##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 20-F
 ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 for the fiscal year ended December 31, 2006
 Commission File Number 1-15106
    
    Commission File Number: 333-14168PETRÓLEO BRASILEIRO S.A.  PETROBRAS
    
    Petrobras International Finance Company(Exact name of registrant as specified in its charter)
    
    (Exact name of registrant as specified in its charter)Brazilian Petroleum Corporation  PETROBRAS(Translation of registrants name into English)The Federative Republic of Brazil
    
    Cayman Island(Jurisdiction of incorporation or organization)
    
    (Jurisdiction of incorporation or organization)
 
 Harbour Place103 South Church Street, 4thfloorAvenida República do Chile, 65
    
    P.O. Box 1034GT  BWI20031-912  Rio de Janeiro  RJ
    
    George Town, Grand CaymanBrazil
    
    Cayman Islands(Address of principal executive offices)
    
    (Address of principal executive offices)
 
 Securities registered or to be registered pursuant to Section 12(b) of the Act:
 Title of each class:
    
    Name of each exchange on which registered:PETROBRAS Common Shares, without par value*
PETROBRAS American Depositary Shares (as
evidenced by 
American Depositary Receipts), each representing 
4 Common Shares
    
    New York Stock ExchangePETROBRAS Preferred Shares, without par value*
PETROBRAS American Depositary Shares (as
evidenced by 
American Depositary Receipts), each representing 
4 Preferred Shares
    
    New York Stock Exchange
 
 *
    
    Not for trading, but only in connection with the registration of American Depositary
Shares, pursuant to the requirements of the Securities and Exchange Commission. Securities registered or to be registered pursuant to Section 12(g) of the Act: None
 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
 Title of each class:
 Indicate the number of outstanding shares of each of the issuers classes of capital or common stock
 as of the close of the period covered by this Annual Report :
  Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of
the Securities Act.
 Yes þ No o
 If this report is an annual or transitional report, indicate by check mark if the registrant is not
required to file reports pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.
 Yes o No þ
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
 Yes þ No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer in Rule 12b-2 of the Exchange
Act. (Check one):
 Large accelerated filer þ [Petrobras]            Accelerated filer o Non-accelerated filer þ [PifCo]
 Indicate by check mark which financial statement item the registrant has elected to follow.
 Item 17 o Item 18 þ
 If this is an annual report, indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
 Yes o No þ




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##### 



TABLE OF CONTENTS
  
 FORWARD-LOOKING STATEMENTS
    
    
    2CERTAIN TERMS AND CONVENTIONS
    
    
    3PRESENTATION OF FINANCIAL INFORMATION
    
    
    3Petrobras
    
    
    3PifCo
    
    
    4RECENT DEVELOPMENTS
    
    
    4Acquisition of Assets of Ipiranga Group
    
    
    4PRESENTATION OF INFORMATION CONCERNING RESERVES
    
    
    5ITEM 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    6ITEM 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    6ITEM 3.
    
    KEY INFORMATION
    
    
    6Selected Financial Data
    
    
    6Exchange Rates
    
    
    13Risk Factors
    
    
    13Risks Relating to Our Operations
    
    
    13Risks Relating to PifCo
    
    
    19Risks Relating to the Relationship between us and the Brazilian Government
    
    
    19Risks Relating to Brazil
    
    
    20ITEM 4.
    
    INFORMATION ON THE COMPANY
    
    
    24History and Development of Petrobras
    
    
    24Competitive Strengths
    
    
    26Overview by Business Segment
    
    
    29Exploration, Development and Production
    
    
    29Refining, Transportation and Marketing
    
    
    40Distribution
    
    
    51Natural
Gas, Power and Renewable Energy
    
    
    54Renewable Energy Alternative
    
    
    61International
    
    
    62PifCo
    
    
    73Organizational Structure
    
    
    77Property, Plants and Equipment
    
    
    79Regulation of the Oil and Gas Industry in Brazil
    
    
    79Health, Safety and Environmental Initiatives
    
    
    85Competition
    
    
    87Insurance
    
    
    88ITEM 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    89Managements Discussion and Analysis of Petrobras Financial Condition and Results of Operations
    
    
    89Overview
    
    
    89Sales Volumes and Prices
    
    
    90Effect of Taxes on our Income
    
    
    92Financial Income and Expense
    
    
    93Inflation and Exchange Rate Variation
    
    
    93Results of Operations
    
    
    95Business Segments
    
    
    104Managements Discussion and Analysis of PifCos Financial Condition and Results of Operations
    
    
    106Overview
    
    
    106Purchases and Sales of Crude Oil and Oil Products
    
    
    106Results of Operations
    
    
    107Liquidity and Capital Resources
    
    
    107Critical Accounting Policies and Estimates
    
    
    118Impact of New Accounting Standards
    
    
    121Research and Development
    
    
    122Market Trend
    
    
    123
  i




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ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    124Directors and Senior Management
    
    
    124Compensation
    
    
    132Share Ownership
    
    
    132Fiscal Council
    
    
    133Audit
Committee Petrobras
    
    
    133PifCo
    
    
    134Employees and Labor Relations
    
    
    134ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    137Major Shareholders
    
    
    137Petrobras Related Party Transactions
    
    
    137PifCo Related Party Transactions
    
    
    138ITEM 8.
    
    FINANCIAL INFORMATION
    
    
    140Petrobras Consolidated Statements and Other Financial Information
    
    
    140PifCo Consolidated Statements and Other Financial Information
    
    
    140Legal Proceedings
    
    
    141Dividend Distribution
    
    
    147ITEM 9.
    
    THE OFFER AND LISTING
    
    
    147Petrobras
    
    
    147PifCo
    
    
    153ITEM 10.
    
    ADDITIONAL INFORMATION
    
    
    153Memorandum and Articles of Incorporation of Petrobras
    
    
    153Restrictions on Non-Brazilian Holders
    
    
    160Transfer of Control
    
    
    161Disclosure of Shareholder Ownership
    
    
    161Memorandum and Articles of Association of PifCo
    
    
    161Material Contracts
    
    
    164Exchange Controls
    
    
    165Taxation relating to our ADSs and common and preferred shares
    
    
    166Taxation relating to PifCos notes
    
    
    173Documents on Display
    
    
    176ITEM 11.
    
    QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    177Petrobras
    
    
    177PifCo
    
    
    183ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    184ITEM 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    184ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    184ITEM 15.
    
    CONTROLS AND PROCEDURES
    
    
    184ITEM 16A.
    
    AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    186ITEM 16B.
    
    CODE OF ETHICS
    
    
    186ITEM 16C.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    187Principal Accountant Fees
    
    
    187Audit and Non-Audit Fees
    
    
    187Audit Committee Approval Policies and Procedures
    
    
    188ITEM 16D.
    
    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    188ITEM 16E.
    
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    188ITEM 17.
    
    FINANCIAL STATEMENTS
    
    
    188ITEM 18.
    
    FINANCIAL STATEMENTS
    
    
    188ITEM 19.
    
    EXHIBITS
    
    
    189GLOSSARY OF PETROLEUM INDUSTRY TERMS
    
    
    194ABBREVIATIONS
    
    
    195CONVERSION TABLE
    
    
    195SIGNATURES
    
    
    196SIGNATURES
    
    
    197
  ii




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FORWARD-LOOKING STATEMENTS
  
    
    regional marketing and expansion strategy;
    
    drilling and other exploration activities;
    
    import and export activities;
    
    projected and targeted capital expenditures and other costs, commitments and revenues;
    
    liquidity; and
    
    development of additional revenue sources.
  
    
    general economic and business conditions, including crude oil and other commodity
prices, refining margins and prevailing exchange rates;
    
    international and Brazilian political, economic and social developments;
    
    our ability to find, acquire or gain access to additional reserves and to
successfully develop our current ones;
    
    uncertainties inherent in making estimates of our reserves;
    
    our ability to obtain financing;
    
    competition;
    
    technical difficulties in the operation of our equipment and the provision of our services;
    
    changes in, or failure to comply with, governmental regulations;
    
    receipt of governmental approvals and licenses;
    
    military operations, terrorist acts, wars or embargoes;
    
    the cost and availability of adequate insurance coverage; and
    
    other factors discussed below under Risk Factors.
   2




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CERTAIN TERMS AND CONVENTIONS
  
 PRESENTATION OF FINANCIAL INFORMATION
 real reais reais
 
 Petrobras
 reais Comissão de Valores Mobiliários
  real real reais
  
    
    historical data contained in this annual report that were not derived from the
consolidated financial statements have been translated from reaison a similar basis;
    
    forward-looking amounts, including estimated future capital expenditures, have all
been based on our Petrobras 2015 Strategic Plan, which covers the period from 2004 to
2015, which we refer to as the Petrobras 2015 Strategic Plan, and on our 2007-2011
Business Plan, and have been projected on a constant basis and have been translated
from reaisin 2007 at an estimated average exchange rate of R$2.50 to U.S.$1.00, and
future calculations involving an assumed price of crude oil have been calculated using
a Brent crude oil price of U.S.$55 per barrel for 2007, and U.S.$40 per barrel for 2008
and U.S.$35 per barrel for 2009 and thereafter, adjusted for our quality and location
differences, unless otherwise stated; and
 3




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
    
    estimated future capital expenditures are based on the most recently budgeted
amounts, which may not have been adjusted to reflect all factors that could affect such
amounts.
 
 PifCo
  
 RECENT DEVELOPMENTS
 PESA Issues Notes
  
 Acquisition of Assets of the Ipiranga Group
     4




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Acquisition of Refinery  Pasadena Texas
  Electrical Energy
 Agência
Nacional de Energia Elétrica
 
 PRESENTATION OF INFORMATION CONCERNING RESERVES
  Agência Nacional de Petróleo
   5




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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3. KEY INFORMATION
 
 Selected Financial Data
 Petrobras
   6




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BALANCE SHEET DATA  PETROBRAS
 As of December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(in millions of U.S. dollars)AssetsCurrent assets:Cash and cash equivalents
    
    $
    12,688
    
    
    $
    9,871
    
    
    $
    6,856
    
    
    $
    8,344
    
    
    $
    3,301Accounts receivable, net
    
    
    6,311
    
    
    
    6,184
    
    
    
    4,285
    
    
    
    2,905
    
    
    
    2,267Inventories
    
    
    6,573
    
    
    
    5,305
    
    
    
    4,904
    
    
    
    2,947
    
    
    
    2,540Recoverable taxes
    
    
    2,593
    
    
    
    2,087
    
    
    
    1,475
    
    
    
    917
    
    
    
    672Advances to suppliers
    
    
    948
    
    
    
    652
    
    
    
    422
    
    
    
    504
    
    
    
    794Other current assets
    
    
    1,842
    
    
    
    1,685
    
    
    
    1,484
    
    
    
    1,817
    
    
    
    748Total current assets
    
    
    30,955
    
    
    
    25,784
    
    
    
    19,426
    
    
    
    17,434
    
    
    
    10,322Property, plant and equipment, net
    
    
    58,897
    
    
    
    45,920
    
    
    
    37,020
    
    
    
    30,805
    
    
    
    18,224Investments in non-consolidated companies and other investments
    
    
    3,262
    
    
    
    1,810
    
    
    
    1,862
    
    
    
    1,173
    
    
    
    334Other assets:Accounts receivables, net
    
    
    513
    
    
    
    642
    
    
    
    411
    
    
    
    528
    
    
    
    369Advances to suppliers
    
    
    852
    
    
    
    462
    
    
    
    580
    
    
    
    416
    
    
    
    450Petroleum and Alcohol Account-Receivable from the
Brazilian government(1)
    
    
    368
    
    
    
    329
    
    
    
    282
    
    
    
    239
    
    
    
    182Government securities
    
    
    479
    
    
    
    364
    
    
    
    326
    
    
    
    283
    
    
    
    176Unrecognized pension obligation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61Restricted deposits for legal proceedings and guarantees
    
    
    816
    
    
    
    775
    
    
    
    699
    
    
    
    543
    
    
    
    290Recoverable taxes
    
    
    1,292
    
    
    
    639
    
    
    
    536
    
    
    
    467
    
    
    
    156Investments PEPSA and PELSA
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,073Goodwill
    
    
    243
    
    
    
    237
    
    
    
    211
    
    
    
    183
    
    
    
    Prepaid expenses
    
    
    244
    
    
    
    246
    
    
    
    271
    
    
    
    190
    
    
    
    100Marketable securities
    
    
    94
    
    
    
    129
    
    
    
    313
    
    
    
    806
    
    
    
    208Fair value asset of gas hedge
    
    
    
    
    
    
    547
    
    
    
    635
    
    
    
    
    
    
    
    Others
    
    
    665
    
    
    
    754
    
    
    
    510
    
    
    
    545
    
    
    
    209Total other assets
    
    
    5,566
    
    
    
    5,124
    
    
    
    4,774
    
    
    
    4,200
    
    
    
    3,274Total assets
    
    $
    98,680
    
    
    $
    78,638
    
    
    $
    63,082
    
    
    $
    53,612
    
    
    $
    32,154Liabilities and Shareholders equityCurrent liabilities:Trade accounts payable
    
    $
    5,418
    
    
    $
    3,838
    
    
    $
    3,284
    
    
    $
    2,261
    
    
    $
    1,702Taxes payable
    
    
    3,357
    
    
    
    3,423
    
    
    
    2,569
    
    
    
    2,305
    
    
    
    1,801Short-term debt
    
    
    1,293
    
    
    
    950
    
    
    
    547
    
    
    
    1,329
    
    
    
    671Current portion of long-term debt
    
    
    2,106
    
    
    
    1,428
    
    
    
    1,199
    
    
    
    1,145
    
    
    
    727Current portion of project financings
    
    
    2,182
    
    
    
    2,413
    
    
    
    1,313
    
    
    
    842
    
    
    
    239Current portion of capital lease obligations
    
    
    231
    
    
    
    239
    
    
    
    266
    
    
    
    378
    
    
    
    349Dividends and interest on capital payable
    
    
    3,693
    
    
    
    3,068
    
    
    
    1,900
    
    
    
    1,955
    
    
    
    307Payroll and related charges
    
    
    1,192
    
    
    
    918
    
    
    
    618
    
    
    
    581
    
    
    
    283Advances from customers
    
    
    880
    
    
    
    609
    
    
    
    290
    
    
    
    258
    
    
    
    119Employees postretirement benefits obligations  Pension
    
    
    198
    
    
    
    206
    
    
    
    166
    
    
    
    160
    
    
    
    89Other current liabilities
    
    
    1,236
    
    
    
    1,069
    
    
    
    1,176
    
    
    
    823
    
    
    
    976Total current liabilities
    
    
    21,786
    
    
    
    18,161
    
    
    
    13,328
    
    
    
    12,037
    
    
    
    7,263Long-term liabilities:Long-term debt
    
    
    10,510
    
    
    
    11,503
    
    
    
    12,145
    
    
    
    11,888
    
    
    
    6,987Project financings
    
    
    4,192
    
    
    
    3,629
    
    
    
    4,399
    
    
    
    5,066
    
    
    
    3,800Employees postretirement benefits obligations  Pension
    
    
    4,645
    
    
    
    3,627
    
    
    
    2,915
    
    
    
    1,895
    
    
    
    1,363Employees postretirement benefits obligation  Health Care
    
    
    5,433
    
    
    
    3,004
    
    
    
    2,137
    
    
    
    1,580
    
    
    
    1,060Capital lease obligations
    
    
    824
    
    
    
    1,015
    
    
    
    1,069
    
    
    
    1,242
    
    
    
    1,907Deferred income tax
    
    
    2,916
    
    
    
    2,166
    
    
    
    1,558
    
    
    
    1,122
    
    
    
    259Gas-fired power liabilities
    
    
    
    
    
    
    
    
    
    
    1,095
    
    
    
    1,142
    
    
    
    Deferred Purchase Incentive
    
    
    
    
    
    
    144
    
    
    
    153
    
    
    
    
    
    
    
    Provision for abandonment of wells
    
    
    1,473
    
    
    
    842
    
    
    
    403
    
    
    
    396
    
    
    
    Other liabilities
    
    
    636
    
    
    
    556
    
    
    
    497
    
    
    
    541
    
    
    
    350Total long-term liabilities
    
    
    30,629
    
    
    
    26,486
    
    
    
    26,371
    
    
    
    24,872
    
    
    
    15,726Minority interest
    
    
    1,966
    
    
    
    1,074
    
    
    
    877
    
    
    
    367
    
    
    
    (136
    )
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As of December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(in millions of U.S. dollars)Shareholders equityShares authorized and issued:Preferred share
    
    
    7,718
    
    
    
    4,772
    
    
    
    4,772
    
    
    
    2,973
    
    
    
    2,459Common share
    
    
    10,959
    
    
    
    6,929
    
    
    
    6,929
    
    
    
    4,289
    
    
    
    3,761Capital reserve and other comprehensive income
    
    
    25,622
    
    
    
    21,216
    
    
    
    10,805
    
    
    
    9,074
    
    
    
    3,081Total Shareholders equity
    
    
    44,299
    
    
    
    32,917
    
    
    
    22,506
    
    
    
    16,336
    
    
    
    9,301Total liabilities and Shareholders equity
    
    $
    98,680
    
    
    $
    78,638
    
    
    $
    63,082        $
    
    
    
    53,612
    
    
    $
    32,154
 
 (1)
    
    Prior to July 29, 1998, the Petroleum and Alcohol Account reflected the difference between
our actual cost for imported crude oil and oil products and the price set by the Brazilian
government, as well as the net effects on us of the administration of certain subsidies and of
our fuel alcohol activities. From July 29, 1998 until December 31, 2001, the Petroleum and
Alcohol Account was required to be adjusted by the Specific Parcel Price-PPE and certain fuel
transportation and other reimbursable costs. As from the price deregulation on January 2,
2002, the Petroleum and Alcohol Account reflected only the outstanding balance owed to us by
the Brazilian government and adjustments resulting from monetary correction and audits to the
Account. See Item 4. Information on the CompanyRegulation of the Oil and Gas Industry in
BrazilPrice RegulationThe Petroleum and Alcohol Account. 8




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INCOME STATEMENT DATA  PETROBRAS
 For the Year Ended December 31,2006
    
    
    2005 (8)
    
    
    2004 (8)
    
    
    2003(8)
    
    
    2002(8)(in millions of U.S. dollars, except for share and per share data)Sales of products and services
    
    $
    93,893
    
    
    $
    74,065
    
    
    $
    51,954
    
    
    $
    42,690
    
    
    $
    32,987Value-added and other taxes on sales and services
    
    
    (17,906
    )
    
    
    (14,694
    )
    
    
    (10,906
    )
    
    
    (9,527
    )
    
    
    (7,739
    )CIDE(1)
    
    
    (3,640
    )
    
    
    (3,047
    )
    
    
    (2,620
    )
    
    
    (2,249
    )
    
    
    (2,636
    )Net operating revenues
    
    
    72,347
    
    
    
    56,324
    
    
    
    38,428
    
    
    
    30,914
    
    
    
    22,612Cost of sales
    
    
    40,061
    
    
    
    29,828
    
    
    
    21,279
    
    
    
    15,533
    
    
    
    11,506Depreciation, depletion and amortization(2)(3)
    
    
    3,673
    
    
    
    2,926
    
    
    
    2,481
    
    
    
    1,785
    
    
    
