and from 16-2/3% to 30% for Bitumen, based on the profitability of thosereservoirs.

 

•                                          Other taxes:

 

•                                          Surfacetax:  equal to 100 tax units for eachsquare kilometer or fraction thereof for each year, determined based on theconcession area not under production; with an annual increase of 2% for fiveyears and 5% in subsequent years.

 

•                                          General consumptiontax:  applicable to each liter ofhydrocarbon-derived product sold in the domestic market, the rate for whichshall be fixed annually in the Budget Law at between 30% and 50% of the pricepaid by the final consumer.  For theyears 2003 and 2002 the applicable tax rate was 30%.

 

•                                          Tax on theCompany’s own consumption:  equivalent to10% of the value of each cubic meter of hydrocarbon-derived product, producedand consumed as fuel oil in the organization’s operations, calculated based onthe final sale price.

 

F-7

----

 

During December 2002and the first months of 2003, a work stoppage promoted by some sectorsdisrupted certain activities in the country, including the operations of PDVSAand its Venezuelan subsidiaries.  Theseevents affected the production of crude oil and natural gas, as well as theexports of crude oil and by-products (see notes 20 and 21).

 

As a result of themodifications to PDVSA’s corporate guidelines and in order to support works orservices to develop infrastructure and highways and roads, agricultural, healthand educational activities and to further productive investments, PDVSA takespart in diverse programs established by the National Government.  PDVSA’s participation provides for thecontribution of cash to finance social programs and projects, including thosedenominated “misiones” (see notes 4, 18 and 22(a)).

 

## ***(b)****                                **Basis ofPresentation*

## ** **

In preparing itsconsolidated financial statements, the Company has elected, for internationalreporting purposes, to present its financial statements in accordance withaccounting principles generally accepted in the United States of America (USGAAP).  The main economic operatingenvironment of PDVSA consists of the international markets for crude oil andproducts.  The U.S. dollar (dollar or $)is the reporting currency for PDVSA. The dollar is the functional currency ofthe Company’s subsidiaries in Venezuela and the United States of America.

 

Assets and liabilities ofsubsidiaries outside of Venezuela and the United States of America aregenerally translated into U.S. dollars at the rate of exchange in effect at thebalance sheet date.  Income and expenseitems are translated at the weighted average exchange rate prevailing duringeach year presented.  The translationeffect is not significant in total and has not been significant in recentyears.

 

Transactions in foreigncurrencies other than the dollar are converted at the exchange rate in effectat the transaction date. Monetary assets and liabilities denominated in foreigncurrencies other than the dollar are reported in US dollars at the exchangerate in effect at the balance sheet date and the resulting exchange gains orlosses are recognized in the statement of income (see note 3).

 

## ***(c)****                                 **Estimates,Risks and Uncertainties*

## ** **

In order to prepare theconsolidated financial statements management is required to make estimates thathave an effect on the reported amounts of assets and liabilities and thereported amounts of income and expenses during the corresponding period, aswell as the disclosures of contingent assets and liabilities at the financialstatements dates.  The Company uses itsbest estimates and judgments; however, the final results could vary in relationto the original estimates due to the occurrence of future events.

 

PDVSA’s operations can beinfluenced by domestic and international political, legislative, regulatory andlegal environments.  In addition,significant changes in the prices or availability of crude oil and refined productscould have a significant impact on the results of operations for any particularyear.

 

## ***(d)****                                **Consolidation*

## ** **

***Subsidiaries***

*** ***

Subsidiary companies arethose controlled by PDVSA or where the latter has a share greater than 50% ofthe capital stock.  Control exists whenPDVSA has the power, directly or indirectly to control the financial andoperating policies of an entity in order to obtain benefits based on its

 

F-8

----

 

activities.  The potential voting rights that can beexerted or agreed are taken into consideration for purposes of assessingcontrol.  The subsidiaries’ financialstatements are included from the date of acquiring control until the datecontrol ceases.

 

Significant wholly-ownedsubsidiaries are:  PDVSA Petróleo, S.A.(PDVSA Petróleo); Petroquímica de Venezuela, S.A. (Pequiven) (see note 22(f));PDVSA Gas, S.A. (PDVSA Gas); Deltaven, S.A. (Deltaven) and CorporaciónVenezolana del Petróleo, S.A. (CVP) in Venezuela; PDV Holding, Inc. (PDVHolding) and its main subsidiary PDV America, Inc. (PDV America), whichoperate in the United States of America and PDVSA Finance Ltd. (PDVSA Finance),a company incorporated in The Cayman Islands and that acts as PDVSA’s corporatefinancing vehicle.  The main activity ofPDVSA in the United States of America is represented by CITGO PetroleumCorporation and its subsidiaries (CITGO), which is wholly-owned by PDV America.

 

***Non-Consolidated Investees***

*** ***

Non-consolidatedinvestees are those entities in which PDVSA has significant influence, but notcontrol, over the financial and operating policies or those in which it ownsbetween 20% and 50% of the capital stock. The consolidated financial statements include PDVSA’s share of therecognized gains and losses of non-consolidated investees on an equity basis,from the date when joint control commences until the date when significantcontrol ceases.  When PDVSA’s share oflosses exceeds the carrying amount of the investment, the carrying amount isreduced to nil and recognition of further losses is discontinued except to theextent that PDVSA has incurred obligations in respect of the investee.  Prior to the adoption of Statement of Financial Accounting Standards No. 142,“Goodwill and Other Intangible Assets” (SFAS No. 142), the excess of costof the stock of those investees over PDVSA’s share of their net assets at theacquisition date was recognized as goodwill and was being amortized on astraight-line basis over a maximum of 40 years, based on the estimated usefullives of the investees’ assets. Subsequent to adoption of SFAS No. 142 on January 1, 2002, theequity method goodwill is not amortized but is tested annually for impairment,by applying a fair-value-based test at the reporting unit level.  The effect of adopting this standard was notsignificant.

 

***Transactions Eliminated on Consolidation***

*** ***

Intercompany balances andtransactions, and any unrealized gains from intercompany transactions, areeliminated in preparing the consolidated financial statements.

 

***Jointly Controlled Entities***

*** ***

Entities controlledjointly are those where PDVSA has common control, established through acontractual agreement.  PDVSA Petróleoparticipates through its consolidated subsidiaries PDVSA Cerro Negro, S. A.(PDVSA Cerro Negro), PDVSA Sincor, S. A. (PDVSA Sincor) and Corpoguanipa, S. A.(Corpoguanipa), in associations for the development of extra-heavy petroleumreserves in the Orinoco Belt (see note 10(a)). These subsidiaries of PDVSA Petróleo account for these investments usingthe proportional consolidation method, recognizing their percentage share inthe assets, liabilities, income and costs, in accordance with their percentageparticipation in the joint businesses from the date of acquiring joint controluntil the date that joint control ceases.

 

F-9

----

 

***Investments at Cost***

*** ***

Investments of less than20% are recorded at cost and dividends from these companies are included inincome when declared.

 

## ***(e)****                                 **RevenueRecognition*

## ** **

Income from the sale ofcrude oil, natural gas, refined and petrochemical products, mineral carbon,Orimulsión® and others from the Venezuelan subsidiaries and abroad arerecognized in the statement of income when the significant risks and advantagesderived from ownership have been transferred to the buyer.  This transfer is determined by the deliveryterms established in the contract with the client.  No income is recognized if there is asignificant uncertainty as to the recovery of the obligation acquired by thecustomer.

 

## ***(f)****                                   **Trade AccountsReceivable*

## ** **

Trade accounts receivableare accounted for using the amounts billed and are presented net of anestimated allowance for doubtful accounts, which represents the amount ofprobable losses.  The Company estimatessuch allowance based on the aging of accounts receivable and the results ofassessment of the client portfolio.

 

## ***(g)****                                **Inventories*

## ** **

Inventories are stated atthe lower of cost or market value. Costs of inventories of crude oil and itsproducts are determined by the last-in, first-out (LIFO) method. Fertilizersand industrial products are stated at average cost.  Materials and supplies are stated mainly ataverage cost, less an allowance for possible losses, and are classified intothree groups:  current assets,non-current assets and the portion to be capitalized as property, plant andequipment.

 

## ***(h)****                                **Property,Plant and Equipment*

## ** **

Property, plant andequipment are stated at cost net of accumulated depreciation and losses due toimpairment (see note 1(i)).  Thesuccessful efforts method of accounting is used for oil and gas exploration andproduction activities.  All costs ofdevelopment wells, related to plant and equipment and oil and gas propertiesare capitalized.  Costs of exploratorywells are capitalized pending determination of whether the wells find provedreserves.  Costs of wells for which noproved reserves are found are expensed, when they are determinedunsuccessful.  Other exploratory expenditures,including the geological and geophysical costs, are expensed as incurred.  Major replacements and renewals arecapitalized.  Expenditures for majormaintenance and plant repairs (plant turnaround costs) are recorded as deferredcosts and amortized over the period between maintenance.  Expenditures for minor maintenance, repairsand renewals carried out to maintain facilities in operating condition areexpensed.  Income or losses resultingfrom the withdrawals or disposals of assets are included as operating expensesin the consolidated statement of income.

 

The costs of properties,plant and equipment also include, when relevant, the amounts associated withobligations for asset disposals (see note 1(n)).

 

F-10

----

 

Financing costs ofprojects requiring major investments in long-term construction and thoseincurred from financing of specific projects are capitalized and amortized overthe estimated useful lives of the related assets.

 

Depreciation anddepletion of capitalized costs of proved crude oil, natural gas and bitumen productionproperties are determined using the units-of-production method by field, basedon the proved developed reserves.  Therates used are reviewed annually based on an analysis of the reserves andapplied retroactively at the beginning of the year.  Depreciation and depletion for coalproduction are determined using the units-of-production method, based on theproved reserves, as they are produced.  Depreciation of petrochemical plants isdetermined using the units-of-production method.  The capitalized costs of other plants andequipment are depreciated on a straight-line basis over their estimated usefullives, which for refining assets and other facilities range between 17 and 25years; 20 years for the administrative buildings; 21 years for the extra-heavycrude upgrading assets and between 3 and 10 years for the remainingassets.  In addition, the assets acquiredunder financial leases are depreciated using the straight-line method overapproximately 10 years, which approximates the average useful life of suchassets, as ownership of these assets is transferred at the end of the leaseterm.

 

## ***(i)****           **Impairment ofLong-Lived Assets*

## ** **

PDVSA evaluates forimpairment the carrying value of long-lived assets whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable.  Recoverability of assets tobe held and used is measured by a comparison of the carrying amount of therelated assets to estimated undiscounted future net cash flows expected to begenerated by the asset.  If the carryingamount of an asset exceeds its estimated future cash flows, an impairmentcharge is recognized for the amount by which the carrying amount of the assetexceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balancesheet and reported at the lower of the carrying amount or fair value less coststo sell.

 

## ***(j)****           **Accounting forIncome Taxes*

## ** **

Income taxes areaccounted for under the asset and liability method as follows:  a) A current tax liability or asset isrecognized for the estimated taxes payable or refundable on tax returns for thecurrent year, b) A deferred tax liability or asset is recognized for theestimated future tax effects attributable to temporary differences and tax lossand tax credit carryforwards, c) The measurement of current and deferred taxliabilities and assets is based on provisions of the enacted tax law and theeffects of future changes in the tax law or rates are not anticipated, and d)The measurement of deferred tax assets is reduced, if necessary, by the amountof any tax benefits for which available evidence indicates that it is morelikely than not that they will not be realized. Under this method, deferred tax is recognized with respect to alltemporary differences, and the benefit from utilizing tax loss carryforwardsand tax credits is recognized in the year in which the losses or credits arise,subject to a valuation allowance with respect to any tax benefits not expectedto be realized.

 

PDVSA and its Venezuelansubsidiaries were required to adjust the tax bases of their non-monetary assetsand liabilities in bolivars for the effects of inflation beginning in1993.  No deferred tax asset is recordedfor the future benefit of the inflation revaluation in accordance with SFAS No. 109.  SFAS No. 109 prohibits recognition of adeferred tax liability or asset for

 

F-11

----

 

differences related toassets and liabilities that are remeasured from bolivars to U.S. dollars usinghistorical exchange rates and that result from: (1) changes in exchange rates or (2) indexing for taxpurposes. Revaluation for the effects of inflation on PDVSA and its Venezuelansubsidiaries’ non-monetary assets and liabilities is performed annually.  These annual revaluations may generateadditional taxable income or losses which may be offset against or increase thebenefit from the amortization of the initial and annual revaluation.  Under SFAS No. 109, the net benefit fromthe initial and future revaluations are recognized as realized.  Foreign exchange gains or losses related todeferred taxes are included in deferred tax expense.

 

## ***(k)****          **EmployeeTermination, Pension and Other Postretirement Benefits*

## ** **

PDVSA accrues itsliability for Venezuelan employee termination benefits, in accordance withVenezuelan labor legislation and the collective labor contracts.  A significant portion of the terminationbenefits has been deposited in trust accounts on behalf of the employees.

 

In October 2002,PDVSA signed a new collective labor contract effective until 2004, introducingimproved salaries and benefits for its contractual workers (see note 22 (e)).

 

Labor contracts, both inVenezuela and abroad, provide for pension plans for all eligible workers based,among other things, on length of service, age and compensation levels.  The pension liability, that is calculatedusing actuarial methods, establishes an individual capitalization plan for eachworker, with monthly contributions.  Thecost of this program is being funded currently.

 

PDVSA provides otherbenefits to its eligible former employees, such as health care, life insurance,disability payments, payments in lieu of salaries and wages and other socialbenefits.  This liability is accrued usingactuarial methods over the active service lives of employees.  The net periodic costs are recognized asemployees render the services necessary to earn the postretirement benefits.

 

## ***(l)****           **EnvironmentalExpenditures*

## ** **

Pursuant to theenvironmental policy established by PDVSA and the applicable legal standards aliability is recognized when the costs are probable and may be reasonablyestimated. Disbursements relating to environmental preservation, linked toincome due to current or future operations are recorded as expenses or assets,as required. The outlays relating to past operations and that do not contributeto the obtaining of current or future income are charged to expenses. Thecreation of these allowances coincides with the identification of anenvironmental remedial obligation for which the Company has adequateinformation available to determine a reasonable estimate of the cost ofremediation.  Subsequent adjustments toestimates, when necessary, may be recorded upon obtaining additionalinformation.

 

## ***(m)****         **Commodity andInterest Rate Derivatives*

## ** **

The Company usesderivative financial instruments to reduce its exposure to commodity price riskand interest rate risk arising from operational, financing and investmentactivities. In accordance with its treasury policy, PDVSA does not usederivative financial instruments for trading or speculative purposes.

 

F-12

----

 

PDVSA elected not todesignate any of its derivatives as hedges for accounting purposes, exceptunder limited circumstances involving derivatives with initial terms of 90 daysor greater and notional amounts of $25 million or greater.  There were no derivative instrumentsaccounted for as hedges outstanding at December 31, 2003 or 2002.   Derivative financial instruments arerecognized initially at cost.  Subsequentto initial recognition, derivative financial instruments are stated at fairvalue and subsequent changes are recognized in the consolidated statement ofincome.  The effects of changes in thefair value of derivatives during the years ended December 31, 2003, 2002and 2001 are recorded in other income (expenses), net and were not significant.

 

The fair value of futurepurchase-sale contracts of petroleum is their quoted market price at thebalance sheet date, which is the present value of the quoted future price.

 

The fair value ofinterest rate swaps, to manage fluctuations in cash flows resulting frominterest rate risk, is the estimated amount that would be obtained or paid byPDVSA in order to make the operation effective at the financial statementsdate, considering current interest rates and the current solvency of thecounterparties.

 

## ***(n)****          **Costs Relatedto Asset Retirement Obligations*

## ** **

The Company provides forestimated dismantlement and site removal costs of oil and gas exploration andproduction areas and other industrial facilities based on the plan ofretirement of the related assets in the future. Effective January 1, 2003, the Company adopted SFAS No. 143, “Accountingfor Asset Retirement Obligations” which addresses financial accounting andreporting for obligations associated with the retirement of tangible long-livedassets and the associated asset retirement costs.  It applies to legal obligations associated withthe retirement of long-lived assets that result from the acquisition,construction, development and/or normal use of such assets. It requires thatthe fair value of a liability for an asset retirement obligation be recognizedin the period in which it was incurred if a reasonable estimate of such fairvalue can be made.  The fair value of theliability is added to the carrying amount of the associated asset and thisadditional carrying amount is depreciated over the life of such asset.  The liability is adjusted at the end of eachperiod to reflect the passage of time and changes in the estimated future cashflows underlying the initial fair value measurement, and such adjustments arereflected in the consolidated statement of income.  If PDVSA’s obligation is settled for otherthan the carrying amount of the liability, PDVSA will recognize a gain or losson settlement.

 

During 2003, the Companyperformed an analysis of the costs associated with obligations for assetdisposals relating to production and injection wells, which were recognized inthe financial statements of that year as follows:

 

•              $234million corresponding to the cumulative effect of the cost associated withobligations due to asset disposals, net of the deferred income tax benefit of$175 million, which is presented in the consolidated statement of income.

 

•              $65million capitalized as part of property, plant and equipment associated withthese obligations, net of $60 million of accumulated depreciation (see note 8).

 

•              $537million corresponding to liabilities associated with obligations for assetdisposals, presented in accrued and other liabilities (see note 17).

 

F-13

----

 

•              $6million of depreciation expense on assets associated with obligations fromasset disposals.

 

•              $57million of financial expense corresponding to the adjustment to this obligationfrom January 1, 2003 to December 31, 2003.

 

The asset retirementobligations relating to the refining and marketing plants and related assetswere not estimated as these assets are considered to have an indeterminatelife, due to planned major maintenance and repairs, and therefore there is notsufficient information available to determine within a reasonable range anestimate of the related asset retirement obligation.

 

The following tableindicates movements of the Company’s asset retirement obligations for 2003,2002 and 2001, and illustrates the effects on the consolidated financialposition had FAS 143 been applied retroactively (in millions of dollars):

 
| ** **                                                       | ** ** | **2003** | ** ** | **2002** | ** ** | **From January 1,  1924 to  December 31,  2001** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|------------------------------------------------------------|------------|
| Accrual for asset retirement obligations as  of January 1   |       | 478      |       | 429      |       | 117                                                        |       |
| Accretion                                                        |       | 57       |       | 51       |       | 312                                                        |       |
| Acquisitions                                                     |       | 3        |       | 5        |       | —                                                     |       |
| Sales and disposals                                              |       | (1       | )          | (7       | )          | —                                                     |       |
| Accrual for asset retirement obligations as  of December 31 |       | 537      |       | 478      |       | 429                                                        |       |
|                                                             |       |     |       |     |       |                                                       |       |
| Property, plant and equipment as of January 1               |       | 122      |       | 117      |       | —                                                     |       |
| Acquisitions                                                     |       | 3        |       | 6        |       | 117                                                        |       |
| Sales and disposal                                               |       | —   |       | (1       | )          | —                                                     |       |
| Property, plant and equipment as of December 31             |       | 125      |       | 122      |       | 117                                                        |       |
|                                                             |       |     |       |     |       |                                                       |       |
| Accumulated depreciation and depletion as  of January 1     |       | 54       |       | 47       |       | —                                                     |       |
| Depreciation and depletion                                       |       | 6        |       | 7        |       | 47                                                         |       |
| Accumulated depreciation and depletion as  of December 31   |       | 60       |       | 54       |       | 47                                                         |       |

 

## ***(o)****          **Research andDevelopment Costs*

## ** **

Research and developmentcosts are expensed when incurred.  In2003, 2002 and 2001, amounts charged to expense for research and developmentactivities amounted to $13 million, $31 million and $41 million, respectively.

 

## ***(p)****          **SegmentInformation*

## ** **

A segment is anidentifiable component of PDVSA that is engaged in supplying products orservices (operating segment), or that engages into providing products orservices within a particular economic environment (geographical segment), thatis subject to specific and diverse risks and benefits of other segments.

 

PDVSA has determined thatits reportable segments are those that are based on the Company’s method ofinternal reporting. PDVSA identifies such segments based on its business unitsand

 

F-14

----

 

geographically. PDVSA’sreportable operating segments include exploration, production and improvementof crude oil and natural gas (upstream); refining, supply and marketing(downstream); and petrochemicals.

 

## ***(q)****          **Cash and CashEquivalents*

## ** **

For purposes of the consolidatedstatement of cash flows, PDVSA considers as cash equivalents all deposits andother cash placements with original maturities of less than three months,including amounts deposited with the Central Bank of Venezuela (BCV), availableon a current basis, which at December 31, 2003, 2002 and 2001 amounted to$1,059 million, $273 million and $87 million, respectively.

 

## ***(r)****           **Reclassifications*

## ** **

Certain reclassificationshave been made to the 2002 and 2001 financial statements to conform to theclassifications used in 2003.

 

## ***(s)****           **RecentlyIssued Accounting Standards*

## ** **

Some important accountingstandards recently issued are summarized as follow (see note 22(j)):

 

In December 2003,the FASB issued FASB Interpretation No. 46 (revised December 2003), *Consolidation of Variable Interest Entities*, which addresseshow a business enterprise should evaluate whether it has a controllingfinancial interest in an entity through means other than voting rights andaccordingly should consolidate the entity. The Company applies FIN 46R to variable interests in VIEs created after December 31,2003.  For variable interests in VIEscreated before January 1, 2004, the Interpretation will be appliedbeginning on January 1, 2005.  Forany VIEs that must be consolidated under FIN 46R that were created before January 1,2004, the assets, liabilities and noncontrolling interests of the VIE initiallywould be measured at their carrying amounts with any difference between the netamount added to the balance sheet and any previously recognized interest beingrecognized as the cumulative effect of an accounting change.  If determining the carrying amounts is notpracticable, fair value at the date FIN 46R first applies may be used tomeasure the assets, liabilities and noncontrolling interest of the VIE.  The Company expects that the adoption of FIN46R will not have a material impact on its consolidated financial position orresults of operations.

 

In April 2003, theFASB issued SFAS No. 149, “Amendment of Statement 133 on DerivativeInstruments and Hedging Activities”.  Thechanges in SFAS No. 149 improve financial reporting by requiring thatcontracts with comparable characteristics be accounted for similarly.  Those changes will result in more consistentreporting of contracts as either derivatives or hybrid instruments. SFAS No. 149is effective for contracts entered into or modified after June 30, 2003,except for certain issues from SFAS No. 133 which have been effective forfiscal quarters that began prior to June 15, 2003 and for hedgingrelationships designated after June 30, 2003.  In addition, all provisions of SFAS No. 149should be applied prospectively.  Theadoption of SFAS No. 149 did not have a material effect on PDVSA’sconsolidated financial position or results of operations.

 

F-15

----

 

The FASB’s EmergingIssues Task Force Abstract No. 01-8, “Determining Whether an ArrangementContains a Lease” (“EITF 01-8”) issued in May 2003, requires that whenPDVSA makes an evaluation of whether an arrangement contains a lease within thescope of SFAS No. 13, “Accounting for Leases”, such an assessment shouldbe based on the substance of the arrangement and should be made at inception ofthe arrangement based on all of the facts and circumstances.  A reassessment of an arrangement should bebased on the facts and circumstances as of the date of reassessment, includingthe remaining term of the arrangement. The consensus in EITF 01-8 should be applied to (a) arrangementsagreed to or committed to, if earlier, after the beginning of an entity’s nextreporting period beginning after May 28, 2003, (b) arrangementsmodified after the beginning of an entity’s next reporting period beginningafter May 28, 2003, and (c) arrangements acquired in business combinationsinitiated after the beginning of an entity’s next reporting period beginningafter May 28, 2003.  The Company isin the process of evaluating the effects, if any, of this standard on itsconsolidated financial position and results of operations.

 

In December 2003,the FASB issued SFAS No. 132R (revised 2003), “Employers’ Disclosuresabout Pensions and Other Postretirement Benefits”.  It does not change the measurement orrecognition of those plans.  TheStatement retains and revises the disclosure requirements contained in theoriginal FASB Statement No. 132 “Employers’ Disclosures about Pensions andOther Postretirement Benefits”, which it replaces.  It requires additional disclosures to thosein the original Statement No. 132 about assets, obligations, cash flowsand net periodic benefit cost of defined benefit pension plans and otherdefined benefit postretirement plans (see note 16).

 

# **(2)**           Foreign Exchange Agreement with the Central Bank ofVenezuela (BCV)

#  

Under Venezuelan law, theCentral Bank of Venezuela (BCV) is required to sell foreign currency to PDVSAat an agreed rate effective at the transaction date, which approximates themarket rate, and on a priority basis to meet its foreign exchange needs, as setout in PDVSA’s annual foreign exchange budget. Pursuant to the agreement between the Venezuelan government and the BCV,all foreign currency from petroleum activities received by PDVSA, including itsVenezuelan subsidiaries, must be sold to the BCV at the agreed rate, whichapproximates the market rate.  PDVSA mayuse such foreign currency to service its current debt, make capital investmentsand pay operating expenses and maintain a rotatory fund for working capitalwhich shall not exceed $600 million (see notes 4 and 22(a)).

 

On February 5, 2003,the Venezuelan Government established an exchange control regime and fixed theexchange rates for the sale and purchase of foreign currency at Bs1,600.00 to$1 and Bs1,596.00 to $1, respectively. It also created the Comisión para la Administración de Divisas (CADIVI)(Foreign Currency Administration Commission) setting forth rules for theadministration and control of foreign currencies. Despite the new regime, theexchange agreement between the Ministry of Finance and the BCV containsprovisions that are specific to PDVSA, which have been in effect since 1982.Among other things, the exchange regime exempts PDVSA from the exchangecontrols referred to above, up to the limit of the rotatory fund.  As a result, the new exchange controls do nothave a significant impact on PDVSA’s operations (see notes 3, 22(b) and22(i)).