    1,930Exploration, including exploratory dry holes(2)
    
    
    934
    
    
    
    1,009
    
    
    
    613
    
    
    
    512
    
    
    
    435Selling, general and administrative expenses
    
    
    4,989
    
    
    
    4,474
    
    
    
    2,901
    
    
    
    2,091
    
    
    
    1,741Other operating expense
    
    
    1,829
    
    
    
    2,008
    
    
    
    793
    
    
    
    597
    
    
    
    222Total costs and expenses
    
    
    51,486
    
    
    
    40,245
    
    
    
    28,067
    
    
    
    20,518
    
    
    
    15,834Financial income
    
    
    1,165
    
    
    
    710
    
    
    
    956
    
    
    
    634
    
    
    
    1,142Financial expense
    
    
    (1,340
    )
    
    
    (1,189
    )
    
    
    (1,733
    )
    
    
    (1,247
    )
    
    
    (774
    )Monetary and exchange variation on monetary
assets and liabilities, net
    
    
    75
    
    
    
    248
    
    
    
    450
    
    
    
    509
    
    
    
    (2,068
    )Employee benefit expense
    
    
    (1,017
    )
    
    
    (994
    )
    
    
    (650
    )
    
    
    (595
    )
    
    
    (451
    )Other non-operating income (expense), net(4)
    
    
    (583
    )
    
    
    (262
    )
    
    
    (449
    )
    
    
    (924
    )
    
    
    (1,395
    )Income before income taxes,
minority interest, extraordinary item and
accounting change
    
    
    19,161
    
    
    
    14,592
    
    
    
    8,935
    
    
    
    8,773
    
    
    
    3,232Income tax (expense) benefit:Current
    


    
    (5,011
    )
    
    
    (4,223
    )
    
    
    (2,114
    )
    
    
    (2,599
    )
    
    
    (1,269
    )Deferred
    
    
    (680
    )
    
    
    (218
    )
    
    
    (117
    )
    
    
    (64
    )
    
    
    116Total income tax expense
    
    
    (5,691
    )
    
    
    (4,441
    )
    
    
    (2,231
    )
    
    
    (2,663
    )
    
    
    (1,153
    )Minority interests in results of consolidated
subsidiaries
    
    
    (644
    )
    
    
    35
    
    
    
    (514
    )
    
    
    (248
    )
    
    
    232Income before extraordinary item and effect of
change in accounting principle
    
    
    12,826
    
    
    
    10,186
    
    
    
    6,190
    
    
    
    5,862
    
    
    
    2,311Extraordinary gain net of tax
    
    
    
    
    
    
    158
    
    
    
    
    
    
    
    
    
    
    
    Cumulative effect of change in accounting
principle, net of taxes(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    697
    
    
    
    Net income for the year
    
    $
    12,826
    
    
    $
    10,344
    
    
    $
    6,190
    
    
    $
    6,559
    
    
    $
    2,311Weighted average number of shares Outstanding:(5)Common(5)
    
    
    2,536,673,672
    
    
    
    2,536,673,672
    
    
    
    2,536,673,672
    
    
    
    2,536,673,672
    
    
    
    2,536,673,672Preferred(5)
    
    
    1,850,364,698
    
    
    
    1,849,478,028
    
    
    
    1,849,478,028
    
    
    
    1,849,478,028
    
    
    
    1.807.742.676Basic and diluted earnings per share:(5)(6)Common and Preferred Shares(5)(6)
    
    $
    2.92
    
    
    $
    2.36
    
    
    $
    1.41
    
    
    $
    1.50
    
    
    $
    0.53Common and Preferred ADS(5)(6)
    
    $
    11.68
    
    
    $
    9.44
    
    
    $
    5.64
    
    
    $
    6.00
    
    
    $
    2.12Cash dividends per(5)(7):Common and Preferred shares(5)(7)
    
    $
    0.84
    
    
    $
    0.68
    
    
    $
    0.42
    
    
    $
    0.37
    
    
    $
    0.29Common and Preferred ADS(5)(7)
    
    $
    3.36
    
    
    $
    2.72
    
    
    $
    1.68
    
    
    $
    1.48
    
    
    $
    1.16
 
 (1)
    
    CIDE is an excise tax payable to the Brazilian government, required to be paid by
producers, blenders and importers upon sales and purchases of specified oil and fuel products
at a set amount for different products based on the unit of measurement typically used for
such products.(2)
    
    In 2002, U.S.$284 million in abandonment costs were recognized as depreciation, depletion and
amortization in accordance with SFAS 19. In 2003, as a result of our adoption of SFAS 143 -
Accounting for Asset Retirement Obligations, depreciation on the asset retirement obligation
was recorded under depreciation, depletion and amortization, while accretion expense was
recorded under exploration, including exploratory dry holes. This change resulted in U.S.$43
million in abandonment costs being recognized as exploration, including exploratory dry holes
in 2003. The cumulative effect of adoption is recorded separately.(3)
    
    Includes impairment charge.(4)
    
    Amounts reported include financial charges in respect of the Petroleum and Alcohol Account of
U.S.$2 million in 2002. 9




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##### Table of Contents



(5)
    
    On July 22, 2005, our Board of Directors authorized a 4 for 1 stock split. For purposes of
comparison, the weighted average number of shares outstanding, net income per share/ADS and
cash dividends per share/ADS were restated for periods prior to the stock split, which became
effective as of September 1, 2005. See note 10 to our audited consolidated financial
statements.(6)
    
    Basic and diluted earnings per share for 2003 reflect our adoption of SFAS 143. That change
in accounting principle altered our 2003 basic and diluted earnings per share from U.S.$1.34
(before effect of change in accounting principle) to U.S.$1.50 (after effect of change in
accounting principle). And for 2005, the extraordinary item altered our basic and diluted
earnings per share from U.S.$2.32 (before effect of extraordinary item) to U.S.$2.36 (after
effect of extraordinary item).(7)
    
    Represents dividends declared in respect of the earnings of each period.(8)
    
    Certain amounts from prior years have been reclassified to conform to the current years
presentation. These reclassifications had no impact on the Companys net income. 
 10




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PifCo
  11




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INCOME STATEMENT AND BALANCE SHEET DATA - PifCoFor the Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(in millions of U.S. dollars)Income Statement Data:Sales of crude oil and oil products and
Services:Related Parties
    
    $
    14,236.5
    
    
    $
    13,974.4
    
    
    $
    10,118.4
    
    
    $
    5,543.0
    
    
    $
    5,375.5Others
    
    
    7,833.3
    
    
    
    3,161.7
    
    
    
    2,237.2
    
    
    
    1,432.5
    
    
    
    1,014.7Lease income(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36.1$
    22,069.8
    
    
    $
    17,136.1
    
    
    $
    12,355.6
    
    
    $
    6,975.5
    
    
    $
    6,426.3Operating Expenses:Cost of salesRelated Parties
    
    
    (8,122.0
    )
    
    
    (7,780.3
    )
    
    
    (4,391.3
    )
    
    
    (2,851.4
    )
    
    
    (2,409.0
    )Others
    
    
    (13,778.5
    )
    
    
    (9,203.0
    )
    
    
    (7,844.7
    )
    
    
    (4,068.7
    )
    
    
    (3,962.5
    )Lease expense(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24.0
    )Selling, general and Administrative expensesRelated parties
    
    
    (189.7
    )
    
    
    (158.1
    )
    
    
    (98.7
    )
    
    
    (17.1
    )
    
    
    Others
    
    
    (17.7
    )
    
    
    (7.6
    )
    
    
    (1.1
    )
    
    
    (1.5
    )
    
    
    (1.2
    )(22,107.9
    )
    
    
    (17,149.0
    )
    
    
    (12,335.8
    )
    
    
    (6,938.7
    )
    
    
    (6,396.7
    )Operating income (loss)
    
    
    (38.1
    )
    
    
    (12.9
    )
    
    
    19.8
    
    
    
    36.8
    
    
    
    29.6Financial income(2)Related Parties
    
    
    999.2
    
    
    
    765.5
    
    
    
    568.6
    
    
    
    401.7
    
    
    
    201.9Others
    
    
    286.0
    
    
    
    218.5
    
    
    
    110.2
    
    
    
    41.2
    
    
    
    17.7Total
    
    
    1,285.2
    
    
    
    984.0
    
    
    
    678.8
    
    
    
    442.9
    
    
    
    219.6Financial expense(3)Related Parties
    
    
    (722.4
    )
    
    
    (409.8
    )
    
    
    (169.0
    )
    
    
    (111.9
    )
    
    
    (61.3
    )Others
    
    
    (735.4
    )
    
    
    (589.1
    )
    
    
    (592.2
    )
    
    
    (370.8
    )
    
    
    (253.4
    )Total
    
    
    (1,457.8
    )
    
    
    (998.9
    )
    
    
    (761.2
    )
    
    
    (482.7
    )
    
    
    (314.7
    )Other income, netRelated Parties
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    Others
    
    
    0.2
    
    
    
    
    
    
    
    4.0
    
    
    
    
    
    
    
    Net loss
    
    $
    (210.5
    )
    
    $
    (27.8
    )
    
    $
    (59.1
    )
    
    $
    (3.0
    )
    
    $
    (65.5
    )Balance Sheet Data (end of period):Cash and cash equivalents
    
    $
    510.8
    
    
    $
    230.7
    
    
    $
    1,107.3
    
    
    $
    664.2
    
    
    $
    260.6Trade accounts receivableRelated parties
    
    
    10,658.9
    
    
    
    8,681.1
    
    
    
    7,788.1
    
    
    
    5,064.5
    
    
    
    4,837.1Others
    
    
    835.4
    
    
    
    212.7
    
    
    
    153.6
    
    
    
    109.4
    
    
    
    57.1Notes receivableRelated parties
    
    
    6,354.4
    
    
    
    3,909.3
    
    
    
    1,936.9
    
    
    
    1,726.4
    
    
    
    1,631.6Export PrepaymentRelated parties
    
    
    532.2
    
    
    
    943.9
    
    
    
    1,414.7
    
    
    
    1,479.4
    
    
    
    751.2Marketable Securities
    
    
    1,796.9
    
    
    
    2,248.6
    
    
    
    1,864.8
    
    
    
    615.8
    
    
    
    96.3Total assets
    
    
    21,321.3
    
    
    
    16,748.9
    
    
    
    14,670.2
    
    
    
    10,196.6
    
    
    
    8,697.3Trade accounts payableRelated parties
    
    
    1,142.9
    
    
    
    950.7
    
    
    
    562.1
    
    
    
    271.0
    
    
    
    292.0Other
    
    
    1,122.0
    
    
    
    616.1
    
    
    
    568.1
    
    
    
    349.0
    
    
    
    281.1Notes payableRelated parties
    
    
    12,828.5
    
    
    
    8,080.3
    
    
    
    6,435.0
    
    
    
    2,442.8
    
    
    
    3,688.2Short-term financing and current portion of
long-term debt
    
    
    1,205.9
    
    
    
    891.1
    
    
    
    680.9
    
    
    
    1,076.4
    
    
    
    367.5Long-term debt(4)
    
    
    4,640.1
    
    
    
    5,908.4
    
    
    
    6,151.8
    
    
    
    5,825.3
    
    
    
    3,850.4Total stockholders equity
    
    
    (24.8
    )
    
    
    8.0
    
    
    
    35.7
    
    
    
    94.8
    
    
    
    43.9Total liabilities and stockholders equity
    
    
    21,321.3
    
    
    
    16,748.9
    
    
    
    14,670.2
    
    
    
    10,196.6
    
    
    
    8,697.3
 
 (1)
    
    As a result of PifCos transfer of PNBV, its leasing subsidiary, to us in January 2003,
PifCo had no lease income or lease expense in 2003, 2004, 2005 and 2006.(2)
    
    Financial income represents primarily the imputed interest realized from PifCos sales of
crude oil and oil products to us and intercompany loans to related parties.(3)
    
    Financial expense consists primarily of costs incurred by PifCo in financing its activities
in connection with the importation by us of crude oil and oil products.(4)
    
    Includes capital lease obligations of U.S.$601.7 million at December 31, 2002. 
 12




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Exchange Rates
 real real
 real real real
 reais
 (R$ /U.S.$)High
    
    Low
    
    Average (1)
    
    Period EndYear ended December 31,2006
    
    
    2.371
    
    
    
    2.059
    
    
    
    2.175
    
    
    
    2.1382005
    
    
    2.762
    
    
    
    2.163
    
    
    
    2.435
    
    
    
    2.3412004
    
    
    3.205
    
    
    
    2.654
    
    
    
    2.926
    
    
    
    2.6542003
    
    
    3.662
    
    
    
    2.822
    
    
    
    3.075
    
    
    
    2.8892002
    
    
    3.955
    
    
    
    2.271
    
    
    
    2.924
    
    
    
    3.533MonthNovember 2006
    
    
    2.187
    
    
    
    2.135
    
    
    
    2.156
    
    
    
    2.167December 2006
    
    
    2.169
    
    
    
    2.138
    
    
    
    2.150
    
    
    
    2.138January 2007
    
    
    2.156
    
    
    
    2.125
    
    
    
    2.139
    
    
    
    2.125February 2007
    
    
    2.118
    
    
    
    2.077
    
    
    
    2.096
    
    
    
    2.118March 2007
    
    
    2.139
    
    
    
    2.050
    
    
    
    2.089
    
    
    
    2.050April 2007
    
    
    2.050
    
    
    
    2.023
    
    
    
    2.032
    
    
    
    2.034May 2007
    
    
    2.034
    
    
    
    1,929
    
    
    
    1.986
    
    
    
    1,929June 2007 (through June 21)
    
    
    1.964
    
    
    
    1.905
    
    
    
    1.930
    
    
    
    1.920
 
 Source: Central Bank of Brazil(1)
    
    Year-end figures stated for calendar years 2006, 2005, 2004, 2003 and 2002 represent the
average of the month-end exchange rates during the relevant period. The figures provided for
the months of calendar years 2007 and 2006, as well as for the month of June up to and
including June 21, 2007, represent the average of the exchange rates at the close of trading
on each business day during such period.  
 Risk Factors
 
 Risks Relating to Our Operations
 Substantial or extended declines in the prices of crude oil and oil products may have a material
adverse effect on our income.
  13




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##### Table of Contents




    
    global and regional economic and geopolitical developments in crude oil producing
regions, particularly in the Middle East;
    
    the ability of the Organization of Petroleum Exporting Countries (OPEC) to set and
maintain crude oil production levels and defend prices;
    
    global and regional supply and demand for crude oil and oil products;
    
    competition from other energy sources;
    
    domestic and foreign government regulations; and
    
    weather conditions.
  Our ability to achieve our long-term growth objectives depends on our ability to discover
additional reserves and successfully develop them, and failure to do so could prevent us from
achieving our long-term goals for growth in production.
   Our crude oil and natural gas reserve estimates involve some degree of uncertainty, which could
adversely affect our ability to generate income.
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##### Table of Contents



We are subject to numerous environmental and health regulations that have become more stringent in
the recent past and may result in increased liabilities and increased capital expenditures.
 Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis environmental compensation
  We may incur losses and spend time and money defending pending litigations and arbitrations.
    If the State of Rio de Janeiro enforces a law imposing the Domestic Value-Added Tax (ICMS) on
upstream oil activities, our results of operations and financial condition may be adversely
affected.
 Supremo Tribunal Federal
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Our participation in the domestic power market has generated losses and may not become profitable.
  
    
    The potential mismatch between the contracted price indexation for energy to be sold
by gas-fired power companies and the cost of natural gas or other substitute fuel
supply; and
    
    The dependence on the construction of pipelines and other infrastructure to
transport and produce natural gas, and the commitment to purchase firm quantities of
natural gas to satisfy the requirement of the new regulatory model for power generation
in order to sell under long term energy contracts.
  We may not be able to obtain financing for some of our planned investments, and failure to do so
could adversely affect our operating results and financial condition.
  Currency fluctuations could have a material adverse effect on our financial condition and results
of operations, because most of our revenues are in reais and a large portion of our liabilities are
in foreign currencies.
 real reais
 16




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##### Table of Contents



real real
 We are exposed to increases in prevailing market interest rates, which leaves us vulnerable to
increased financing expenses.
  We are not insured against business interruption for our Brazilian operations and most of our
assets are not insured against war or sabotage.
  We are subject to substantial risks relating to our international operations, in particular in
Latin America and the Middle East.
  
    
    the imposition of exchange or price controls;
    
    the imposition of restrictions on hydrocarbon exports;
    
    the depreciation of local currencies;
    
    the nationalization of oil and gas reserves;
    
    increases in export tax / income tax rates for crude oil and oil products; or
    
    unilateral (governmental) institutional and contractual changes.
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The nationalization measures taken by the Bolivian and Venezuelan governments may have an adverse
effect on our results of operations and financial condition. The Bolivian and Venezuelan
governments have recently increased their participation in their respective domestic oil and gas
industries, which may generate material losses to us.
 
  3⁄4 3⁄4 3⁄4 3⁄4
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Risks Relating to PifCo
 PifCos operations and debt servicing capabilities are dependent on us.
    PifCo depends on its ability to pass on its financing costs to us.
  
 Risks Relating to the Relationship between us and the Brazilian Government
 The Brazilian government, as our controlling shareholder, may cause us to pursue certain
macroeconomic and social objectives that may have an adverse effect on our results of operations
and financial condition.
  If the Brazilian government reinstates controls over the prices we can charge for crude oil and oil
products, such price controls could affect our financial condition and results of operations.
  19




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##### Table of Contents



We do not own any of the crude oil and natural gas reserves in Brazil.
  