 

F-16

----

 

# **(3)**           Transactions and Balances in Currencies Other Than theDollar

#  

PDVSA has the followingmonetary assets and liabilities denominated in currencies other than the dollarwhich are converted to dollars at the exchange rate prevailing at the balancesheet date (in millions of dollars):

 
| ** **                                    | ** ** | **December 31** | ** ** |
|-----------------------------------------------|------------|----------------------|------------|
| ** **                                    | ** ** | **2003**             | ** ** | **2002** | ** ** |
| Monetary assets:                              |       |                 |       |   |   |
| Bolivars                                      |       | 6,260                |       | 6,495 |   |
| Euros                                         |       | 52                   |       | 195 |   |
| Other  currencies                             |       | 78                   |       | 5 |   |
|                                          |       | 6,390                |       | 6,695 |   |
|                                          |       |                 |       |   |   |
| Monetary liabilities:                         |       |                 |       |   |   |
| Bolivars                                      |       | 4,459                |       | 5,272 |   |
| Euros                                         |       | 150                  |       | 172 |   |
| Other  currencies                             |       | 320                  |       | 414 |   |
|                                          |       | 4,929                |       | 5,858 |   |
| Net monetary asset position (see note  22(b)) |       | 1,461                |       | 837 |   |

 

The year-end exchangerate, the average exchange rate for the year and the interannual increases inthe exchange rate and Consumer Price Index (CPI), published by the BCV, were asfollows:

 
| ** **                                     | ** ** | **December 31** | ** ** |
|------------------------------------------------|------------|----------------------|------------|
| ** **                                     | ** ** | **2003**             | ** ** | **2002** | ** ** | **2001** | ** ** |
| Exchange rates at year-end (Bs/$1)             |       | 1,600.00             |       | 1,403.00 |   | 770.09 |   |
| Average annual exchange rates (Bs/$1)          |       | 1,611.32             |       | 1,163.91 |   | 772.01 |   |
| Interannual increase in the exchange rate  (%) |       | 14.04                |       | 82.19 |   | 10.29 |   |
| Interannual increase in the CPI (%)            |       | 27.10                |       | 31.22 |   | 12.29 |   |

 

Net gains from transactionsin currencies other than the dollar in 2003 amounted to $266 million, which iscomprised of $284 million of gains included in other (income) expenses net, and$18 million loss, included in deferred income tax (benefit) expense.  Foreign currency losses in 2002 amounted to$509 million, which are comprised of $26 million gain included in other(income) expenses, net and $535 million of losses included in deferred incometax (benefit) expense.  For 2001, gainsand losses from currencies other than the dollar were not significant.

 

F-17

----

 

# **(4)**           Restricted Cash

 

Restricted cash includes(in millions of dollars):

 
| ** **                                                                                                                     | ** ** | **December 31** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                     | ** ** | **2003**             | ** ** | **2002** | ** ** |
| Macroeconomic  Stabilization Fund (FEM), formerly Macroeconomic Stabilization Investment  Fund (FIEM) (see note 18)            |       | 698                  |       | 2,382 |   |
| Funds for  extra-heavy crude oil project in the Orinoco Belt                                                                   |       | 486                  |       | 239 |   |
| Liquidity  account of PDVSA Finance                                                                                            |       | 166                  |       | 161 |   |
| Trust in  Banco de Desarrollo Económico y Social de Venezuela (BANDES) for social  programs and projects (see note 22(a)) |       | 302                  |       | — |   |
| Other                                                                                                                          |       | 7                    |       | 23 |   |
|                                                                                                                           |       | 1,659                |       | 2,805 |   |
| Less current  portion                                                                                                          |       | 961                  |       | 1,772 |   |
| Long-term  portion                                                                                                             |       | 698                  |       | 1,033 |   |

 

***Macroeconomic Stabilization Fund (FEM)***

*** ***

During November 2003,the Venezuelan Government established the FEM upon termination of the FIEM’soperations, which was created in June 1999, in order to achievestabilization of the Nation’s expenses, at state and municipal levels.  It was constituted to manage the fluctuationsof extraordinary income and to which contributions will be made on the basis ofadditional oil income, the net income corresponding to the Republic, as aconsequence of the privatization of public companies or concessions orstrategic associations, that have not been employed in operations linked to themanagement of public liabilities, the extraordinary contributions made by theNational Government, other than those stated above and the net yields obtainedfrom operations.  PDVSA will contribute50% of the difference in excess between the income due to oil and byproductsexports in dollars and the average of such income collected during the lastthree calendar years, after deducting the taxes related to such income.

 

The deposits made in theFEM may be used in the event of a decrease in the fiscal income from petroleumor in the income from oil and byproducts exports in relation to the average ofsuch income collected during the last three calendar years or in the event of anational state of emergency.  In thesecases, PDVSA will be able to withdraw an amount that will not exceed 75% of thedifference between the estimated income for this period and the average of suchincome collected during the last three calendar years, with prior approval ofthe Board of Directors of the FEM and the opinion of the Permanent FinanceCommission of the National Assembly. Also, a maximum resources accrual level is established for PDVSAconsisting of 30% of the average oil exports during the last three years.  In the event of an excess, it will betransferred to the Fondo de Ahorro Intergeneracional.  However, if PDVSA is required to executespecial investment plans for the management and expansion of its operations, itmay use part of such excess, with prior approval of the Stockholder’s Assembly.

 

F-18

----

 

Through the BCV, theNational Government transferred the balance available from the FIEM to the FEMof $698 million upon termination of the FIEM and creation of the FEM.

 

In October 2001 and2002, and January and April 2003, the Venezuelan Governmentintroduced reforms to the FIEM Law and, among other changes, suspendedcontributions for the last quarter of 2001 and the years 2002 and 2003.

 

In June 2002, theboard of directors of the FIEM and the National Assembly authorized PDVSA towithdraw up to $2,445 million.  As of December 31,2002, $2,173 million had been withdrawn.

 

During 2003, the NationalGovernment and the National Assembly authorized PDVSA to withdraw $1,430million from the funds deposited in the FIEM. These funds have been totally utilized by PDVSA as of December 31,2003.

 

***Funds for Extra-heavy Crude Oil Projects in the OrinocoBelt***

*** ***

The funds for theextra-heavy crude oil projects in the Orinoco Belt correspond to restrictedcash that cannot be utilized in the operations of the subsidiary of PDVSAPetróleo.  The funds, deposited mainly incurrent accounts in financial institutions abroad, are restricted in order tocomply with commitments related to the financing received for the developmentof these projects.

 

***Liquidity Account of PDVSA Finance***

*** ***

The restricted cash ofthe subsidiary PDVSA Finance corresponds to the “Liquidity Account”, inaccordance with the agreement signed with financial institutions for the issueof bonds, and which is comprised of cash and time deposits that are permittedinvestments, including interest earned on such amounts (see note 22 (c)).

 

***Trust with BANDES***

*** ***

Aspart of the support to the different social programs established by theNational Government, on August 21, 2003, the subsidiary CVP and BANDESsubscribed a trust agreement, the objective of which is the administration andinvestment of the fiduciary fund in operations, adjusted to liquidity, safetyand profitability principles.  Suchfiduciary fund was created to fulfill the commitments of CVP to make loans toinstitutions for the execution and development of housing and infrastructureprograms and projects.  The trust fund,approved at the Board of Directors’ meeting on August 25, 2003 was createdin dollars, with an amount of $300 million, for a duration of one year,extendable automatically for similar periods. As of December 31, 2003 funds held by the trust amounted to $300million and financial income was generated thereon of $2 million (see note22(a)).

 

F-19

----

 

# **(5)**           Notes and Accounts Receivable

#  

Notes and accountsreceivable are summarized as follows (in millions of dollars):

 
| ** **                                             | ** ** | **December 31** | ** ** |
|--------------------------------------------------------|------------|----------------------|------------|
| ** **                                             | ** ** | **2003**             | ** ** | **2002** | ** ** |
| Trade                                                  |       | 4,223                |       | 3,066 |   |
| Related parties (see note 18)                          |       | 436                  |       | 328 |   |
| Other                                                  |       | 421                  |       | 179 |   |
|                                                   |       | 5,080                |       | 3,573 |   |
| Less allowance for doubtful trade accounts  receivable |       | 125                  |       | 58 |   |
|                                                   |       | 4,955                |       | 3,515 |   |

 

# **(6)**           Inventories

#  

Inventories aresummarized as follows (in millions of dollars):

 
| ** **                                                                      | ** ** | **December 31** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                      | ** ** | **2003**             | ** ** | **2002** | ** ** |
| Crude oil and products                                                          |       | 1,952                |       | 1,883 |   |
| Fertilizers, industrial products, coal,  Orimulsion® and other             |       | 50                   |       | 57 |   |
| Materials and supplies                                                          |       | 461                  |       | 404 |   |
|                                                                            |       | 2,463                |       | 2,344 |   |
| Less materials and supplies classified in  non-current assets, net (see note 9) |       | 81                   |       | 81 |   |
|                                                                            |       | 2,382                |       | 2,263 |   |

 

At December 31, 2003and 2002, crude oil and products inventories stated using the LIFO methodaccounted for 79% and 80% of total inventories, respectively.

 

At December 31, 2003and 2002, the replacement cost of inventories of crude oil and productsexceeded LIFO cost by approximately $1,434 million and $1,759 million,respectively, and accordingly, no write-down was necessary.

 

F-20

----

 

# **(7)**           Investments in Non-Consolidated Investees

#  

Investments innon-consolidated investees accounted by the equity method are summarized asfollows (in millions of dollars):

 
| ** **                                                                                         | ** ** | **December 31** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                         | ** ** | **Percentage of**    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                         | ** ** | **capital stock**    | ** ** | **Share of equity** | ** ** |
| ** **                                                                                         | ** ** | **2003**             | ** ** | **2002** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Foreign  investees:                                                                                |       |                 |       |   |   |   |   |   |   |
| United  States of America:                                                                         |       |                 |       |   |   |   |   |   |   |
| CITGO  investees:                                                                                  |       |                 |       |   |   |   |   |   |   |
| LYONDELL-CITCO  Refining Company, L.P. (LYONDELL-CITCO)                                            |       | 41                   |       | 41 |   | 455 |   | 518 |   |
| The Needle  Coker Co. (Needle Coker)                                                               |       | 25                   |       | 25 |   | 18 |   | 19 |   |
| Other                                                                                              |       | —               |       | — |   | 174 |   | 179 |   |
| Chalmette  Refining, L.L.C. (Chalmette Refining)                                                   |       | 50                   |       | 50 |   | 254 |   | 253 |   |
| Merey  Sweeny, L.P. (Merey Sweeny)                                                                 |       | 50                   |       | 50 |   | 19 |   | 14 |   |
|                                                                                               |       |                 |       |   |   | 920 |   | 983 |   |
| Virgin  Islands:                                                                                   |       |                 |       |   |   |   |   |   |   |
| Hovensa  L.L.C. (Hovensa)                                                                          |       | 50                   |       | 50 |   | 888 |   | 762 |   |
| Germany:                                                                                           |       |                 |       |   |   |   |   |   |   |
| Ruhr Oel  GmbH (Ruhr)                                                                              |       | 50                   |       | 50 |   | 172 |   | 146 |   |
| Sweden:                                                                                            |       |                 |       |   |   |   |   |   |   |
| AB Nynäs  Petroleum (Nynäs)                                                              |       | 50                   |       | 50 |   | 103 |   | 83 |   |
| Colombia:                                                                                          |       |                 |       |   |   |   |   |   |   |
| Monómeros  Colombo Venezolanos (Monómeros)                                               |       | 47                   |       | 47 |   | 29 |   | 26 |   |
| Other:                                                                                             |       |                 |       |   |   |   |   |   |   |
| Bitor  investees                                                                                   |       | 50                   |       | 50 |   | 4 |   | (3 | ) |
|                                                                                               |       |                 |       |   |   | 2,116 |   | 1,997 |   |
| Investees in  Venezuela:                                                                           |       |                 |       |   |   |   |   |   |   |
| Petrolera  Zuata, C.A. (Petrozuata)                                                                |       | 50                   |       | 50 |   | 419 |   | 352 |   |
| Fertilizantes  Nitrogenados de Venezueala, C.E.C. (Fertinitro)                                     |       | 35                   |       | 35 |   | 144 |   | 121 |   |
| Metanol de  Oriente, S.A. (METOR)                                                                  |       | 38                   |       | 38 |   | 110 |   | 109 |   |
| Carbones del  Guasare, S.A., subsidiary of Carbones del Zulia, S.A. (CARBOZULIA) (see note  22(f)) |       | 49                   |       | 49 |   | 76 |   | 53 |   |
| Supermetanol,  C.A.                                                                                |       | 35                   |       | 35 |   | 64 |   | 58 |   |
| Super  Octanos C.A.                                                                                |       | 49                   |       | 49 |   | 101 |   | 97 |   |
| Ceras de  Venezuela, C.A. (Ceraven)                                                                |       | 49                   |       | 49 |   | 10 |   | 10 |   |
| Propilenos  de Falcón, C.A. (Profalca)                                                        |       | 35                   |       | 35 |   | 14 |   | 13 |   |
| Informática  Telecomunicaciones, S.A. (Intesa) (see notes 18 and 20)                          |       | 40                   |       | 40 |   | — |   | — |   |
| Tripoliven,  C.A.                                                                                  |       | 33                   |       | 33 |   | 6 |   | 5 |   |
| Aguas  Industriales de Jose, C.A.                                                                  |       | 25                   |       | 25 |   | 11 |   | 10 |   |
| Other                                                                                              |       | —               |       | — |   | 1 |   | 29 |   |
|                                                                                               |       |                 |       |   |   | 956 |   | 857 |   |
| Total  non-consolidated investees                                                                  |       |                 |       |   |   | 3,072 |   | 2,854 |   |

 

F-21

----

 

The carrying value ofthese investments exceeded PDVSA’s equity in the underlying net assets byapproximately $125 million and $197 million at December 31, 2003 and 2002,respectively.

 

Information on PDVSA’sinvestments in non-consolidated investees follows (in millions of dollars):

 
| ** **                                                            | ** ** | **December 31** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                            | ** ** | **2003**             | ** ** | **2002** | ** ** |
| PDVSA’s investments in non-consolidated  investees (see note 18) |       | 3,072                |       | 2,854 |   |
| PDVSA’s equity in net income of  non-consolidated investees      |       | 379                  |       | 268 |   |
| Dividends and distributions received from  non-consolidated investees |       | 240                  |       | 228 |   |
| Investments, including exchange effects                               |       | 79                   |       | 5 |   |

 

Summarized gross combinedfinancial information of the above non-consolidated investees abroad and inVenezuela follows (in millions of dollars):

 
| ** **                       | ** ** | **December 31** | ** ** |
|----------------------------------|------------|----------------------|------------|
| ** **                       | ** ** | **2003**             | ** ** | **2002** | ** ** |
| ** **                       | ** ** | **Venezuela**        | ** ** | **Abroad** | ** ** | **Total** | ** ** | **Venezuela** | ** ** | **Abroad** | ** ** | **Total** | ** ** |
| Financial position:              |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Current assets                   |       | 844                  |       | 2,641 |   | 3,485 |   | 851 |   | 2,092 |   | 2,943 |   |
| Non-current  assets              |       | 4,846                |       | 7,266 |   | 12,112 |   | 5,027 |   | 7,247 |   | 12,274 |   |
| Current  liabilities             |       | (547                 | )          | (1,998 | ) | (2,545 | ) | (519 | ) | (1,886 | ) | (2,405 | ) |
| Long-term  liabilities           |       | (2,920               | )          | (4,504 | ) | (7,424 | ) | (3,516 | ) | (4,400 | ) | (7,916 | ) |
| Net equity                       |       | 2,223                |       | 3,405 |   | 5,628 |   | 1,843 |   | 3,053 |   | 4,896 |   |
|                             |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Operating  results for the year: |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Revenues                         |       | 1,559                |       | 16,142 |   | 17,701 |   | 1,614 |   | 8,913 |   | 10,527 |   |
| Operating  income                |       | 598                  |       | 1,360 |   | 1,958 |   | 548 |   | 2,018 |   | 2,566 |   |
| Net income                       |       | 294                  |       | 798 |   | 1,092 |   | 508 |   | 246 |   | 754 |   |

 

F-22

----

 

# **(8)**           Property, Plant and Equipment, Net

 

Property, plant andequipment, net are summarized as follows (in millions of dollars):

 
| ** **                                  | ** ** | **December 31** | ** ** |
|---------------------------------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **2003**             | ** ** | **2002** | ** ** |
| Oil and gas production                      |       | 42,880               |       | 40,774 |   |
| Refining, marketing and transportation      |       | 25,075               |       | 24,363 |   |
| Petrochemical                               |       | 3,353                |       | 3,343 |   |
| Other                                       |       | 1,386                |       | 1,343 |   |
|                                        |       | 72,694               |       | 69,823 |   |
| Less accumulated depreciation and depletion |       | 42,142               |       | 39,329 |   |
|                                        |       | 30,552               |       | 30,494 |   |
| Land                                        |       | 350                  |       | 355 |   |
| Construction in progress                    |       | 3,818                |       | 5,022 |   |
|                                        |       | 34,720               |       | 35,871 |   |

 

Depreciation anddepletion expenses, impairment charges, asset retirement obligations andcapitalized interest are summarized as follows (in millions of dollars):

 
| ** **                                 | ** ** | **December 31** | ** ** |
|--------------------------------------------|------------|----------------------|------------|
| ** **                                 | ** ** | **2003**             | ** ** | **2002** | ** ** | **2001** | ** ** |
| Depreciation and depletion                 |       | 2,824                |       | 3,038 |   | 2,624 |   |
| Impairment charges                         |       | 296                  |       | 722 |   | 257 |   |
| Asset retirement obligations (see note 17) |       | 537                  |       | — |   | — |   |
| Capitalized interest                       |       | 40                   |       | 51 |   | 51 |   |

 

Asset impairment chargesrelate mainly to oil and gas wells which are planned to be abandoned andretired.  For segment reporting purposesthese assets are reflected in the Company’s Venezuelan upstream operations.

 

As of December 31,2003, PDVSA maintains several projects under execution, included inconstruction in progress and that will be capitalized as property, plant andequipment at the date of incorporation into operations.  The most significant are:

 

### **(a)**           Hamaca Project:  includes theparticipation of third party investors to develop, over a 35-year period, theproduction, transportation and improvement activities of extra-heavy crude fromthe Orinoco Belt.  As of December 31,2003, the balance of the investment is approximately $571 million, correspondingto the participation of the Company in this project (see note 10(a)).

### ** **

### **(b)**           The Valorización de Corrientes (VALCOR) Project, executed by PDVSA in thefacilities of the Refinery in Puerto la Cruz, Anzoátegui State, is intended toimprove the refined products and increase the refining margin, by maximizingthe benefit of the existing facilities of industrial services and externalareas; this will be accomplished through conditioning the refinery’s facilities

 

F-23

----

 

### **to produce unleaded gasoline in the country’seastern region, as well as the production of diesel with low sulphurcontent.  Also, it provides forconditioning the refinery to capture new markets abroad as well as theimprovement of air quality.  As of December 31,2003, approximately $487 million has been invested, which is pendingcapitalization.**

### ** **

### **(c)**           The Gas Project of the Plataforma Deltana includes the participation ofthird parties to complete the exploration and future development of the area.PDVSA completed the project’s initial phase, including 3D seismic analyses andthe drilling of four exploratory wells that culminated in May, 2003.  At December 31, 2003, approximately $135million has been invested (see note 10(d)).

### ** **

### **(d)**           The purpose of the Anaco Gas Project is to increase the production of gasto satisfy internal demand.  Currently,the drilling process of exploratory wells located north of Anaco, AnzoáteguiState is underway.  This project includesthe design and construction of facilities to increase the daily gas productionto 2,400 million cubic feet per day (MMCFD) and 35 thousand barrels per day(MBPD) of light crude.  The productioncapacity of this project is expected to reach 2,400 MMCFD by 2007.  The total estimated investment in thisproject is $732 million and as of December 31, 2003 approximately $39million has been invested.

### ** **

### **(e)**           Construction and operation of a natural bitumen production andemulsification unit for the production of Orimulsión® (MPE-3).  As of December 31, 2003, approximately$31 million has been invested in this project (see note 10(e)).

### ** **

### **(f)**            The main purpose of the Integral Ceuta-Tomoporo project is to maximizethe recoverable crude oil reserves value of Ceuta-Tomoporo, throughexploitation of the B-superior Eocene formation, which has estimated reservesof 1,000 million barrels of 23.6 °API crude oil.  Total investment costs will be approximately$1,200 million, with an average crude oil production of 90 to 277 MBPD.  As of December 31, 2003, approximately $28million has been invested and it is estimated that the development projectrelating to these reserves will end in 2021.

### ** **

### **(g)**           The Project Mariscal Sucre for Liquefied Natural Gas (LNG) is intended todevelop and exploit the reserves of non-associated offshore gas, as well as theconstruction of a liquefied natural gas plant, for projected gas production of1,070 MMCFD and the processing of 4.7 million metric tons per year (MMT/Y) ofLNG; 300 MMCFD of methane gas that will be used to satisfy the domestic market’sdemand, and the remainder of the production is expected to be exported. The LNGexports will be directed towards the eastern coast of the United States ofAmerica.  The investment required for thedevelopment of offshore fields, the LNG plant and the associated infrastructureis estimated to total $2,700 million. As of December 31, 2003,approximately $7 million has been invested.

### ** **

### **(h)**           The purpose of the project Interconexión Oriente-Occidente (East-WestInterconnection-ICO-Project) is to connect the natural gas transmission systemsof the central and eastern region of Venezuela (Anaco, AnzóateguiState-Barquisimeto, Lara State) with the transmission system located in thecountry’s western region (Ulé-Amuay, Falcón State) in order to cover the gas demandof the country’s western region, expand the gas service to other regionsnationwide and to promote the industrial and commercial development in areasnear the construction of this transmission system.  The estimated total investment in thisproject is $413 million and it is

 

F-24

----

 

### **expected to be completed by 2007.  As of December 31, 2003, approximately$6 million has been invested.**

 

At December 31, 2003and 2002, there are certain gas compression plants and related equipmentacquired under capital lease agreements recorded as property, plant andequipment for approximately $105 million and $304 million, net of accumulateddepreciation of approximately $166 million and $582 million, respectively.  Depreciation expense recorded in 2003, 2002and 2001 for assets acquired under capital lease agreements, amounted to $14million, $45 million and $45 million, respectively.  At December 31, 2003, future leasepayments for operating and capital leases are summarized as follows (inmillions of dollars):

 
| ** **                                                                    | ** ** | **Leases**    | ** ** |
|-------------------------------------------------------------------------------|------------|---------------|------------|
| **Years**                                                                     | ** ** | **Operating** | ** ** | **Capital** | ** ** |
| 2004                                                                          |       | 311           |       | 25 |   |
| 2005                                                                          |       | 267           |       | 6 |   |
| 2006                                                                          |       | 248           |       | 6 |   |
| 2007                                                                          |       | 227           |       | 6 |   |
| 2008                                                                          |       | 221           |       | 6 |   |
| Remaining years                                                               |       | 234           |       | 11 |   |
| Estimated  future lease payments                                              |       | 1,508         |       | 60 |   |
| Less interest                                                                 |       |          |       | (14 | ) |
| Present  value, included in accrued and other liabilities  (see note 17) |       |          |       | 46 |   |

 

Rent expense incurredfrom operating leases during 2003, 2002 and 2001 was $281 million, $182 millionand $108 million, respectively.

 

On August 14, 2001,a fire occurred in the crude oil distilling unit at the Lemont Refinery,Illinois State, United States of America. In May 2002, a new crude distilling unit was available foroperations.  On September 21, 2001,a fire occurred in the hydrocarbons unit at the Lake Charles refinery,Louisiana State, United States of America. The operations of the hydrocracker unit were resumed on November 22,2001.  The Company recognizes as income,insurance company indemnifications for material damages to its properties,equivalent to the value of such indemnifications in excess of the carryingvalue of the assets involved in the accident, and recognizes insurancerecoveries due to business operations disruption when these amounts areconsidered realized.  During 2003 and2002, the Company recorded in other (income) expenses, net, $146 million and$407 million, respectively, for recoveries mainly relating to these fires.