 Risks Relating to Brazil
 The Brazilian government has historically exercised, and continues to exercise, significant
influence over the Brazilian economy. Brazilian political and economic conditions have a direct
impact on our business and may have a material adverse effect on our results of operations and
financial condition.
  
    
    devaluations and other exchange rate movements;
    
    inflation;
    
    exchange control policies;
    
    social instability;
    
    price instability;
    
    energy shortages;
    
    interest rates;
    
    liquidity of domestic capital and lending markets;
    
    tax policy; and
    
    other political, diplomatic, social and economic developments in or affecting Brazil.
  Inflation and government measures to curb inflation may contribute significantly to economic
uncertainty in Brazil and to heightened volatility in the Brazilian securities markets and,
consequently, may adversely affect the market value of our securities and financial condition.
 Índice
Nacional de Preços ao Consumidor Amplo real
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##### Table of Contents



Access to international capital markets for Brazilian companies is influenced by the perception of
risk in Brazil and other emerging economies, which may hurt our ability to finance our operations
and the trading values of our securities.
  Risks Relating to our Equity and Debt Securities
 The size, volatility, liquidity and/or regulation of the Brazilian securities markets may curb your
ability to sell the common or preferred shares underlying our ADSs.
  The market for PifCos notes may not be liquid.
  You may be unable to exercise preemptive rights with respect to the common or preferred shares
underlying the ADSs.
  You may not be able to sell your ADSs at the time or the price you desire because an active or
liquid market for our ADSs may not be sustained.
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##### Table of Contents



Restrictions on the movement of capital out of Brazil may impair your ability to receive dividends
and distributions on, and the proceeds of any sale of, the common or preferred shares underlying
the ADSs and may impact our ability to service certain debt obligations, including standby purchase
agreements we have entered into in support of PifCos notes.
  reais reais reais
 reais
 If you exchange your ADSs for common or preferred shares, you risk losing the ability to remit
foreign currency abroad and forfeiting Brazilian tax advantages.
 Conselho Monetário Nacional
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##### Table of Contents



You may face difficulties in protecting your interests as a shareholder because we are subject to
different corporate rules and regulations as a Brazilian company and because holders of our common
shares, preferred shares and ADSs have fewer and less well-defined shareholders rights than those
traditionally enjoyed by The United States shareholders.
    Preferred shares and the ADSs representing preferred shares generally do not give you voting
rights.
  Enforcement of our obligations under the standby purchase agreement might take longer than
expected.
   If Brazilian law restricts us from paying PifCo in U.S. dollars, PifCo may have insufficient U.S.
dollar funds to make payments on its debt obligations and we may not be able to pay our obligations
under the standby purchase agreement in U.S. Dollars.
  23




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##### Table of Contents



reais
 reais
 We would be required to pay judgments of Brazilian courts enforcing our obligations under the
standby purchase agreement only in reais
 reais reais reais
 A finding that we are subject to U.S. bankruptcy laws and that the standby purchase agreement
executed by us was a fraudulent conveyance could result in PifCo noteholders losing their legal
claim against us.
  
    
    were or are insolvent or rendered insolvent by reason of our entry into the standby
purchase agreement;
    
    were or are engaged in business or transactions for which the assets remaining with
us constituted unreasonably small capital; or
    
    intended to incur or incurred, or believed or believe that we would incur, debts
beyond our ability to pay such debts as they mature; and
    
    in each case, intended to receive or received less than reasonably equivalent value
or fair consideration therefor,
  
 ITEM 4. INFORMATION ON THE COMPANY
 
 History and Development of Petrobras
  24




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##### Table of Contents




    
    Exploration and Production  Our exploration and production segment encompasses
exploration, development and production activities in Brazil.
    
    Supply  Our supply segment encompasses refining, logistics, transportation,
exportation and the purchase of crude oil, as well as the purchase and sale of oil
products and fuel alcohol. In addition, this segment includes the petrochemical and
fertilizers division, which includes investments in domestic petrochemical companies
and our two domestic fertilizer plants.
    
    Distribution  Our distribution segment represents the oil product and fuel alcohol
distribution activities conducted by our wholly owned subsidiary, Petrobras
Distribuidora S.A.  BR in Brazil.
    
    Gas and Power  Our gas and power segment encompasses the purchase, sale,
transportation and distribution of natural gas produced in or imported into Brazil. In
addition, this segment includes our participation in domestic electricity production,
including investments in domestic natural gas transportation companies, state owned
natural gas distributors and gas-fired power companies.
    
    International  Our international segment encompasses Exploration and Production,
Supply, Distribution and Gas and Power activities conducted in the following countries:
Argentina, Angola, Bolivia, Colombia, Ecuador, Equatorial Guinea, Iran, Libya, Mexico,
Mozambique, Nigeria, Paraguay, Peru, the United States, Tanzania, Turkey, Uruguay and
Venezuela.
    
    Corporate  Our corporate segment includes the financial results and those
activities not attributable to other segments, including corporate financial
management, overhead related to central administration
and other expenses, which include actuarial expenses related to our pension and health
care plans for non-active participants.
  25




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Competitive Strengths
 Dominant market position in the production, refining and transportation of crude oil, natural gas
and oil products in Brazil
  Strong reserve base
     Upstream and downstream technological expertise and international recognition for production and
exploration in deep and ultra-deep waters
   Cost efficiencies created by large-scale operations combined with vertical integration among
business
  
    
    the location of over 81% of our proved reserves in large, contiguous and highly
productive fields in the offshore Campos Basin, which allows for the concentration of
our operational infrastructure, thereby reducing our total costs of exploration,
development and production;
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
    
    the location of most of our refining capacity in the Southeast region, directly
adjacent to the Campos Basin and situated within the countrys most heavily populated
and industrialized markets; and
    
    the relative balance between our domestic production of 1,778 Mbpd, our refining
throughput of 1,746 Mbpd and our sales to the Brazilian market for hydrocarbon products
of 1,697 Mbpd.
  Strong position in Brazils growing natural gas markets
   
    
    increasing the internal production of both associated and non-associated gas, mainly
offshore in the Espírito Santo, Campos and Santos Basins;
    
    expanding of the natural gas transportation network throughout Brazil;
    
    prioritizing the acceleration of investment projects in anticipation of the natural
gas supply in the southeast region of Brazil;
    
    increasing participation in the natural gas distribution market through investments
in 19 of the 25 natural gas distribution companies in Brazil;
    
    investments in gas-fired power plants, which serve as sources of demand for our
natural gas; and
    
    seeking greater operational flexibility in our sources, including two LNG projects
in the northeastern and southeastern regions, to improve our energy demand management.
 Success in attracting international partners in all our activities
     27




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##### Table of Contents



Consolidate and increase competitive advantages in the Brazilian and South American oil and
oil products market
    Selectively expand international activities in an integrated manner with our business
  Develop and lead the domestic natural gas market and act in an integrated manner in the gas and
power market in South America
  
    
    developing the natural gas industry in an integrated manner with other areas of the
Company in the production and consumption chain; and
    
    taking advantage of opportunities in the power industry in an integrated manner with
other natural gas market areas in which our Company already operates.
  Selectively expand our activities in the petrochemicals market
  28




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##### Table of Contents



Selectively perform in the renewable energy market
  
    
    The diesel from the HBIO process. The HBIO technology has been developed by the
Petrobras research and development facility as one of the projects of the Petrobras
refining technology program. This process involves a catalytic hydroconversion of
mixtures of diesel fractions and vegetable oil in an HDT reactor under controlled
conditions of high temperature and hydrogen pressure. The triglycerides from vegetable
oil are transformed into linear hydrocarbon chains, similar to those that already exist
in the diesel coming from petroleum but, without residue generation and with a small
propane production; and
    
    biomass energy.
 
 Overview by Business Segment
 
 Exploration, Development and Production
 Summary and Strategy
   Agência Nacional de Petróleo
   
    
    Strengthen our position in deep and ultra-deepwater drilling and operating;
    
    Operate both onshore and in shallow waters, focusing on profitable opportunities;
    
    Implement new practices and technologies in order to increase reserve recovery;
 29




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##### Table of Contents




    
    Increase exploration and development efforts in new territories to maintain a
sustainable reserves to production ratio;
    
    Assure long-term Brazilian self-sufficiency in oil, with production reaching
approximately 20% above domestic consumption by 2015;
    
    Optimize the development of our existing proved reserves, especially by expanding
light oil production; and
    
    Accelerate the production and supply of natural gas.
 Principal Domestic Oil and Gas Producing Regions
          30




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##### Table of Contents



Properties
  Average
    
    AverageOil and
    
    Oil andNatural Gas
    
    Natural GasProduction
    
    Productionfor the
    
    for the YearYear Ended
    
    EndedProduction Acreage as of
    
    December
    
    DecemberDecember 31, 2006
    
    31,
    
    31,Developed
    
    Undeveloped
    
    2006(1)(4)
    
    2005(1)(4)Gross(2)
    
    Net(2)
    
    Gross(2)
    
    Net(2)(in acres)
    
    (boe per day) (3)Brazil(1)OffshoreCampos Basin
    
    
    1,706,226
    
    
    
    1,587,370
    
    
    
    399,808
    
    
    
    388,441
    
    
    
    1,594,820
    
    
    
    1,530,147Other offshore
    
    
    310,358
    
    
    
    280,459
    
    
    
    690,892
    
    
    
    665,193
    
    
    
    120,147
    
    
    
    64,510Total offshore
    
    
    2,016,583
    
    
    
    1,867,829
    
    
    
    1,090,700
    
    
    
    1,053,634
    
    
    
    1,714,967
    
    
    
    1,594,657Onshore
    
    
    1,019,781
    
    
    
    1,019,782
    
    
    
    138,129
    
    
    
    138,129
    
    
    
    339,327
    
    
    
    363,203Total Brazil
    
    
    3,036,364
    
    
    
    2,887,611
    
    
    
    1,228,829
    
    
    
    1,191,763
    
    
    
    2,054,294
    
    
    
    1,957,860InternationalOnshore
    
    
    3,634,675
    
    
    
    2,334,637
    
    
    
    2,306,486
    
    
    
    1,507,738
    
    
    
    233,915
    
    
    
    245,828Offshore
    
    
    113,457
    
    
    
    31,893
    
    
    
    332,816
    
    
    
    68,185
    
    
    
    9,377
    
    
    
    12,909Total International
    
    
    3,748,132
    
    
    
    2,366,530
    
    
    
    2,639,302
    
    
    
    1,575,923
    
    
    
    243,292
    
    
    
    258,737Total
    
    
    6,784,496
    
    
    
    5,254,141
    
    
    
    3,868,131
    
    
    
    2,767,686
    
    
    
    2,297,586
    
    
    
    2,216,597
 
 (1)
    
    Over 77% of our production of natural gas was associated gas in 2006 and 2005.(2)
    
    A gross acre is an acre in which a working interest is owned. The number of gross acres is
the total number of acres in which a working interest is owned. A net acre is deemed to exist
when the sum of fractional ownership working interests in gross acres equals one. The number
of net acres is the sum of the fractional working interests owned in gross acres expressed as
whole numbers and fractions thereof.(3)
    
    See Conversion Table for the ratios used to convert cubic feet of natural gas to barrels of
oil equivalent.(4)
    
    Includes production from shale oil reserves, natural gas liquids and reinjected gas volumes,
which are not included in our proved reserves figures.  Productive WellsOil
    
    Gas
    
    TotalGross productive wellsBrazil
    
    
    9,058
    
    
    
    484
    
    
    
    9,542International
    
    
    5,873
    
    
    
    354
    
    
    
    6,227Total
    
    
    14,931
    
    
    
    838
    
    
    
    15,769Net productive wellsBrazil
    
    
    9,046
    
    
    
    484
    
    
    
    9,530International
    
    
    4,237
    
    
    
    236
    
    
    
    4,473Total
    
    
    13,283
    
    
    
    720
    
    
    
    14,003
  31




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##### Table of Contents



Deepwater Expertise
  
    
    in January 2003, we drilled the worlds second horizontal deepwater multilateral
well in the Barracuda-Caratinga field, in Campos Basin, at an water depth of 2,999 feet
(914 meters), consisting of two legs for each well;
    
    on December 31, 2006, we were operating 62 wells at water depths in excess of 3,281
feet (1,000 meters); and
    
    by December 31, 2006, we had drilled 565 wells at water depths in excess of 3,281
feet (1,000 meters), the deepest well being an exploration well in a water depth of
9,360 feet (2,853 meters).
  
    
    we have been more successful in finding and developing crude oil offshore, as a
result of the existence of a larger number and size of oil reservoirs offshore as
compared to onshore reservoirs and a greater volume of offshore seismic data collected;
and
    
    we have been able to spread the total costs of exploration, development and
production over a large base, given the size and productivity of our offshore reserves.
Offshore production has exceeded onshore production by a per barrel production ratio of
6.94:1 in 2006, 5.92:1 in 2005 and 4.96:1 in 2004.
  OFFSHORE PRODUCTION BY WATER DEPTH
 Depth
    
    Percentage in 2006
    
    Percentage in 20050-400 meters (0-1,312 feet)
    
    
    17
    %
    
    
    18
    %400-1,000 meters (1,312 feet-3,281 feet)
    
    
    52
    %
    
    
    56
    %More than 1,000 meters (3,281 feet)
    
    
    31
    %
    
    
    26
    %
 Exploration Activities
   32




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##### Table of Contents



33




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##### Table of Contents



Exploration
    
    Development
    
    Production
    
    TotalEventAreas held (December 31, 2003)
    
    
    54
    
    
    
    35
    
    
    
    234
    
    
    
    323Areas won on Bid, Round 6
    
    
    36
    
    
    
    0
    
    
    
    0
    
    
    
    36Areas obtained through acquisitions (BT-REC-4,
BT-POT-9, BT-ES-4, BM-C-14, BM-S-14 and BM-S-22)
    
    
    6
    
    
    
    0
    
    
    
    0
    
    
    
    6Joint concession SMI to PJ (4)
    
    
    0
    
    
    
    0
    
    
    
    (1
    )
    
    
    (1
    )New concession (January 15, 2004) (Baleia Franca)
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    1New concession (January 15, 2004) (Golfinho)
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    1New concession (January 15, 2004) (Mexilhão)
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    1New concession (January 19, 2004) (Azulão)
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    1New concession (January 19, 2004) (Japim)
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    1New concession (August 30, 2004) (Piranema)
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    1New concession (December 20, 2004) (Baleia Anã)
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    1New concession (December 20, 2004) (Baleia Azul)
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    1New concession (December 20, 2004) (Baleia Bicuda)
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    1New concession (December 22, 2004) (Salema Branca)
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    1Areas held (December 31, 2004)
    
    
    96
    
    
    
    45
    
    
    
    233
    
    
    
    374Areas won on Bid, Round 7
    
    
    39
    
    
    
    0
    
    
    
    0
    
    
    
    39Areas relinquished (until December 31, 2005)
(BM-FZA-1)
    
    
    (1
    )
    
    
    0
    
    
    
    0
    
    
    
    (1
    )New concession (February 1, 2005) (Jandaia)
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    1New concession (April 4, 2005) (Anambé)
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    1New concession (July 14, 2005) (Acauã)
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    1New concession (November 24, 2005) (Inhambu)
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    1New concession (December 27, 2005) (Papa-Terra)
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    1New concession (December 29, 2005) (Uruguá)
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    1New concession (December 29, 2005) (Tambaú)
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    1New concession (December 29, 2005) (Canapú)
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    1Areas redefined (January 17, 2005) (Rio Joanes)
    
    
    0
    
    
    
    (1
    )
    
    
    1
    
    
    
    0Areas redefined (February 1, 2005) (Fazenda Sori)
    
    
    0
    
    
    
    (1
    )
    
    
    1
    
    
    
    0Areas redefined (February 25, 2005) (Camaçari)
    
    
    0
    
    
    
    (1
    )
    
    
    1
    
    
    
    0Areas redefined (March 3, 2005) (Jandaia)
    
    
    0
    
    
    
    (1
    )
    
    
    1
    
    
    
    0Areas redefined (April 1, 2005) (Fazenda Matinha)
    
    
    0
    
    
    
    (1
    )
    
    
    1
    
    
    
    0Areas redefined (April 12, 2005) (Quererá)
    
    
    0
    
    
    
    (1
    )
    
    
    1
    
    
    
    0Areas redefined (June 18, 2005) (Rio da Serra)
    
    
    0
    
    
    
    (1
    )
    
    
    1
    
    
    
    0Areas redefined (August 11, 2005) (Anambé)
    
    
    0
    
    
    
    (1
    )
    
    
    1
    
    
    
    0Areas redefined (August 13, 2005) (Fazenda Santa Rosa)
    
    
    0
    
    
    
    (1
    )
    
    
    1
    
    
    
    0Areas redefined (November 24, 2005) (Inhambu)
    
    
    0
    
    
    
    (1
    )
    
    
    1
    
    
    
    0Joint concession BBI to CHT(5)
    
    
    0
    
    
    
    (1
    )
    
    
    0
    
    
    
    (1
    )Joint concession NPE to DEN (6)
    
    
    0
    
    
    
    (1
    )
    
    
    0
    
    
    
    (1
    )Total areas held (as of December 31, 2005)
    
    
    134
    
    
    
    41
    
    
    
    243
    
    
    
    418Net area held in thousands of acres (as of December
31, 2005)
    
    
    31,727
    
    
    
    523
    
    
    
    3,008
    
    
    
    35,258Areas won on Bid Round 8
    
    
    21
    
    
    
    0
    
    
    
    0
    
    
    
    21Areas relinquished (until December 31, 2006)
    
    
    (1
    )
    
    
    0
    
    
    
    (4
    )
    
    
    (5
    )New Concessions
    
    
    0
    
    
    
    25
    
    
    
    0
    
    
    
    25Areas redefined
    
    
    0
    
    
    
    (8
    )
    
    
    8
    
    
    
    0Total areas held (as of Dec. 31, 2006)
    
    
    154
    
    
    
    58
    
    
    
    247
    
    
    
    459Net area held in thousands of acres (as of December
31, 2006)
    
    
    29,716
    
    
    
    1,192
    
    
    
    2,888
    
    
    
    33,796
 
 (1)
    
    COG  Córrego Grande, CCN  Córrego Cedro Grande(2)
    
    CDL  Cardeal, MP  Massapê(3)
    
    CR  Curió, FBL  Fazenda Belém(4)
    
    SMI  São Miguel, PJ  Pajeú(5)
    
    BBI  Baleia Bicuda, CHT  Cachalote(6)
    
    NPE  Norte de Pescada, DEN  Dentão Joint Ventures 34




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##### Table of Contents




    
    drilling approximately 114 new exploratory and approximately 400 new development wells;
    
    shooting and processing two-dimensional and three-dimensional seismic surveys; and
    
    constructing onshore and offshore production and support facilities.
  DRILLING UNITS
 2006
    
    2005
    
    2004Brazil
    
    International
    
    Brazil
    
    International
    
    Brazil
    
    InternationalLand rigs for
onshore exploration
and development
    
    
    19
    
    
    
    22
    
    
    
    22
    
    
    
    19
    
    
    
    19
    
    
    
    28Owned
    
    
    13
    
    
    
    0
    
    
    
    13
    
    
    
    0
    
    
    
    13
    
    
    
    0Leased
    
    
    6
    
    
    
    22
    
    
    
    9
    
    
    
    19
    
    
    
    6
    
    
    
    28Semi-submersible rigs
    
    
    20
    
    
    
    3
    
    
    
    17
    
    
    
    1
    
    
    
    18
    
    
    
    0Owned
    
    
    4
    
    
    
    0
    
    
    
    3
    
    
    
    0
    
    
    
    4
    
    
    
    0Leased
    
    
    16
    
    
    
    3
    
    
    
    14
    
    
    
    1
    
    
    
    14
    
    
    
    0Drill ships
    
    
    8
    
    
    
    1
    
    
    
    7
    
    
    
    2
    
    
    
    7
    
    
    
    1Owned
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Leased
    
    
    8
    
    
    
    1
    
    
    
    7
    
    
    
    2
    
    
    
    7
    
    
    
    1Jack-up rigs
    
    
    6
    
    
    
    1
    
    
    
    7
    
    
    
    1
    
    
    
    6
    
    
    
    0Owned
    
    
    5
    
    
    
    0
    
    
    
    6
    
    
    
    0
    
    
    
    6
    
    
    
    0Leased
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    0
    
    
    
    0Moduled rigs for
offshore exploration
and development
    
    
    10
    
    
    
    0
    
    
    
    11
    
    
    
    0
    
    
    
    11
    
    
    
    0Owned
    
    
    6
    
    
    
    0
    
    
    
    9
    
    
    
    0
    
    
    
    8
    
    
    
    0Leased
    
    
    4
    
    
    
    0
    
    
    
    2
    
    
    
    0
    
    
    
    3
    
    
    
    0Total
    
    
    63
    
    
    
    27
    
    
    
    64
    
    
    
    23
    
    
    
    61
    
    
    
    29
 Development Activities
  35




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##### Table of Contents



Main Domestic Production Development Projects
 Unit
    
    Production
    
    Capacity
    
    Water
    
    Production
    
    InjectionField
    
    Type
    
    Unit
    
    (bpd)
    
    Depth (m)
    
    Wells
    
    Wells
    
    Start Up (year)
    
    ObservationAlbacora Leste (1)
    
    FPSO
    
    P-50
    
    
    180,000
    
    
    
    1,230
    
    
    
    17
    
    
    
    14
    
    
    
    2,006Golfinho  Module 1
    
    FPSO
    
    Capixaba
    
    
    100,000
    
    
    
    1,300
    
    
    
    5
    
    
    
    3
    
    
    
    2,006
    
    
    Chartered from SBMJubarte  Phase I
    
    FPSO
    
    P-34
    
    
    60,000
    
    
    
    1,350
    
    
    
    4
    
    
    
    
    
    
    
    2,006Espadarte  Module 2
    
    FPSO
    
    Cidade do Rio de Janeiro
    
    
    100,000
    
    
    
    1,350
    
    
    
    5
    
    
    
    4
    
    
    
    2,007
    
    
    Chartered from ModecGolfinho  Module 2
    
    FPSO
    
    Cidade de Vitória
    
    
    100,000
    
    
    
    1,360
    
    
    
    5
    
    
    
    3
    
    
    
    2,007
    
    
    Chartered from SaipenPiranema
    
    SS
    
    P-300
    
    
    30,000
    
    
    
    1,090
    
    
    
    3
    
    
    
    3
    
    
    
    2,007
    
    
    Chartered from Sevan MarineRoncador  Phase II
    
    SS
    
    P-52
    
    
    180,000
    
    
    
    1,800
    
    
    
    18
    
    
    
    11
    
    
    
    2,007Roncador  Module 2
    
    FPSO
    
    P-54
    
    
    180,000
    
    
    
    1,400
    
    
    
    11
    
    
    
    6
    
    
    
    2,007Jabuti
    
    FPSO
    
    Cidade de Niterói
    
    
    100,000
    
    
    
    1,400
    
    
    
    8
    
    
    
    0
    
    
    
    2,008
    
    
    Chartered from ModecMarlim Sul  Module 2
    
    SS
    
    P-51
    
    
    180,000
    
    
    
    1,255
    
    
    
    10
    
    
    
    9
    
    
    
    2,008Frade (2)
    
    FPSO
    
    n/a
    
    
    100,000
    
    
    
    900
    
    
    
    12
    
    
    
    7
    
    
    
    2,009Marlim Leste
    
    FPU
    
    P-53
    
    
    180,000
    
    
    
    1,090
    
    
    
    14
    
    
    
    7
    
    
    
    2,009Jubarte  Phase II
    
    FPSO
    
    P-57
    
    
    180,000
    
    
    
    1,300
    
    
    
    15
    
    
    
    7
    
    
    
    n/aParque das Conchas (3)
    
    n/a
    
    n/a
    
    
    100,000
    
    
    
    1,600
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    2,011Roncador  Module 3
    
    SS
    
    P-55
    
    
    180,000
    
    
    
    1,795
    
    
    
    11
    
    
    
    7
    
    
    
    n/a
 
 (1)
    
    Petrobras (operator) 90%, YPF 10%.(2)
    
    Petrobras 30%, Chevron (operator) 51.74%, Frade Japão 18.26%.(3)
    
    Petrobras 35%, Shell (operator) 50%, ONGC 15%.  
  Production Activities
  36




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##### Table of Contents



For the Year Ended December 31,2006
    
    
    2005
    
    
    2004Crude Oil and NGL Production (in Mbpd)Brazil (1)OffshoreCampos Basin
    
    
    1,468
    
    
    
    1,405
    
    
    
    1,204Other
    
    
    78
    
    
    
    36
    
    
    
    38Total offshore
    
    
    1,546
    
    
    
    1,441
    
    
    
    1,242Onshore
    
    
    232
    
    
    
    243
    
    
    
    251Total Brazil
    
    
    1,778
    
    
    
    1,684
    
    
    
    1,493International
    
    
    130
    
    
    
    163
    
    
    
    168Non-consolidated international production (2)
    
    
    12
    
    
    
    
    
    
    
    Total crude oil and NGL production
    
    
    1,920
    
    
    
    1,847
    
    
    
    1,661Crude Oil and NGL Average Sales Price (U.S. dollars per Bbl)Brazil
    
    $
    54.71
    
    
    $
    45.42
    
    
    $
    33.49International
    
    
    44.02
    
    
    
    34.91
    
    
    
    26.51Natural Gas Production (in Mmcfpd)Brazil (3)OffshoreCampos Basin
    
    
    759
    
    
    
    752
    
    
    
    645Other
    
    
    257
    
    
    
    172
    
    
    
    184Total offshore
    
    
    1,016
    
    
    
    924
    
    
    
    829Onshore
    
    
    644
    
    
    
    719
    
    
    
    762Total Brazil
    
    
    1,660
    
    
    
    1,643
    
    
    
    1,590International
    
    
    595
    
    
    
    575
    
    
    
    564Non-consolidated international production (2)
    
    
    12
    
    
    
    
    
    
    
    Total natural gas production
    
    
    2,267
    
    
    
    2,218
    
    
    
    2,154Natural Gas Average Sales Price (U.S. dollars per Mcf)Brazil (4)
    
    $
    2.61
    
    
    $
    2.17
    
    
    $
    1.93International (5)
    
    
    2.16
    
    
    
    1.64
    
    
    
    1.17Aggregate Average Lifting Costs (oil and natural gas) (U.S. dollars per boe)BrazilWith government take
    
    $
    17.64
    
    
    $
    14.73
    
    
    $
    10.72Without government take
    
    
    6.59
    
    
    
    5.73
    
    
    
    4.28International
    
    
    3.36
    
    
    
    2.90
    
    
    
    2.60
 
 (1)
    
    Brazilian figures include production from shale oil reserves and natural gas liquids, which
are not included in our proved reserves figures.(2)
    
    Equity method companies in Venezuela.(3)
    
    Brazilian figures include reinjected gas volumes, which are not included in our proved
reserves figures.(4)
    
    Excludes (1) exploration and production overhead; (2) costs related to intra-company
transfers of oil products to our exploration and production division; (3) costs of sales of
oil products produced in natural plants overseen by our exploration and production department;
and (4) price of oil and gas bought from partners in certain joint ventures.(5)
    
    Excludes (1) royalties; (2) special government participation; and (3) rental of areas.  37




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##### Table of Contents



Reserves
  
    
    9.48 billion barrels of crude oil and NGLs; and
    
    11,843.4 billion cubic feet of natural gas.
     WORLDWIDE ESTIMATED NET PROVED RESERVES
 CombinedBrazil
    
    
    
    
    
    
    
    
    
    International
    
    
    
    
    
    GlobalNatural
    
    
    
    
    
    Crude
    
    Natural
    
    
    
    
    
    ProvedCrude Oil
    
    Gas(1)
    
    Combined(2)
    
    Oil
    
    Gas(1)
    
    Combined(2)
    
    Reserves(MMbbl)
    
    (Bcf)
    
    (Mmboe)
    
    (MMbbl)
    
    (Bcf)
    
    (Mmboe)
    
    (Mmboe)Net Proved Developed and
Undeveloped Reserves:Reserves as of December 31, 2004
    
    
    9,243.4
    
    
    
    7,954.3
    
    
    
    10,569.1
    
    
    
    702.0
    
    
    
    3,292.8
    
    
    
    1,250.9
    
    
    
    11,820.0Revisions of previous estimates
    
    
    123.0
    
    
    
    842.4
    
    
    
    263.4
    
    
    
    0.5
    
    
    
    (32.6
    )
    
    
    (4.97
    )
    
    
    258.4Extensions, discoveries and
improved recovery
    
    
    252.0
    
    
    
    996.9
    
    
    
    418.2
    
    
    
    38.4
    
    
    
    38.8
    
    
    
    44.9
    
    
    
    463.1Production for the year
    
    
    (584.5
    )
    
    
    (529.8
    )
    
    
    (672.8
    )
    
    
    (58.8
    )
    
    
    (210.9
    )
    
    
    (93.9
    )
    
    
    (766.7
    )Reserves as of December 31, 2005
    
    
    9,033.9
    
    
    
    9,263.8
    
    
    
    10,577.8
    
    
    
    682.1
    
    
    
    3,088.1
    
    
    
    1,196.8
    
    
    
    11,774.6Revisions of previous estimates
    
    
    463.4
    
    
    
    322.1
    
    
    
    517.2
    
    
    
    (15.2
    )
    
    
    (459.1
    )
    
    
    (91.7
    )
    
    
    425.5Extensions, discoveries and
improved recovery
    
    
    119.7
    
    
    
    328.2
    
    
    
    174.4
    
    
    
    28.1
    
    
    
    75.1
    
    
    
    40.6
    
    
    
    215.0Sales of reserves in place
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4.5
    )
    
    
    0.0
    
    
    
    (4.5
    )
    
    
    (4.5
    )Purchase of reserves in place
    
    
    0.9
    
    
    
    45.8
    
    
    
    8.5
    
    
    
    8.9
    
    
    
    16.0
    
    
    
    11.6
    
    
    
    20.1Production for the year
    
    
    (616.0
    )
    
    
    (532.9
    )
    
    
    (704.8
    )
    
    
    (42.6
    )
    
    
    (209.8
    )
    
    
    (77.6
    )
    
    
    (782.3
    )Interest Loss in Venezuela (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (174.8
    )
    
    
    (93.9
    )
    
    
    (190.5
    )
    
    
    (190.5
    )Transfer to Unconsolidated
Companies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65.7
    )
    
    
    (77.3
    )
    
    
    (78.6
    )
    
    
    (78.6
    )Reserves as of December 31, 2006
    
    
    9,001.9
    
    
    
    9,427.0
    
    
    
    10,573.1
    
    
    
    416.3
    
    
    
    2,339.1
    
    
    
    806.2
    
    
    
    11,379.3Net Proved Developed Reserves:As of December 31, 2004
    
    
    4,129.8
    
    
    
    4,427.6
    
    
    
    4,867.7
    
    
    
    383.1
    
    
    
    2,495.2
    
    
    
    799.0
    
    
    
    5,666.7As of December 31, 2005
    
    
    4,071.7
    
    
    
    4,088.8
    
    
    
    4,753.2
    
    
    
    365.9
    
    
    
    2,333.7
    
    
    
    754.9
    
    
    
    5,508.1As of December 31, 2006
    
    
    3,987.7
    
    
    
    4,115.4
    
    
    
    4,673.6
    
    
    
    232.9
    
    
    
    1,758.0
    
    
    
    525.9
    
    
    
    5,199.5Proved Reserves in Unconsolidated
Companies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65.7
    
    
    
    77.3
    
    
    
    78.6
    
    
    
    78.6Total Proved Reserves as of
December 31, 2006 (4)
    
    
    9,001.9
    
    
    
    9,427.0
    
    
    
    10,573.1
    
    
    
    482.0
    
    
    
    2,416.4
    
    
    
    884.8
    
    
    
    11,457.9
 38




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##### Table of Contents



(1)
    
    Natural gas liquids are extracted and recovered at natural gas processing plants downstream
from the field. The volumes presented for natural gas reserves are prior to the extraction of
natural gas liquids.(2)
    
    See Conversion Table for the ratios used to convert cubic feet of natural gas to barrels of
crude oil equivalent. Production of shale oil and associated reserves are not included.(3)
    
    Changes due to contractual changes (Joint Ventures to Unconsolidated Companies).(4)
    
    Total Proved Reserves as of December 31, 2006 equals Reserves as of December 31, 2006 plus
Proved Reserves in Unconsolidated Companies.  CRUDE OIL NET PROVED RESERVES BY REGION
 As of December 31,2006
    
    2005
    
    2004Proved
    
    
    
    
    
    ProvedProved
    
    
    
    
    
    Developed
    
    
    
    
    
    DevelopedDeveloped and
    
    Proved
    
    and
    
    Proved
    
    and
    
    ProvedUndeveloped
    
    Developed
    
    Undeveloped
    
    Developed
    
    Undeveloped
    
    Developed(MMbbl)BrazilOffshoreCampos Basin
    
    
    7,855.4
    
    
    
    3,305.4
    
    
    
    7,886.0
    
    
    
    3,395.9
    
    
    
    8,130.4
    
    
    
    3,422.7Other
    
    
    373.7
    
    
    
    131.8
    
    
    
    388.3
    
    
    
    101.3
    
    
    
    335.4
    
    
    
    106.1Total offshore
    
    
    8,229.1
    
    
    
    3,437.2
    
    
    
    8,274.3
    
    
    
    3,497.2
    
    
    
    8,465.8
    
    
    
    3,528.8Onshore
    
    
    772.8
    
    
    
    550.5
    
    
    
    759.6
    
    
    
    574.5
    
    
    
    777.6
    
    
    
    601.0Total Brazil
    
    
    9,001.9
    
    
    
    3,987.7
    
    
    
    9,033.9
    
    
    
    4,071.7
    
    
    
    9,243.4
    
    
    
    4,129.8InternationalOther South America(1)
    
    
    408.2
    
    
    
    252.2
    
    
    
    625.8
    
    
    
    350.8
    
    
    
    678.4
    
    
    
    367.0West Coast of Africa
    
    
    42.0
    
    
    
    7.4
    
    
    
    42.6
    
    
    
    8.6
    
    
    
    11.8
    
    
    
    11.8Gulf of Mexico
    
    
    31.8
    
    
    
    10.0
    
    
    
    13.7
    
    
    
    6.5
    
    
    
    11.8
    
    
    
    4.3Total international
    
    
    482.0
    
    
    
    269.6
    
    
    
    682.1
    
    
    
    365.9
    
    
    
    702.0
    
    
    
    383.1Total
    
    
    9,483.9
    
    
    
    4,257.3
    
    
    
    9,716.0
    
    
    
    4,437.6
    
    
    
    9,945.4
    
    
    
    4,512.9
 
 (1)
    
    Includes Argentina, Bolivia Colombia, Ecuador, Peru and proportional reserves related to
unconsolidated companies in Venezuela. NATURAL GAS NET PROVED RESERVES BY REGION:
 As of December 31,2006
    
    2005
    
    2004Proved
    
    
    
    
    
    ProvedProved
    
    
    
    
    
    Developed
    
    
    
    
    
    DevelopedDeveloped and
    
    Proved
    
    and
    
    Proved
    
    and
    
    ProvedUndeveloped
    
    Developed
    
    Undeveloped
    
    Developed
    
    Undeveloped
    
    Developed(Bcf)BrazilOffshoreCampos Basin
    
    
    4,043.1
    
    
    
    1,748.0
    
    
    
    3,836.5
    
    
    
    1,772.3
    
    
    
    4,039.3
    
    
    
    1,820.4Other
    
    
    2,985.7
    
    
    
    918.5
    
    
    
    2,912.1
    
    
    
    720.9
    
    
    
    1,337.5
    
    
    
    854.0Total offshore
    
    
    7,028.8
    
    
    
    2,666.5
    
    
    
    6,748.6
    
    
    
    2,493.2
    
    
    
    5,376.8
    
    
    
    2,674.4Onshore
    
    
    2,398.2
    
    
    
    1,448.9
    
    
    
    2,515.2
    
    
    
    1,595.6
    
    
    
    2,577.5
    
    
    
    1,753.2Total Brazil
    
    
    9,427.0
    
    
    
    4,115.4
    
    
    
    9,263.8
    
    
    
    4,088.8
    
    
    
    7,954.3
    
    
    
    4,427.6InternationalOther South America(1)
    
    
    2,241.7
    
    
    
    1,688.9
    
    
    
    2,951.7
    
    
    
    2,270.2
    
    
    
    3,162.2
    
    
    
    2,456.2Gulf of Mexico
    
    
    174.7
    
    
    
    112.2
    
    
    
    136.5
    
    
    
    63.5
    
    
    
    130.6
    
    
    
    39.0Total international
    
    
    2,416.4
    
    
    
    1,801.1
    
    
    
    3,088.1
    
    
    
    2,333.7
    
    
    
    3,292.8
    
    
    
    2,495.2Total
    
    
    11,843.4
    
    
    
    5,916.5
    
    
    
    12,351.9
    
    
    
    6,422.5
    
    
    
    11,247.1
    
    
    
    6,922.8
 
 (1)
    
    Includes Argentina, Bolivia, Colombia, Peru and proportional reserves related to
unconsolidated companies in Venezuela. 39




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##### Table of Contents



Refining, Transportation and Marketing
 Summary and Strategy
     th Statistical Review of the
World
   
    
    focus on clients and develop our portfolio of goods and services based on their needs;
    
    expand our processing, transportation and commercialization activities, using
bio-energy sources and raw material produced by us;
    
    diversify our business portfolio, focusing on synergies among assets;
    
    expand activities in the petrochemical and fertilizer industries, by seeking
strategic partnerships and promoting synergies with our other operations;
 40




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##### Table of Contents




    
    improve efficiency in all stages of logistic processes by using a variety of
transportation systems and focusing on operational excellence, safety standards and
high quality services; and
    
    apply state of the art technology in oil processing to promote energy and
environmental efficiency.
  Refining
 Petroleum Intelligence Weekly th
   Refinery Production and Capacity
  41




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##### Table of Contents



REFINING STATISTICS
 2006
    
    
    
    
    
    
    
    
    
    2005
    
    
    
    
    
    
    
    
    
    2004Capacity
    
    Throughput(1)
    
    Utilization(2)
    
    Capacity
    
    Throughput(1)
    
    Utilization(2)
    
    Capacity
    
    Throughput(1)
    
    Utilization(2)Refineries
    
    (Mbpd)
    
    (Mbpd)
    
    (%)
    
    (Mbpd)
    
    (Mbpd)
    
    (%)
    
    (Mbpd)
    
    (Mbpd)
    
    (%)Paulínia
    
    
    365
    
    
    
    341
    
    
    
    93
    
    
    
    365
    
    
    
    320
    
    
    
    88
    
    
    
    365
    
    
    
    351
    
    
    
    96Landulpho Alves (8)
    
    
    323
    
    
    
    261
    
    
    
    81
    
    
    
    332
    
    
    
    249
    
    
    
    75
    
    
    
    323
    
    
    
    237
    
    
    
    73Duque de Caxias (8)
    
    
    242
    
    
    
    254
    
    
    
    105
    
    
    
    275
    
    
    
    242
    
    
    
    88
    
    
    
    242
    
    
    
    230
    
    
    
    95Henrique Lage
    
    
    251
    
    
    
    211
    
    
    
    84
    
    
    
    251
    
    
    
    241
    
    
    
    96
    
    
    
    251
    
    
    
    236
    
    
    
    94Alberto Pasqualini(3)
    
    
    189
    
    
    
    114
    
    
    
    60
    
    
    
    189
    
    
    
    116
    
    
    
    61
    
    
    
    189
    
    
    
    103
    
    
    
    54Pres. Getúlio Vargas(4)
    
    
    189
    
    
    
    183
    
    
    
    97
    
    
    
    189
    
    
    
    186
    
    
    
    98
    
    
    
    189
    
    
    
    165
    
    
    
    87Pres. Bernardes
    
    
    170
    
    
    
    163
    
    
    
    96
    
    
    
    170
    
    
    
    157
    
    
    