 

F-25

----

 

# **(9)**           Long-Term Accounts Receivable and Other Assets

#  

Long-term accountsreceivable and other assets are summarized as follows (in millions of dollars):

 
| ** **                                                          | ** ** | **December 31** | ** ** |
|---------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                          | ** ** | **2003**             | ** ** | **2002** | ** ** |
| Long-term accounts receivable (see note 18)                         |       | 680                  |       | 669 |   |
| Materials and supplies (see note 6)                                 |       | 81                   |       | 81 |   |
| Plant turnaround costs, net of amortization  and short-term portion |       | 372                  |       | 402 |   |
| Goodwill (see note 7)                                               |       | 52                   |       | 52 |   |
| Intangible pension plan asset (see note 16)                         |       | 40                   |       | 680 |   |
| Others                                                              |       | 171                  |       | 251 |   |
|                                                                |       | 1,396                |       | 2,135 |   |

 

# **(10)**         Joint Development Activities

#  

PDVSA has undertaken thefollowingjoint development activities in Venezuela:

 

## ***(a)****          **Development ofthe Orinoco Belt Extra-Heavy Crude Oil Reserves*

## ** **

The Venezuelan NationalAssembly (formerly National Congress) approved between 1993 and 1999 severalassociation agreements for the exploitation and upgrading of extra-heavy crudeoil and marketing of the upgraded crude oil, as follows:

 
| ** **           | ** ** | **PDVSA’s**  | ** ** | ** **                          | ** ** | **Estimated**    | ** ** | **Total Project**        | ** ** |
|----------------------|------------|-------------------|------------|-------------------------------------|------------|------------------|------------|--------------------------|------------|
| ** **           | ** ** | **percentage**    | ** ** | ** **                          | ** ** | **gross**        | ** ** | **Incurred as**          | ** ** | **Incurred as of** | ** ** |
| ** **           | ** ** | **of**            | ** ** | ** **                          | ** ** | **project cost** | ** ** | **of December 31,** | ** ** | **December 31,** | ** ** |
| **Association**      | ** ** | **participation** | ** ** | **Partners**                        | ** ** | **(unaudited)**  | ** ** | **2003 (unaudited)**     | ** ** | **2002 (unaudited)** | ** ** |
| Petrozuata           |       | 49.90             |       | ConocoPhillips                      |       | 3,085            |       | 3,478                    |       | 3,478 |   |
| Cerro Negro          |       | 41.67             |       | ExxonMobil-BP                       |       | 2,018            |       | 2,823                    |       | 2,823 |   |
| Sincor               |       | 38.00             |       | Total Fina – Statoil |       | 4,260            |       | 4,185                    |       | 4,185 |   |
| Hamaca (see  note 8) |       | 30.00             |       | ChevronTexaco - ConocoPhillips      |       | 3,534            |       | 2,544                    |       | 2,227 |   |

 

The variation between theestimated gross project cost and the cost incurred as of December 31,2003, in Petrozuata, corresponds mainly to the following factors:  a) a change in the scope of the project,which was expanded for the construction of maritime facilities and a terminalfor handling solids; b) an increase in the labor cost arising as a result ofcontractual agreements; and c) an increase in the investment to accelerate thedrilling program.  The variation betweenthe estimated gross project cost and the cost incurred as of December 31,2003, in Cerro Negro, corresponds mainly to the operating costs, as well asother additional administrative expenses incurred during the project’s earlyproduction stage.

 

PDVSA Petróleo,participates in these joint ventures through non-consolidated investees:  Petrozuata, and its wholly-ownedsubsidiaries, PDVSA Cerro Negro, PDVSA Sincor and Corpoguanipa (Hamaca Project)(see notes 1(d), 4 and 7).

 

F-26

----

 

The objective of thesejoint ventures is to perform vertically integrated activities for theexploration, development, production, mixing and transport of extra-heavy crudeoil, in the areas of Zuata, Cerro Negro, and Hamaca from the Orinoco Belt, forprocessing in the improvement plants to produce upgraded crude oil of highgravity for commercialization on the international markets.  During the construction phase of the plants,the joint ventures produce development product.

 

During 1998, 1999, 2000and 2001, development production commenced in Petrozuata, Cerro Negro, Sincorand Hamaca, respectively.  The commercialproduction of upgraded crude oil in Petrozuata, Cerro Negro, Sincor and Hamacabegan in February 2001, August 2001, March 2002 and October 2004,respectively.

 

The disbursementsrequired for these joint ventures are covered by capital contributions of PDVSAand the partners, from financing and income from development production (seenote 14).

 

During 2001, thePetrozuata and Cerro Negro projects were completed.  During 2002 and 2004, the Sincor and Hamacaprojects were completed, respectively.

 

A summary of the combinedfinancial statements of the Cerro Negro, Sincor and Hamaca projects follows (inmillions of dollars):

 
| ** **                       | ** ** | **December 31** | ** ** |
|----------------------------------|------------|----------------------|------------|
| ** **                       | ** ** | **2003**             | ** ** | **2002** | ** ** |
| Financial  position:             |       |                 |       |   |   |
| Current assets                   |       | 862                  |       | 622 |   |
| Non-current assets               |       | 9,011                |       | 8,538 |   |
| Current liabilities              |       | (596                 | )          | (491 | ) |
| Long-term liabilities            |       | (3,544               | )          | (4,447 | ) |
|                             |       |                 |       |   |   |
| Net equity                       |       | 5,733                |       | 4,222 |   |
|                             |       |                 |       |   |   |
| Operating  results for the year: |       |                 |       |   |   |
| Revenues                         |       | 1,840                |       | 1,006 |   |
| Operating income                 |       | 1,186                |       | 286 |   |
| Net income                       |       | 998                  |       | 195 |   |

 

## ***(b)***                                 AssociationAgreements in New Areas

##  

CVP is the subsidiarythat was designated in January 1996 by the MEP, to contract risk andprofit sharing agreements with private investor companies (associationagreements) to coordinate, control and supervise the activities relating to theexploration and exploitation of hydrocarbon fields in new areas.

 

F-27

----

 

The associationagreements provide for the creation of a Control Committee, as the ultimatebody for approval and control, which makes the fundamental decisions in thenational interest for the Venezuelan Government, in connection with theexecution of these association agreements.

 

These areas were assignedby means of a competitive bid process to participate in association agreementswith CVP.  These agreements establishthat investors will carry out exploration activities at risk, and in thosecases where a field is declared commercially viable and a development plan isapproved by the Control Committee, CVP will notify the investors of itsparticipation in such development.  Theparticipation of CVP shall not be less than 1% or greater than 35%. Consideringthe exploration, development and commercial production phases of the areas andtheir potential extension, the agreements, in general, will have a maximumduration of thirty-nine years.

 

During the reorganizationprocess, initiated by PDVSA’s Board of Directors in 2003, it was decided totransfer to the subsidiary CVP the coordination of activities relating to theoperating agreements of the first, second and third rounds and the strategicassociations for the exploitation and production of extra-heavy crude of theOrinoco Belt, which were formerly coordinated by the subsidiary PDVSA Petróleo.

 

In accordance with theterms of the association agreements, CVP and the investors incorporated jointlyowned companies for each area, the capital stock of which is represented by 35%Class ”A” shares owned by CVP and 65% Class ”B” shares owned by theinvestors.  The purpose of the jointlyowned companies is to direct, coordinate and supervise the activities that willbe executed by the operators of the areas.

 

As of December 31,2003 and 2002, CVP has investments in shares representing its 35% participationin the companies as of that date, as listed below by area:

 
| **Areas**               | ** ** | **CVP Partners**                                                | ** ** | **Jointly owned Companies**                             |
|-------------------------|------------|-----------------------------------------------------------------|------------|---------------------------------------------------------|
|                    |       |                                                            |       |                                                    |
| Eastern PariaGulf       |       | Ineparia - ConocoPhillips -  ENI B.V. – OPIC Karimun Corp. |       | Administradora del Golfo de  Paria Este, S.A.           |
| Western Paria  Gulf (1) |       | ConocoPhillips - ENI B.V. – OPIC Karimun Corp.             |       | Compañía Agua Plana, S.A.                     |
| La Ceiba                |       | Exxon Mobil - PetroCanada                                       |       | Adminstradora Petrolera La  Ceiba, C.A.                 |
| San Carlos(2)           |       | Petrobrás Energía de  Venezuela, S.A.                 |       | Compañía Anónima Mixta San  Carlos, S.A. |

 

F-28

----

 

----

(1)                                  Profit sharing agreement under phase I(development)

 

(2)                                  Changedto a gas license in 2002

 

The companies listed abovehave not begun hydrocarbon commercial production operations; the activitiesperformed during 2003 and 2002 consisted mainly of completing the minimumexploratory program and continuation of the exploration efforts, as well asapproving and continuing with the assessment and outline plans.  These activities included, among others, thereprocessing and 3D and 2D seismic interpretation, as well as the drilling ofexploratory/outlining wells.  Inaddition, the Control Committee approved the assessment plan of the discoveryin La Ceiba (blocks 1, 3, 4 and 7).

 

During 2002, the outlineand development plan (blocks 5, 6, 9 and 10) of the gas discovery in LaDoncella, located in San Carlos, Cojedes State, continued and the MEP granted agas license for this area. In addition, during 2003, CVP granted thecoordination of the area of San Carlos to the MEP and the Ente Nacional de Gas(ENAGAS) and began the liquidation of Compañía Anónima Mixta San Carlos, S. A.

 

During 2002, noactivities in the Eastern Paria Gulf were carried out. In September 2003,upon approval of CVP, Ineparia sold and transferred 75% of its shares in theassociation agreement for this area as well as its participation inAdministradora del Golfo de Paria Este, S. A., to the investors ConocoPhillips(37.5%), ENI B. V. (30.0%), OPIC Karimun Corp (7.5%).

 

In 2002, the assessmentplan approved for blocks 7 and 9 of the Western Paria Gulf continued and anextended test was conducted.  In April 2003,the Control Committee declared commercially viable a discovery in the WesternParia Gulf Project, named Corocoro. In May 2003, PDVSA’s Board ofDirectors authorized CVP to participate in the development plan of thisdiscovery.  The participants in theconsortium for this development plan for Corocoro are:  CVP (35%), ConocoPhillips (32.5%), ENIB.V.(26.0%) and OPIC (6.5%).  The planestablishes a total investment of $557 million for the period 2003-2005, and anaverage production of 60 (MBPD) of crude 24° API, similar to the crude of TíaJuana, until reaching 120 (MBPD) in 2008. Phase II that will be implemented in 2008 provides for an approximateinvestment of $487 million.

 

At December 31, 2003and 2002, the execution status (unaudited) of the modified minimum work programfollows:

 
| ** **       | ** ** | **Commitment** | ** ** | **Execution** | ** ** |
|------------------|------------|----------------|------------|---------------|------------|
| ** **       | ** ** | **2003**       | ** ** | **2002**      | ** ** | **2003** | ** ** | **2002** | ** ** |
| Seismic 2D (Km)  |       | 4,670          |       | 4,670         |       | 4,265 |   | 4,265 |   |
| Seismic 3D (Km2) |       | 2,439          |       | 2,439         |       | 3,368 |   | 3,368 |   |
| Drilling (wells) |       | 21             |       | 21            |       | 15 |   | 15 |   |

 

F-29

----

 

In order to guaranteecompliance with the minimum work program established in the agreements, CVPreceived in July 1996 letters of credit or guarantees from the investors’parent companies. Pursuant to the agreements, these guarantees may be reducedevery six months, upon request of the investors and in accordance with thedevelopment of such program. As of December 31, 2003 and 2002, the amountof the guarantees was approximately $29 million for each year and the minimumwork programs of Phase I of Exploration were completed.

 

## ***(c)***                                  OperatingAgreements

##  

During 1992 and 1993,PDVSA signed, through its subsidiary PDVSA Petróleo, the first and secondrounds of operating agreements with specialized international companies.  The purpose of these agreements is thereactivation and operation of 15 oil fields which in general cover a term of 20years.  During 2003 and 2002, thesereactivated fields have been productive.

 

In June 1997, PDVSAPetróleo held a third bidding round and awarded an additional 18 fields to beoperated under operating agreements with specialized national and internationalcompanies.  These fields are located inthe Venezuelan States of Anzoátegui, Falcón, Monagas and Zulia.  Field operations are subject to the approvalof development programs which include the execution of exploration activitiesat the operator’s risk, and in areas where reserves are discovered, theagreement provides for the signing of new agreements for furtherdevelopment.  During 2003 and 2002, thesereactivated fields have been productive. Since the beginning of the agreementsfor the third round exploration activities in these fields have not beensuccessful, although such activities continue.

 

As established in theoperating agreements, the investors will make capital investments in the assetsnecessary to increase production in the fields received, possibly recoveringtheir investments by collecting operating fees and stipends, which aredetermined based on the amount of crude oil delivered to PDVSA Petróleo duringthe term of the agreement, at the end of which PDVSA Petróleo has no liabilityto pay for the remaining value of the assets existing in the fields.

 

The operating fees,capital fees and other, and stipends included as operating expenses in theconsolidated statements of income are presented below (in millions of dollars):

 
| ** **              | ** ** | **Years ended**      | ** ** |
|-------------------------|------------|----------------------|------------|
| ** **              | ** ** | **December 31** | ** ** |
| ** **              | ** ** | **2003**             | ** ** | **2002** | ** ** | **2001** | ** ** |
| Operating fees          |       | 959                  |       | 852 |   | 766 |   |
| Capital fees and  other |       | 638                  |       | 629 |   | 550 |   |
| Stipends                |       | 748                  |       | 620 |   | 794 |   |
|                    |       | 2,345                |       | 2,101 |   | 2,110 |   |

 

As of December 31,2003 and 2002, the accounts payable related to operating agreements amounted to$614 and $466, respectively, as a result of these operations (see note 11).

 

F-30

----

 

As of December 31,2003, the investments of these operators, which could be paid back to themby PDVSA Petróleo on the basis of the crude oil to be received togetherwith other facts, amount to approximately $7,923 million, which relate toproductive fields.

 

## ***(d)***                                 PlataformaDeltana

##  

For purposes of grantingrights related to the exploration and development of the Plataforma Deltana(Delta Platform), the area was divided into five blocks, mainly considerednon-associated gas projects.  During2002, the first phase of selecting partners was completed.  The first exploration phase was completed byPDVSA in July 2003 (see note 8).

 

The licenses for theexploration and development of blocks two and four were granted by the MEP in February 2003to ChevronTexaco Corporation, ConocoPhillips and Statoil ASA.  These companies are engaged in carrying out aminimum exploratory program with an estimated investment of $150 million andthe subsequent investment for its development, if its profitability isconfirmed.  The participation of PDVSA inthe partnership, which could range from between 1% and 35%, will be establishedwhen the profitability of each block is determined.

 

During the second half of2003, blocks three and five, as redimensioned, were offered. Block three waswon by ChevronTexaco Corporation, which was assigned officially by the MEP in February 2004.Block five did not receive offers.

 

The estimated totalinvestment for this project is approximately $3,810 million, including PDVSA’sparticipation. Blocks one and five are maintained in reserve for futurebusinesses.

 

## ***(e)***                                  CooperationAgreement for Orimulsión®

##  

In April 2001, acooperation agreement for Orimulsión® was signed between BITOR and ChinaNational Oil and Gas Exploration and Development Corporation (CNODC), asubsidiary of China National Petroleum Corporation (CNPC), the objective ofwhich is to carry out a series of pre-investments necessary to determinedefinitively the feasibility of the project. On December 13, 2001, the National Assembly of the BolivarianRepublic of Venezuela authorized BITOR to establish with CNODC, a jointlycontrolled entity named Orifuels Sinoven, S. A. for production of bitumen,design, construction and operation of an emulsification module of bitumen toproduce Orimulsión® (MPE-3); as well as the transportation, exploitation andcommercialization of Orimulsión®. BITOR will have a 30% participation, CNODC40% and PetroChina Fuel Oil Co. Limited 30%. This module shall have an effective production capability of 125 MBPD ofOrimulsión® (6.5 MMT), that will be exported to China’s electricity generationmarket. The production field and facilities will be located in the area ofCerro Negro and Morichal, southern Monagas State, and the emulsification plantin the Industrial Complex in Jose, Anzoátegui State.  An initial investment of $330 million isestimated.  The Morichal facilities wereapproximately 30% complete and the Jose plant was approximately 80% complete byJune 2005.

 

# **(11)**                          AccountsPayable to Suppliers

#  

Accounts payable tosuppliers are summarized as follows (in millions of dollars):

 

F-31

----

 
| ** **                             | ** ** | **December 31** | ** ** |
|----------------------------------------|------------|----------------------|------------|
| ** **                             | ** ** | **2003**             | ** ** | **2002** | ** ** |
| Trade                                  |       | 2,144                |       | 2,071 |   |
| Contractors                            |       | 486                  |       | 266 |   |
| Related entities                       |       | 121                  |       | 47 |   |
| Operating  agreements (see note 10(c)) |       | 614                  |       | 466 |   |
|                                   |       | 3,365                |       | 2,850 |   |

 

# **(12)**                          Taxes

#  

A summary of taxes, whichaffect the consolidated operations of PDVSA, follows (in millions of dollars):

 
| ** **                  | ** ** | **Years ended**      | ** ** |
|-----------------------------|------------|----------------------|------------|
| ** **                  | ** ** | **December 31** | ** ** |
| ** **                  | ** ** | **2003**             | ** ** | **2002** | ** ** | **2001** | ** ** |
| Income taxes                |       | 1,602                |       | 149 |   | 3,766 |   |
| Production and  other taxes |       | 6,428                |       | 5,748 |   | 3,760 |   |
|                        |       | 8,030                |       | 5,897 |   | 7,526 |   |

 

## ***(a)***                                 Incomebefore Income Taxes

##  

Income before incometaxes and minority interests for each year consisted of the following (inmillions of dollars):

 
| ** **   | ** ** | **Years ended**      | ** ** |
|--------------|------------|----------------------|------------|
| ** **   | ** ** | **December 31** | ** ** |
| ** **   | ** ** | **2003**             | ** ** | **2002** | ** ** | **2001** | ** ** |
| In Venezuela |       | 3,605                |       | 2,283 |   | 6,730 |   |
| Foreign      |       | 957                  |       | 461 |   | 1,034 |   |
|         |       | 4,562                |       | 2,744 |   | 7,764 |   |

 

The income tax expense issummarized as follows (in millions of dollars):

 
| ** **                              | ** ** | **Years ended**      | ** ** |
|-----------------------------------------|------------|----------------------|------------|
| ** **                              | ** ** | **December 31** | ** ** |
| ** **                              | ** ** | **2003**             | ** ** | **2002** | ** ** | **2001** | ** ** |
| Current income  tax expense:            |       |                 |       |   |   |   |   |
| In Venezuela                            |       | 1,556                |       | 663 |   | 3,033 |   |
| Foreign                                 |       | 99                   |       | 38 |   | 130 |   |
|                                    |       | 1,655                |       | 701 |   | 3,163 |   |
| Deferred income  tax (benefit) expense: |       |                 |       |   |   |   |   |
| In Venezuela                            |       | (194                 | )          | (613 | ) | 454 |   |
| Foreign                                 |       | 141                  |       | 61 |   | 149 |   |
|                                    |       | (53                  | )          | (552 | ) | 603 |   |
| Income tax expense                      |       | 1,602                |       | 149 |   | 3,766 |   |

 

F-32

----

 

The difference betweenthe statutory income tax rate and the effective consolidated income tax ratefor each year is analyzed as follows:

 
| ** **                                                                   | ** ** | **Years ended**      | ** ** |
|------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                   | ** ** | **December 31** | ** ** |
| ** **                                                                   | ** ** | **2003**             | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                   | ** ** | **%**                | ** ** | **%** | ** ** | **%** | ** ** |
| ** **                                                                   | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| In Venezuela:                                                                |       |                 |       |   |   |   |   |
| Statutory income tax rate for the petroleum sector                           |       | 50.0                 |       | 50.0 |   | 67.7 |   |
| Inflation adjustment for tax purposes and effects of  translation to dollars |       | 18.0                 |       | (79.8 | ) | (8.4 | ) |
| Valuation allowance                                                          |       | (29.2                | )          | 45.8 |   | — |   |
| Legal contribution received from subsidiaries                                |       | —               |       | — |   | (6.1 | ) |
| FIEM/FEM                                                                     |       | (3.2                 | )          | (24.8 | ) | — |   |
| Transfer pricing                                                             |       | (2.8                 | )          | 5.2 |   | — |   |
| Dividend tax                                                                 |       | 5.0                  |       | 0.1 |   | — |   |
| Other differences, net                                                       |       | (1.8                 | )          | (3.5 | ) | (1.4 | ) |
| Effective income tax rate in Venezuela                                       |       | 36.0                 |       | (7.0 | ) | 51.8 |   |
| Foreign:                                                                     |       |                 |       |   |   |   |   |
| Effects of foreign taxation                                                  |       | (0.9                 | )          | 5.4 |   | (3.3 | ) |
| Consolidated effective income tax rate                                       |       | 35.1                 |       | (1.6 | ) | 48.5 |   |

 

PDVSA and some of itsVenezuelan subsidiaries are entitled to tax credits for new investments inproperty, plant and equipment up to 12% of the amounts invested.  Such credits, however, may not exceed 2% ofnet taxable income, and the carryforward period may not exceed threeyears.  During 2003, some subsidiariesutilized tax credits and tax loss carryforwards of $151 million and $1,984 million,respectively, the tax effect of which amounted to $151 million and $903million, respectively.

 

As of December 31,2003 the investment tax credit carryforwards aggregated approximately $383million, and tax loss carryforwards were $7 million, which expire as follows(in millions of dollars):

 
| ** **  | ** ** | **Years ended**      | ** ** |
|-------------|------------|----------------------|------------|
| ** **  | ** ** | **December 31** | ** ** |
| ** **  | ** ** | **2004**             | ** ** | **2005** | ** ** | **2006** | ** ** |
| Tax credits |       | 177                  |       | 105 |   | 101 |   |
| Tax losses  |       | —               |       | 5 |   | 2 |   |

 

The Venezuelan Income TaxLaw introduced an initial adjustment for the effects of inflation for the incometax calculation.  The inflation adjustedvalue of fixed assets is depreciated or depleted over their remaining usefullives for tax purposes.  The Tax Law alsoprovides for the calculation of a regular inflation adjustment to be made everyyear, and included in the reconciliation to taxable income as a taxable ordeductible item.

 

F-33

----

 

In conformity with theVenezuelan Income Tax Law, taxpayers subject to income tax who carry outimport, export and loan operations with related parties domiciled abroad mustdetermine their income, costs and deductions applying transfer pricingrules.  PDVSA has obtained studiessupporting its transfer pricing methodology. The resulting effects are included as a taxable or deductible item inthe determination of income tax.

 

In January 2002, thePartial Reform of the Income Tax Law published in November 2001, came intoeffect.  The most important aspects ofthis Reform are presented below:

 

•                                          Theincome tax rate applicable to companies engaged in the production ofhydrocarbons and related activities was reduced from 67.7% to 50%.  The effect of this change for the year ended December 31,2001 was an increase in deferred tax expense and a decrease in deferred taxasset as of December 31, 2001 of $97 million.

 

•                                          Thedetermination of the taxable base for the calculation of income tax resultsfrom the sum of territorial income and extraterritorial income. The Reformprohibits offsetting losses from an extraterritorial source against income froma territorial source.

 

•                                          Themethods for determining transfer prices were modified. Furthermore, rules relatingto previous transfer pricing agreements were introduced.

 

The tax effects ofsignificant items comprising PDVSA’s net deferred tax assets (liabilities) areas follows (in millions of dollars):

 
| ** **                                                       | ** ** | **December 31** | ** ** |
|------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                       | ** ** | **2003**             | ** ** | **2002** | ** ** |
| Deferred tax  assets:                                            |       |                 |       |   |   |
| Accruals for employee benefits                                   |       | 801                  |       | 999 |   |
| Property, plant and equipment                                    |       | 114                  |       | 391 |   |
| Production tax payable                                           |       | —               |       | 141 |   |
| Inventories                                                      |       | 58                   |       | 101 |   |
| Investment tax credits and tax loss carryforwards                |       | 371                  |       | 1,890 |   |
| Accruals for contingencies                                       |       | 284                  |       | — |   |
| Other                                                            |       | 49                   |       | 94 |   |
|                                                             |       | 1,677                |       | 3,616 |   |
| Less valuation allowance                                         |       | 371                  |       | 1,961 |   |
|                                                             |       | 1,306                |       | 1,655 |   |
| Deferred tax  liabilities:                                       |       |                 |       |   |   |
| Property, plant and equipment                                    |       | 779                  |       | 836 |   |
| Operating agreements, net                                        |       | —               |       | 104 |   |
| Capitalized interest                                             |       | —               |       | 144 |   |
| Investments in non-consolidated investees                        |       | 267                  |       | 238 |   |
| Inventories                                                      |       | —               |       | 82 |   |
| Other assets – deferred charges for plant turnaround  costs |       | —               |       | 82 |   |
| Other                                                            |       | 48                   |       | 185 |   |
|                                                             |       | 1,094                |       | 1,671 |   |
| Net deferred tax assets (liabilities)                            |       | 212                  |       | (16 | ) |

 

F-34

----

 

The movement on netdeferred tax assets (liabilities) for the year ended December 31, 2002includes the tax effects of the reversal of the minimum pension liability inVenezuela from other comprehensive income during 2002, amounting to $377million.

 

The total deferred taxassets and liabilities were reclassified to present the net current andlong-term position indicated as follows (in millions of dollars):

 
| ** **             | ** ** | **December 31** | ** ** |
|------------------------|------------|----------------------|------------|
| ** **             | ** ** | **2003**             | ** ** | **2002** | ** ** |
| Current assets         |       | 257                  |       | 476 |   |
| Long-term assets       |       | 1,049                |       | 454 |   |
| Current  liabilities   |       | (28                  | )          | — |   |
| Long-term  liabilities |       | (1,066               | )          | (946 | ) |
|                   |       | 212                  |       | (16 | ) |

 

In assessing the realizationof deferred tax assets, management considers whether it is more likely than notthat some portion of deferred tax assets will not be realized.  The ultimate realization of deferred taxassets is dependent upon the generation of future taxable income during theperiods in which those temporary differences become deductible and investmenttax credits and tax loss carryforwards utilizable.  Management considers the scheduled reversalof deferred tax liabilities, projected future taxable income, and tax planningin making these assessments.  Based uponthe level of historical taxable income and projections of future taxable incomeover periods in which the deferred tax assets are deductible, managementbelieves it is more likely than not that the Company will realize the benefitsof these deductible differences, net of the existing valuation allowances at December 31,2003.  The amount of the deferred taxasset considered realizable, however, could be reduced in the near term ifestimates of future taxable income during the carryforward period arereduced.  During 2003, 2002 and 2001, thevaluation allowance decreased by $1,590 million, increased by $925 million andincreased by $186 million, respectively.