    92
    
    
    
    170
    
    
    
    154
    
    
    
    91Gabriel Passos
    
    
    151
    
    
    
    136
    
    
    
    90
    
    
    
    151
    
    
    
    131
    
    
    
    87
    
    
    
    151
    
    
    
    132
    
    
    
    87Manaus
    
    
    46
    
    
    
    36
    
    
    
    78
    
    
    
    46
    
    
    
    44
    
    
    
    96
    
    
    
    46
    
    
    
    45
    
    
    
    98Capuava
    
    
    53
    
    
    
    40
    
    
    
    76
    
    
    
    53
    
    
    
    35
    
    
    
    66
    
    
    
    53
    
    
    
    46
    
    
    
    87Fortaleza
    
    
    7
    
    
    
    7
    
    
    
    100
    
    
    
    6
    
    
    
    5
    
    
    
    83
    
    
    
    6
    
    
    
    5
    
    
    
    83Total Brazilian (8)
    
    
    1,986
    
    
    
    1746
    
    
    
    88
    
    
    
    2,027
    
    
    
    1,726
    
    
    
    85
    
    
    
    1,985
    
    
    
    1,704
    
    
    
    86Pasadena (9)
    
    
    100
    
    
    
    91
    
    
    
    91Gualberto Villarroel(5)
    
    
    40
    
    
    
    24
    
    
    
    60
    
    
    
    40
    
    
    
    25
    
    
    
    63
    
    
    
    40
    
    
    
    22
    
    
    
    55Ricardo Eliçabe(6)
    
    
    31
    
    
    
    30
    
    
    
    97
    
    
    
    31
    
    
    
    26
    
    
    
    84
    
    
    
    31
    
    
    
    30
    
    
    
    98Guillermo Elder Bell(5)
    
    
    20
    
    
    
    16
    
    
    
    80
    
    
    
    20
    
    
    
    16
    
    
    
    80
    
    
    
    20
    
    
    
    16
    
    
    
    80San Lorenzo (6)
    
    
    50
    
    
    
    33
    
    
    
    66
    
    
    
    38
    
    
    
    37
    
    
    
    97
    
    
    
    38
    
    
    
    33
    
    
    
    89Del Norte (7)
    
    
    26
    
    
    
    17
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total International
    
    
    241
    
    
    
    194
    
    
    
    81
    
    
    
    129
    
    
    
    104
    
    
    
    81
    
    
    
    129
    
    
    
    101
    
    
    
    78Total
    
    
    2,227
    
    
    
    1,940
    
    
    
    87
    
    
    
    2,156
    
    
    
    1,830
    
    
    
    85
    
    
    
    2,114
    
    
    
    1,805
    
    
    
    85
 
 (1)
    
    Throughput does not include slop or any reprocessed feedstock.(2)
    
    Utilization was calculated based on crude oil and NGL only.(3)
    
    We own 70% of this refinery.(4)
    
    Because of improvements to the crude plant of this refinery, its output can now slightly
exceed the nameplate capacity originally registered with and acknowledged by the National
Petroleum Agency in Brazil in 2003.(5)
    
    Located in Bolivia.(6)
    
    Located in Argentina.(7)
    
    Located in Argentina. Del Norte statistics are not included since we own just 28.5% of that
refinery.(8)
    
    Includes NGL Capacity (Mbpd): Landulpho Alves = 9, Duque de Caxias = 33 in 2005.(9)
    
    Located in the United States. We acquired 50% of this refinery in September 2006 and we
started operations in October 2006. We are not including the full years information, rather
the last three months figures only in calculating the average.   42




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##### Table of Contents



DOMESTIC PRODUCTION VOLUME OF OIL PRODUCTS
 2006
    
    %
    
    2005
    
    %
    
    2004
    
    %(Mbpd)
    
    
    
    
    
    (Mbpd)
    
    
    
    
    
    (Mbpd)ProductDiesel
    
    
    665.8
    
    
    
    37.8
    
    
    
    660.1
    
    
    
    38.0
    
    
    
    657.0
    
    
    
    38.7Gasoline
    
    
    345.3
    
    
    
    19.5
    
    
    
    324.5
    
    
    
    18.7
    
    
    
    292.8
    
    
    
    17.3Fuel oil
    
    
    259.0
    
    
    
    14.7
    
    
    
    257.8
    
    
    
    14.9
    
    
    
    279.9
    
    
    
    16.5Naphtha and jet fuel
    
    
    212.1
    
    
    
    12.0
    
    
    
    218.5
    
    
    
    12.6
    
    
    
    220.2
    
    
    
    13.0Other
    
    
    281.4
    
    
    
    16.0
    
    
    
    274.3
    
    
    
    15.8
    
    
    
    245.7
    
    
    
    14.5Total
    
    
    1,763.6
    
    
    
    100.0
    
    
    
    1,735.2
    
    
    
    100.0
    
    
    
    1,695.6
    
    
    
    100.0
    
    
    enhance the value of Brazilian crude oil by increasing capacity to refine greater
quantities of heavier crude oil that is produced domestically;
    
    increase production of oil products demanded by the Brazilian market that we
currently must import, such as diesel;
    
    improve gasoline and diesel quality to comply with stricter environmental
regulations currently being implemented; and
    
    reduce emissions and pollutant streams.
   43




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##### Table of Contents



Refinery
    
    ObjectiveAlberto Pasqualini (REFAP)
    
    Units to upgrade gasoline and diesel quality.Presidente Getúlio Vargas Refinery (REPAR)
    
    Expansion and metallurgic adaptation of existing
distillation unit to increase heavy oil processing,
installation of a coker, expansion of existing
refinery unit and units to upgrade the quality of
diesel and gasoline, and creation of a propylene
unit.Henrique Lage (REVAP)
    
    Metallurgic adaptation of existing distillation
unit to increase heavy oil processing, installation
of a coker and units to upgrade the quality of
diesel and gasoline, and creation of a propylene
unit.Paulínia Refinery (REPLAN)
    
    Expansion and metallurgic adaptation of existing
distillation unit to increase heavy oil processing,
installation of other coker, and units to upgrade
the quality of diesel and gasoline, and creation of
a propylene unit.Landulpho Alves (RLAM)
    
    Expansion and metallurgic adaptation of existing
distillation unit to increase heavy oil processing,
expansion of existing refinery unit, installation
of a coker, and units to upgrade the quality of
diesel and gasoline.Duque de Caxias Refinery (REDUC)
    
    Metallurgic adaptation of existing distillation
unit to increase heavy oil processing, expansion of
existing refinery unit, installation of a lube oil
unit, installation of a coker and units to upgrade
the quality of diesel and gasoline.Gabriel Passos Refinery (REGAP)
    
    Metallurgic adaptation of existing distillation
unit to increase heavy oil processing, installation
of a coker, unit to upgrade the quality of diesel
and gasoline, and creation of a propylene unit.Presidente Bernardes Refinery (RPBC)
    
    Expansion and metallurgic adaptation of existing
distillation unit to increase heavy oil processing,
installation of a coker, and units to upgrade the
quality of diesel and gasoline.Capuava Refinery (RECAP)
    
    Units to upgrade the quality of diesel and gasoline.Isaac Sabbá Refinery (REMAN)
    
    Mild thermal cracking unit and units to upgrade the
quality of diesel and gasoline.Lubrificantes e Derivados de Petróleo do Nordeste (LUBNOR)
    
    Units to improve the lube oil production.
  Imports
  44




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IMPORTS OF CRUDE OIL BY REGION
 2006
    
    2005
    
    2004Volume (%)RegionAfrica
    
    
    70.6
    %
    
    
    67.5
    %
    
    
    73.4
    %Middle East
    
    
    27.9
    
    
    
    29.4
    
    
    
    24.2Central and South America/Caribbean
    
    
    1.5
    
    
    
    3.1
    
    
    
    2.4Oceania
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Europe
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
   IMPORTS OF OIL PRODUCTS
 2006
    
    2005
    
    2004Volume (Mbbl)Oil ProductLPG
    
    
    9,936
    
    
    
    6,268
    
    
    
    11,537Distillates(1)
    
    
    20,287
    
    
    
    16,740
    
    
    
    16,879Naphtha
    
    
    7,329
    
    
    
    8,243
    
    
    
    7,231Others(2)
    
    
    5,550
    
    
    
    3,523
    
    
    
    4,487Total
    
    
    43,102
    
    
    
    34,774
    
    
    
    40,134
 
 (1)
    
    Includes gasoline, diesel fuel and some intermediate fractions.(2)
    
    Includes Algerian NGLs, fuel oil, Ethanol, Methanol and others.  Exports
  45




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EXPORTS OF OIL AND OIL PRODUCTS(1)
 2006
    
    2005
    
    2004(Mbbl)Crude Oil
    
    
    122,279
    
    
    
    96,155
    
    
    
    66,319Fuel Oil (including bunker fuel)
    
    
    61,351
    
    
    
    63,896
    
    
    
    107,104Gasoline
    
    
    16,018
    
    
    
    17,240
    
    
    
    11,510Other (2)
    
    
    12,562
    
    
    
    9,716
    
    
    
    1,288Total
    
    
    212,210
    
    
    
    187,007
    
    
    
    186,221
 
 (1)
    
    The figure includes sales made by PifCo to unaffiliated third parties, including sales of
oil and oil products purchased internationally.(2)
    
    Not including fertilizers.  Transportation
   Pipelines and Terminals
  46




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47




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Plano
Diretor de Escoamento e Tratamento
   Programa de Integridade de Dutos)
 48




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Shipping
  OWNED/BAREBOAT CHARTERED VESSELS
 Number
    
    Capacity(deadweight tonnage inthousands)Type of VesselTankers
    
    
    45
    
    
    
    2,592.3Liquefied petroleum gas tankers
    
    
    6
    
    
    
    40.2AHTS Anchor Handling Tug Supply
    
    
    1
    
    
    
    2.2FSO Floating, Storage and Offloading
    
    
    1
    
    
    
    28.9Total
    
    
    53
    
    
    
    2,663.6
  PRODUCTS AND QUANTITIES TRANSPORTED
 2006
    
    2005
    
    2004(millions of tons)ProductCrude oil
    
    
    106.85
    
    
    
    92.38
    
    
    
    88.4Oil Products
    
    
    39.76
    
    
    
    40.42
    
    
    
    34.0Fuel Alcohol
    
    
    0.08
    
    
    
    0.04
    
    
    
    Total
    
    
    146.69
    
    
    
    132.84
    
    
    
    122.4Percentage transported by our owned/bareboat chartered fleet
    
    
    40.3
    %
    
    
    43
    %
    
    
    45.1
    %Coastal transport as a percentage of total tonnage
    
    
    65
    %
    
    
    67
    %
    
    
    61.1
    %
  Petrochemicals
  49




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Fertilizers
     
 Distribution
 Summary and Strategy
   
    
    become the leader in the Brazilian market for petroleum derivatives and biofuels,
maximizing market share and profitability;
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
    
    position ourselves as the top brand in the eyes of customers by providing excellent
products and services; and
    
    coordinate our business in the energy sector with our other activities and
ultimately expand the market for derivatives and biofuels.
 gás liquefeito de petróleo Sindicato Nacional das Empresas Distribuidoras
de Gás Liqüefeito de Petróleo
  OIL PRODUCT SALES
 2006
    
    2005
    
    2004(MMbbl)ProductDiesel
    
    
    230.9
    
    
    
    228.1
    
    
    
    224.9Gasoline
    
    
    120.0
    
    
    
    114.3
    
    
    
    104.8Fuel oil
    
    
    94.3
    
    
    
    77.2
    
    
    
    106.1Naphtha and jet fuel
    
    
    82.3
    
    
    
    79.3
    
    
    
    81.5Others
    
    
    361.8
    
    
    
    343.5
    
    
    
    129.1Total
    
    
    889.3
    
    
    
    842.4
    
    
    
    646.4CustomerWholesalersDiesel
    
    
    110.8
    
    
    
    105.5
    
    
    
    106.6Gasoline
    
    
    46.5
    
    
    
    43.0
    
    
    
    42.9Others
    
    
    24.6
    
    
    
    25.4
    
    
    
    25.6Total wholesalers
    
    
    181.9
    
    
    
    173.9
    
    
    
    175.1Retail distributorsBR
    
    
    159.5
    
    
    
    157.8
    
    
    
    145.1Third parties
    
    
    547.9
    
    
    
    510.7
    
    
    
    326.2Total retail distributors
    
    
    707.4
    
    
    
    668.5
    
    
    
    471.3Total customers
    
    
    889.3
    
    
    
    842.4
    
    
    
    646.4
    52




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3 3
  BR MARKET SHARE IN DISTRIBUTION
 2006
    
    2005
    
    2004Fuel oil
    
    
    69.4
    %
    
    
    64.8
    %
    
    
    64.4
    %Diesel
    
    
    31.6
    %
    
    
    31.9
    %
    
    
    28.6
    %Gasoline
    
    
    25.0
    %
    
    
    25.0
    %
    
    
    22.1
    %Fuel alcohol.
    
    
    34.0
    %
    
    
    32.2
    %
    
    
    31.2
    %Total
    
    
    33.6
    %
    
    
    33.8
    %
    
    
    31.6
    %
   De Olho no Combustível
     53




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COMMERCIAL AND INDUSTRIAL RETAIL SALES BY PRODUCT
 For the Year Ended December 31,2006
    
    2005
    
    2004(Mboe)Fuel oil
    
    
    24,195
    
    
    
    22,850
    
    
    
    24,649Diesel
    
    
    77,409
    
    
    
    78,241
    
    
    
    70,521Gasoline
    
    
    37,640
    
    
    
    36,690
    
    
    
    32,147Jet fuels
    
    
    15,245
    
    
    
    15,784
    
    
    
    15,020Fuel alcohol
    
    
    5,858
    
    
    
    5,132
    
    
    
    4,147Lubricants
    
    
    1,498
    
    
    
    1,601
    
    
    
    1,460Others
    
    
    26,605
    
    
    
    24,943
    
    
    
    22,609Total
    
    
    188,450
    
    
    
    185,241
    
    
    
    170,554
 
 Natural Gas, Power and Renewable Energy
 Summary and Strategy
    
    
    Develop and consolidate the natural gas business in a profitable manner;
    
    Expand business in South America, especially related to the supply network for the
Brazilian market, in order to increase our share in the primary distribution markets;
    
    Structure our supply system to permit it to continue to be reliable, flexible, and
competitive;
    
    Develop and consolidate the energy business in a profitable manner, expanding our
share in generation and co-generation;
    
    Act in an effective way within the energy segment in order to make the hydrothermal
system more efficient and take advantage of business opportunities;
    
    Take advantage of synergies within the biofuel business so as to expand the market
for our products and services, continue leading the domestic production of biodiesel
and increase our share in the ethanol business; and
    
    Produce electricity using renewable sources, such as wind power, solar power,
small-scale hydropower and biomass (raw materials with biologic origin), and take
advantage of cooperation between our businesses and the businesses of our subsidiary,
BR.
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Natural Gas
     Malha
Sudeste Malha Nordeste
   55




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DOMESTIC SALES OF NATURAL GAS TO LOCAL DISTRIBUTION COMPANIES
 Year Ended December 31,2006
    
    2005
    
    2004(in MMscfd)Total sales annual average(i)
    
    
    1,355
    
    
    
    1,289
    
    
    
    1,164Annual sales growth(i)
    
    
    5.2
    %
    
    
    11
    %
    
    
    19
    %
 
 (i)
    
    The volume of natural gas sold to local distribution companies (thermal and non-thermal).
Our internal consumption and natural gas received by internal transfer are not included. 56




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Gas purchase commitments
 NATURAL GAS PURCHASE COMMITMENTS
 2007
    
    2008
    
    2009
    
    2010
    
    2011Brent Crude Oil Projection (1)
    
    
    50
    
    
    
    35
    
    
    
    30
    
    
    
    30
    
    
    
    30Volume Obligation (Mmcmpd)
    
    
    24
    
    
    
    24
    
    
    
    24
    
    
    
    24
    
    
    
    24Volume Obligation (Mmcfd)
    
    
    850
    
    
    
    850
    
    
    
    850
    
    
    
    850
    
    
    
    850Estimated Payments (U.S.$million)(2)
    
    
    1,101
    
    
    
    884
    
    
    
    758
    
    
    
    740
    
    
    
    740
 
 (1)
    
    Corporate projections announced in June 2006 in the 2007-2011 Business Plan.(2)
    
    Amounts calculated based on current prices set forth under the agreements projected constant
to the future. Prices may be adjusted in the future and actual amounts may vary. Of these
amounts, 25.3% are related to Petrobras Bolivia. force majeure
 Ship-or-pay commitments
 57




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NATURAL GAS SHIP-OR-PAY COMMITMENTS (TBG)
 2007
    
    2008
    
    2009
    
    2010
    
    2011Volume Commitment (MMcmpd)
    
    
    30
    
    
    
    30
    
    
    
    30
    
    
    
    30
    
    
    
    30Volume Commitment (MMcfpd)
    
    
    1,059
    
    
    
    1,059
    
    
    
    1,059
    
    
    
    1,059
    
    
    
    1,059Estimated Payments (U.S.$million)
    
    
    393.80
    
    
    
    393.57
    
    
    
    398.21
    
    
    
    401.96
    
    
    
    404.11
 NATURAL GAS SHIP-OR-PAY COMMITMENTS (GTB)
 2007
    
    2008
    
    2009
    
    2010
    
    2011Volume Commitment (MMcmpd)
    
    
    30
    
    
    
    30
    
    
    
    30
    
    
    
    30
    
    
    
    30Volume Commitment (MMcfpd)
    
    
    1,059
    
    
    
    1,059
    
    
    
    1,059
    
    
    
    1,059
    
    
    
    1,059Estimated Payments (U.S.$million)
    
    
    58.49
    
    
    
    58.79
    
    
    
    59.08
    
    
    
    59.37
    
    
    
    59.67
 Natural gas sales contracts
  NATURAL GAS SALES CONTRACTS
 2007
    
    2008
    
    2009
    
    2010
    
    2011(in MMscfd)To Local Gas DistributionCompaniesRelated parties(1)
    
    
    500
    
    
    
    508
    
    
    
    544
    
    
    
    549
    
    
    
    560Third parties
    
    
    640
    
    
    
    640
    
    
    
    642
    
    
    
    645
    
    
    
    646To Power Generation PlantsRelated parties(1)
    
    
    107
    
    
    
    107
    
    
    
    107
    
    
    
    107
    
    
    
    107Third parties
    
    
    104
    
    
    
    104
    
    
    
    259
    
    
    
    259
    
    
    
    259Total
    
    
    1,351
    
    
    
    1,359
    
    
    
    1,552
    
    
    
    1,560
    
    
    
    1,573Estimated Contract Revenues (U.S.$million)(2)(3)
    
    $
    2,416
    
    
    $
    2,663
    
    
    $
    3,224
    
    
    $
    3,153
    
    
    $
    3,093
 58




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##### Table of Contents



(1)
    
    For purposes of this table, related parties include all local gas distribution companies
and power generation plants in which we have an equity interest and third parties refer to
those in which we do not have an equity interest.(2)
    
    Figures show revenues net of taxes. Estimates are based on sales (outside sales) and do not
include internal consumption or transfers. Estimated volumes are based on take or pay
agreements in our contracts, expected volumes, and contracts under negotiation, not maximum
sales.(3)
    
    Prices may be adjusted in the future and actual amounts may vary. Pricing Portaria Portaria
    Novo Modelo Regulatório do
Setor Elétrico Brasileiro
     
    
    our participation in the power sector helps create a market for natural gas made
available through our investments in the natural gas business;
    
    we are able to build inside the fence co-generation plants close to our refineries
and other facilities, which provide us with a reliable and inexpensive source of
electricity for use in our own refineries; and
    
    these co-generation plants also produce steam for use by our refineries and in
onshore crude oil recovery enhancement projects. For example, the gas-fired power
plant, Termoaçu, which is currently
 59




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under construction, will generate steam for the
Exploration and Production Unit of Rio Grande do Norte and Ceará. The production and
consumption of steam reduces the overall costs of generating electricity, making such
electricity cost competitive relative to other gas-fired power generation, including
new hydroelectric developments.
      POWER OFFTAKE PROJECTED COMMITMENTS
 PLANT
    
    2007
    
    2008
    
    2009(Average MW)FAFEN
    
    
    138
    
    
    
    138
    
    
    
    138TermoBahia
    
    
    186
    
    
    
    186
    
    
    
    186Total NE Tolling Arrangements
    
    
    324
    
    
    
    324
    
    
    
    324Ibiritermo
    
    
    226
    
    
    
    226
    
    
    
    226Total S/SE Tolling Arrangements
    
    
    226
    
    
    
    226
    
    
    
    226
     60




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Renewable Energy Alternative
  Renewable Energy
   Biodiesel
   pinhão manso
  Sustainable Development
 2
 61




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Energy Efficiency
  2
 Programa Nacional de Racionalização do Uso dos Derivados 2
 
 International
 Summary and Strategy
     
    
    Assure our leadership as an integrated energy company in Latin America;
    
    Expand our exploration and production activities in the Gulf of Mexico and Africa;
    
    Expand our operations in new exploration and production in areas where we may have
competitive advantages;
    
    Expand downstream activities in profitable markets with a high potential for growth;
    
    Add value to our production of heavy crude;
    
    Incorporate natural gas reserves and operate in the LNG market; and
    
    Internationalize and add value to our brand.
  62




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Exploration and Production
  DISTRIBUTION OF CAPITAL EXPENDITURES IN INTERNATIONAL EXPLORATION ACTIVITIES
 2006
    
    2005
    
    2004Argentina
    
    
    6.4
    %
    
    
    7.2
    %
    
    
    3.1
    %Bolivia
    
    
    0.6
    
    
    
    4.4
    
    
    
    0.2Colombia
    
    
    3.6
    
    
    
    4.6
    
    
    
    3.5Peru, Ecuador and Venezuela
    
    
    1.1
    
    
    
    0.3
    
    
    
    2.4South America
    
    
    11.7
    
    
    
    16.5
    
    
    
    9.2West Coast of Africa
    
    
    43.7
    
    
    
    47.8
    
    
    
    52.0Gulf of Mexico
    
    
    31.5
    
    
    
    33.9
    
    
    
    36.8Others
    
    
    13.1
    
    
    
    1.8
    
    
    
    2.0Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Development
  ALLOCATION OF CAPITAL EXPENDITURES IN INTERNATIONAL DEVELOPMENT ACTIVITIES
 2006
    
    2005
    
    2004Argentina
    
    
    26.5
    %
    
    
    36.2
    %
    
    
    41.9
    %Peru
    
    
    5.8
    
    
    
    8.3
    
    
    
    10.9Ecuador
    
    
    3.6
    
    
    
    16.7
    
    
    
    7.4Bolivia
    
    
    1.3
    
    
    
    1.7
    
    
    
    1.5Colombia
    
    
    2.8
    
    
    
    4.6
    
    
    
    6.8Venezuela
    
    
    1.8
    
    
    
    15.9
    
    
    
    28.4South America
    
    
    41.8
    
    
    
    83.4
    
    
    
    96.9West Coast of Africa
    
    
    41.0
    
    
    
    15.0
    
    
    
    1.4Gulf of Mexico
    
    
    17.2
    
    
    
    1.6
    
    
    
    1.7Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 63




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Argentine Activities
      Project MEGA
  Other interests of PESA
   64




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Bolivian Activities
       3⁄4
 Venezuelan Activities
 empresas
mistas
  65




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66




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67




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Ecuadorian Activities
         68




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Peruvian Activities
     Uruguayan Activities
     Paraguayan Activities
  69




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Colombian Activities
     2
 U.S. Gulf of Mexico Activities
      70




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Mexican Activities
   African Activities
    
  71




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2
 2
  Middle East Activities
   Turkey Activities
  72




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PifCo
 th
 PifCo Business Overview
    
    
    Petrobras Europe Limited, or PEL, a United Kingdom company that acts as an agent and
advisor in connection with our trading activities in Europe, the Middle East, the Far
East and North Africa;
    
    Petrobras Finance Limited, or PFL, a Cayman Islands company, that carries out a
financing program supported by future sales of fuel oil;
    
    Bear Insurance Company Limited, or BEAR, a company incorporated in Bermuda that
contracts insurance for us and our subsidiaries; and
    
    Petrobras Singapore Private Limited, or PSPL, a company incorporated in Singapore to
trade crude oil and oil products in connection with our trading activities in Asia.
This company initiated its operations in July 2006.
  73




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PETROBRAS ANNUAL BUNKER FUEL PRODUCTION
 2006
    
    2005
    
    2004
    
    2003
    
    2002(Mbbl)Export
    
    
    23,588
    
    
    
    22,948
    
    
    
    22,452
    
    
    
    21,402
    
    
    
    23,653Domestic Consumption
    
    
    1,614
    
    
    
    1,313
    
    
    
    1,061
    
    
    
    1,048
    
    
    
    1,620Petrobras Fleet
    
    
    4,427
    
    
    
    3,739
    
    
    
    3,912
    
    
    
    4,291
    
    
    
    4,596Total
    
    
    29,629
    
    
    
    28,000
    
    
    
    27,425
    
    
    
    26,741
    
    
    
    29,869
     76




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FUEL OIL EXPORT SALES
 2006
    
    2005
    
    2004
    
    2003
    
    2002Millions of U.S.$
    
    
    1,500.1
    
    
    
    1,077.6
    
    
    
    1,306.1
    
    
    
    967.3
    
    
    
    697.0Millions of Barrels
    
    
    67.3
    
    
    
    25.5
    
    
    
    47.5
    
    
    
    38.4
    
    
    
    30.8
 
 Organizational Structure
  77




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Property, Plants and Equipment
 Petrobras
  PifCo
  
 Regulation of the Oil and Gas Industry in Brazil
 Regulatory Framework
    Agência Nacional de Petróleo,
Gas, e Combustíveis Renováveis
  79




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##### Table of Contents



Mercados del
Valores Latinoamericanos en Euros Comissão de Valores Mobiliários Comisión Nacional del Mercado de Valores  CNMV Comisión Nacional de Valores
  Price Regulation
   Contribuição de Intervenção no Domínio Econômico
 Programa de Integração Social Contribuição para o
Financiamento da Seguridade Social
 PIS/PASEPand COFINSProduct
    
    rate
    
    CIDE(reais/m3, exceptLPG/metric ton)Gasoline
    
    R$
    261.60
    
    
    
    280.0Diesel
    
    
    148.00
    
    
    
    70.0Jet Fuel
    
    
    71.20
    
    
    
    LPG
    
    
    167.70
    
    
    
    
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
    
    introduced a new methodology for determining the price of oil products designed to
track prevailing international prices and the real/U.S. dollar exchange rate;
    
    eliminated regulation of the cost at which we could record imported crude oil and
oil products in our cost of sales;
    
    gradually eliminated controls on wholesale prices at which we could sell our oil
products, except for diesel, gasoline and LPG;
    
    effective July 28, 1998, eliminated transportation cost equalization subsidies known
as Frete para Uniformização de Preços(Freight for the Uniformity of Prices, or FUP),
in the case of transportation subsidies for oil products, and Frete para Uniformização
de Preços do Álcool(Freight for the Uniformity of Prices of Alcohol, or FUPA), in the
case of transportation subsidies for fuel alcohol; and
    
    continued to require that we act as the Brazilian governments administrator for the
fuel alcohol program.
    
    
    the Brazilian government no longer set sales prices for crude oil and oil products;
and
    
    the Brazilian government established CIDE, an excise tax payable to the Brazilian
government required to be paid by producers, blenders and importers upon sales and
purchases of specified oil and fuel products at a set amount for different products
based on the unit of measurement typically used for such products.
     81




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##### Table of Contents



For the Year Ended December 31,2006
    
    2005
    
    2004(in millions of U.S. dollars)Opening balance
    
    $
    329
    
    
    $
    282
    
    
    $
    239Reimbursements to Petrobras: transport of oil products
    
    
    
    
    
    
    
    
    
    
    1Financial income
    
    
    7
    
    
    
    9
    
    
    
    4Results of certification/audit process conducted by
the Brazilian government
    
    
    
    
    
    
    
    
    
    
    16Partial settlement
    
    
    
    
    
    
    
    
    
    
    (3
    )Translation gain (loss)(1)
    
    
    32
    
    
    
    38
    
    
    
    25Ending balance
    
    $
    368
    
    
    $
    329
    
    
    $
    282
 
 (1)
    
    Exchange rate translation gains (losses) are recorded as a component of cumulative
translation adjustments. real
 82




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##### Table of Contents



Exploration and Development Regulation
   
    
    signature bonuses;
    
    rentals for the occupation or retention of areas;
    
    special participation; and
    
    royalties.
    
    
    volume of production; and
    
    whether the block is onshore or offshore and, if offshore, whether it is shallow or deep water.
  
    
    royalties paid;
    
    investment in exploration;
    
    operational costs; and
    
    depreciation adjustments and applicable taxes.
 edital
de licitação contrato de concessão
 83




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##### Table of Contents



Environmental Regulations
 Conselho Nacional do Meio Ambiente
  Taxa de Controle e
Fiscalização Ambiental Confederação Nacional da Indústria Supremo Tribunal Federal
   
    
    fines;
    
    partial or total suspension of activities;
    
    obligations to fund recovery works and environmental projects;
    
    forfeiture or restriction of tax incentives or benefits;
 84




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##### Table of Contents




    
    closing of the establishments or undertakings; and
    
    forfeiture or suspension of participation in credit lines with official credit establishments.
      
 Health, Safety and Environmental Initiatives
 Initiatives
  
    
    developed the PEGASO program to upgrade our pipelines and other equipment, implement
new technologies, improve our emergency response readiness, reduce emissions and
residues and prevent environmental accidents. From April 2000 to December 2006, we
spent approximately U.S.$4.081 billion under this program, including the Programa de
Integridade de Dutos(Pipeline Integrity
Program) through which we conduct inspections of, and improvements to, our pipelines. In
2006, we spent approximately U.S.$562 million in connection with the PEGASO program;
    
    proposed the execution of, or entered into, environmental commitment agreements with
several environmental protection agencies and/or the federal or state public
ministries, in which we agree to undertake certain measures in order to complete the
environmental licensing for several of our operating facilities;
    
    integrated our corporate health department into the already existing corporate
environment and safety department, thereby facilitating the development of systematic,
company-wide procedures to handle concerns related to health, safety and the
environment, or HSE;
 85




---



##### Table of Contents




    
    established our new HSE policy and corporate guidelines, which focus on principles
of sustainable development, compliance with legislation and the availability and use of
environmental performance indicators;
    
    undertook capital investments to reduce the HSE risk of our operations, including
making improvements to our refineries and transportation facilities and developing and
implementing oil pollution prevention guidelines;
    
    built nine environmental protection centers and seven advanced bases for oil spill
prevention, control and response, established local and regional, onshore and offshore
contingency plans involving public services and communities to deal with oil spills,
and chartered three dedicated oil spill recovery vessels (OSRVs) fully equipped for oil
spill control and fire fighting;
    
    received HSE integrated management certificates for our operating units. As of
December 2006, Petrobras owned 34 certificates for its operating units in Brazil and 20
for units abroad. These certificates acknowledge the compliance of our HSE management
system with ISO 14001 (environment) and OHSAS 18001 (health and safety) standards.
Because some of those certificates cover more than one site, the total number of
certified sites is 159 in Brazil and 20 abroad. The Frota Nacional de Petroleiros
(National Fleet of Vessels) has been fully certified by the IMO International
Management Code for Safe Operation of Ships and for Pollution Prevention (ISM Code)
since December 1997;
    
    implemented through the Programa de Segurança de Processo (Process Safety Program)
standardized, company-wide guidelines for HSE management, for effectively investigating
incidents and for strengthening our institutional commitment to HSE through employee
training. The HSE Management Manual developed through that program is a day-to-day
management tool currently being applied in all of our operating units;
    
    implemented the Excellence in Health, Safety and Environment Project, included in
our Strategic Agenda, which, through actions already defined in all of our business and
services segments and in our subsidiaries, seeks to ensure that by 2015, we reach the
same level of performance as measured by safety, environmental and health indices as
the leading oil, Gas and Power companies in the world;
    
    developed an Air Emissions Management System, in conjunction with an international
consulting company, for our operations in Brazil and South America. The system gathers
information about emissions of sulfur dioxide, nitrogen oxides, carbon monoxide, the
main greenhouse gases (carbon dioxide, methane and nitrous oxide), volatile organic
compounds (VOCs) and particulate material, allowing us to improve the management of our
emissions. We have registered our 2004 Annual Emissions Summary in the Global
Greenhouse Gas Register of the World Economic Forum. The report gathers data provided
by the Air Emissions Management System and is available for public access through the
Forums website;
    
    established a corporate goal, included in our Balanced Scorecard, for avoiding
emissions of greenhouse gases (GHG). Considering the projects included in our 2007-2011
Business Plan,, we aim
to cut 18.5 million tons of GHG emissions through 2011, by implementing projects that
may also be eligible for the Clean Development Mechanism of the Kyoto Protocol;
    
    participated in negotiations conducted by the Brazilian Ministry of Mines and Energy
of new regulations of environmental compensation related to the implementation of new
projects;
    
    participated with the Brazilian Ministry of Mines and Energy and IBAMA in a
governmental follow-up group created to supervise the implementation of the new planned
gas pipelines and oil and gas production projects;
    
    participated regularly in the discussion agenda of the Brazilian Ministry of Mines
and Energy and the Ministry of the Environment about environmental issues affecting our
business; and
 86




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##### Table of Contents




    
    participated directly in discussions with the Ministry of the Environment and IBAMA
regarding issues that could affect Petrobras business.
        Management
   
 Competition
   87




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##### Table of Contents



Associação Brasileira das Empresas de Gás Natural
  
 Insurance
    88




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##### Table of Contents



ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
 Managements Discussion and Analysis of Petrobras Financial Condition and Results of Operations
  
 Overview
  
    
    domestic sales, which consist of sales of oil products (such as diesel oil,
gasoline, jet fuel, naphtha, fuel oil and liquefied petroleum gas), natural gas,
electricity and petrochemical products;
    
    export sales, which consist primarily of sales of crude oil and oil products;
    
    international sales (excluding export sales), which consist of sales of crude oil,
natural gas and oil products that are purchased, produced and refined abroad; and
    
    other sources, including services, investment income and foreign exchange gains.
  
    
    costs of sales (which are composed of labor expenses, costs of operating and
purchases of crude oil and oil products); maintaining and repairing property, plants
and equipment; depreciation and amortization of fixed assets; depletion of oil fields;
and costs of exploration;
    
    selling (which include expenses for transportation and distribution of our
products), general and administrative expenses; and
    
    interest expense, monetary and foreign exchange losses.
  89




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##### Table of Contents




    
    the volume of crude oil, oil products and natural gas we produce and sell;
    
    changes in international prices of crude oil and oil products, which are denominated in U.S. dollars;
    
    related changes in the domestic prices of crude oil and oil products, which are
denominated in reais;
    
    fluctuations in the real/U.S. dollar and Argentine peso/U.S. dollar exchange rates;
    
    Brazilian political and economic conditions; and
    
    the amount in taxes and duties that we are required to pay with respect to our
operations, by virtue of our status as a Brazilian company and our involvement in the
oil and gas industry.
 
 Sales Volumes and Prices
    Domestic Sales Volumes and Prices
   90




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##### Table of Contents



For the Year Ended December 31,2006
    
    
    2005
    
    
    2004Net
    
    
    Net
    
    
    
    
    
    
    Net
    
    
    Net
    
    
    
    
    
    
    Net
    
    
    NetAverage
    
    
    Operating
    
    
    
    
    
    
    Average
    
    
    Operating
    
    
    
    
    
    
    Average
    
    
    OperatingVolume
    
    
    Price
    
    
    Revenues
    
    
    Volume
    
    
    Price
    
    
    Revenues
    
    
    Volume
    
    
    Price
    
    
    Revenues(Mbbl,
    
    
    
    
    
    
    
    
    
    
    (Mbbl,
    
    
    
    
    
    
    
    
    
    
    (Mbbl,except as
    
    
    
    
    
    
    
    
    
    
    except as
    
    
    
    
    
    
    
    
    
    
    except asotherwise
    
    
    (U.S.$)
    
    
    (U.S.$ in
    
    
    otherwise
    
    
    (U.S.$)
    
    
    (U.S.$ in
    
    
    otherwise
    
    
    (U.S.$)
    
    
    (U.S.$ innoted)
    
    
    (1)
    
    
    millions)
    
    
    noted)
    
    
    (1)
    
    
    millions)
    
    
    noted)
    
    
    (1)
    
    
    millions)Energy products:Automotive gasoline
    
    
    112,541
    
    
    
    73.86
    
    
    
    8,312
    
    
    
    104,901
    
    
    $
    60.08
    
    
    $
    6,302
    
    
    
    100,712
    
    
    $
    41.58
    
    
    $
    4,188Diesel
    
    
    245,159
    
    
    
    83.65
    
    
    
    20,507
    
    
    
    242,831
    
    
    
    68.20
    
    
    
    16,561
    
    
    
    240,237
    
    
    
    44.64
    
    
    
    10,725Fuel oil
    
    
    36,340
    
    
    
    47.47
    
    
    
    1,725
    
    
    
    36,243
    
    
    
    40.81
    
    
    
    1,479
    
    
    
    39,654
    
    
    
    28.45
    
    
    
    1,128Liquid petroleum gas
    
    
    73,382
    
    
    
    36.00
    
    
    
    2,642
    
    
    
    77,891
    
    
    
    34.55
    
    
    
    2,691
    
    
    
    76,982
    
    
    
    28.14
    
    
    
    2,166Total energy products
    
    
    467,422
    
    
    
    
    
    
    
    33,186
    
    
    
    461,866
    
    
    
    
    
    
    
    27,033
    
    
    
    457,585
    
    
    
    
    
    
    
    18,207Non-energy products:Petrochemical naphtha
    
    
    60,197
    
    
    
    63.31
    
    
    
    3,811
    
    
    
    57,281
    
    
    
    53.49
    
    
    
    3,064
    
    
    
    57,595
    
    
    
    42.28
    
    
    
    2,435Others
    
    
    96,369
    
    
    
    63.09
    
    
    
    6,080
    
    
    
    80,953
    
    
    
    58.35
    
    
    
    4,724
    
    
    
    77,652
    
    
    