 

The valuation allowancefor deferred tax assets as of January 1, 2003, 2002 and 2001 was $371million, $1,961 million and $1,036 million, respectively.  During 2003, 2002 and 2001, the valuationallowance decreased by $1,590 million, increased by $925 million and increasedby $186 million, respectively.

 

## ***(b)***                                 ProductionTax

##  

Production tax is payablebased on crude oil produced and natural gas processed in Venezuela. Commencing January 2002,the maximum rate of this tax was increased from 16-2/3% to 30% on the volumesof hydrocarbons for the delivery and sale of crude oil to traditional areas(PDVSA Petróleo).  For mature reservoirsor extra-heavy crude oil from the Orinoco Belt, a 16-2/3% rate is establishedto be applied during the first phase of the production, calculated on the basisof certain parameters established by the Venezuelan government.  Upon commencement of the commercialproduction of synthetic crude the rate will be reduced to 1% and maintained atthat level during the nine subsequent years or until the income from the saleof the crude triple the value of the initial investment, should that occurbefore the aforementioned term has elapsed. After the nine-year period, the 16 2/3% rate is reintroduced.  These conditions, applicable to the projectsof the

 

F-35

----

 

Orinoco Belt weremodified (see note 22 (d)).  Forbitumens, a rate ranging from between 16-2/3% and 30% is used based on theprofitability of reservoirs.  Royaltiesfor 2003, 2002 and 2001 amounted to $6,298 million, $5,659 million and $3,733million, respectively, and are included in production and other taxes in theconsolidated statement of income.

 

## ***(c)***                                  BusinessAssets Tax

##  

This tax is as analternative minimum tax, calculated based on 1% of the average value of theinflation-adjusted assets at the beginning and end of the year.  On an individual company basis, PDVSA and itsVenezuelan subsidiaries calculate this tax together with income tax and pay thehigher of the two. In 2003, 2002 and 2001, this tax resulted in an expense of$24 million, $47 million and $27 million, respectively, included underproduction and other taxes in the consolidated statement of income (see note22(d)).

 

## ***(d)***                                 ValueAdded Tax

##  

The Value Added Tax Law(VAT) effective from June 10, 1999, established a tax rate of 15.5%applicable to the taxable base, and in August 2000, the rate was modifiedto 14.5%.  Effective from September 2002,the applicable rate was 16% (see note 22(d)). The VAT Law provides for an exemption for the commercialization ofcertain hydrocarbon derivative products and the right to recover from theNational Treasury certain tax credits resulting from export sales.  Amounts to be recovered do not bearinterest.  A consolidated summary of taxcredits pending compensation or recovery follows (in millions of dollars):

 
| ** **                                   | ** ** | **Years ended**      | ** ** |
|----------------------------------------------|------------|----------------------|------------|
| ** **                                   | ** ** | **December 31** | ** ** |
| ** **                                   | ** ** | **2003**             | ** ** | **2002** | ** ** | **2001** | ** ** |
| Tax credits  receivable at beginning of year |       | 1,933                |       | 2,150 |   | 1,475 |   |
| Generated during  the year                   |       | 453                  |       | 753 |   | 1,022 |   |
| Exchange loss                                |       | (236                 | )          | (970 | ) | (138 | ) |
| Recovered during  the year                   |       | —               |       | — |   | (209 | ) |
| Tax credits  receivable at end of year       |       | 2,150                |       | 1,933 |   | 2,150 |   |

## *** ***

## ***(e)***                                  Salesand Excise Taxes

##  

In Venezuela and theUnited States of America, sales of gasoline and other motor fuels are subjectto sales and excise taxes.  In 2003, 2002and 2001, such taxes, paid to the corresponding governments, amounted to $3,766million, $3,623 million and $4,133 million, respectively.  These taxes are presented as a reduction fromsales in the consolidated statement of income.

 

## ***(f)***                                    SurfaceTax

##  

The Organic HydrocarbonsLaw establishes the payment of a tax equivalent to 100 tax units (TU) persquare kilometer or fraction of surface extention of land granted and notexploited.  This tax will be increasedannually by 2% during the first five years and by 5% in subsequent years.  During 2003 and 2002, PDVSA Petróleo incurredsurface tax in Venezuela of $106 million and

 

F-36

----

 

$42 million,respectively, included under production and other taxes in the consolidatedstatement of income.

 

# **(13)**                          Financialand Derivative Instruments

#  

## ***(a)***                                 CommodityDerivative Activity and Interest Rate Swap and Cap Agreements

##  

PDVSA uses commodity andfinancial instrument derivatives to manage defined commodity price and interestrate risks arising out of the Company’s core business activities, and does notuse them for trading or speculative purposes. The Company’s commodity derivatives are generally entered into throughmajor brokerage houses and are traded on national exchanges and can be settledin cash or through delivery of the commodity.

 

PDVSA enters intopetroleum futures contracts, options and other over-the-counter commodityderivatives principally to manage a portion of the risk associated with marketprice movements of crude oil and refined products.  The Company’s derivative commodity activityis undertaken within limits established by management and contract duration isgenerally less than 30 days.

 

Furthermore, PDVSA entersinto various interest rate swap agreements to manage the risk related tointerest rate fluctuations on its debt.

 

## ***(b)***                                 Concentrationof Credit Risk

##  

The Company’s financialinstruments that are exposed to concentrations of credit risk consistprincipally of its cash equivalents, derivative financial instruments and notesand accounts receivable.  The Company’scash equivalents are in high-quality securities placed with a wide array ofinstitutions.  Similar standards ofcreditworthiness and diversity are applied to the Company’s counterparties toderivative instruments.  Notes andaccounts receivable balances are dispersed among a broad customer baseworldwide and the Company routinely assesses the financial strength of itscustomers.  The Company’s credit risk isdependent on numerous additional factors including the price of crude oil andrefined products, as well as the demand for and the production of crude oil andrefined products.

 

## ***(c)***                                  FairValue of Financial Instruments

##  

The following estimatedfair value amounts have been determined by the Company using available marketinformation and appropriate valuation methodologies.  However, considerable judgment is requiredfor interpreting market data to develop the estimates of fair value.  Accordingly, the estimates presented hereinare not necessarily indicative of the amounts that the Company could realize ina current market exchange.  The use ofdifferent market assumptions and/or estimation methodologies could have amaterial effect on the estimated fair value amounts (in millions of dollars):

 

F-37

----

 
| ** **                                                          | ** ** | **December 31** | ** ** |
|---------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                          | ** ** | **2003**             | ** ** | **2002** | ** ** |
| ** **                                                          | ** ** | **Carrying  amount** | ** ** | **Fair  value** | ** ** | **Carrying  amount** | ** ** | **Fair  value** | ** ** |
| Assets:                                                             |       |                 |       |   |   |   |   |   |   |
| Cash and cash equivalents                                           |       | 2,938                |       | 2,938 |   | 1,703 |   | 1,703 |   |
| Restricted cash                                                     |       | 961                  |       | 961 |   | 1,772 |   | 1,772 |   |
| Notes and accounts receivable                                       |       | 4,955                |       | 4,955 |   | 3,515 |   | 3,515 |   |
| Recoverable value added tax                                         |       | 2,150                |       | 1,919 |   | 1,933 |   | 1,693 |   |
| Long-term accounts receivable (included in other  assets)           |       | 680                  |       | 680 |   | 669 |   | 583 |   |
| Derivative assets (included in prepaid expenses and  other assets)  |       | 20                   |       | 20 |   | 3 |   | 3 |   |
|                                                                |       |                 |       |   |   |   |   |   |   |
| Liabilities:                                                        |       |                 |       |   |   |   |   |   |   |
| Account payable to suppliers                                        |       | 3,365                |       | 3,365 |   | 2,850 |   | 2,850 |   |
| Current portion of long-term debt                                   |       | 750                  |       | 737 |   | 1,817 |   | 1,770 |   |
| Long-term debt, net of current portion                              |       | 6,265                |       | 6,186 |   | 6,426 |   | 5,851 |   |
| Derivative liabilities (included in accrued and  other liabilities) |       | 8                    |       | 8 |   | 36 |   | 36 |   |

 

Thecarrying amounts of cash and cash equivalents, notes and accounts receivableand accounts payable to suppliers approximate their fair value due tothe short maturity of these instruments.

 

Restricted cash bearsinterest at variable market rates, and the carrying amount approximates fairvalue.

 

The fair value ofrecoverable value added tax has been determined by discounting the non-interestbearing carrying value, based on future estimated recoveries, using interestrates applicable in the money market.

 

Long-term accountsreceivable result mainly from transactions with related parties and theircarrying value as of December 31, 2003 approximates fair value.

 

The fair value oflong-term debt, including the current portion, at December 31, 2003 and2002, is based on interest rates that are currently available to PDVSA forissuance of debt with similar terms and remaining maturities and broker quoteswhich contemplate credit risk.

 

The fair value ofderivative instruments is based on the estimated amount that the Company wouldreceive or pay to terminate the agreements, considering current commodityprices and interest rates and the current creditworthiness of thecounterparties.

 

# **(14)**                          Long-TermDebt and Credit Facilities

#  

Long-term debt consistsof the following (in millions of dollars):

 

F-38

----

 
| ** **                                                                                                                                                                  | ** ** | **December 31** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **2003**             | ** ** | **2002** | ** ** |
| PDV  America/CITGO:                                                                                                                                                         |       |                 |       |   |   |
| 7.25% to 7.87% unsecured senior notes, due 2003                                                                                                                             |       | —               |       | 499 |   |
| 2.4% to 2.5% unsecured revolving bank loans, due 2003-2005                                                                                                                  |       | —               |       | 279 |   |
| Variable rate senior secured term loan with CITGO’s  stock participation in two affiliates, due 2006                                                                   |       | 200                  |       | — |   |
| 7.875% unsecured senior notes under $600 shelf  registration, due 2006                                                                                                      |       | 150                  |       | 200 |   |
| 9.3% unsecured private placement senior notes, due  2003 to 2006                                                                                                            |       | 34                   |       | 46 |   |
| 7.17% to 8.94% unsecured master shelf agreement  senior notes, due 2003-2009                                                                                                |       | 185                  |       | 235 |   |
| Variable and fixed rate 2.1% to 8.3% guaranteed  tax-exempt bonds, due 2004 to 2033                                                                                         |       | 332                  |       | 426 |   |
| Variable rate taxable bonds guaranteed with letters  of credit, due 2026 to 2028                                                                                            |       | 25                   |       | 115 |   |
| 11.375% unsecured senior notes, due 2011                                                                                                                                    |       | 547                  |       | — |   |
|                                                                                                                                                                        |       | 1,473                |       | 1,800 |   |
| PDVSA Finance –  Unsecured notes: (see note 22 (c)):                                                                                                                   |       |                 |       |   |   |
| 6.45% due 2002 through 2004                                                                                                                                                 |       | 50                   |       | 250 |   |
| 8.75% due 2000 through 2004                                                                                                                                                 |       | 28                   |       | 127 |   |
| 6.25% due 2002 through 2006 (in euros)                                                                                                                                      |       | 142                  |       | 171 |   |
| 6.65% due 2004 through 2006                                                                                                                                                 |       | 300                  |       | 300 |   |
| 9.37% due 2004 through 2007                                                                                                                                                 |       | 250                  |       | 250 |   |
| 6.80% due 2007 through 2008                                                                                                                                                 |       | 300                  |       | 300 |   |
| 9.75% due 2008 through 2010                                                                                                                                                 |       | 250                  |       | 250 |   |
| 8.50% due 2010 through 2012                                                                                                                                                 |       | 500                  |       | 500 |   |
| 7.40% due 2014 through 2016                                                                                                                                                 |       | 400                  |       | 400 |   |
| 9.95% due 2018 through 2020                                                                                                                                                 |       | 100                  |       | 100 |   |
| 7.50% due 2027 through 2028                                                                                                                                                 |       | 400                  |       | 400 |   |
| Treasury notes                                                                                                                                                              |       | —               |       | (4 | ) |
|                                                                                                                                                                        |       | 2,720                |       | 3,044 |   |
| PDVSA VI:                                                                                                                                                                   |       |                 |       |   |   |
| 8.46% notes guaranteed by PDVSA and the stock  participation in Hovensa, due 2003 to 2009                                                                                   |       | 334                  |       | 395 |   |
|                                                                                                                                                                        |       |                 |       |   |   |
| PDVSA Petróleo:                                                                                                                                                        |       |                 |       |   |   |
| Variable and fixed rate (2.44% to 6.55%) loans guaranteed  by governmental export agencies and financial institutions, due 2004 to 2005                                     |       | 92                   |       | 185 |   |
| 7.33% to 8.03% PDVSA Cerro Negro bonds guaranteed  with property, plant and equipment, due 2003 to 2028                                                                     |       | 276                  |       | 288 |   |
| Variable rate (LIBOR plus 1% to 1.5%) PDVSA Cerro  Negro line of credit guaranteed with property, plant and equipment, due 2003  to 2012                                    |       | 121                  |       | 136 |   |
| Variable rate (LIBOR plus 0.875% to 2.125%) PDVSA  Sincor loan guaranteed with property, plant and equipment and by the partners  of the project, due 2003 to 2012          |       | 432                  |       | 456 |   |
| Variable rate (LIBOR plus 0.875% to 3.5%)  Corpoguanipa lines of credit guaranteed with property, plant and equipment  and by the partners of the project, due 2008 to 2018 |       | 291                  |       | 284 |   |
|                                                                                                                                                                        |       | 1,212                |       | 1,349 |   |
| Bariven, S.A.  (Bariven):                                                                                                                                                   |       |                 |       |   |   |
| Variable and fixed rate (1.09% to 6.13%) loans  guaranteed by governmental export agencies and financial institutions, due  2003 to 2008                                    |       | 234                  |       | 348 |   |
|                                                                                                                                                                        |       |                 |       |   |   |
| PDV Marina, S.A. (PDV Marina):                                                                                                                                              |       |                 |       |   |   |
| Variable rate (2.8125% to 3.65625%) letters of  credit facility guaranteed with tankers, transfer of rights on freight  contracts and management, due 2003 to 2006          |       | 87                   |       | 136 |   |
|                                                                                                                                                                        |       |                 |       |   |   |
| PDVSA Corporate:                                                                                                                                                            |       |                 |       |   |   |
| Variable rate (LIBOR plus 0.5%) loan agreement  guaranteed by governmental export agencies and financial institutions, due  2008                                            |       | 600                  |       | 475 |   |
| Variable rate (1.7% to 2.3%) loan agreement  guaranteed by governmental export agencies and financial institutions, due  2012 (in yen)                                      |       | 280                  |       | 250 |   |
| Unsecured variable rate (LIBOR plus 0.45%) loan  facility, due 2010                                                                                                         |       | 18                   |       | 370 |   |
|                                                                                                                                                                        |       | 898                  |       | 1,095 |   |
| Other subsidiaries, including $16 payable in  bolivars at December 31, 2003 ($11 at December 31, 2002)                                                            |       | 57                   |       | 76 |   |
|                                                                                                                                                                        |       | 7,015                |       | 8,243 |   |
| Less current  portion of long-term debt                                                                                                                                     |       | 750                  |       | 1,817 |   |
| Total long-term portion                                                                                                                                                     |       | 6,265                |       | 6,426 |   |

 

F-39

----

 

Future maturities of thelong-term portion at December 31, 2003 are as follows (in millions ofdollars):

 
| **Years**       | ** ** | ** ** | ** ** |
|-----------------|------------|------------|------------|
| 2005            |       | 751        |       |
| 2006            |       | 848        |       |
| 2007            |       | 638        |       |
| 2008            |       | 732        |       |
| Remaining years |       | 3,296      |       |
|            |       | 6,265      |       |

 

***All debt is denominated in dollars except forthe Euro and Yen denominated loans as indicated above.***

 

***Covenants***

 

Various of PDVSA’sborrowing facilities contain covenants that restrict, among other things, theability of the Company and its subsidiaries to incur additional debts, to paydividends, place liens on property and sell certain assets.  The Company was in compliance with thesecovenants at December 31, 2003 and 2002.

 

***Credit Facilities***

 

PDVSA and itssubsidiaries have the following unused credit facilities available at December 31,2003 (in millions of dollars):

 

F-40

----

 
| Loan agreements-secured    |   | 163 |   |
|----------------------------|--------|-----|--------|
| Lines of  credit-secured   |   | 39  |   |
| Lines of  credit-unsecured |   | 260 |   |
|                       |   | 462 |   |

# **(15)**                          CapitalStock and Reserves

#  

At December 31, 2003and 2002, PDVSA’s capital stock is represented by 51,204 registered shares ofBs25 million each, totaling $39,094 million. By law the shares may not be transferred or encumbered in any way.

 

The legal reserve is arequirement for Venezuelan companies. Pursuant to Venezuelan law, the legal reserve shall not be distributedas dividends. Other reserves include principally the reserve for therealization of deferred tax asset and the reserve for new investments.

 

Cash dividends paid tothe shareholder are declared and paid in bolivars based on the statutoryfinancial statements, which reflect retained earnings.  Non-cash dividends with a fair value of $251million and $63 million were paid to the shareholder in 2003 and 2001, respectively.  In 2003, 2002 and 2001, total cash and non-cashdividends were declared equivalent to Bs4,150,000 million, Bs3,400,000 millionand Bs3,400,000 equivalent, in US dollars, to $2,594 million, $2,752 millionand $4,774 million, respectively.

 

# **(16)**                          EmployeeBenefit Plans

#  

An analysis of theliability for employee benefit plans follows (in millions of dollars):

 
| ** **                                 | ** ** | **December 31** | ** ** |
|--------------------------------------------|------------|----------------------|------------|
| ** **                                 | ** ** | **2003**             | ** ** | **2002** | ** ** |
|                                       |       |                 |       |   |   |
| Accrual for  employee termination benefits |       | 131                  |       | 111 |   |
| Pension plans                              |       | 795                  |       | 1,672 |   |
| Other postretirement  benefits             |       | 1,245                |       | 1,043 |   |
|                                       |       | 2,171                |       | 2,826 |   |
| Less current  portion                      |       | 263                  |       | 431 |   |
| Long-term portion                          |       | 1,908                |       | 2,395 |   |

 

PDVSA and itssubsidiaries have the following employee benefit plans:

 

## ***(a)***                                 DefinedContribution Savings Plans

##  

PDVSA and its Venezuelansubsidiaries maintain savings funds for their employees and guaranteecontributions to the members’ accounts. At December 31, 2003 and 2002, the guaranteed amount in the savingsfund is $165 million and $160 million, respectively. In addition, a U.S. subsidiarymaintains three retirement and savings plans with defined contributions,covering all eligible employees; the employees who are members of these plansmake voluntary contributions to the plans that in turn are matched by thesubsidiary.

 

F-41

----

 

## ***(b)***                                 PensionPlans and Other Postretirement Benefits

##  

Pursuant to thecollective labor contract, PDVSA and its Venezuelan subsidiaries have aretirement plan that covers all eligible employees.  There is a single pension fund and anorganization which administers the assets of the pension plan.  The pension plan is terminally funded formost of the retirees’ liabilities.  AU.S. subsidiary also sponsors three qualified noncontributory defined benefitpension plans and three nonqualified defined benefit plans.  The qualified pension plans are funded inaccordance with current legislation, without exceeding tax deductionrestrictions.  The nonqualified plans arefunded as necessary to pay retiree benefits.

 

In addition to pensionplans, PDVSA provides social benefits and medical and life insurance forretired personnel.  These benefits arefunded on a pay-as-you-go basis.

 

PDVSA and some of itsVenezuelan subsidiaries have a foreign currency denominated pension obligationmeasured under the U.S. dollar method and remeasured into the reportingcurrency (dollar) before calculating actuarial gains and losses.  Foreign currency gains and losses fromremeasurement of the bolivar pension obligation are treated as actuarial gainsand losses and therefore are subject to deferral and amortization of thecorridor.

 

The following sets forththe changes in benefit obligations, plan assets for the pension plans, and thefunded status of such plans and postretirement benefits for 2003 and 2002, andthe funded status of such plans reconciled with amounts reported in theconsolidated balance sheets (in millions of dollars):

 
| ** **                            | ** ** | **Years ended December 31** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **2003**                         | ** ** | **2002** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                            | ** ** | **Pension benefits**             | ** ** | **Other postretirement  benefits** | ** ** |
| Venezuela:                            |       |                             |       |   |   |   |   |   |   |
| Change in benefit obligation          |       |                             |       |   |   |   |   |   |   |
| Benefit obligation, beginning of year |       | 2,734                            |       | 4,240 |   | 1,096 |   | 1,462 |   |
| Service cost                          |       | 51                               |       | 152 |   | 26 |   | 52 |   |
| Interest cost                         |       | 204                              |       | 414 |   | 94 |   | 143 |   |
| Participant contributions             |       | 8                                |       | 12 |   | — |   | — |   |
| Plan amendments                       |       | 452                              |       | 180 |   | — |   | 6 |   |
| Actuarial gains                       |       | (118                             | )          | (2,091 | ) | (32 | ) | (494 | ) |
| Benefits paid                         |       | (184                             | )          | (173 | ) | (52 | ) | (73 | ) |
| Curtailments                          |       | (835                             | )          | — |   | (212 | ) | — |   |
| Benefit obligation, end of year       |       | 2,312                            |       | 2,734 |   | 920 |   | 1,096 |   |

 

F-42

----

 
| ** **                                   | ** ** | **Years ended December 31** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **2003**                         | ** ** | **2002** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                   | ** ** | **Pension benefits**             | ** ** | **Other postretirement  benefits** | ** ** |
| Change in plan assets                        |       |                             |       |   |   |   |   |   |   |
| Fair value of plan assets, beginning of year |       | 1,054                            |       | 1,199 |   | — |   | — |   |
| Actual return on plan assets                 |       | 575                              |       | (592 | ) | — |   | — |   |
| Employer contributions                       |       | 120                              |       | 501 |   | — |   | 73 |   |
| Participant contributions                    |       | 8                                |       | 12 |   | — |   | — |   |
| Benefits paid                                |       | (137                             | )          | (66 | ) | — |   | (73 | ) |
| Fair value of plan assets, end of year       |       | 1,620                            |       | 1,054 |   | — |   | — |   |
|                                         |       |                             |       |   |   |   |   |   |   |
| Funded status                                |       | (692                             | )          | (1,680 | ) | (920 | ) | (1,096 | ) |
| Employer contributions                       |       | 9                                |       | 11 |   | — |   | — |   |
| Benefit payments made directly by employer   |       | 32                               |       | 5 |   | — |   | — |   |
| Unrecognized net actuarial gain              |       | (1,042                           | )          | (475 | ) | (196 | ) | (147 | ) |
| Unrecognized prior service cost              |       | 1,053                            |       | 1,256 |   | 200 |   | 457 |   |
| Unrecognized transition obligation           |       | —                           |       | 2 |   | — |   | — |   |
| Net amount recognized                        |       | (640                             | )          | (881 | ) | (916 | ) | (786 | ) |

 

F-43

----

 
| ** **                                   | ** ** | **Years ended December 31** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **2003**                         | ** ** | **2002** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                   | ** ** | **Pension benefits**             | ** ** | **Other postretirement  benefits** | ** ** |
| Amounts  recognized in the Company’s    |       |                             |       |   |   |   |   |   |   |
| consolidated balance sheets consist of:      |       |                             |       |   |   |   |   |   |   |
| Accrued benefit liability                    |       | (681                             | )          | (1,574 | ) | (916 | ) | (786 | ) |
| Employer contributions                       |       | 9                                |       | 10 |   | — |   | — |   |
| Benefit payments made directly by employer   |       | 32                               |       | 5 |   | — |   | — |   |
| Intangible asset                             |       | —                           |       | 678 |   | — |   | — |   |
| Net amount recognized                        |       | (640                             | )          | (881 | ) | (916 | ) | (786 | ) |
| Foreign:                                     |       |                             |       |   |   |   |   |   |   |
| Change in benefit obligation                 |       |                             |       |   |   |   |   |   |   |
| Benefit obligation, beginning of year        |       | 450                              |       | 391 |   | 334 |   | 261 |   |
| Service cost                                 |       | 20                               |       | 17 |   | 9 |   | 7 |   |
| Interest cost                                |       | 29                               |       | 28 |   | 22 |   | 19 |   |
| Amendments                                   |       | (8                               | )          | — |   | (4 | ) | — |   |
| Actuarial loss                               |       | 39                               |       | 29 |   | 62 |   | 55 |   |
| Plan merger/acquisitions                     |       | 5                                |       | — |   | — |   | — |   |
| Accumulated other comprehensive Income       |       | (19                              | )          | (15 | ) | (8 | ) | (8 | ) |
| Benefit obligation, end of year              |       | 516                              |       | 450 |   | 415 |   | 334 |   |
| Change in plan assets -                      |       |                             |       |   |   |   |   |   |   |
| Fair value of plan assets, beginning of year |       | 290                              |       | 324 |   | 1 |   | 1 |   |
| Actual return on plan assets                 |       | 59                               |       | (28 | ) | — |   | — |   |
| Plan merger/acquisitions                     |       | 4                                |       | — |   | — |   | — |   |
| Employer contributions                       |       | 24                               |       | 9 |   | 8 |   | 8 |   |
| Benefits paid                                |       | (34                              | )          | (15 | ) | (8 | ) | (8 | ) |
| Fair value of plan assets, end of year       |       | 343                              |       | 290 |   | 1 |   | 1 |   |
| Funded status                                |       | (173                             | )          | (159 | ) | (413 | ) | (333 | ) |
| Unrecognized net actuarial loss              |       | 90                               |       | 91 |   | 87 |   | 75 |   |
| Unrecognized prior service cost              |       | (6                               | )          | 2 |   | (4 | ) | — |   |
| Net amount recognized                        |       | (89                              | )          | (66 | ) | (330 | ) | (258 | ) |