    41.96
    
    
    
    3,258Total non-energy products
    
    
    156,566
    
    
    
    
    
    
    
    9,891
    
    
    
    138,234
    
    
    
    
    
    
    
    7,788
    
    
    
    135,247
    
    
    
    
    
    
    
    5,693Fuel alcohol
    
    
    59
    
    
    
    67.80
    
    
    
    4
    
    
    
    126
    
    
    
    23.81
    
    
    
    3
    
    
    
    455
    
    
    
    30.77
    
    
    
    14Natural gas (BOE)
    
    
    88,839
    
    
    
    26.27
    
    
    
    2,334
    
    
    
    83,090
    
    
    
    21.77
    
    
    
    1,809
    
    
    
    77,310
    
    
    
    18.61
    
    
    
    1,439Sub-total
    
    
    712,886
    
    
    
    63.71
    
    
    
    45,415
    
    
    
    683,316
    
    
    
    53.61
    
    
    
    36,633
    
    
    
    670,597
    
    
    
    37.81
    
    
    
    25,353Distribution net sales
    
    
    204,649
    
    
    
    91.46
    
    
    
    18,718
    
    
    
    201,347
    
    
    
    78.53
    
    
    
    15,811
    
    
    
    182,327
    
    
    
    57.36
    
    
    
    10,458Intercompany net sales
    
    
    (195,903
    )
    
    
    69.89
    
    
    
    (13,692
    )
    
    
    (187,268
    )
    
    
    62.22
    
    
    
    (11,651
    )
    
    
    (164,730
    )
    
    
    46.69
    
    
    
    (7,692
    )Total domestic market
    
    
    721,632
    
    
    
    69.90
    
    
    
    50,441
    
    
    
    697,395
    
    
    
    58.49
    
    
    
    40,793
    
    
    
    688,194
    
    
    
    40.86
    
    
    
    28,119Export net sales
    
    
    259,630
    
    
    
    55.39
    
    
    
    14,381
    
    
    
    187,008
    
    
    
    47.80
    
    
    
    8,938
    
    
    
    186,221
    
    
    
    31.81
    
    
    
    5,923International net sales
    
    
    73,363
    
    
    
    62.72
    
    
    
    4,601
    
    
    
    64,860
    
    
    
    48.41
    
    
    
    3,140
    
    
    
    83,800
    
    
    
    33.89
    
    
    
    2,840Others
    
    
    50,098
    
    
    
    47.87
    
    
    
    2,398
    
    
    
    75,770
    
    
    
    40,09
    
    
    
    3,038
    
    
    
    31,504
    
    
    
    39.17
    
    
    
    1,234Sub-Total
    
    
    383,091
    
    
    
    55.81
    
    
    
    21,380
    
    
    
    327,638
    
    
    
    46.14
    
    
    
    15,116
    
    
    
    301,525
    
    
    
    33.15
    
    
    
    9,997Services
    
    
    
    
    
    
    
    
    
    
    526
    
    
    
    
    
    
    
    
    
    
    
    415
    
    
    
    
    
    
    
    
    
    
    
    312Consolidated net sales
    
    
    1,104,723
    
    
    
    
    
    
    
    72,347
    
    
    
    1,025,033
    
    
    
    
    
    
    $
    56,324
    
    
    
    989,719
    
    
    
    
    
    
    $
    38,428
 
 (1)
    
    Net average price calculated by dividing net sales by the volume for the year.  Export Sales Volumes and Prices
  International Volumes and Prices
  91




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##### Table of Contents



Import Purchase Volumes and Prices
   
 Effect of Taxes on our Income
 General
 Imposto sobre Circulação de Mercadorias e Serviços
 
    
    Royalties, which generally correspond to a percentage between 5% and 10% of
production, are calculated based on a reference price for crude oil or natural gas, and
will thus vary with the international price of crude oil. The ANP also takes into
account the geological risks involved, and productivity levels expected, with respect
to a particular concession. Virtually all of our crude oil production is currently
taxed at the maximum royalty rate.
    
    Special Participation, which applies to our larger, more profitable fields, and
ranges from 0% to 40% depending on the volumes of crude oil produced in the fields, the
location of the fields (including whether they are onshore or offshore), water depth
and number of years that the field has been in production, and the quality of the oil
that is produced. In 2006, the tax was charged on 19 of our fields, including Marlim,
Albacora, Roncador, Leste do Urucu, Rio Urucu, Canto do Amaro, Marimbá, Marlim Sul,
Namorado, Carapeba, Pampo, Albacora Leste, Barracuda, Caratinga, Cherne, Pilar, Fazenda
Alegre, Miranga and Carmópolis. The tax is based on net revenues of a field, which
consists of gross revenues less royalties paid, investments in exploration, operational
costs and depreciation adjustments and applicable taxes. The Special Participation Tax
uses as a reference international oil prices converted to reaisat the current exchange
rate.
    
    Retention Bonus, which is a tax payable on those concessions that are available for
exploration and production, and is calculated at a rate established by the ANP, taking
into consideration factors such as the location and size of the relevant concession
block, the sedimentary basin and its geological characteristics.
  92




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Potential Change in ICMS Legislation
     
 Financial Income and Expense
   reais
 
 Inflation and Exchange Rate Variation
 Inflation
 real reais real
 Exchange Rate Variation
 real real real reais real
 93




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##### Table of Contents



real
 real
 reais real reais reais reais real
 reais reais real
 
    
    We record the remeasurement effects of our non-reaisdenominated assets and
liabilities held in Brazil (e.g., cash, cash equivalents and financial obligations) in
our statements of income. Primarily because of our substantial liabilities denominated
in foreign currency, we recorded a U.S.$55 million net foreign exchange gain in our
2006 statement of income, as compared to a U.S.$269 million net foreign exchange gain
in 2005 and to a U.S.$368 million net foreign exchange gain in 2004. To the extent
these variations are not recognized in a transaction (such as the repayment of the debt
in the period in which there is a depreciation), the foreign exchange gain is added
back for purposes of determining our cash flow.
    
    Our other assets and liabilities in Brazil, primarily accounts receivable,
inventories and property, plant and equipment, cash and cash equivalents and government
securities, pension plan liabilities, health care benefits and deferred income taxes,
are all translated into U.S. dollars. Therefore, any depreciation (appreciation) of the
realagainst the U.S. dollar will be reflected as a reduction (gain) in the U.S. dollar
value of those assets and liabilities, charged directly to shareholders equity. These
currency translation effects are beyond our control. Accordingly, we recorded a
U.S.$3,230 million credit directly to shareholders equity in our statement of changes
in shareholders equity for 2006, without affecting net income, to reflect the
appreciation of the realagainst the U.S. dollar of approximately 8.7%, as compared to
a credit of U.S.$3,107 million in 2005 to reflect the appreciation of 11.8%, as
compared to a credit of U.S.$1,911 million in 2004 to reflect the appreciation of 8.1%.
 reais real
 real
 94




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##### Table of Contents



Results of Operations
 real
 2006
    
    2005
    
    2004Crude Oil and NGL Production (Mbpd)Brazil
    
    
    1,778
    
    
    
    1,684
    
    
    
    1,493International
    
    
    130
    
    
    
    163
    
    
    
    168Non-consolidated international production(1)
    
    
    12
    
    
    
    
    
    
    
    Total Crude Oil and NGL Production
    
    
    1,920
    
    
    
    1,847
    
    
    
    1,661Change in Crude Oil and NGL Production
    
    
    4.0
    %
    
    
    11.2
    %
    
    
    (2.4
    )%Average Sales Price for Crude (U.S.$  per bbl)Brazil
    
    $
    54.71
    
    
    $
    45.42
    
    
    $
    33.49International
    
    $
    44.02
    
    
    $
    34.91
    
    
    $
    26.51Natural Gas Production (Mmcfpd)Brazil
    
    
    1,660
    
    
    
    1,644
    
    
    
    1,590International
    
    
    595
    
    
    
    576
    
    
    
    564Non-consolidated international production(1)
    
    
    12
    
    
    
    
    
    
    
    Total Natural Gas Production
    
    
    2,267
    
    
    
    2,220
    
    
    
    2,154Change in Natural Gas Production (sold only)
    
    
    2.2
    %
    
    
    3.1
    %
    
    
    7.2
    %Average Sales Price for Natural Gas (U.S.$  per Mcf)Brazil
    
    
    2.61
    
    
    
    2.17
    
    
    
    1.93International
    
    
    2.16
    
    
    
    1.64
    
    
    
    1.17Year End Exchange Rate
    
    
    2.14
    
    
    
    2.34
    
    
    
    2.65Appreciation (Depreciation) during the year(2)
    
    
    8.7
    %
    
    
    11.8
    %
    
    
    8.1
    %Average Exchange Rate for the year
    
    
    2.18
    
    
    
    2.44
    
    
    
    2.93Appreciation (Depreciation) during the year(3)
    
    
    10.7
    %
    
    
    16.8
    %
    
    
    4.8
    %Inflation Rate (IGP-DI)
    
    
    3.8
    %
    
    
    1.2
    %
    
    
    12.1
    %
 
 (1)
    
    Non-consolidated companies in Venezuela.(2)
    
    Considering year end exchange rate.(3)
    
    Considering average exchange rate for the year. Results of Operations for the year ended December 31, 2006(2006) compared to the year ended
December 31, 2005 (2005).
 eal eal
 95




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##### Table of Contents



reais
 Revenues
 eal
   
    
    Value-added, PASEP, COFINS and other taxes on sales of products and services and
social security contributions. These taxes increased 21.9% to U.S.$17,906 million for
2006, as compared to U.S.$14,694 million for 2005, primarily due to the increase in
prices and sales volume of our products and services; and
    
    CIDE, the per-transaction fee, which increased 19.5% to U.S.$3,640 million for 2006,
as compared to U.S.$3,047 million for 2005. This increase was primarily attributable to
the increase in sales volume of our products and services and to the 10.7% increase in
the value of the realagainst the U.S. dollar in 2006, as compared to 2005.
 Cost of sales (excluding Depreciation, depletion and amortization)
  
    
    a U.S.$3,376 million increase in the cost of imports due to higher prices for the
products imported and to the increase in the volume of products imported;
    
    a U.S.$2,588 million increase in costs associated with a 19.4% increase in our
international market sales volumes;
    
    a U.S.$2,033 million increase in taxes and charges imposed by the Brazilian
government totaling U.S.$7,443 million for 2006, as compared to U.S.$5,410 million for
2005, as a result of higher international oil prices and the new interpretation by the
ANP prohibiting the deductibility of charges associated with project financing for the
Marlim field; including an increase in the special participation charge (an
extraordinary charge payable in the event of high production and/or profitability from
our fields) of U.S.$3,885 million for 2006, as compared to U.S.$3,016 million for
2005, as a result of higher international oil prices and an increase of U.S.$249
million due to the new interpretation by the ANP mentioned above;
    
    a U.S.$187 million expense related to gas produced and re-injected in reserves in
the Solimões, Campos and Espírito Santo basins;
    
    a U.S.$156 million increase in costs associated with our international trading
activities, due to increases in volume and prices from offshore operations, conducted
by PifCo; and
    
    the 10.7% increase in the value of the Realagainst the U.S. dollar in 2006, as
compared to 2005.
 96




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##### Table of Contents



Depreciation, depletion and amortization
  
    
    increased capital expenditures related to property, plant and equipment associated
with our crude oil and natural gas production; and
    
    the 10.7% increase in the value of the Realagainst the U.S. dollar in 2006, as
compared to 2005.
 Exploration, including exploratory dry holes
 Real
 Impairment of oil and gas properties
  Selling, general and administrative expenses
   
    
    an increase of approximately U.S.$43 million in expenses related to the increased
consumption of materials;
    
    an increase of approximately U.S.$23 million in personnel expenses due to the
increase in our workforce and salaries;
    
    an increase of approximately U.S.$13 million in expenses mainly associated with
transportation costs of oil products, due mainly to an increase in the exports; and
    
    the 10.7% increase in the value of the Realagainst the U.S. dollar in 2006, as
compared to 2005.
 Real
 Research and development expenses
  97




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
    
    a provision for an ANP research and development investment, related to regulation
ANP 05/2005, in the amount of approximately U.S.$249 million;
    
    additional investments in programs for environmental safety, including deepwater and
refining technologies of approximately U.S.$31 million; and
    
    the 10.7% increase in the value of the Realagainst the U.S. dollar in 2006, as
compared to 2005.
 Other operating expenses
   
    
    a U.S.$568 million expense for institutional relations and cultural projects;
    
    a U.S.$331 million expense for idle capacity from gas-fired power plants;
    
    a U.S.$75 million expense for losses resulting from legal proceedings and
contingencies related to pending lawsuits;
    
    a U.S.$64 million expense for unscheduled stoppages of plant and equipment; and
    
    a U.S.$46 million gain related to bonuses received from partners and other results
with non-core activities.
  
    
    a U.S.$457 million expense for gas-fired power plants related to idle capacity and
penalties and contingencies;
    
    a U.S.$397 million expense for institutional relations and cultural projects;
    
    a U.S.$255 million loss related to the exchange of assets between us and Repsol that
occurred in 2001. See Note 10(b) to our consolidated financial statements for the year
ended December 31, 2006;
    
    a U.S.$139 million expense for losses resulting from legal proceedings and
contingencies related to pending lawsuits;
    
    a U.S.$64 million expense for unscheduled stoppages of plant and equipment; and
    
    a U.S.$61 million expense related to contractual losses from compliance with our
ship or pay commitments with respect to our investments in the OCP pipeline in Ecuador.
 Equity in results of non-consolidated companies
  Financial income
  98




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Financial expenses
  Monetary and exchange variation on monetary assets and liabilities, net
 Real Real
 Employee benefit expense for retired participants
 Real
 Other taxes
  
    
    an increase of U.S.$54 million in the PASEP/COFINS tax related to the increase in
financial income;
    
    an increase of U.S.$49 million in the CPMF, a tax payable in connection with certain
bank account transactions;
    
    an increase of U.S.$48 million in taxes related to the increase in operations with
SPEs, mainly with Companhia Locadora de Equipamentos Petrolíferos  CLEP, Nova
Transportadora do Sudeste  NTS and Nova Transportadora do Nordeste  NTN;
    
    an U.S.$12 million increase in taxes in Colombia and Bolivia, related to foreign
remittance accounts and dividends; and
    
    the 10.7% increase in the value of the Realagainst the U.S. dollar in 2006, as
compared to 2005.
 99




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Other expenses, net
  Income tax (expense) benefit
  Extraordinary gain, net of taxes
  Results of Operations for the year ended December 31, 2005(2005) compared to the year ended
December 31, 2004 (2004).
 Real Real Real
 reais
  Revenues
 Real
   
    
    Value-added (ICMS), PASEP, COFINS and other taxes on sales of products and services
and social security contributions. These taxes increased 34.7% to U.S.$14,694 million
for 2005, as compared to U.S.$10,906 million for 2004, primarily due to the increase in
prices and sales volume of our products and services; and
 100




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
    
    CIDE, the per-transaction fee, which increased 16.3% to U.S.$3,047 million for 2005,
as compared to U.S.$2,620 million for 2004. This increase was primarily attributable to
the increase in sales volume of our products and services and to the 16.8% increase in
the value of the Realagainst the U.S. dollar in 2005, as compared to 2004.
 Cost of sales (excluding Depreciation, Depletion and Amortization)
  
    
    a U.S.$1,834 million increase in taxes and charges paid to the Brazilian government
totaling U.S.$5,410 million for 2005, as compared to U.S.$3,576 million for 2004,
including an increase in the special participation charge (an extraordinary charge
payable in the event of high production and/or profitability from our fields) to
U.S.$3,016 million for 2005, as compared to U.S.$1,883 million for 2004, as a result of
higher international oil prices;
    
    a U.S.$1,654 million increase in the cost of imports due to higher prices for the
products imported;
    
    a U.S.$1,375 million increase in costs attributable to: (1) maintenance and
technical services for well restoration, materials, support for vessels, undersea
operations, freight with third parties (these prices tend to accompany the
international oil prices) consumption of chemical products to clear out and eliminate
toxic gases  principally at Marlim; and (2) higher personnel expenses primarily
related to: overtime payments as set forth in our collective bargaining agreement; an
increase in our workforce; and a revision in the actuarial calculations relating to
future health care and pension benefits;
    
    a U.S.$1,281 million increase in costs associated with our international trading
activities, due to increases in volume and prices from offshore operations, conducted
by PifCo;
    
    a U.S.$561 million increase in costs associated with a 9.0% increase in our
international market sales volumes;
    
    a U.S.$534 million increase in costs in our Argentinean subsidiary PEPSA mainly due
to oil products purchases as a result of total capacity utilization of its refineries
and higher sales volume of petrochemical products;
    
    a U.S.$198 million increase in costs associated with a 1.7% increase in our domestic
sales volumes; and
    
    the 16.8% increase in the value of the Realagainst the U.S. dollar in 2005, as
compared to 2004.
 Depreciation, depletion and amortization
  
    
    increased property, plant and equipment expenditures an increased crude oil and
natural gas production; and
    
    the 16.8% increase in the value of the Realagainst the U.S. dollar in 2005, as
compared to 2004.
 Exploration, including exploratory dry holes
  101




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
    
    the increase of U.S.$196 million due to a revision in the estimated expenses for
dismantling oil and gas producing areas and future well abandonment that affected
the exploration costs and was related to new commercial areas, increased estimates
of cost to abandon and changes in asset retirement obligations estimates provided
by operators in joint ventures;
    
    an increase of U.S.$98 million in geological and geophysical expenses;
    
    an increase of U.S.$16 million in dry holes expenses; and
    
    the 16.8% increase in the value of the Realagainst the U.S. dollar in 2005, as
compared to 2004.
 Impairment of oil and gas properties
  Selling, general and administrative expenses
   
    
    an increase of U.S.$338 million in expenses mainly associated with the
transportation costs of oil products due mainly to an increase in the exports; and
    
    the 16.8% increase in the value of the Realagainst the U.S. dollar in 2005, as
compared to 2004.
  
    
    an increase of approximately U.S.$287 million in employee expenses due to the
increase in our workforce and salaries; and an increase in the actuarial calculations
relating to future health care and pension benefits due to changes in actuarial
assumptions;
    
    an increase of approximately U.S.$212 million in expenses related to technical
consulting services in connection with our increased outsourcing of selected non-core
general activities; and
    
    the 16.8% increase in the average value of the Realagainst the U.S. dollar in 2005,
as compared to 2004.
 Research and development expenses
 Real
 Other operating expenses
  102




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
    
    a U.S.$457 million expense for gas-fired power plants related to idle capacity and
penalties and contingencies;
    
    a U.S.$397 million expense for institutional relations and cultural projects;
    
    a U.S.$255 million loss related to the exchange of assets between us and Repsol that
occurred in 2001. See Note 10(b) to our consolidated financial statements for the year
ended December 31, 2006;
    
    a U.S.$139 million expense for losses resulting from legal proceedings and
contingencies related to pending lawsuits;
    
    a U.S.$64 million expense for unscheduled stoppages of plant and equipment; and
    
    a U.S.$61 million expense related to contractual losses from compliance with our
ship or pay commitments with respect to our investments in the OCP pipeline in Ecuador.
  