 

F-44

----

 
| ** **                                                                        | ** ** | **December 31** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                        | ** ** | **2003**             | ** ** | **2002** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                        | ** ** | **Pension benefits** | ** ** | **Other postretirement  benefits** | ** ** |
| Amounts recognized in the Company’s consolidated  balance sheets consist of- |       |                 |       |   |   |   |   |   |   |
| Accrued benefit liability                                                         |       | (114                 | )          | (97 | ) | (330 | ) | (258 | ) |
| Intangible asset                                                                  |       | —               |       | 2 |   | — |   | — |   |
| Accumulated other comprehensive income                                            |       | 25                   |       | 29 |   | — |   | — |   |
| Net amount recognized                                                             |       | (89                  | )          | (66 | ) | (330 | ) | (258 | ) |

 

F-45

----

 

The net periodic benefit(reversal) costs are as follows (in millions of dollars):

 
| ** **                                         | ** ** | **Years ended December 31** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **2003**                         | ** ** | **2002** | ** ** | **2001** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                         | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | **Other postretirement** | ** ** |
| ** **                                         | ** ** | **Pension benefits**             | ** ** | **benefits** | ** ** |
| Venezuela:                                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Components of net periodic benefit (reversal) cost |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Service cost                                       |       | 51                               |       | 152 |   | 142 |   | 26 |   | 52 |   | 52 |   |
| Interest cost                                      |       | 204                              |       | 414 |   | 386 |   | 94 |   | 143 |   | 135 |   |
| Expected return on plan assets                     |       | (104                             | )          | (120 | ) | (121 | ) | — |   | — |   | — |   |
| Amortization of prior service cost                 |       | 87                               |       | 118 |   | 118 |   | 44 |   | 68 |   | 68 |   |
| Amortization of net gain at date of adoption       |       | 2                                |       | 2 |   | 2 |   | — |   | — |   | — |   |
| Recognized net actuarial (gain) loss               |       | (22                              | )          | 44 |   | 45 |   | (7 | ) | 18 |   | 26 |   |
| Curtailments/settlements                           |       | (267                             | )          | — |   | — |   | 25 |   | — |   | — |   |
| Net periodic benefit (reversal) cost               |       | (49                              | )          | 610 |   | 572 |   | 182 |   | 281 |   | 281 |   |
|                                               |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Foreign:                                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Components of net periodic benefit cost            |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Service cost                                       |       | 20                               |       | 17 |   | 16 |   | 9 |   | 7 |   | 6 |   |
| Interest cost                                      |       | 29                               |       | 28 |   | 26 |   | 22 |   | 19 |   | 16 |   |
| Expected return on plan assets                     |       | (27                              | )          | (30 | ) | (31 | ) | — |   | — |   | — |   |
| Amortization of prior service cost                 |       | —                           |       | — |   | — |   | — |   | — |   | — |   |
| Recognized net actuarial (gain) loss               |       | 3                                |       | — |   | (3 | ) | 50 |   | 11 |   | — |   |
| Net periodic benefit cost                          |       | 25                               |       | 15 |   | 8 |   | 81 |   | 37 |   | 22 |   |

 

Additionalinformation for Venezuela is presented below:

 
| ** **                                                                                                     | ** ** | **2003**     | ** ** | **2002**                 | ** ** | **2001** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|--------------|------------|--------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                                                                     | ** ** | **Pension**  | ** ** | **Other postretirement** | ** ** |
| ** **                                                                                                     | ** ** | **Benefits** | ** ** | **Benefits**             | ** ** |
| ** **                                                                                                     | ** ** | **%**        | ** ** | **%**                    | ** ** | **%**    | ** ** | **%**    | ** ** | **%**    | ** ** | **%**    | ** ** |
| Weighted-average  assumptions used to determine benefit obligations at December 31:                       |       |         |       |                     |       |     |       |     |       |     |       |     |       |
| Discount rate                                                                                                  |       | 10.00        |       | 10.00                    |       | 10.00    |       | 10.00    |       | 10.00    |       | 10.00    |       |
| Rate of compensation increase                                                                                  |       | 7.00         |       | 7.00                     |       | 7.00     |       | 7.00     |       | 7.00     |       | 7.00     |       |
| Weighted-average  assumptions used to determine net periodic benefit cost for the year ended December 31: |       |         |       |                     |       |     |       |     |       |     |       |     |       |
| Discount rate                                                                                                  |       | 10.00        |       | 10.00                    |       | 10.00    |       | 10.00    |       | 10.00    |       | 10.00    |       |
| Rate of compensation increase                                                                                  |       | 7.00         |       | 7.00                     |       | 7.00     |       | 7.00     |       | 7.00     |       | 7.00     |       |
| Expected return on plan assets                                                                                 |       | 10.00        |       | 10.00                    |       | 10.00    |       | —   |       | —   |       | —   |       |

 

F-46

----

 

In Venezuela the rate ofreturn of the plan’s assets generally reflects the historic return of theassets, according to the structure of the investment portfolio.  At December 31, 2003, the weightedaverage return of the investment portfolio over the last ten years was 29.9%.

 

In Venezuela, for thepurpose of benefits other than pension plans, an 8% incremental inflation rateis applied for health benefits and 6% for food subsidy plans.

 

The inflation rateincrements on these benefits have a significant effect on the reportedquantities for these plans.  A onepercent variation in the rates would have the following effects (in millions ofdollars):

 
| ** **                                                         | ** ** | **1% increase** | ** ** | **1% decrease** | ** ** |
|--------------------------------------------------------------------|------------|-----------------|------------|-----------------|------------|
| Increase  (decrease) in total service and interest cost components |       | 20              |       | (16             | )          |
| Increase  (decrease) in postretirement benefit obligation          |       | 123             |       | (102            | )          |

 

The measurement date todetermine the amounts of assets and liabilities of the pension plan was December 31,2003.

 

F-47

----

 

*Additional information forforeign subsidiaries is presented below:*

 
| ** **                                                                               | ** ** | **2003**     | ** ** | **2002**                 | ** ** | **2001** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------|------------|--------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                                               | ** ** | **Pension**  | ** ** | **Other postretirement** | ** ** |
| ** **                                                                               | ** ** | **benefits** | ** ** | **benefits**             | ** ** |
| ** **                                                                               | ** ** | **%**        | ** ** | **%**                    | ** ** | **%**    | ** ** | **%**    | ** ** | **%**    | ** ** | **%**    | ** ** |
| Weighted-average assumptions used to determine  benefit obligations at December 31: |       |         |       |                     |       |     |       |     |       |     |       |     |       |
| Discount rate                                                                            |       | 6.25         |       | 6.75                     |       | 7.25     |       | 6.25     |       | 6.75     |       | 7.25     |       |
| Rate of compensation increase                                                            |       | 4.46         |       | 5.00                     |       | 5.00     |       | —   |       | —   |       | —   |       |

 
| ** **                                                                                                     | ** ** | **2003**     | ** ** | **2002**                 | ** ** | **2001** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|--------------|------------|--------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                                                                     | ** ** | **Pension**  | ** ** | **Other postretirement** | ** ** |
| ** **                                                                                                     | ** ** | **benefits** | ** ** | **benefits**             | ** ** |
| ** **                                                                                                     | ** ** | **%**        | ** ** | **%**                    | ** ** | **%**    | ** ** | **%**    | ** ** | **%**    | ** ** | **%**    | ** ** |
| Weighted-average assumptions used to determine net  periodic benefit cost for the year ended December 31: |       |         |       |                     |       |     |       |     |       |     |       |     |       |
| Discount rate                                                                                                  |       | 6.75         |       | 7.25                     |       | 7.25     |       | 6.75     |       | 7.25     |       | 7.25     |       |
| Expected long-term return on plan assets                                                                       |       | 8.50         |       | 9.00                     |       | 9.00     |       | 8.50     |       | 9.00     |       | 6.00     |       |
| Rate of compensation increase                                                                                  |       | 5.00         |       | 5.00                     |       | 5.00     |       | —   |       | —   |       | —   |       |

 

CITGO’s expected long-term rate of return on planassets is intended to generally reflect the historical returns of the assets inits investment portfolio.  The weightedaverage return at December 31, 2003 on indices representing CITGO’sinvestment portfolio is 7.94% over the past 10 years and 8.84% over the past 15years.

 

For measurement purposes, a 10 percent pre-65 and an11 percent post-65 annual rate of increase in the per capita cost of coveredhealth care benefits was assumed for 2003. These rates are assumed to decrease 1 percent per year to an ultimatelevel of 5 percent by 2009 for pre-65 and 2010 for post-65 participants, and toremain at that level thereafter.

 

Assumed health care cost trend rates have asignificant effect on the amounts reported for the health care plans.  A one-percentage-point change in assumedhealth care cost trend rates would have the following effects (in millions ofdollars):

 

F-48

----

 
| ** **                                                         | ** ** | **1% increase** | ** ** | **1% decrease** | ** ** |
|--------------------------------------------------------------------|------------|-----------------|------------|-----------------|------------|
| Increase  (decrease) in total service and interest cost components |       | 6               |       | (5              | )          |
| Increase  (decrease) in postretirement benefit obligation          |       | 69              |       | (55             | )          |

 

In the United States, in December 2003,the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“MedicareReform”) was signed into law.  MedicareReform introduces a prescription drug benefit under Medicare (Medicare Part D)as well as a non-taxable federal subsidy to sponsors of retiree health carebenefit plans that provide a benefit that is at least actuarially equivalent toMedicare Part D.  In May 2004,the FASB Staff issued FASB Staff Position No. FAS 106-2, “Accounting andDisclosure Requirements Related to the Medicare Prescription Drug, Improvementand Modernization Act of 2003”.  TheStaff Position permits a sponsor to report the effects of Medicare Reformprospectively in the third quarter of 2004 or retrospectively to themeasurement date following enactment of the legislation.  CITGO has chosen to use the retrospectivemethod to reflect Medicare Reform as of January 1, 2004.  The effect of this legislation at that datewas to reduce the benefit obligation by approximately $40 million.  The service cost and interest cost componentsof that reduction total approximately $3 million.  Under CITGO’s accounting policy forrecognizing actuarial gains, net periodic benefit cost for the year ended December 31,2004 was reduced $40 million related to this actuarial gain.

 

**Plan Assets**

 

For Venezuela the plan assets include:

 
| ** **         | ** ** | **Target**     | ** ** | **December 31** | ** ** |
|--------------------|------------|----------------|------------|----------------------|------------|
| **Asset category** | ** ** | **allocation** | ** ** | **2003**             | ** ** | **2002** | ** ** |
| ** **         | ** ** | **%**          | ** ** | **%**                | ** ** | **%** | ** ** |
| Equity             |       | 22             |       | 23.30                |       | 4.13 |   |
| Fixed income       |       | 30             |       | 29.36                |       | 22.69 |   |
| Cash               |       | 48             |       | 47.34                |       | 73.18 |   |
|               |       | 100            |       | 100                  |       | 100 |   |

 

The investment return objective for these assets is toachieve returns that meet or exceed the actuarial discount rate over time.  This is to be accomplished using awell-diversified portfolio structure. The Company periodically reviews the asset allocation to determinewhether it remains appropriate for achieving the investment return objective.

 

***Contributions***

 

In accordance with Venezuelan policy for contributionsto pension plan funds, the Company contributes to the selected plan, 9% of theintegral salary to each individual employee account.  At the time the employee retires, the Companythen contributes the difference between the current value of the pensions andthe outstanding accrued amount to the selected plan.  For 2004, PDVSA estimates contributions of$81 million.

 

With regard to the policy to constitute funds forbenefits other than retirement plan, the “pay-as-you-go” method is applied,PDVSA estimates contributions for these plans in 2004 will be $51 million.

 

F-49

----

 

For foreign subsidiaries the plan assets include:

 

| ** **         | ** ** | **Target**     | ** ** | **December 31** | ** ** |
|--------------------|------------|----------------|------------|----------------------|------------|
| **Asset category** | ** ** | **allocation** | ** ** | **2003**             | ** ** | **2002** | ** ** |
| ** **         | ** ** | **%**          | ** ** | **%**                | ** ** | **%** | ** ** |
| Equity             |       | 60             |       | 60.20                |       | 52.16 |   |
| Fixed income       |       | 40             |       | 39.20                |       | 46.73 |   |
| Cash               |       | 0              |       | 0.60                 |       | 1.11 |   |
|               |       | 100            |       | 100                  |       | 100 |   |

 

***Contributions***

 

For foreign plans, the policy is to fund the qualifiedpension plans in accordance with applicable laws and regulations and not toexceed the tax-deductible limits.  CITGOestimates that it will contribute $58 million to these plans in 2004.  The nonqualified plans are funded asnecessary to pay retiree benefits.  Theplan benefits for each of the qualified pension plans are primarily based on anemployee’s years of plan service and compensation as defined by each plan.

 

CITGO’s policy is to fund its postretirement benefitsother than its pension obligations, on a pay-as-you-go basis.  CITGO estimates that it will contribute $10million to these plans in 2004.

 

# **(17)**                          Accruedand Other Liabilities

#  

Accrued and otherliabilities are summarized as follows (in millions of dollars):

 
| ** **                                             | ** ** | **December 31** | ** ** |
|--------------------------------------------------------|------------|----------------------|------------|
| ** **                                             | ** ** | **2003**             | ** ** | **2002** | ** ** |
| Withholding  taxes                                     |       | 258                  |       | 109 |   |
| Valued added tax  (VAT)                                |       | 201                  |       | 230 |   |
| Production tax  payable                                |       | 637                  |       | 288 |   |
| Capital leases  (see note 8)                           |       | 46                   |       | 98 |   |
| Long-term  accounts payable                            |       | 88                   |       | 334 |   |
| Provision for  lawsuits and claims (see note 20)       |       | 380                  |       | 46 |   |
| Employees’  accounts payable                      |       | 134                  |       | 421 |   |
| Environmental  accrual (see note 20)                   |       | 473                  |       | 58 |   |
| Accrual for  refining works                            |       | 50                   |       | — |   |
| Accrual for  asset retirement obligations (see note 8) |       | 537                  |       | — |   |
| Interest payable                                       |       | 111                  |       | 117 |   |
| Dividends  payable                                     |       | 126                  |       | 109 |   |
| Accrued expenses                                       |       | 396                  |       | 204 |   |
| Other                                                  |       | 138                  |       | 331 |   |
|                                                   |       | 3,575                |       | 2,345 |   |
| Less current  portion of accrued and other liabilities |       | 2,293                |       | 1,757 |   |
| Long-term portion                                      |       | 1,282                |       | 588 |   |

 

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# **(18)**                          RelatedParty Transactions

#  

PDVSA considers itsaffiliates, companies controlled jointly, the Company’s directors andexecutives, other companies that are also property of the stockholder and othergovernment institutions as related parties.

 

A summary of transactionswith related parties follows (expressed in millions of dollars):

 
| ** **                                       | ** ** | **Years ended December 31** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **2003**                         | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                             |       |                             |       |   |   |   |   |
| Activities of the  year:                         |       |                             |       |   |   |   |   |
| Sales                                            |       | 6,022                            |       | 6,602 |   | 4,167 |   |
| Equity in earnings of non-consolidated investees |       | 379                              |       | 268 |   | 464 |   |
| Costs and expenses                               |       | 5,690                            |       | 6,402 |   | 4,991 |   |

 
| ** **                                                                   | ** ** | **December 31** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                   | ** ** | **2003**             | ** ** | **2002** | ** ** |
| Balances at  year-end:                                                       |       |                 |       |   |   |
| Deposits with the BCV, contributions to the FEM (see  notes 2 and 4)         |       | 698                  |       | 2,382 |   |
| Trust signed with the Banco de Desarrollo Económico  y                  |       |                 |       |   |   |
| Social de Venezuela (BANDES), for social programs  and projects (see note 4) |       | 302                  |       | — |   |
| Accounts receivable (see note 5)                                             |       | 436                  |       | 328 |   |
| Long-term accounts receivable included in other  assets (see note 9)         |       | 680                  |       | 669 |   |
| Investments in affiliates (see note 7)                                       |       | 3,072                |       | 2,854 |   |
| Accounts payable to suppliers, accrued and other  liabilities                |       | 758                  |       | 684 |   |

 

Long-term accountsreceivable as of December 31, 2003 and 2002, include balances withPetrozuata for $234 million and $490 million, respectively, which are held forcash requirements; also, they include balances receivable from C. A. deAdministración y Fomento Eléctrico (CADAFE) for $220 million and $132 million,respectively. The accounts receivable from CADAFE result from servicesprovided, industrial distribution, and methane gas transportation. Also, thesupply of light diesel, by the subsidiaries of PDVSA Gas, Deltaven and PDVSAPetróleo, may be offset against energy supply services provided by CADAFE.  During 2003 and 2002, PDVSA, through itssubsidiary PDVSA Petróleo, offset with CADAFE $16 million and $17 million,respectively.

 

In 2003, PDVSA and CADAFEentered into a cooperation agreement whereby PDVSA, through PDVSA Petróleo,acquired certain assets for $70 million that are included in property, plantand equipment as construction in progress at December 31, 2003.  These assets will be transferred to CADAFEand the costs involved, derived from or associated with this operation, will berecovered by PDVSA through discounts and/or supply of electric power by CADAFE.

 

During 2003, 2002 and2001, PDVSA purchased upgraded crude oil from Petrozuata amounting to $196million, $261 million and $301 million, respectively, which is included incosts and expenses.  Additionally,Petrozuata reimbursed PDVSA for project and operating expenditures amounting to$14 million, $11 million and $68 million in 2003, 2002 and 2001, respectively(see notes 7 and 10).

 

F-51

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In 2002, the affiliatedcompany, INTESA invoiced PDVSA for information technology services of $253million, which are included in costs and expenses (see note 20).

 

PDVSA Petróleo hasvarious agreements for supplies with affiliated companies, which are summarizedas follows (MBPD):

 
| **Affiliate**                 | ** ** | **Delivery  obligation** | ** ** | **Year of termination**      | ** ** |
|-------------------------------|------------|--------------------------|------------|------------------------------|------------|
| Ruhr Oel                      |       | 237                      |       | 2022                         |       |
| AB Nynäs  petroleum      |       | 57                       |       | 2005                         |       |
| LYONDELL-CITGO  (see note 20) |       | 230                      |       | 2017                         |       |
| Chalmette Refining            |       | 90                       |       | Strategic association period |       |
| ConocoPhillips                |       | 172                      |       | 2020                         |       |
| Hovensa                       |       | 270                      |       | Between 2008 and 2022        |       |
|                          |       | 1,056                    |       |                         |       |

 

During the years ended December 31,2003, 2002 and 2001, CITGO acquired refined products from various affiliatedcompanies, LYONDELL-CITGO, Hovensa and Chalmette Refining under long-termagreements.  These purchases amounted to$4,900 million, $3,500 million and $3,400 million, respectively, and areincluded in the consolidated statement of income as purchases of crude oil andproducts.  At December 31, 2003 and2002, accounts payable resulting from these operations amounted to $148 millionand $110 million, respectively.

 

During 2003, 2002 and2001, CITGO sold to affiliated companies refined products and other refinerysupplies of $387 million, $277 million and $248 million, respectively.  The outstanding balances resulting from theseoperations at December 31, 2003 and 2002 amounted to $71 million and $94million, respectively, that are included in notes and accounts receivable fromrelated parties (see note 5).

 

During 2003, PDVSAthrough CVP, and as part of the process to support the social projects carriedout by the National Government, donated to the Bolivarian Republic of Venezuela$251 million in non-cash materials purchased from the counterparty to theenergy cooperation and integration agreement described below.  This donation was expensed during 2003 and isincluded in costs and expenses.  The debtcreated by CVP’s purchases from this counterparty was later paid through an offsetof trade accounts receivable due from an affiliate of the counterparty.  The trade accounts receivable that wereoffset were derived from sales made in connection with the Caracas energycooperation and integration agreement “Convenio de Cooperación y de IntegraciónEnergética de Caracas” that was transferred from PDVSA Petróleo to CVP (seenote 22(a)).

 

As part of the supportfor various programs established by the National Government during 2003, PDVSAhas made contributions for donations and to social Missions for $22 million and$227 million, respectively, that are included as costs and expenses in thestatement of income (see note 22(a)).

 

# **(19)**                          OperatingSegments and Geographic Data

#  

Intersegment sales, whichprimarily consist of sales of crude oil, are generally made at approximatemarket prices.  PDVSA evaluates theperformance of its segments and allocates resources to them based on netrevenues, operating income (calculated as income before financing expenses andincome taxes), capital

 

F-52

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expenditures andproperty, plant and equipment.  The “other”line item includes corporate related items and results of non-significantoperations in Venezuela, Europe and the Caribbean.

 

The exploration, productionand upgrading segment in Venezuela, include the search for oil and gasreserves, and improvement of extra-heavy crudes; and the transportation ofcrude and natural gas to the point of delivery to the refineries andfractionation plants.

 

Refining, supply andmarketing activities in Venezuela include the administration of refineries,marketing and transportation of crude oil, natural gas and refined petroleumproducts under the brand name PDV. Petrochemical activities in Venezuela cover the production and marketingof various compound mixes, olefins, plastic resins and chemical additives.  Refining, supply and marketing activities inthe United States of America cover the administration of refineries and the marketingof gasoline and refined petroleum products in the eastern and midwesternregions under the brand name CITGO.

 

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Summarized financialinformation for the Company’s reportable segments is presented in the followingtable (in millions of dollars):

 
| ** **                                | ** ** | **Years ended December 31** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **2003**                         | ** ** | **2002** | ** ** | **2001** | ** ** |
| Revenues:                                 |       |                             |       |   |   |   |   |
| Net sales of crude oil and products:      |       |                             |       |   |   |   |   |
| Segments in Venezuela:                    |       |                             |       |   |   |   |   |
| Upstream operations                       |       | 21,241                           |       | 18,931 |   | 20,480 |   |
| Downstream operations                     |       | 22,026                           |       | 23,342 |   | 25,903 |   |
| Petrochemical operations                  |       | 784                              |       | 919 |   | 1,070 |   |
| Segments in the United States of America: |       |                             |       |   |   |   |   |
| Downstream operations                     |       | 25,217                           |       | 19,358 |   | 19,601 |   |
| Other                                     |       | 714                              |       | 645 |   | 851 |   |
|                                      |       | 69,982                           |       | 63,195 |   | 67,905 |   |
| Eliminations (1)                          |       | (23,393                          | )          | (20,615 | ) | (21,655 | ) |
|                                      |       | 46,589                           |       | 42,580 |   | 46,250 |   |
| Operating income (2):                     |       |                             |       |   |   |   |   |
| Segments in Venezuela:                    |       |                             |       |   |   |   |   |
| Upstream operations                       |       | 8,320                            |       | 4,032 |   | 7,653 |   |
| Downstream operations                     |       | (4,117                           | )          | (583 | ) | (1,348 | ) |
| Petrochemical operations                  |       | 42                               |       | 265 |   | (104 | ) |
| Segments in the United States of America: |       |                             |       |   |   |   |   |
| Downstream operations                     |       | 762                              |       | 314 |   | 658 |   |
| Other                                     |       | 670                              |       | 464 |   | 2,534 |   |
|                                      |       | 5,677                            |       | 4,492 |   | 9,393 |   |
| Eliminations (1)                          |       | (488                             | )          | (985 | ) | (1,120 | ) |
|                                      |       | 5,189                            |       | 3,507 |   | 8,273 |   |
| Depreciation:                             |       |                             |       |   |   |   |   |
| Segments in Venezuela:                    |       |                             |       |   |   |   |   |
| Upstream operations                       |       | 1,571                            |       | 1,718 |   | 1,714 |   |
| Downstream operations                     |       | 821                              |       | 819 |   | 441 |   |
| Petrochemical operations                  |       | 126                              |       | 145 |   | 114 |   |
| Segments in the United States of America: |       |                             |       |   |   |   |   |
| Downstream operations                     |       | 263                              |       | 300 |   | 286 |   |
| Other                                     |       | 43                               |       | 56 |   | 69 |   |
|                                      |       | 2,824                            |       | 3,038 |   | 2,624 |   |

 

----

(1)                                  Represents the elimination ofintersegment sales.

 

(2)                                  Before financing expenses, income taxes,minority interests and cumulative effect of accounting change for assetretirement obligations.

 

F-54

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| ** **                                | ** ** | **Years ended December 31** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **2003**                         | ** ** | **2002** | ** ** | **2001** | ** ** |
| Capital expenditure, net:                 |       |                             |       |   |   |   |   |
| Segments in Venezuela:                    |       |                             |       |   |   |   |   |
| Upstream operations                       |       | 1,276                            |       | 1,316 |   | 764 |   |
| Downstream operations                     |       | 237                              |       | 814 |   | 2,517 |   |
| Petrochemical operations                  |       | 9                                |       | (172 | ) | 110 |   |
| Segments in the United States of America: |       |                             |       |   |   |   |   |
| Downstream operations                     |       | 357                              |       | 754 |   | 292 |   |
| Other                                     |       | 90                               |       | 31 |   | 98 |   |
|                                      |       | 1,969                            |       | 2,743 |   | 3,781 |   |
| Property, plant and equipment, net:       |       |                             |       |   |   |   |   |
| Segments in Venezuela:                    |       |                             |       |   |   |   |   |
| Upstream operations                       |       | 19,951                           |       | 20,415 |   | 21,673 |   |
| Downstream operations                     |       | 8,324                            |       | 9,024 |   | 8,899 |   |
| Petrochemical operations                  |       | 1,808                            |       | 1,925 |   | 2,241 |   |
| Segments in the United States of America: |       |                             |       |   |   |   |   |
| Downstream operations                     |       | 3,833                            |       | 3,750 |   | 3,293 |   |
| Other                                     |       | 804                              |       | 757 |   | 782 |   |
|                                      |       | 34,720                           |       | 35,871 |   | 36,888 |   |

 

Net sales and long-livedassets information by geographic area are summarized below (in millions ofdollars):

 
| ** **                  | ** ** | **Venezuela** | ** ** | **United States  of America** | ** ** | **Other  Countries (3)** | ** ** | **Total** | ** ** |
|-----------------------------|------------|---------------|------------|-------------------------------|------------|--------------------------|------------|-----------|------------|
| **December 31,  2003** |       |          |       |                          |       |                     |       |      |       |
| Net sales (1)               |       | 20,659        |       | 25,216                        |       | 335                      |       | 46,210    |       |
| Long-lived assets (2)       |       | 37,834        |       | 5,039                         |       | 2,178                    |       | 45,051    |       |
|                        |       |          |       |                          |       |                     |       |      |       |
| **December 31,  2002** |       |          |       |                          |       |                     |       |      |       |
| Net sales (1)               |       | 22,309        |       | 19,358                        |       | 645                      |       | 42,312    |       |
| Long-lived assets (2)       |       | 37,874        |       | 5,086                         |       | 1,320                    |       | 44,280    |       |
|                        |       |          |       |                          |       |                     |       |      |       |
| **December 31,  2001** |       |          |       |                          |       |                     |       |      |       |
| Net sales (1)               |       | 26,184        |       | 19,602                        |       | —                   |       | 45,786    |       |
| Long-lived assets (2)       |       | 40,402        |       | 4,432                         |       | 2,351                    |       | 47,185    |       |

 

----

(1)                                  Based on the country in which the salesoriginate.

 

(2)                                  Based on the location of the asset.

 

(3)                                  The long-lived assets consist primarilyof investments in non-consolidated investees.

 

F-55

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# **(20)**         Commitmentsand Contingencies

 

***Guarantees andOther***Commitments

 

As of December 31, 2003, some of PDVSA’s subsidiaries haveconstruction completion guarantees related to debt and financing arrangementssecured by joint venture projects.  Thesubsidiaries, projects, guarantee obligations and year of termination arepresented below (in millions of dollars):

 
| **Subsidiary/Project**                       | ** ** | **Guarantee  obligations** | ** ** | **Year of  termination** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|--------------------------|------------|
| PDV Holding  Inc./Merey Sweeny, L.P. (MSLP)  |       | 175                        |       | 2004                     |       |
| CITGO/affiliates  and other                  |       | 53                         |       | 2004-2009                |       |
| PDVSA  Petróleo/Hamaca Project          |       | 291                        |       | 2005                     |       |
| PDVSA  Petróleo/Sincor Project          |       | 16                         |       | 2005                     |       |
| PDVSA  Petróleo/Ministry of Environment |       | 34                         |       | 2007                     |       |

 

PDVSA and its affiliateshave guaranteed the debt of others in a variety of circumstances includingletters of credit, bank debt and customer debt amounting to $100 million as of December 31,2003.  No liabilities have been recordedfor these amounts.

 

***Litigation andOther Claims***

 

In August 1999, theU.S. Department of Commerce rejected a petition filed by a group of independentoil producers to apply antidumping measures and countervailing duties againstimports of crude oil from Venezuela and some other countries.  The petitioners appealed this decision beforethe U.S. Court of International Trade based in New York.  On September 19, 2000, the Court ofInternational Trade remanded the case to the Department of Commerce withinstructions to reconsider its August 1999 decision.  The Department of Commerce was required tomake a revised decision as to whether or not to initiate an investigation.  The Department of Commerce appealed to theU.S. Court of Appeals for the Federal Circuit, which dismissed the appeal aspremature on July 31, 2001.  TheDepartment of Commerce issued its revised decision, which again rejected thepetition, in August 2001.  Therevised decision was affirmed by the Court of International Trade on December 17,2002.  In February 2003, theindependent oil producers appealed the Court of International Trade’s decisionto the Federal Circuit. On January 30, 2004 the U.S. Court of Appeals forthe Federal Circuit affirmed the decision of the Court of International Trade.

 

In February 2002,LYONDELL-CITGO commenced an action against PDVSA and PDVSA Petróleo, in theUnited States District Court for the Southern District of New York seekingdamages for alleged breaches of the long-term crude oil supply agreementbetween LYONDELL-CITGO and Lagoven (subsequently merged into PDVSA Petróleo)and the supplemental supply agreement, between LYONDELL-CITGO and PDVSA.  Both agreements are dated May 5, 1993and expire in 2017.  On May 31,2002, PDVSA and PDVSA Petróleo filed a motion to dismiss the case.  On August 6, 2003, the judge dismissedone of the ten counts in the complaint, allowing the remaining counts toproceed through early stages of litigation. The parties engaged in extensive discovery beginning in November 2003.  In the course of expert discovery, on September 30,2004, one of LYONDELL-CITGO’s retained experts filed a report listing theamount of liquidated damages owed by PDVSA and PDVSA Petróleo to LYONDELL-CITGOthrough September 2004 as $125 million. For the same period, LYONDELL-CITGO’s expert calculated the amount ofactual damages as $258 million to $260 million, depending on the method used to

 

F-56

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calculate interest.  LYONDELL-CITGO also claims additionalunspecified amounts for attorneys’ fees and costs.  Discovery was formally concluded on October 1,2004.  On October 1 and October 6,2004, the magistrate judge issued orders directing PDVSA and PDVSA Petróleo toproduce all Board of Directors minutes and related documents toLYONDELL-CITGO.  PDVSA informed themagistrate judge that it could not comply with his order because grantingLYONDELL-CITGO unrestricted access to PDVSA’s Board of Directors materialsviolated Venezuelan law.  The magistratejudge entered an adverse inference sanction against PDVSA and PDVSA Petróleo,ordering that the court may infer that the Board of Directors’ documents wereunfavorable to PDVSA and favorable to LYONDELL-CITGO.  The magistrate judge also ordered that thecourt may give the strongest weight to the evidence already in the case infavor of LYONDELL-CITGO, but may also consider any evidence presented by PDVSAto explain why it did not produce the Board of Directors materials.  The judge affirmed the magistrate judge’sadverse inference instruction on April 29, 2005.  Meanwhile, on October 22, 2004, bothparties filed motions for summary judgment with the court, which have beenfully briefed.  These motions are stillpending.  Management of the companiesintends to contest vigorously LYONDELL-CITGO’s claims.

 

On April 11, 2003, a legal action was filed against PDVSA and itssubsidiaries PDVSA Petróleo, PDVSA Finance and CITGO in the federal districtcourt of Denver, Colorado, USA.  Theplaintiff is a U.S. oil and gas exploration and production company that hasallegedly entered into an exclusive offshore license agreement with thegovernment of Grenada to explore, develop, produce and market oil and/ornatural gas in 4.75 million offshore acres between Grenada and Venezuela.  The plaintiff alleges that PDVSA hasinterrupted and otherwise interfered with its ability to develop and market Grenada’soil and natural gas resources in violation of the U.S. antitrust laws.  The plaintiff seeks damages in an amount tobe established at trial that it believes should exceed $100 million.  The companies deny the allegations andcomplaints and intend to contest the case vigorously if it proceeds.  In November 2003, the plaintiff filed aNotice of Dismissal, without prejudice, with respect to PDVSA Finance.  The defenses will continue for the case ofPDVSA, PDVSA Petróleo and CITGO.  On September 30,2004 the court, where the case is dealt with, announced a decision favorable toPDVSA.  The plaintiff appealed againstthe final outcome of the case, and the decision relating to that appeal ispending.  Management and their legalcounsel believe that the companies have substantial defenses.

 

The work stoppage promoted by some sectors during December 2002and the first months of 2003 which interrupted the operations of PDVSA and itsVenezuelan subsidiaries (see note 21), resulted in the termination of the laborrelationship, beginning January 1, 2003, for approximately 18,000 workersof PDVSA and its subsidiaries in Venezuela (of its then total labor force ofapproximately 45,000 workers).  In theopinion of PDVSA’s management and its legal advisors, the dismissals werecarried out in conformity with the Venezuelan Organic Labor Law (LOT), and allthe significant outstanding labor benefits, pursuant to PDVSA’s collectivelabor contract and the Venezuelan LOT, have been accrued for as of December 31, 2003and 2002. The employees fired from PDVSA have filed a re-hiring request withthe labor court. Management and their legal counsel believe that this matterwill be resolved in favor of the Company.

 

PDVSA previously outsourced its information technology services to INTESA,based on a joint venture and a services agreement.  INTESA is a Venezuelan company owned 60% bySAIC Bermuda Ltd. and 40% by PDV-IFT, a subsidiary of PDVSA.  PDVSA gave notice of termination of theservices agreement, in accordance with the contract, on June 28,2002.  PDVSA has proposed a plan tojointly liquidate INTESA and to honor all valid obligations with the employeesand providers.  PDVSA has been assignedand has paid a significant portion of INTESA’s obligations with providers,which will be offset against the debt that

 

F-57

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PDVSA has with INTESA. Management and their legal counsel believe that this matter will beresolved in favor of the Company.

 

In May 2003, an arbitration proceeding was commenced in theInternational Court of Arbitration against PDVSA Petróleo in connection with adispute arising under an alleged contract for the sale and purchase of 50,000MMT of unleaded gasoline dated February 19, 2003.  The plaintiffs are claiming for damagesamounting to $14 million.  Management andtheir legal advisors deny the allegations and have contested the claimsvigorously.  Management and their legalcounsel believe that they have substantial defenses to the claims asserted.

 

The Company is involved in various other claims and legal actions inthe ordinary course of business amounting to $2,900 million.  In the opinion of management, the ultimatedisposition of these matters will not have a material adverse effect on theCompany’s consolidated financial position, results of operations, or liquidity.

 

Based on an analysis of the available information, a provision as of December 31,2003 and 2002, amounting to $380 million and $46 million, respectively, isincluded in accrued and other liabilities relating to all the contingenciesdescribed above (see note 17).  If knownlawsuits and claims were to be determined in a manner adverse to the Company,and in amounts greater than the Company’s accruals, then such determinationscould have a material adverse effect on the Company’s results of operations ina given reporting period.  Although it isnot possible to predict the outcome of these matters, management, based in parton advice of its legal counsel, does not believe that it is probable that lossesassociated with the proceedings discussed above, that exceed amounts alreadyrecognized, will be incurred in amounts that would be material to the Company’sfinancial position or results of operations.

 

***EnvironmentalCompliance and Remediation***

 

The majority of PDVSA’s subsidiaries, both in Venezuela and abroad, aresubject to various environmental laws and regulations under which they may berequired to make significant expenditures to modify their facilities and toprevent or remedy the environmental effects of waste disposal and spills ofpollutants.  In the United States andEurope, PDVSA’s operations are subject to various federal, state and localenvironmental laws and regulations, which may require them to take action toremedy or alleviate the effects on the environment of earlier plantdecommissioning or leakage of pollutants.

 

PDVSA is taking important steps to prevent risks to the environment,people’s health, and the integrity of its installations.  In 2003, PDVSA continued implementing itsIntegral Risk Management System (SIR-PDVSA®) throughout the company.  The full deployment of this system isexpected to be completed by 2006.  Thismanagement system is based on international practices and standards, such asISO 14001 for Environmental Management, ISO 18000 & British StandardBS 8800 for health and the Occupational Safety and Health Administration (OSHA)’sand American Petroleum Institute (API)’s 750 for process safety.  In addition, PDVSA has an investment plan tocomply with the applicable environmental regulations in Venezuela.  This investment plan contemplatesapproximately $2,255 million in capital expenditure from 2004 through 2009,including the following:  $1,150 millionfor product quality; $911 million for risk control at operating sites; $162million for environmental compliance projects; and $32 million for otherenvironmental-related investments. CITGO estimates expenditures ofapproximately $785 million for environmental and regulatory capital projectsfrom 2004 through 2008.  During 2003,PDVSA spent approximately $59 million in Venezuela and CITGO spentapproximately $253 million for environmental and regulatory capitalimprovements in its operations.

 

F-58

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Additionally and as part of the environmental responsibility of PDVSA,there is a plan to remediate a total of 12,392 petroleum pits (excavations madeon the soil surface to store oil sludge and / or drilling cuts).  The plan has an expected duration of 12 yearsand started in 2001.  As of December 2003,a total of 3,417 petroleum pits have been remediated.  During the year ended December 31, 2003,the corporate management of PDVSA’s Safety, Health and Environment obtaineddetailed information that allowed determining the value of liabilitiesassociated with the remediation of pits and other environmental damages.Accordingly, the Company’s management decided to record those commitments,which amount to $408 million, with a charge to 2003 results.  The accrual for environmental issues as of December 31,2003, is $473 million (see note 17).

 

During the work stoppage in December 2002 and the firstmonths of 2003, there were oil spills which affected the environment inVenezuela.  Two technical reports wereprepared, one by INTEVEP (PDVSA’s Research and Development Center) and ICLAM(Maracaibo Lake Conservation Institute) and the other by Simón BolívarUniversity and IVIC (Venezuelan Scientific Investigations Institute).  Both reports conclude that the impact of theoil spills were minor and were located principally in the Maracaibo Lakearea.  These conclusions were confirmedby the Ministry of Environment.  Theremediation costs for these minor oil spills were covered by the operatingbudget of the Western Operations Division of PDVSA (see note 21).

 

CITGO has received various notices of violation from the EnvironmentalProtection Agency (EPA) and other regulatory agencies, which include noticesunder the federal Clean Air Act, and could be designated as PotentiallyResponsible Parties (“PRPs”) jointly with other industrial companies withrespect to sites under the Comprehensive Environmental Response, Compensation,and Liability Act (CERCLA).  Thesenotices are being reviewed and, in some cases, remedial action is being takenor CITGO is engaged in settlement negotiations.

 

Conditions that require additional expenditures may exist at varioussites including, but not limited to, the Company’s operating complexes, servicestations and crude oil and petroleum storage terminals.  Management believes that these matters, inthe normal course of operations, will not have a material effect on thefinancial position, liquidity or operations of PDVSA.

 

# **(21)**         Effectsof the Work Stoppage on PDVSA

 

During December 2002 and the first months of 2003, a series ofnational events significantly interrupted the economic activities inVenezuela.  Concurrently, a substantialgroup of workers from PDVSA and its Venezuelan subsidiaries abruptly initiateda work stoppage that interrupted the Company’s normal ongoing operationsin Venezuela, that continued despite requests made by management of the Companyin the local media for them to return to their positions.  PDVSA is of the opinion that thisinterruption of the activities, and related actions, constituted sabotage, andaccordingly the Company has referred the matter to the competent authorities,including the General Prosecutor of the Republic, to establish thecorresponding responsibilities.

 

Management of PDVSA believes that this interruption, in the normal ongoingactivities of PDVSA’s Venezuelan operations, was a major contributing factor toa significant reduction in PDVSA’s production volumes of oil and natural gas in2003 and, to a lesser extent, to the reductions in production volumesexperienced in 2002.  Managementattributes this reduction in crude oil and natural gas production as a majorcause to the reduction in the exports of crude oil and products from Venezueladuring 2003 and 2002.  Presented below isa comparison of the export volumes and average price per barrel of exports of

 

F-59

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PDVSA’s principal Venezuelan subsidiary, PDVSA Petróleo, for the yearsended December 31, 2003, 2002 and 2001:

 
| **Year**   | ** ** | **Export volumes of****Crude oil and products** | ** ** | **Average price per****Barrel of exports** | ** ** |
|------------|------------|-------------------------------------------------|------------|--------------------------------------------|------------|
| ** ** | ** ** | **(in thousands of barrels)**                   | ** ** | **(US$ per barrel)**                  | ** ** |
| 2003(*)    |       | 760,718                                         |       | 24.78                                      |       |
| 2002(*)    |       | 870,473                                         |       | 21.84                                      |       |
| 2001       |       | 1,026,271                                       |       | 20.14                                      |       |

 

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(*) Work stoppage commenced in December 2002and continued into 2003.

 

During the period that PDVSA’s operations wereinterrupted, the Venezuelan Government authorized PDVSA to purchase petroleumand diesel on the international market in order to meet the needs of the localmarket.  These purchases were made at internationalprices that are higher than sales prices in the local market.  The difference between the internationalpurchase price for such petroleum products and the related sales pricesrealized in Venezuela resulted in an unfavorable effect for the Company in 2003of approximately $504 million.  Basedupon an evaluation made by PDVSA, the Company’s upstream and downstreaminstallations in Venezuela were also damaged by the work stoppage, resulting inlosses of approximately $209 million. Both amounts are reflected in the results of operations in 2003.

 

As a result of the work stoppage and theextensive reduction in the Company’s workforce there were certain weaknesses ininternal controls, which affected the processing of the Company’s financial andoperational information during December 2002 and an important part of2003. During the affected period, the Company concentrated its efforts onfilling key managerial positions and hiring and training new personnel to takecharge of information, financial, administrative and operating systems and onthe implementation of alternative controls. Pre-existing controls have been progressively re-established.

 

# **(22)**         SubsequentEvents

 

The most significant events considered, after thebalance sheet, are summarized as follows:

 

## ***(a)****                                 FundsAllocation for Social Programs*

 

As part of the support to various social programsestablished by the National Government, during 2004 and part of 2005, thefollowing activities have been carried out:

 

•                                          Atan Extraordinary Stockholder’s Meeting held on January 15, 2004, PDVSAapproved the creation of *Fondo de InversíonAgrícola Zamora* (Zamora Agricultural Investment Fund), with apartial contribution of up to $600 million, payable in bolivars.  This Fund will be used to make payments forthe execution of programs and projects relating to the country’s agriculturalsector expressly indicated by the National Government through the Ministry ofAgriculture and Lands, and with the involvement of public entities designatedby this Ministry, which will act as executors through contacts ofadhesion.  The total contribution of $600was made in 2004.

 

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•                                          Duringan Extraordinary Stockholder’s Meeting held on January 23, 2004, PDVSAapproved the creation of a fund aimed to honor the obligations acquired by CVPin connection with the execution of programs and projects for the developmentof educational, health, agricultural and industrial areas, together withhighways and roads, among others.  Thefiduciary fund is named Fondo para el Desarrollo Económico y Social del País(FONDESPA), comprising extraordinary income, net of royalties and taxesprovided by the export of crudes and byproducts exceeding the average price of$23 per barrel.  This fund is comprisedof an initial contribution of $1,000 million, and subsequent contributions of$250 million, and a contribution in bolivars equivalent to $1,042 million.

 

•                                          Duringan Extraordinary Stockholder’s Meeting held on September 30, 2004, PDVSAapproved the modification of CVP’s statutes for it to support social welfareactivities.  During 2004 and part of2005, PDVSA has participated in various programs established by the NationalGovernment, by making contributions in bolivars from donations, and for socialMissions (see note 18).

 

## ***(b)****                                 ForeignExchange Regime*

 

On February 6, 2004, the National Government andthe BCV superseded exchange agreement No. 2 of February 5, 2003,fixing the exchange rates for sales and purchases at Bs1,920.00 to $1 andBs1,915.20 to $1, respectively.  Also,the new agreement establishes the payment at the exchange rates set forth inthe former agreement, for some purchase and sale operations pending payment andsome operations in transit made by the exchange operators (see note 2).

 

On March 1, 2005, the National Government and theBCV superseded exchange agreement No. 2 dated February 6, 2004,fixing the exchange rates for sales and purchases at Bs2,150.00 to $1 andBs2,144.60 to $1, respectively.

 

## ***(c)****                                  Purchaseof PDVSA Finance’s Debt*

 

On June 28, 2004, PDVSA Finance made a publicoffer in cash for the purchase of a portion or the entirety of bonds issued bysuch entity.  Simultaneously with thisoffer, the subsidiary asked for the consent of the bondholders to amend certainprovisions of the Indenture and Supplemental Indentures, under which eachseries of bonds had been issued.  Theadoption of the amendments proposed required the consent of the majority of thebondholders of the main aggregated amount of each series owed by then, byvoting for all of them as a single class. Bondholders with an aggregateapproximating to 96.34% of the principal amount of the notes, participated inthe offer and granted their consent in accordance with the purchase offer.  According to this offer, on August 2,2004 the subsidiary purchased a principal amount of such debt of $2,512 million(see note 14).  Resulting from therepurchase of the notes, a premium of $54.8 million plus dealer/manager fees of$15.1 million and expenses of $1.7 million were charged to the 2004 results ofoperations.

 

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## ***(d)****                                 Taxesand Contributions to the National Tax Authorities*

 

On August 11, 2004, the Partial Reform Law of theValue Added Tax Law was published, reducing the rate applicable to the taxablebase from 16% to 15%.  This Law becameeffective on September 1, 2004 (see note 12 (d)).

 

On August 17, 2004, the Business Assets Tax Lawof November 26, 1993 was repealed, effective September 1, 2004 (seenote 12(c)).

 

In October 2004, the MEP established a new rateof royalties for the exploitation of extra-heavy crudes of the Orinoco Belt,carried out by the strategic associations, of 16-2/3 %, after October 11,2004 (see notes 10(a) and 12(b)).

 

## ***(e)****                                  Benefitsto Workers*

 

In December 2004, PDVSA signed a new collectivelabor contract, effective until 2006, whereby salary improvements and socialbenefits for the workers of the contractual payroll were introduced (see note1(k)).

 

During 2005, the Company decided to incorporateapproximately 5,300 workers, who worked formerly for contractor companies.Currently, the Company’s management is assessing the net effect of somecontractual rights and benefits that might result from this decision.

 

## ***(f)****                                    Transferof Subsidiaries to Governmental Entities*

 

In a Decree dated January 30, 2004, issued by thePresidency of the Bolivarian Republic of Venezuela and published in OfficialGazette on February 2, 2004, the National Government approved the transferof PDVSA’s ownership rights in the stock of Carbozulia to the Corporación deDesarrollo de la Región Zuliana (Corpozulia) (see note 7).

 

By presidential decree published in Official Gazetteon January 21, 2005, it was decided to separate Pequiven, a subsidiary ofPDVSA, for it to become Corporación Petroquímica de Venezuela attached to theMinistry of Basic Industries and Mining. The transformation of this subsidiary still requires a series of legal,financial and structural adjustments. The National Government has committed to guarantee the supply of rawmaterials by PDVSA, support the national petrochemical plan, promote the newPetrochemical Law, ensure the financing for new investments and accelerate theexecution of projects.  The terms for thetransfer of such subsidiary have not been defined.  The financial statements of Pequivenrepresent 5% of total assets as of December 31, 2003 and2% of total revenues for the year then ended of the related consolidatedtotals in respect of PDVSA’s consolidated financial statements.

 

## ***(g)****                                 Eventsthat affect CITGO*

 

CITGO received an informal inquiry from the Securitiesand Exchange Commission (“SEC”) seeking information from CITGO regarding aninquiry being conducted by a special commission of the Venezuelan NationalAssembly (the “VNA”), allegations made by a CITGO employee in a letter sent toboth CITGO’s auditors as well as the SEC, and CITGO’s October 2004 tenderoffer

 

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for 11-3/8% senior notes.  CITGO is cooperating and has provided therequested information to the SEC.  On July 27,2005, the VNA announced that it had concluded its inquiry.  No claims of wrongdoing were made againstCITGO or its directors, officers or employees as a result of the inquiry.  In March 2005, a CITGO employee sent amemorandum to both CITGO’s auditors and the SEC referencing the VNA inquiry andmatters related to CITGO’s internal audit department.  An independent counsel investigation did notfind any evidence of any acts or omissions that could have resulted in materialmisstatements in any of CITGO’s previously issued financial statements or anyother acts or omissions by CITGO in violation of federal securities laws;however, they took note of, but did not address matters that were the subjectof, pending internal reviews.  Thesereviews involve payments beginning in 1999, a portion of which were made forthe benefit of the Venezuelan Government which owns PDVSA, CITGO’s ultimateparent entity.  These payments includescholarship payments made to several Venezuelan students, payments made toassist the Venezuelan Embassy in Washington, D.C. with building improvementsand event costs, travel expenses paid on behalf of Venezuelan Governmentofficials in connection with business conferences in the United States orvisits to CITGO’s facilities, and payments for various cultural and charitableactivities.  The aggregate amount of suchpayments is not material in relation to the consolidated financialstatements.  CITGO is continuing toreview those payments as well as their compliance with applicable law.  A second independent counsel was retained toinvestigate the employee’s allegations regarding the management and integrityof the Company’s internal audit department. The second independent counsel concluded that there was no substance tosuch allegations.

 

## ***(h)****                                 EnergyAgreements/Covenants*

 

Subsequent to December 31, 2003, the NationalGovernment entered into certain energy agreements with the governments of thefollowing countries, mainly from Latin America and the Caribbean:

 
| **Country**          | ** ** | **Company** | ** ** | **(MPBD)** | ** ** |
|----------------------|------------|-------------|------------|------------|------------|
| Uruguay              |       | ANCAP       |       | 43.80      |       |
| Dominican  Republic  |       | REFIDOMSA   |       | 50.00      |       |
| Argentina            |       | CAMMESA     |       | 9.00       |       |
| Paraguay             |       | PETROPAR    |       | 24.66      |       |
| Bolivia              |       | YPFB        |       | 1.65       |       |
| Jamaica              |       | PETROJAM    |       | 21.00      |       |
| Carribean  countries |       | Various     |       | 27.60      |       |
| Total                |       |        |       | 177.71     |       |

 

The agreements entered into with Caribbean countriesinclude the following; Antigua and Barbuda, the Bahamas, Belize, DominicanRepublic, Guyana, Saint Kitts and Nevis, Saint Vincent and the Grenadines,Santa Lucia and Suriname, which are members of the Energy Cooperation AgreementPETROCARIBE.  These agreements are in theprocess of formalization and their terms are being negotiated.

 

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The agreement with the Dominican Republic was signedin November 2004, and revised in September 2005, through theparticipation of this country in the Energy Cooperation Agreement PETROCARIBE.

 

The agreement entered into with every countryestablishes that PDVSA will enter into a covenant for the supply of crude oiland refined products with the national oil company of each of these countriesbased on a number of barrels agreed by the Venezuelan Government.

 

These supply agreements provide for, among otherconditions, a sale price equivalent to the market value, payment terms ofbetween 30 and 90 days for a significant portion of every shipment, and along-term financing of the remaining portion (between 15 and 20 years).  The agreements will be effective for oneyear, and may be extended by mutual agreement of the parties involved.

 

In accordancewith an agreement subscribed in 2000, PDVSA supplied 53 MBPD of crude oil toCuba.  In 2004 this agreement wasmodified to supply 92 MBPD of crude oil.

 

## ***(i)****                                    NewCentral Bank Law*

 

A new Central Bank Law came into effect in July 2005,which establishes a new regime for PDVSA’s foreign currency transactions.  According to this new regime, PDVSA will onlybe obligated to sell to the BCV the foreign currency revenues necessary to meetits local currency obligations.  Theremaining foreign currency amounts can be held by PDVSA in order to meet itsforeign currency obligations and investments. Any amount in excess of the above shall be transferred by PDVSA to aFund created by the Executive Branch. For the implementation of this new regime, a new exchange agreementbetween the Ministry of Finance and the BCV is currently under consideration.

 

## ***(j)****                                    RefineriesAffected by Recent Hurricanes*

## ** **

During the months of August and September 2005,some hurricanes affected the Caribbean area and the Gulf Coast and East Coastof The United States of America.  As aresult of these natural events, the activities of some of the refineriesoperated by PDVSA’s subsidiaries have been interrupted and operations areexpected to be resumed during the next weeks. Estimated damages to PDVSA’s installations are not consideredsignificant in relation to the consolidated financial statements of PDVSA.

 

## ***(k)****                                 ReportingRequirements Pursuant to the Indenture*

 

Pursuantto the terms of the senior indenture, dated as of May 14, 1998 between theCompany’s finance subsidiary, PDVSA Finance, and J.P. Morgan Chase Bank(formerly, “The Chase Manhattan Bank”), as Trustee (the “Trustee”), assupplemented, PDVSA Finance is required to provide audited financial statementsto the Trustee within 180 days after year-end. On June 30, 2005, PDVSA Finance provided to the Trustee its annualaudited financial statements for the fiscal year ended December 31, 2004,prepared in accordance with International Financial Reporting Standards (IFRS)(formerly International Accounting Standards or IAS) adopted by theInternational Accounting Standards Board.

 

Aspart of the continuing review of PDVSA Finance’s financial statements bymanagement and the Company’s Independent Registered Public Accounting Firm, ithas been identified that

 

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approximatelyUS$72 million was paid by PDVSA Petróleo in respect of expenses and premiums inconnection with PDVSA Finance’s cash tender offer that should have beenrecorded in PDVSA Finance’s financial statements for the fiscal year ended December 31,2004 as an expense of PDVSA Finance with a corresponding contribution fromPDVSA to PDVSA Finance.  Accordingly, wehave been advised that the audit opinion with respect to PDVSA Finance’sfinancial statements for the fiscal year ended December 31, 2004 will beretracted and that such financial statements should be restated to reflect suchexpense and corresponding contribution.

 

It isunclear whether such restatement of PDVSA Finance’s financial statements forthe year ended December 31, 2004 previously provided to the Trustee on atimely basis would constitute an event of default under the terms of the seniorindenture, as supplemented, which occurred subsequent to December 31,2003.  Nonetheless, the Company and itslegal counsel are of the opinion that any event of default that may result fromsuch restatement would be cured upon the delivery of the restated financialstatements to the Trustee.  The Companyis currently in the process of completing the restatement of PDVSA Finance’sfinancial statements for the fiscal quarter ended September 30, 2004 andfor the fiscal year ended December 31, 2004.  The Company intends to deliver such restatedfinancial statements of PDVSA Finance to the Trustee promptly after itscompletion and, in any event, within 60 days.

 

Inaddition to the annual financial statements of PDVSA Finance, the seniorindenture, as supplemented, requires the Company to deliver unaudited quarterlyfinancial statements of PDVSA Finance to the Trustee within 90 days of thefirst three quarters of each year.  As ofthe date of this report the Company is in the process of finalizing theunaudited financial statements for the quarter ended June 30, 2005, andaccordingly has not delivered such to the Trustee within the 90 dayrequirement.  The Company intends todeliver the unaudited financial statements for the quarter ended June 30,2005 to the Trustee promptly after its completion with any event of defaultarising from such late submission being cured upon such presentation to theTrustee.

 

## ***(l)****                                    RecentlyIssued Accounting Standards*

 

During 2004 and 2005 new accounting standards wereissued that include, among others:

 

In March 2004, the EITF reached a consensus onIssue 03-01, The Meaning of Other-Than-Temporary Impairment and Its Applicationto Certain Investments (EITF 03-01). EITF 03-01 provides a step model todetermine whether an investment, within the scope of the EITF Issue, isimpaired and if an impairment is other-than-temporary.  In addition, it requires that investorsprovide certain disclosures for cost method investments and, if applicable,other information related specifically to cost method investments.  The EITF 03-01 impairment model shall beapplied prospectively to all current and future affected investments, effectivein reporting periods beginning after June 15, 2004.  The disclosure requirements are effective forannual periods for fiscal years ending after June 15, 2004. PDVSA is inthe process of analyzing the effects of this statement.

 

In April 2004, the FASB issued FASB StaffPosition No. 141-1 and No. 142-2, “Interaction of FASB Statements No. 141,Business Combinations, and No. 142, Goodwill and Other Intangible Assets,and EITF Issue No. 04-2, “Whether Mineral Rights Are Tangible orIntangible Assets.”  (“FSP FAS 141-1 andFAS 142-2”). This FSP amends statements 141 and 142 to address theinconsistency between the consensus on EITF issue 04-02, that mineral rightsare tangible assets

 

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and the characterization of mineral rights asintangible assets in statements 141 and 142. The guidance in this FSP should be applied to the first reporting periodbeginning after April 29, 2004.

 

In September 2004, the FASB issued FASB StaffPosition EITF 03-1-1 “Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1”(FSP EITF 03-1-1). FSP EITF 03-1-1 delays the effective date for themeasurement and recognition guidance contained in paragraphs 10-20 of EITF 03-1.  The disclosure requirements of EITF 03-1remain effective for fiscal years ending after June 15, 2004. No effectivedate for the measurement and recognition guidance has been established in FSPEITF 03-1-1.  During the period of delay,FSP EITF 03-1-1 states that companies should continue to apply current guidanceto determine if an impairment is other-than-temporary.

 

In September 2004, the FASB’s Emerging IssuesTask Force issued EITF Abstract 03-13 “Applying the Conditions in Paragraph 42of FASB Statement No. 144, Accounting for the impairment or Disposal ofLong-Lived Assets, in Determining Whether to Report Discontinued Operations”(EITF 03-13) to provide guidance on applying SFAS 144, “Determining Whether toReport Discontinued Operations.” SFAS 144 discusses when an entity shoulddisclose a “component” as discontinued operations. Under SFAS 144, a componentshould be disclosed as discontinued operations when continuing cash flows areeliminated and when there is no significant continuing involvement with thecomponent. EITF 03-13 provides additional guidance on factors to consider inevaluating what constitutes continuing cash flows and continuing significantinfluence. This Statement is effective for fiscal periods beginning after December 15,2004.

 

In September 2004, the FASB issued FASB StaffPosition No. 142-2, “Application of FASB Statement No.142, Goodwill andOther Intangible Assets, to Oil-and Gas-Producing Entities” (“FSP FAS 142-2”).FSP FAS 142-2 believes that the scope exception of FASB Statement No 142includes the balance sheet classification and disclosures for drilling andmineral rights of oil-and gas-producing entities that are within the scope ofFASB Statement No. 19, Financial Accounting and Reporting by Oil-andGas-Producing Companies.  The guidance inthis FSP shall be applied to the first reporting period beginning after September 2004.

 

In October 2004, the FASB’s Emerging Issues TaskForce issued EITF Abstract EITF 04-1, “Accounting for Preexisting Relationshipsbetween the Parties to a Business Combination”. This Issue applies when twoparties that have a preexisting relationship enter into a business combination.Specifically, the Issue is whether a consummation of a business combinationbetween two parties that have a preexisting relationship should be evaluated todetermine if a settlement of a preexisting relationship exists, and theaccounting for the preexisting relationship. PDVSA is in the process of analyzing the effects of this statement.

 

In December 2004, the FASB issued FASB StaffPosition No. 109-1, “Application of FASB Statement No. 109, “Accountingfor Income Taxes,” to the Tax Deduction on Qualified Production ActivitiesProvided by the American Jobs Creation Act of 2004” (“FSP FAS 109-1”). TheAmerican Jobs Creation Act introduces a special 9% tax deduction on qualifiedproduction activities. FSP FAS 109-1 clarifies that this tax deduction shouldbe accounted for as a special tax deduction in accordance with FASB Statement No. 109.  This FSP is effective upon issuance.  The Company does not expect the adoption ofthis new tax provision to have a material impact on its consolidated financialposition, results of operations or cash flows.

 

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In December 2004, the FASB issued FASB StaffPosition No. 109-2, “Accounting and Disclosure Guidance for the ForeignEarnings Repatriation Provision within the American Jobs Creation Act of 2004”(“FSP FAS 109-2”).  The American JobsCreation Act introduces a special one-time dividends received deduction on therepatriation of certain foreign earnings to a U.S. taxpayer (repatriationprovision), provided certain criteria are met. FSP FAS 109-1 believes an enterprise is allowed time beyond thefinancial reporting period of enactment to evaluate the effect of the “repatriationprovision” on the plan for reinvestment or repatriation of foreign earnings forpurposes of applying FASB Statement No. 109.  This FSP is effective upon issuance.

 

In December 2004, the FASB issued SFAS No. 151,“Inventory Costs, an Amendment of ARB No. 43, Chapter 4”.  SFAS No. 151 amends the guidance inAccounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing”,to clarify the accounting for abnormal amounts of idle facility expense,freight, handling costs and spoilage. In addition, SFAS No. 151 requiresthat allocation of fixed production overheads to the costs of conversion bebased on the normal capacity of the production facilities.  SFAS No. 151 will be effective forinventory cost incurred on or after January 1, 2006.

 

In December 2004, the FASB issued SFAS No. 153,“Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29”.  SFAS No. 153 eliminates an exception inAPB No. 29 for non-monetary exchanges of similar productive assets andreplaces it with a general exception for exchanges of non-monetary assets thatdo not have commercial substance.  SFAS No. 153will be effective for non-monetary asset exchanges occurring on or after January 1,2006.

 

In March 2005, the FASB issued Interpretation No. 47,“Accounting for Conditional Asset Retirement Obligations” (“FIN 47”), whichclarifies the application of FASB Statement No. 143, “Accounting for AssetRetirement Obligations” (“SFAS No. 143”). FIN 47 clarifies (i) thatan entity is required to recognize a liability for the fair value of aconditional asset retirement obligation when incurred if the liability’s fairvalue can be reasonably estimated; and (ii) when an entity would havesufficient information to reasonably estimate the fair value of an assetretirement obligation. FIN 47 is effective no later than the end of fiscalyears ending after December 15, 2005. Retrospective application for interim financial information is permittedbut is not required.

 

In April 2005, the FASB issued FASB StaffPosition No. 19-1, “Accounting for Suspend Well Costs” (“FSP FAS 19-1”).FSP FAS 19-1 believes that the exploratory well costs should continue to becapitalized when the well has found a sufficient quantity of reserves tojustify its completion as a producing well and the enterprise is makingsufficient progress assessing the reserves and the economic operating viabilityof the project.  The guidance in this FSPshall be applied to the first reporting period beginning after April 2005.

 

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections” replacement of APB Opinion No. 20 and FASBStatement No. 3. Early adoption is permitted for accounting changes andcorrections of errors made in fiscal years beginning after the date thisStatement is issued. This Statement does not change the transition provisionsof any existing accounting pronouncements, including those that are in atransition phase as of the effective date of this Statement. This Statementshall be effective for accounting changes and corrections of errors made infiscal years beginning after December 15, 2005.

 

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# **(23)**         SupplementaryInformation on Oil and Gas Exploration and Production Activities (Unaudited)

 

The following tables provide supplementary information on the oil andgas exploration, development and production activities in compliance with SFAS No. 69“Disclosures about Oil and Gas Producing Activities”, published by the U.S.Financial Accounting Standards Board. All exploration and production activities are located in Venezuela,principally represented by PDVSA Petróleo and its subsidiaries and PDVSA Gas.

 

***Table I - Crude Oil and Natural Gas Reserves***

 

All the crude oil and natural gas reserves located in Venezuela areowned by the Bolivarian Republic of Venezuela. Crude oil and natural gasreserves are estimated by PDVSA and reviewed by the Ministry of Energy andMines, using reserve criteria which are consistent with those prescribed by theAmerican Petroleum Institute (API) and the U.S. Securities and Exchange Commission (SEC).

 

Proved reserves are the estimated quantities of crude oil and naturalgas which, with reasonable certainty, are recoverable in future years fromknown deposits under existing economic and operating conditions.  Due to the inherent uncertainties and limitednature of the data relating to deposits, estimates of underground reserves aresubject to change over time, as additional information becomes available.  Proved reserves do not include additionalquantities which may result from the extension of currently explored areas, orfrom the application of secondary recovery processes not yet tested anddetermined to be economically feasible.

 

Proved developed reserves are the quantities that can be expected to berecovered from existing wells with existing equipment and operatingmethods.  Proved undeveloped reserves arethose volumes which are expected to be recovered from new wells on undrilledacreage, or from existing wells where a relatively major expenditure isrequired for recompletion.

 

Proved crude oil reserves have been separated between conventionalcrude oils, consisting of light, medium and heavy grade crude oils, andextra-heavy crude oil.

 

A summary of the annual changes in the proved reserves of crude oil andnatural gas follows:

 

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#### **(a)**                                  Conventional and Extra-heavy Crude Oil Reserves(in millions of barrels):

 
| ** **                                                                                                                       | ** ** | **Years ended December 31** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                       | ** ** | **2003**                         | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                                                                                                             |       |                             |       |   |   |   |   |
| Proved developed and undeveloped reserves  of light, medium and heavy crude oil at January 1                                |       | 41,776                           |       | 42,225 |   | 41,998 |   |
| Revisions                                                                                                                        |       | 589                              |       | 238 |   | 784 |   |
| Extensions and new discoveries                                                                                                   |       | 433                              |       | 238 |   | 538 |   |
| Production                                                                                                                       |       | (844                             | )          | (925 | ) | (1,095 | ) |
| Proved developed and undeveloped reserves  of light, medium and heavy crude oil at December 31                              |       | 41,954                           |       | 41,776 |   | 42,225 |   |
| Proved developed and undeveloped reserves  of extra-heavy crude oil at December 31                                          |       | 35,186                           |       | 35,381 |   | 35,558 |   |
| Total proved developed and undeveloped reserves  at December 31                                                             |       | 77,140                           |       | 77,157 |   | 77,783 |   |
| Total proved developed reserves, submitted to  production, including extra-heavy crude oil at December 31 (included  above) |       | 16,288                           |       | 15,699 |   | 17,372 |   |

 

At December 31 2003, 2002 and 2001, proved reservesof crude oil under operating agreements amounted to 5,446 million barrels,5,501 million barrels and 5,600 million barrels, respectively (see note 10(c)).  During 2003, 2002 and 2001, thedaily production of crude oil in the areas under operating agreements wasapproximately 465,400 barrels, 481,000 barrels and 502,000 barrels,respectively.

 

Venezuela has significant reserves of extra-heavycrude (less than 8 API degrees), which are being developed in conjunction withthe production of Orimulsión® by the subsidiary BITOR, through operatingagreements which apply new technologies for refining and improvement of thecrude oil aimed at the economic viability of production. PDVSA used 22 million,25 million and 27 million barrels of extra-heavy crude oil for the productionof Orimulsión® during 2003, 2002 and 2001, respectively.  Furthermore, PDVSA is currently developingVenezuela’s significant extra-heavy crude oil reserves with several foreigncompanies through joint ventures (see note 10 (a)).

 

During the years ended December 31, 2003, 2002and 2001, the changes in proved developed and undeveloped extra-heavy crude oilreserves related to these projects and total proved developed and undevelopedextra-heavy crude oil reserves at those dates, reflecting the full amount ofthe reserves, are summarized below (in millions of barrels):

 

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| ** **                                                                                      | ** ** | **2003**     | ** ** | **2002**                       | ** ** | **2001**     | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------|------------|--------------------------------|------------|--------------|------------|
| ** **                                                                                      | ** ** | **Projects** | ** ** | **Total  including  projects** | ** ** | **Projects** | ** ** | **Total  including  projects** | ** ** | **Projects** | ** ** | **Total  including  projects** | ** ** |
| Proved developed and undeveloped reserves  of extra-heavy crude oil at January 1           |       | 10,639       |       | 35,381                         |       | 10,768       |       | 35,558 |   | 9,776 |   | 35,688 |   |
| Revisions(1)                                                                                    |       | —       |       | —                         |       | —       |       | — |   | 1,079 |   | — |   |
| Production                                                                                      |       | (156         | )          | (195                           | )          | (129         | )          | (177 | ) | (87 | ) | (130 | ) |
| Proved developed and undeveloped reserves  of extra-heavy crude oil at December 31         |       | 10,483       |       | 35,186                         |       | 10,639       |       | 35,381 |   | 10,768 |   | 35,558 |   |
| Proved developed extra-heavy crude oil  reserves at December 31                            |       | 1,751        |       | 3,010                          |       | 1,273        |       | 2,154 |   | 1,170 |   | 1,963 |   |
| Net proved extra-heavy crude oil reserves  in unincorporated joint ventures at December 31 |       | 7,916        |       |                           |       | 8,224        |       |   |   | 8,121 |   |   |   |
| Net proved extra-heavy crude oil reserves  in equity affiliate at December 31 (2)          |       | 2,567        |       |                           |       | 2,415        |       |   |   | 2,647 |   |   |   |
|                                                                                            |       | 10,483       |       |                           |       | 10,639       |       |   |   | 10,768 |   |   |   |

 

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(1)                      Includestransfers from unassigned areas.

 

(2)                      RepresentsPDVSA’s equity share of the Petrozuata extra-heavy oil joint venture.

 

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#### **(b)**                                  Natural Gas Reserves:

 
| ** **                                                                                                                                                                               | ** ** | **2003**                         | ** ** | **2002** | ** ** | **2001** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                                                                                               | ** ** | **Billions of cubic feet (BCF)** | ** ** |
|                                                                                                                                                                                     |       |                             |       |     |       |     |       |
| Proved developed and undeveloped reserves  of natural gas at January 1                                                                                                              |       | 134,655                          |       | 135,819  |       | 135,080  |       |
| Revisions                                                                                                                                                                                |       | 2,358                            |       | 468      |       | 997      |       |
| Extensions and new discoveries                                                                                                                                                           |       | 1,984                            |       | —   |       | 1,209    |       |
| Production                                                                                                                                                                               |       | (1,381                           | )          | (1,632   | )          | (1,467   | )          |
|                                                                                                                                                                                     |       |                             |       |     |       |     |       |
| Proved developed and undeveloped reserves  of natural gas at December 31                                                                                                            |       | 137,616                          |       | 134,655  |       | 135,819  |       |
| Proved reserves related to extra-heavy  crude reserves at December 31                                                                                                               |       | 12,427                           |       | 12,454   |       | 12,476   |       |
| Total proved developed and undeveloped reserves  at December 31                                                                                                                     |       | 150,043                          |       | 147,109  |       | 148,295  |       |
|                                                                                                                                                                                     |       |                             |       |     |       |     |       |
| Total proved developed reserves of natural  gas, submitted to production, including quantities associated with  extra-heavy crude oil in production at December 31 (included above) |       | 105,030                          |       | 102,191  |       | 103,807  |       |

 

Proved natural gas reserves include the portion ofliquefiable natural hydrocarbonsrecoverable in PDVSA’s processing plants. In 2003, 2002 and 2001, natural gas liquids recovered amounted to some52 million barrels, 63 million barrels and 63 million barrels, respectively.

 

Production of natural gas is shown on the basis ofactual volumes before the extraction of liquefiable hydrocarbons.  During 2003, 2002 and 2001, natural gasutilized in reinjection operations amounted to 900 BCF, 638 BCF and 695 BCF,respectively.

 

***Table II – Costs Incurred inExploration and Development Activities***

 

Exploration costs include the costs of geological and geophysicalactivities and drilling and equipping exploratory wells. Development costsinclude those of drilling and equipping development wells, enhanced recoveryprojects and facilities to extract, treat and store crude oil and naturalgas.  Annual costs, summarized below,include amounts both expensed and capitalized for PDVSA’s conventional and extra-heavycrude oil reserves (in millions of dollars):

 

F-71

----

 
| ** **          | ** ** | **2003**                   | ** ** | **2002**                               | ** ** | **2001**  | ** ** |
|---------------------|------------|----------------------------|------------|----------------------------------------|------------|-----------|------------|
| ** **          | ** ** | **Conventional  reserves** | ** ** | **Extra-  heavy  crude oil  reserves** | ** ** | **Total** | ** ** | **Conventional  reserves** | ** ** | **Extra-  heavy  crude oil  reserves** | ** ** | **Total** | ** ** | **Conventional  reserves** | ** ** | **Extra-  heavy  crude oil  reserves** | ** ** | **Total** | ** ** |
| Exploration costs   |       | 27                         |       | —                                 |       | 27        |       | 133 |   | — |   | 133 |   | 174 |   | — |   | 174 |   |
| Development costs   |       | 629                        |       | 250                                    | (2)        | 879       |       | 1,434 |   | 510 | (2) | 1,944 |   | 1,364 |   | 792 | (2) | 2,156 |   |
| Total               |       | 656                        |       | 250                                    |       | 906       |       | 1,567 |   | 510 |   | 2,077 |   | 1,538 |   | 792 |   | 2,330 |   |
| Equity affiliate(1) |       | —                     |       | 13                                     |       | 13        |       | — |   | (19 | ) | (19 | ) | — |   | 86 |   | 86 |   |
| Total               |       | 656                        |       | 263                                    |       | 919       |       | 1,567 |   | 491 |   | 2,058 |   | 1,538 |   | 878 |   | 2,416 |   |

 

----

(1)           RepresentsPDVSA’s equity share of the Petrozuata extra-heavy oil joint venture.

 

(2)           RepresentsPDVSA’s proportional share in unincorporated extra-heavy oil joint ventures.

 

***Table III – Capitalized Costs Relating to Oil and Gas ProducingActivities***

 

The following table summarizes capitalized costs ofoil and gas exploration and production activities and the related accumulateddepreciation and depletion at December 31 for PDVSA’s conventional andextra-heavy crude oil reserves (in millions of dollars):

 
| ** **                              | ** ** | **2003**                   | ** ** | **2002**                               | ** ** | **2001**  | ** ** |
|-----------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|-----------|------------|
| ** **                              | ** ** | **Conventional  reserves** | ** ** | **Extra-  heavy  crude oil  reserves** | ** ** | **Total** | ** ** | **Conventional  reserves** | ** ** | **Extra-  heavy  crude oil  reserves** | ** ** | **Total** | ** ** | **Conventional  reserves** | ** ** | **Extra-  heavy  crude oil  reserves** | ** ** | **Total** | ** ** |
| Producing assets(1)                     |       | 30,111                     |       | 2,788                                  |       | 32,899    |       | 32,486 |   | 2,638 |   | 35,124 |   | 31,255 |   | 1,038 |   | 32,293 |   |
| Support facilities                      |       | 16,204                     |       | 57                                     |       | 16,261    |       | 12,681 |   | 16 |   | 12,697 |   | 12,657 |   | 5 |   | 12,662 |   |
| Total                                   |       | 46,315                     |       | 2,845                                  |       | 49,160    |       | 45,167 |   | 2,654 |   | 47,821 |   | 43,912 |   | 1,043 |   | 44,955 |   |
|                                    |       |                       |       |                                   |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Accumulated  depreciation and depletion |       | (28,940                    | )          | (419                                   | )          | (29,359   | )          | (26,625 | ) | (239 | ) | (26,864 | ) | (25,720 | ) | (43 | ) | (25,763 | ) |
| Construction in  progress               |       | 2,027                      |       | 632                                    |       | 2,659     |       | 2,546 |   | 573 |   | 3,119 |   | 3,092 |   | 1,674 |   | 4,766 |   |
| Net capitalized costs                   |       | 19,402                     |       | 3,058                                  |       | 22,460    |       | 21,088 |   | 2,988 |   | 24,076 |   | 21,284 |   | 2,674 |   | 23,958 |   |
| Equity affiliate(2)                     |       | —                     |       | 1,388                                  |       | 1,388     |       | — |   | 1,375 |   | 1,375 |   | — |   | 1,394 |   | 1,394 |   |
| Total                                   |       | 19,402                     |       | 4,446                                  |       | 23,848    |       | 21,088 |   | 4,363 |   | 25,451 |   | 21,284 |   | 4,068 |   | 25,352 |   |
|                                         |            |                            |            |                                        |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)           Includesland of $135 million, $139 million and $139 million at December 31, 2003,2002 and 2001, respectively.

 

(2)           RepresentsPDVSA’s share of the Petrozuata extra-heavy oil joint venture.

 

F-72

----

 

***Table IV – Results ofOperations for Oil and Gas Producing Activities for Each Year (expressed inmillions of dollars):***

 
| ** **                          | ** ** | **2003**                   | ** ** | **2002**                             | ** ** | **2001**  | ** ** |
|-------------------------------------|------------|----------------------------|------------|--------------------------------------|------------|-----------|------------|
| ** **                          | ** ** | **Conventional  reserves** | ** ** | **Extra-heavy  crude oil  reserves** | ** ** | **Total** | ** ** | **Conventional  reserves** | ** ** | **Extra-  heavy  crude oil  reserves** | ** ** | **Total** | ** ** | **Conventional  reserves** | ** ** | **Extra-heavy  crude oil  reserves** | ** ** | **Total** | ** ** |
| Revenues from  production:          |       |                       |       |                                 |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales                               |       | 14,759                     |       | 981                                  |       | 15,740    |       | 13,479 |   | 633 |   | 14,112 |   | 14,091 |   | 254 |   | 14,345 |   |
| Transfers                           |       | 7,619                      |       | —                               |       | 7,619     |       | 8,322 |   | — |   | 8,322 |   | 8,931 |   | — |   | 8,931 |   |
| Production costs                    |       | (4,306                     | )          | (154                                 | )          | (4,460    | )          | (4,824 | ) | (135 | ) | (4,959 | ) | (4,888 | ) | (76 | ) | (4,964 | ) |
| Production tax                      |       | (6,267                     | )          | (31                                  | )          | (6,298    | )          | (5,642 | ) | (17 | ) | (5,659 | ) | (3,701 | ) | (32 | ) | (3,733 | ) |
| Depreciation and  depletion         |       | (1,665                     | )          | (177                                 | )          | (1,842    | )          | (1,882 | ) | (165 | ) | (2,047 | ) | (1,479 | ) | (25 | ) | (1,504 | ) |
| Exploration costs                   |       | (27                        | )          | —                               |       | (27       | )          | (133 | ) | — |   | (133 | ) | (174 | ) | — |   | (174 | ) |
| Results before  income taxes        |       | 10,113                     |       | 619                                  |       | 10,732    |       | 9,320 |   | 316 |   | 9,636 |   | 12,780 |   | 121 |   | 12,901 |   |
| Income taxes                        |       | (4,926                     | )          | (79                                  | )          | (5,005    | )          | (4,494 | ) | (17 | ) | (4,511 | ) | (8,218 | ) | — |   | (8,218 | ) |
| Results from  production operations |       | 5,187                      |       | 540                                  |       | 5,727     |       | 4,826 |   | 299 |   | 5,125 |   | 4,562 |   | 121 |   | 4,683 |   |
| Equity  affiliate(1)                |       | —                     |       | 125                                  |       | 125       |       | — |   | 213 |   | 213 |   | — |   | 114 |   | 114 |   |
| Total                               |       | 5,187                      |       | 665                                  |       | 5,852     |       | 4,826 |   | 512 |   | 5,338 |   | 4,562 |   | 235 |   | 4,797 |   |

 

----

(1)           RepresentsPDVSA’s equity share of the Petrozuata extra-heavy oil joint venture.

 

Revenues from crude oil production are calculatedusing market prices as if all production were sold.

 

The difference between the results before income taxesreferred to above (Conventional Reserves) and the operating income reported forthe upstream segment in note 19 for the years ended 2003, 2002 and 2001, ismainly due to:  (1) the use oftransfer prices for segment reporting purposes and market prices in the resultsof operations, and the reclassification of sales of gas to the downstreamoperations segment of some $1,138 million, $2,870 million and $2,796 million,respectively; (2) the inclusion in the business segment of generalexpenses and other of some $1,274 million, $2,734 million and $2,061 million,respectively and; (3) certain intercompany charges of some $391 millionduring 2001, recognized only for segment reporting purposes.

 

Productioncosts are lifting costs incurred to operate and maintain productive wells andrelated equipment and facilities, including such costs as operating labor,materials, supplies, fuel consumed in operations and the costs of operatingnatural liquid gas plants.  Productioncosts also include administrative expenses and depreciation and depletion ofequipment associated with production activities.  In addition, they include operating fees forcertain fields operated by specialized companies under operating agreements.

 

F-73

----

 

Production costs include $2,345 million, $2,174million and $2,110 million, paid to independent contractors under servicecontracts during 2003, 2002 and 2001, respectively, which relate to theproduction of 170 million, 176 million and 183 million barrels of crude oilduring 2003, 2002 and 2001, respectively.

 

The costs of extra-heavy crude production include theexpenses incurred to operate and maintain the productive wells, as well astransportation and handling expenses.

 

Exploration costs include those related to thegeological and geophysical activities and non-productive exploratory wells.Depreciation and depletion expenses relate to assets employed in explorationand development activities.  Income taxexpense is calculated using the statutory rate for the year.  For these purposes, results of operations donot include financing expenses and corporate overhead nor their associated taxeffects.

 

The following table summarizes average per unit salesprices and production costs for the years ended December 31 (in dollars):

 
| ** **                                                                              | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Average  sales price:                                                                   |       |     |       |     |       |     |       |
| Crude oil, per barrel                                                                   |       | 24.35    |       | 21.19    |       | 18.95    |       |
| Natural gas liquids, per barrel                                                         |       | 18.84    |       | 17.65    |       | 19.55    |       |
| Natural gas, per barrel                                                                 |       | 3.20     |       | 4.34     |       | 5.35     |       |
| Average  production costs, per barrel of oil equivalent                                 |       | 3.85     |       | 3.92     |       | 3.38     |       |
| Average production costs, per barrel of oil  equivalent, excluding operating agreements |       | 2.06     |       | 2.42     |       | 2.17     |       |

 

***Table V - Standardized Measureof Discounted Future Net Cash Flows Related to Proved Oil and Gas Reserves***

 

Due to uncertainties surrounding the timing of the ultimatedevelopment of the country’s extra-heavy crude oil reserves, only theconventional proved reserves and those reserves related to PDVSA’sparticipation in the extra-heavy crude oil projects have been used in thecalculation of discounted future net cash flows.

 

Estimated future cash inflows from production arecomputed by applying year-end prices for oil and gas to year-end quantities ofestimated proved reserves.  Future incomefrom extra-heavy crude oil production is determined using prices and quantitiesof the upgraded crude that will be produced in the upgrading facilities.  Upgraded crude oil prices approximate thoseof conventional crude oil with similar characteristics at year-end.  Future development and production costs arethose estimated future expenditures necessary to develop and produce year-endestimated proved reserves, assuming continuation of year-end economicconditions.  Estimated future income taxexpense is calculated by applying the appropriate year-end statutory taxrates.  These rates reflect allowabledeductions and tax credits and are applied to estimated future pre-tax net cashflows.  This calculation requires ayear-by-year estimate of when future expenditures will be incurred and when thereserves will be produced.

 

The information provided below does not representcertified estimates of PDVSA’s expected future cash flows or a precise value ofits proved measured crude oil and gas reserves. Estimates of proved reserves

 

F-74

----

 

are imprecise and may change over time as newinformation becomes available. Furthermore, probable and possible reserves, which may become proved inthe future, are excluded from the calculation. The valuation to comply with SFAS No. 69 requires assumptions as tothe timing of future production from proved reserves and the timing and amountof future development and production costs. The calculations are made as of December 31 of each year and shouldnot be relied upon as an indication of PDVSA’s future cash flows or the valueof the oil and gas reserves (in millions of dollars):

 
| ** **                                                                            | ** ** | **2003**                   | ** ** | **2002**                               | ** ** | **2001**  | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|-----------|------------|
| ** **                                                                            | ** ** | **Conventional  reserves** | ** ** | **Extra-  heavy  crude oil  reserves** | ** ** | **Total** | ** ** | **Conventional  reserves** | ** ** | **Extra-  heavy  crude oil  reserves** | ** ** | **Total** | ** ** | **Conventional  reserves** | ** ** | **Extra-  heavy  crude oil  reserves** | ** ** | **Total** | ** ** |
| Future cash  inflows                                                                  |       | 1,182,623                  |       | 78,217                                 |       | 1,260,840 |       | 1,091,423 |   | 64,524 |   | 1,155,947 |   | 893,878 |   | 27,364 |   | 921,242 |   |
| Future production  costs                                                              |       | (152,471                   | )          | (11,227                                | )          | (163,698  | )          | (212,869 | ) | (10,018 | ) | (222,887 | ) | (187,727 | ) | (7,108 | ) | (194,835 | ) |
| Future production  taxes                                                              |       | (336,354                   | )          | (12,007                                | )          | (348,361  | )          | (308,413 | ) | (9,156 | ) | (317,569 | ) | (251,816 | ) | (3,418 | ) | (255,234 | ) |
| Future  development costs                                                             |       | (54,726                    | )          | (6,196                                 | )          | (60,922   | )          | (74,130 | ) | (4,952 | ) | (79,082 | ) | (60,136 | ) | (2,220 | ) | (62,356 | ) |
| Future income tax  expense                                                            |       | (286,707                   | )          | (14,668                                | )          | (301,375  | )          | (220,483 | ) | (11,322 | ) | (231,805 | ) | (179,962 | ) | (3,918 | ) | (183,880 | ) |
| Cost of asset  retirements                                                            |       | (2,596                     | )          | —                                 |       | (2,596    | )          | — |   | — |   | — |   | — |   | — |   | — |   |
| Future net cash  flows                                                                |       | 349,769                    |       | 34,119                                 |       | 383,888   |       | 275,528 |   | 29,076 |   | 304,604 |   | 214,237 |   | 10,700 |   | 224,937 |   |
| Effect of  discounting net cash flows at 12% (10% at December 31, 2002 and 2001) |       | (285,354                   | )          | (27,830                                | )          | (313,184  | )          | (223,588 | ) | (23,643 | ) | (247,231 | ) | (172,961 | ) | (7,881 | ) | (180,842 | ) |
| Discounted future  net cash flows                                                     |       | 64,415                     |       | 6,289                                  |       | 70,704    |       | 51,940 |   | 5,433 |   | 57,373 |   | 41,276 |   | 2,819 |   | 44,095 |   |
| Equity  affiliate(1)                                                                  |       | —                     |       | 1,629                                  |       | 1,629     |       | — |   | 2,064 |   | 2,064 |   | — |   | 1,124 |   | 1,124 |   |
| Total                                                                                 |       | 64,415                     |       | 7,918                                  |       | 72,333    |       | 51,940 |   | 7,497 |   | 59,437 |   | 41,276 |   | 3,943 |   | 45,219 |   |

 

----

(1)                                  RepresentsPDVSA’s equity share of the Petrozuata extra-heavy oil joint venture.

 

F-75

----

 

***TableVI - Analysis of Changes in the Standardized Measure of Discounted Future NetCash Flows Related to Proved Crude Oil and Natural Gas Reserves***

 

The following table analyzes the changes as of December 31of each year (in millions of dollars):

 
| ** **                                                                 | ** ** | **2003**                   | ** ** | **2002**                               | ** ** | **2001**  | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|-----------|------------|
| ** **                                                                 | ** ** | **Conventional  reserves** | ** ** | **Extra-  heavy  crude oil  reserves** | ** ** | **Total** | ** ** | **Conventional  reserves** | ** ** | **Extra-  heavy  crude oil  reserves** | ** ** | **Total** | ** ** | **Conventional  reserves** | ** ** | **Extra-  heavy  crude oil  reserves** | ** ** | **Total** | ** ** |
| Present value at  January 1,                                          |       |                       |       |                                   |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales, net of  production costs and taxes                                  |       | (11,812                    | )          | (509                                   | )          | (12,321   | )          | (12,762 | ) | (63 | ) | (12,825 | ) | (11,446 | ) | (60 | ) | (11,506 | ) |
| Value of reserves  added during the year due to extensions and discoveries |       | 451                        |       | —                                 |       | 451       |       | — |   | — |   | — |   | 902 |   | 1,229 |   | 2,131 |   |
|                                                                       |       | (11,361                    | )          | (509                                   | )          | (11,870   | )          | (12,762 | ) | (63 | ) | (12,825 | ) | (10,544 | ) | 1,169 |   | (9,375 | ) |
| Change in value  of previous year reserves due to:                         |       |                       |       |                                   |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Development costs  incurred during the year                                |       | 629                        |       | 250                                    |       | 879       |       | — |   | — |   | — |   | 1,365 |   | 792 |   | 2,157 |   |
| Change in future  development costs                                        |       | (3,480                     | )          | (91                                    | )          | (3,571    | )          | 13,994 |   | — |   | 13,994 |   | 2,272 |   | (317 | ) | 1,955 |   |
| Net changes in  prices and production costs                                |       | 24,078                     |       | 1,819                                  |       | 25,897    |       | 23,943 |   | (4 | ) | 23,939 |   | (81,216 | ) | (3,887 | ) | (85,103 | ) |
| Revisions of  previous reserve estimates                                   |       | 4,429                      |       | 6                                      |       | 4,435     |       | (3,215 | ) | (1 | ) | (3,216 | ) | 1,161 |   | — |   | 1,161 |   |
| Net changes in  income taxes                                               |       | (12,196                    | )          | 5                                      |       | (12,191   | )          | (8,301 | ) | — |   | (8,301 | ) | 61,642 |   | 1,012 |   | 62,654 |   |
| Net changes in  production rates and other                                 |       | 10,376                     |       | (624                                   | )          | 9,752     |       | (2,994 | ) | 70 |   | (2,924 | ) | (9,354 | ) | 498 |   | (8,856 | ) |
| Total change  during the year                                              |       | 12,475                     |       | 856                                    |       | 13,331    |       | 10,665 |   | 2 |   | 10,667 |   | (34,674 | ) | (733 | ) | (35,407 | ) |
| Equity  affiliate(1)                                                       |       | —                     |       | (435                                   | )          | (435      | )          | — |   | (915 | ) | (915 | ) | — |   | (915 | ) | (915 | ) |
| Total                                                                      |       | 12,475                     |       | 421                                    |       | 12,896    |       | 10,665 |   | (913 | ) | 9,752 |   | (34,674 | ) | (1,648 | ) | (36,322 | ) |

 

----

(1)               RepresentsPDVSA’s equity share of the Petrozuata extra-heavy oil joint venture.

 

F-76

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**Item 19.****         Exhibits**

 
| **Exhibit No:** | ** ** | **Description**                                                                                                                                                                                                                                                     |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                |
| Exhibit 1.1     |       | Memorandum and articles of association of PDVSA  (incorporated herein by referece to the Registration Statement on  Form F-1 filed by us on June 2, 1993).                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                |
| Exhibit 12.1*   |       | Certification of the Principal Executive Officer  required by Rule 13a-14(a) or Rule 15d-14(a) of the  Securities and Exchange Act of 1934.                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                |
| Exhibit 12.2*   |       | Certification of the Principal Financial Officer  required by Rule 13a-14(a) or Rule 15d-14(a) of the  Securities and Exchange Act of 1934.                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                |
| Exhibit 13.1*   |       | Certification of the Principal Executive Officer  required by Rule 13a-14(b) or Rule 15d-14(b) of the  Securities and Exchange Act of 1934 and Section 1350 of Chapter 63 of  Title 18 of the United States Code (18 U.S.C. 1350).         |
|                 |       |                                                                                                                                                                                                                                                                |
| Exhibit 13.2*   |       | Certification of the Principal Financial Officer  required by Rule 13a-14(b) or Rule 15d-14(b) of the  Securities and Exchange Act of 1934 and Section 1350 of Chapter 63 of  Title 18 of the United States Code (18 U.S.C. 1350).         |
|                 |       |                                                                                                                                                                                                                                                                |
| Exhibit 14.1    |       | Annual Report on Form 20-F of PDVSA Finance  Ltd. for the year ended December 31, 2003 as first filed with the U.S.  Securities and Exchange Commission (Commission file No. 333-09678) on  October 7, 2005 (incorporated herein by reference). |

 

----

*****Filed Herewith

 

----

 

**SIGNATURES**

 

The registranthereby certifies that it meets all of the requirements for filing on Form 20-Fand that it has duly caused and authorized the undersigned to sign this annualreport on its behalf.

 
|                       | PDVSA,  S.A. |
|----------------------------|--------------|
|                       |         |
|                       | By:          | /s/  Rafael Ramírez Carreño |   |
|                       |         | Name:  Rafael Ramírez Carreño |
|                       |         | Title:  President |
|                       |         |
| Date: October 7, 2005 |         |

 

----

 

# **ANNEX A**

 

**Measurement Conversion Table**

 
| 1 barrel                       |   | =      |   | 42 U.S. gallons                                                                   |   |   |   |                                                                                                                          |
|--------------------------------|--------|--------|--------|-----------------------------------------------------------------------------------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------|
|                           |   |   |   |                                                                              |   |   |   |                                                                                                                          |
| 1 barrel of oil equivalent     |   | =      |   | 1 barrel of crude oil                                                             |   | =      |   | 5,800 cubic feet of gas (based on the  actual average equivalent energy content of PDVSA’s proved natural gas  reserves) |
|                           |   |   |   |                                                                              |   |   |   |                                                                                                                          |
| 1 barrel of crude oil per day  |   | =      |   | Approximately 50 tons of crude oil per year                                       |   |   |   |                                                                                                                          |
|                           |   |   |   |                                                                              |   |   |   |                                                                                                                          |
| 1 cubic meter                  |   | =      |   | 33.315 cubic feet                                                                 |   |   |   |                                                                                                                          |
|                           |   |   |   |                                                                              |   |   |   |                                                                                                                          |
| 1 metric ton                   |   | =      |   | 1,000 kilograms                                                                   |   | =      |   | Approximately 2,205 pounds                                                                                                    |
|                           |   |   |   |                                                                              |   |   |   |                                                                                                                          |
| 1 metric ton of crude oil      |   | =      |   | Approximately 7.3 barrels of crude oil  (assuming a specific gravity of 33o) |   |   |   |                                                                                                                          |
|                           |   |   |   |                                                                              |   |   |   |                                                                                                                          |
| 1 metric ton of oil equivalent |   | =      |   | Approximately 1,125 cubic meters of natural  gas                                  |   |   |   |                                                                                                                          |

 

A-1

----

 

**Glossary of Certain Oil and Gas Terms**

 

Unless thecontext indicates otherwise, the following terms used in this report have themeanings set forth below:

 
| 2D                     |   | Two dimensional seismic lines (km).                                                                                                                                                                                                                                                                                             |
|------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                   |   |                                                                                                                                                                                                                                                                                                                            |
| 3D                     |   | Three dimensional seismic lines (square kilometers).                                                                                                                                                                                                                                                                            |
|                   |   |                                                                                                                                                                                                                                                                                                                            |
| 4D                     |   | Three dimensional seismic lines (square kilometers)  taken as different periods of time.                                                                                                                                                                                                                                        |
|                   |   |                                                                                                                                                                                                                                                                                                                            |
| Alkylation             |   | The process of producing alkilates (refined products  used to enhance gasoline).                                                                                                                                                                                                                                                |
|                   |   |                                                                                                                                                                                                                                                                                                                            |
| AQUACONVERSION®   |   | A proprietary technology for the thermal/catalytic  conversion of heavy crude oil and residuals by treatment with steam and  additives, to reduce the viscosity of heavy crude oil fractions and  residuals.                                                                                                                    |
|                   |   |                                                                                                                                                                                                                                                                                                                            |
| API gravity            |   | An indication of density of crude oil or other  liquid hydrocarbons as measured by a system recommended by the American  Petroleum Institute (API), measured in degrees. The lower the API gravity,  the heavier the compound. For example, asphalt has an API gravity of 8° and  gasoline has an API gravity of 50°. |
|                   |   |                                                                                                                                                                                                                                                                                                                            |
| Barrels (or bbl)       |   | Barrels of crude oil, including condensate and  natural gas liquids.                                                                                                                                                                                                                                                            |
|                   |   |                                                                                                                                                                                                                                                                                                                            |
| BCF                    |   | Billions of cubic feet.                                                                                                                                                                                                                                                                                                         |
|                   |   |                                                                                                                                                                                                                                                                                                                            |
| BOE                    |   | Barrels of oil equivalent.                                                                                                                                                                                                                                                                                                      |
|                   |   |                                                                                                                                                                                                                                                                                                                            |
| BPD                    |   | Barrels per day.                                                                                                                                                                                                                                                                                                                |
|                   |   |                                                                                                                                                                                                                                                                                                                            |
| Cetane index           |   | An index used to measure diesel quality based on the  efficiency with which the fuel ignites; the higher the number the higher the  quality of the diesel.                                                                                                                                                                      |
|                   |   |                                                                                                                                                                                                                                                                                                                            |
| Condensate             |   | Light carbon substances produced from natural gas  that condense into liquid at normal temperatures and pressures associated  with surface production equipment.                                                                                                                                                                |
|                   |   |                                                                                                                                                                                                                                                                                                                            |
| Crude oil              |   | Crude oil containing condensate.                                                                                                                                                                                                                                                                                                |
|                   |   |                                                                                                                                                                                                                                                                                                                            |
| Crude slate (or slate) |   | A listing of the various crudes that are processed  in a refinery during a given period in a given configuration.                                                                                                                                                                                                               |
|                   |   |                                                                                                                                                                                                                                                                                                                            |
| Distillate             |   | Liquid hydrocarbons distilled from crude or  condensate.                                                                                                                                                                                                                                                                        |
|                   |   |                                                                                                                                                                                                                                                                                                                            |
| Extra-heavy crude oil  |   | Crude oil with an average API gravity of less than  11°.                                                                                                                                                                                                                                                                   |
|                   |   |                                                                                                                                                                                                                                                                                                                            |
| FCC                    |   | The FCC unit is the basis of modern refineries. It  “cracks” heavy molecules of crude oils into smaller, lighter ones that can  then be used in the formulation of gasolines.                                                                                                                                         |
|                   |   |                                                                                                                                                                                                                                                                                                                            |
| Feedstocks             |   | Partially refined petroleum that is added to the  crude slate and converted into refined petroleum products.                                                                                                                                                                                                                    |

 

A-2

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| Fractionator     |   | A processing unit that breaks down feedstocks into  desired fractions (specific boiling ranges).                                                                                                                                                                                                                                                                                                                                                                                                                         |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| Heavy crude oil  |   | Crude oil with an average API gravity of less than  21°.                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| Hydrotreatment   |   | The process of removing sulfur from a hydrocarbon  stream in the presence of a catalyst.                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| km               |   | Kilometer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| Light crude oil  |   | Crude oil with an average API gravity of 30° or  more.                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| LNG              |   | Liquefied natural gas.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| Medium crude oil |   | Crude oil with an average API gravity of 21° or more  and less than 30°.                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| MBPD             |   | Thousands of barrels per day.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| MCF              |   | Thousands of cubic feet.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| MCFD             |   | Thousands of cubic feet per day.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| MDWT             |   | Thousand deadweight tons; a designation for the size  or displacement of a ship.                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| M3D              |   | Cubic meters per day.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| MM3D             |   | One thousand cubic meters per day.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| MMB              |   | Millions of barrels.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| MMMB             |   | Billions of barrels.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| MMCFD            |   | Millions of cubic feet per day.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| Olefins          |   | A class of unsaturated hydrocarbons.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| Pitch            |   | Black or dark viscose substance obtained as a  residual in the distillation of oil (bituminous—resin).                                                                                                                                                                                                                                                                                                                                                                                                              |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| Proved reserves  |   | Proved oil and gas reserves are the estimated  quantities of crude oil, natural gas and natural gas liquids which geological  and engineering data demonstrate with reasonable certainty to be recoverable  in future years from known reserves under existing economic and operating  conditions, i.e., prices and costs as of the date the estimate is made.  Prices include consideration of changes in existing prices provided only by  contractual arrangements, but not escalations based upon future conditions. |

 

A-3

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| Proved developed reserves   |   | Proved developed oil and gas reserves are reserves  that can be expected to be recovered through existing wells with existing  equipment and operating methods. Additional oil and gas expected to be  obtained through the application of fluid injection or other improved  recovery techniques for supplementing natural forces and mechanisms of  primary recovery are included as “proved developed reserves” only after  testing by a pilot project or after the operating of an installed program has  confirmed through production response that increased recovery will be  achieved.                                                                                                                                                                                                                                                 |
|-----------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| Proved undeveloped reserves |   | Proved undeveloped oil and gas reserves are reserves  that are expected to be recovered from new wells on undrilled acreage, or  from existing wells where a relatively minor expenditure is required for  recompletion, but does not include reserves attributable to any acreage for  which an application of fluid injection or other improved recovery technique  is contemplated, unless such techniques have been proven to be effective by  actual testing in the area and in the same reservoir. Reserves on undrilled  acreage are limited to those drilling units offsetting productive units that  are reasonably certain of production when drilled. Proved reserves for other  undrilled units can be claimed only where it can be demonstrated with  certainty that there is continuity of production from the existing productive  field. |
|                        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| Reformer                    |   | A processing unit that converts naphtha into higher  octane components.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| Spud                        |   | To begin to drill a well.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

A-4

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