    
    a U.S.$262 million expense for institutional relations and cultural projects;
    
    a U.S.$87 million expense for legal liability and contingencies related to pending lawsuits; and
    
    a U.S.$85 million expense for unscheduled stoppages of plant and equipment.
 Equity in results of non-consolidated companies
  Financial income
    Financial expenses
  
    
    a U.S.$345 million increase in our interest expense capitalized as part of the cost
of construction and development of crude oil and natural gas production projects. A
breakdown of financial income and
 103




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expenses is shown in Note 14 to our consolidated financial statements for the year ended
December 31, 2005;
    
    a U.S.$130 million decrease of expenses related to hedge transactions; and
    
    a U.S.$120 million decrease in expenses relating to repurchases of our own securities.
 Monetary and exchange variation on monetary assets and liabilities, net
 Real Real
 Employee benefit expense for non-active participants
 Real
 Other taxes
 Real
 Other expenses, net
  Income tax (expense) benefit
   Extraordinary gain, net of taxes
  
 Business Segments
  104




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SELECTED FINANCIAL DATA BY SEGMENT
 For the Year Ended December 31,2006
    
    
    2005
    
    
    2004(In millions of U.S. dollars)Exploration, Development and Production (Exploration
and Production Segment)Net revenues to third parties (1)(2)
    
    $
    3,351
    
    
    $
    1,874
    
    
    $
    2,487Intersegment net revenues
    
    
    32,387
    
    
    
    26,950
    
    
    
    16,384Total net operating revenues (2)
    
    
    35,738
    
    
    
    28,824
    
    
    
    18,871Depreciation, depletion and amortization
    
    
    (2,166
    )
    
    
    (1,571
    )
    
    
    (1,322
    )Net income (3)
    
    
    11,958
    
    
    
    9,469
    
    
    
    5,949Capital expenditures
    
    
    7,329
    
    
    
    6,127
    
    
    
    4,574Property, plant and equipment, net
    
    
    33,979
    
    
    
    25,876
    
    
    
    20,458Refining, Transportation and Marketing (Supply Segment)Net revenues to third parties (1)(2)
    
    $
    42,831
    
    
    $
    33,229
    
    
    $
    20,981Intersegment net revenues
    
    
    15,128
    
    
    
    12,286
    
    
    
    7,786Total net operating revenues(2)
    
    
    57,959
    
    
    
    45,515
    
    
    
    28,767Depreciation, depletion and amortization
    
    
    (669
    )
    
    
    (644
    )
    
    
    (548
    )Net income (3)
    
    
    2,540
    
    
    
    2,245
    
    
    
    825Capital expenditures
    
    
    1,936
    
    
    
    1,749
    
    
    
    1,367Property, plant and equipment, net
    
    
    9,828
    
    
    
    8,098
    
    
    
    6,333Distribution (Distribution Segment)Net revenues to third parties (1)
    
    $
    18,394
    
    
    $
    15,642
    
    
    $
    10,328Intersegment net revenues
    
    
    287
    
    
    
    225
    
    
    
    158Total net operating revenues
    
    
    18,681
    
    
    
    15,867
    
    
    
    10,486Depreciation, depletion and amortization
    
    
    (143
    )
    
    
    (100
    )
    
    
    (59
    )Net income (3)
    
    
    298
    
    
    
    311
    
    
    
    168Capital expenditures
    
    
    351
    
    
    
    207
    
    
    
    47Property, plant and equipment, net
    
    
    1,468
    
    
    
    1,238
    
    
    
    1,011Natural Gas and Power (Gas and Power Segment)Net revenues to third parties (1)
    
    $
    2,833
    
    
    $
    1,932
    
    
    $
    1,547Intersegment net revenues
    
    
    1,257
    
    
    
    1,232
    
    
    
    474Total net operating revenues
    
    
    4,090
    
    
    
    3,164
    
    
    
    2,021Depreciation, depletion and amortization
    
    
    (197
    )
    
    
    (105
    )
    
    
    (100
    )Net loss (3)
    
    
    (502
    )
    
    
    (342
    )
    
    
    (347
    )Capital expenditures
    
    
    1,664
    
    
    
    694
    
    
    
    782Property, plant and equipment, net
    
    
    6,828
    
    
    
    5,328
    
    
    
    4,506International (International Segment)Net revenues to third parties (1)
    
    $
    4,938
    
    
    $
    3,647
    
    
    $
    3,085Intersegment net revenues
    
    
    1,133
    
    
    
    880
    
    
    
    519Total net operating revenues
    
    
    6,071
    
    
    
    4,527
    
    
    
    3,604Depreciation, depletion and amortization
    
    
    (417
    )
    
    
    (461
    )
    
    
    (423
    )Net income (3)
    
    
    123
    
    
    
    526
    
    
    
    568Capital expenditures
    
    
    2,637
    
    
    
    1,175
    
    
    
    727Property, plant and equipment, net
    
    
    5,722
    
    
    
    4,655
    
    
    
    4,160
 
 (1)
    
    As a vertically integrated company, not all of our segments have significant third-party
revenues. For example, our exploration and production segment accounts for a large part of our
economic activity and capital expenditures, but has little third party revenues.(2)
    
    Since 2005, revenues from commercialization of oil to third parties are being classified in
accordance with the points of sale, which could be either the Exploration & Production or
Supply segments. Until 2004, revenues from commercialization of oil were allocated entirely to
the Exploration & Production segment. This classification generated no significant impact on
the results reported for these segments and segment information has not been restated as it is
impracticable to gather and collect data for prior periods as to point of sale.(3)
    
    In order to align the financial statements of each business segment with the best practices
of companies in the Oil & Gas sector and to improve our managements understanding, since the
first quarter of 2006 we have switched to allocating all financial results and items of a
financial nature to the corporate level, including prior years. 105




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Managements Discussion and Analysis of PifCos Financial Condition and Results of Operations
 
 Overview
  
    
    our financial condition and results of operations;
    
    the extent to which we continue to use PifCos services for market purchases of
crude oil and oil products;
    
    Our willingness to continue to make loans to PifCo and provide PifCo with other
types of financial support;
    
    PifCos ability to access financing sources, including the international capital
markets and third-party credit facilities; and
    
    PifCos ability to transfer our financing costs to us.
  
    
    sales of crude oil and oil products to us;
    
    limited sales of crude oil and oil products to third parties; and
    
    the financing of sales to us, inter-company loans to us and investments in
marketable securities and other financial instruments.
  
    
    cost of sales, which is comprised mainly of purchases of crude oil and oil products;
    
    selling, general and administrative expenses; and
    
    financial expense, mainly from interest on its lines of credit and capital markets
indebtedness, sales of future receivables and inter-company loans from us.
 
 Purchases and Sales of Crude Oil and Oil Products
  106




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Results of Operations
 Results of operations for the year ended December 31, 2006 compared to the year ended December 31,
2005.
 Net Loss
  Sales of Crude Oil and Oil Products and Services
  Cost of Sales
  Selling, General and Administrative Expenses
  Financial Income
  Financial Expense
  
 Liquidity and Capital Resources
 Petrobras
 Overview
  107




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##### Table of Contents



Financing Strategy
 .
 Government Regulation
 Plano de Dispêndio Global
   Sources of Funds
      108




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##### Table of Contents



Banco Nacional de Desenvolvimento Econômico e Social
  Notes
    
    Principal amount6.625% Step Down Notes due 2007 (1)
    
    EUR 134 millionPifCos 9.125% Notes due 2007 (2)
    
    U.S.$500 millionPifCos 9.875% Notes due 2008 (2)
    
    U.S.$450 millionPifCos 9.750% Notes due 2011 (2)
    
    U.S.$600 millionPifCos 4.750% Senior Exchangeable Notes due 2007
    
    U.S.$338 millionPifCos 12.375% Global Step-up Notes due 2008 (3)
    
    U.S.$400 millionPifCos 9.125% Global Notes due 2013
    
    U.S.$750 millionPifCos 8.375% Global Notes due 2018
    
    U.S.$750 millionPifCos 3.748% Senior Trust Certificates due 2013
    
    U.S.$200 millionPifCos 6.436% Senior Trust Certificates due 2015
    
    U.S.$550 millionPEPSAs 9.375% Notes due 2013
    
    U.S.$100 millionPifCos 7.75% Global Notes due 2014
    
    U.S.$600 millionPifCos 6.125% Global Notes due 2016
    
    U.S.$500 millionPifCos 2.15% Japanese Yen Bonds due 2016 (4)
    
    U.S.$294 millionPEPSAs 9.00% Notes due 2009
    
    U.S.$181 millionPEPSAs 8.13% Notes due 2010
    
    U.S.$349 millionPEPSAs 6.55% Notes due 2011
    
    U.S.$87 millionPEPSAs 9.38% Notes due 2013
    
    U.S.$200 million
 
 (1)
    
    Euro; U.S.$1.3191 = EUR 1.00 at December 31, 2006.(2)
    
    Issued by PifCo, with support from us through a standby purchase agreement and with insurance
against 18 months of inconvertibility and transfer risk for interest payments.(3)
    
    The Global Step-up Notes bear interest from March 31, 2003 at a rate of 9.00% per year until
April 1, 2006 and at rate of 12.375% per year thereafter, with interest payable semi-annually.
Issued by PifCo, with support from us through a standby purchase agreement.(4)
    
    Issued by PifCo on September 27, 2006 in the amount of ¥ 35 billion.   109




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(in millionsof U.S. dollars)2008
    
    
    1,2522009
    
    
    9932010
    
    
    6662011
    
    
    4012012
    
    
    1582013 and thereafter
    
    
    7224,192
 PifCo
 Overview
  Sources of Funds
   110




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111




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##### Table of Contents



Interest
    
    
    Maturity
    
    
    Principal AmountSecurities Repurchased
    
    Rate
    
    
    Date
    
    
    (in millions of U.S.dollars)Global step-up notes
    
    
    12.375
    %
    
    
    2008
    
    
    
    U.S.$265.4Senior notes
    
    
    9.875
    %
    
    
    2008
    
    
    
    211.8Senior notes
    
    
    9.750
    %
    
    
    2011
    
    
    
    313.6Global notes
    
    
    9.125
    %
    
    
    2013
    
    
    
    251.7Global notes
    
    
    8.375
    %
    
    
    2018
    
    
    
    173.2U.S.$1,215.7
  
    
    U.S.$524.6 million (U.S.$500 million current portion) in two series of long-term
Senior Notes due to 2008 and 2011. On July 24, 2006 these notes were tendered in the
amount of U.S.$525.4 million. The notes bear interest of 9.875% and 9.75%,
respectively.
    
    U.S.$329.9 million (current portion) in 4.75% Senior Exchangeable Notes due 2007,
issued on October 17, 2002, in connection with our purchase of Perez Companc S.A.
(currently known as Petrobras Energia ParticipacionesPEPSA). In exchange, PifCo
received notes issued by Petrobras International Braspetro BV (PIB BV), a related
party, in the same amount, terms and conditions as the Senior Exchangeable Notes. In
connection with the acquisition of Perez Companc, PifCo also provided PIB BV with a
loan for U.S.$724.5 million, with an interest rate of 4.79%.
    
    U.S.$134.6 million in Global Step-up Notes due April 2008. The notes bear interest
from March 31, 2003 at a rate of 12.375% per year until April 1, 2006 and at a rate of
12.375% per year thereafter, with interest payable semiannually. On April 1, 2006, the
noteholders had the right to exercise a put option and require PifCo to repurchase the
notes, in whole or in part, at par value. Noteholders have not exercised this put
option. PifCo used the proceeds from this issuance principally to repay trade-related
debt and inter-company loans. On July 24, 2006 these notes were tendered in the amount
of U.S.$265.4 million.
    
    U.S.$464.4 million (U.S.$65.0 million current portion) in connection with our
exports prepayment program. On December 21, 2001, the Trust (PF Export) issued to PFL,
PifCos subsidiary, U.S.$750 million of Senior Trust Certificates in four series and
U.S.$150 million of Junior Trust Certificates. In addition, on May 13, 2003, the Trust
issued U.S.$550 million in 6.436% Senior Trust Certificates due 2015, and on May 14,
2003, the Trust issued U.S.$200 million in 3.748% Senior Trust Certificates due 2013
and an additional U.S.$150 million of Junior Trust Certificates. In May 2004, PFL and
the PF Export Trust executed an amendment to the Trust Agreement allowing the Junior
Trust Certificates to be set-off against the related Notes, rather than paid in full,
after fulfillment of all obligations pursuant to the Senior Trust Certificates. The
effect of this amendment is that amounts related to the Junior Trust Certificates are
now presented net, rather than gross in PifCos consolidated financial statements, and
thus U.S.$150 million has been reduced from the current portion of long term debt and
from the long-term debt liability caption with respect to sales of rights to future
receivables, with a similar reduction to the asset line item assets related to export
prepayments.
    112




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##### Table of Contents




    
    U. S.$2,181.4 million in Global Notes, of which U.S.$500 million were issued on July
2, 2003 and are due July 2013. The notes bear interest at the rate of 9.125% per year,
payable semi-annually. In September 2003, PifCo issued an additional U.S.$250 million
in Global Notes, which form a single fungible series with PifCos U.S.$500 million
Global Notes due July 2013. The proceeds from these issuances were used principally to
repay trade-related debt and inter-company loans. On July 24, 2006 these notes were
tendered in the amount of U.S.$251.7 million. On December 10, 2003, PifCo issued an
additional U.S.$750 million of Global Notes due December 2018. The notes bear interest
at the rate of 8.375% per year, payable semiannually. On July 24, 2006 these notes were
tendered in the amount of U.S.$173.2 million. In September 2004, PifCo issued an
additional U.S.$600 million of Global Notes due 2014. The notes bear interest at the
rate of 7.75% per year, payable semiannually. The proceeds from the issuance of these
notes were used principally for general corporate purposes, including the financing of
the purchase of oil product imports and the repayment of existing trade-related debt
and inter-company loans. On October 6, 2006, PifCo issued Global Notes of U.S.$500,000
due October 2016. The notes bear interest at the rate of 6.125% per year, payable
semiannually. PifCo used the proceeds from this issuance principally to repay
trade-related debt and inter-company loans.
    
    U.S.$293.9 million (¥35 billion) in Japanese Yen Bonds issued on September 2006 and
due to September 2016. The issue was a private placement in the Japanese market with a
partial guarantee by the Japan Bank for International Cooperation (JBIC) and its main
purposes were to retap the Japanese market, access a new investors base and reduce the
financial cost. The bonds bear interest at the rate of 2.15% per year, payable
semiannually. On the same date, PifCo entered into a swap agreement with Citibank,
swapping the total amount of this debt to a U.S. dollar denominate debt.
  113




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CURRENT AND LONG-TERM DEBT
 December 31, 2006
    
    
    December 31, 2005(in millions of U.S. dollars)Current
    
    
    Long-term
    
    
    Current
    
    
    Long-termFinancing institutions
    
    
    U.S.$329.2
    
    
    
    U.S.$1,041.2
    
    
    
    U.S.$493.6
    
    
    
    U.S.$1,194.7Senior notes
    
    
    533.9
    
    
    
    524.6
    
    
    
    53.5
    
    
    
    1,550.0Global step-up notes
    
    
    4.2
    
    
    
    134.6
    
    
    
    9.0
    
    
    
    400.0Global notes
    
    
    32.7
    
    
    
    2,181.4
    
    
    
    26.3
    
    
    
    2,115.3Sale of right to future
receivables
    
    
    68.4
    
    
    
    614.4
    
    
    
    567.4
    
    
    
    679.4Senior exchangeable notes
    
    
    333.7
    
    
    
    
    
    
    
    3.7
    
    
    
    329.9Japanese yen bonds
    
    
    1.7
    
    
    
    293.9
    
    
    
    
    
    
    
    Assets related to export
prepayment to be offset
against sales of rights to
future receivables
    
    
    
    
    
    
    (150.0
    )
    
    
    (150.0
    )
    
    
    (150.0
    )Repurchased securities
    
    
    
    
    
    
    
    
    
    
    (4.7
    )
    
    
    (210.9
    )U.S.$1,303.8
    
    
    
    U.S.$4,640.1
    
    
    
    U.S.$998.8
    
    
    
    U.S.$5,908.4
 Extinguished securities
  Off Balance Sheet Arrangements
  Uses of Funds
   114




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##### Table of Contents



CONSOLIDATED CAPITAL EXPENDITURES
 For the Year EndedDecember 312006
    
    
    2005
    
    
    2004(in millions of U.S. dollars)Exploration and Production
    
    $
    7,329
    
    
    $
    6,127
    
    
    $
    4,574Supply
    
    
    1,936
    
    
    
    1,749
    
    
    
    1,367Distribution
    
    
    351
    
    
    
    207
    
    
    
    47Gas and Power
    
    
    1,664
    
    
    
    694
    
    
    
    782InternationalExploration and Production
    
    
    2,304
    
    
    
    1,067
    
    
    
    666Supply
    
    
    202
    
    
    
    79
    
    
    
    43Distribution
    
    
    77
    
    
    
    16
    
    
    
    12Gas and Power
    
    
    54
    
    
    
    13
    
    
    
    6Corporate
    
    
    726
    
    
    
    413
    
    
    
    221Total
    
    $
    14,643
    
    
    $
    10,365
    
    
    $
    7,718
        115




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##### Table of Contents



Contractual obligations
   Payments due by period (in millions of U.S. dollars)Less than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    year
    
    1-3 years
    
    3-5 years
    

5
yearsContractual ObligationsBalance Sheet Items:Long Term Debt Obligations
    
    
    12,616
    
    
    
    2,106
    
    
    
    2,265
    
    
    
    2,353
    
    
    
    5,892Pension Fund Obligations (1)
    
    
    17,238
    
    
    
    830
    
    
    
    1,887
    
    
    
    2,274
    
    
    
    12,247Project Financings Obligations
    
    
    6,374
    
    
    
    2,182
    
    
    
    2,245
    
    
    
    1,067
    
    
    
    880Capital (Finance) Lease obligations
    
    
    1,055
    
    
    
    231
    
    
    
    460
    
    
    
    285
    
    
    
    79Total Balance Sheet Items
    
    
    37,283
    
    
    
    5,349
    
    
    
    6,857
    
    
    
    5,979
    
    
    
    19,098Other Long-Term Contractual ObligationsNatural Gas Ship-or-Pay
    
    
    6,467
    
    
    
    491
    
    
    
    988
    
    
    
    996
    
    
    
    3,992Contract Service Obligations
    
    
    8,444
    
    
    
    3,432
    
    
    
    3,726
    
    
    
    825
    
    
    
    461Natural Gas Supply Agreements
    
    
    7,577
    
    
    
    822
    
    
    
    1,227
    
    
    
    1,106
    
    
    
    4,422Operating Lease Obligations
    
    
    8,261
    
    
    
    2,590
    
    
    
    3,800
    
    
    
    1,164
    
    
    
    707Purchase Obligations
    
    
    2,736
    
    
    
    1,104
    
    
    
    964
    
    
    
    234
    
    
    
    434International Purchase Obligations
    
    
    3,262
    
    
    
    895
    
    
    
    493
    
    
    
    535
    
    
    
    1,339Total Other Long-Term Obligations
    
    
    36,747
    
    
    
    9,334
    
    
    
    11,198
    
    
    
    4,860
    
    
    
    11,355Total
    
    
    74,030
    
    
    
    14,683
    
    
    
    18,055
    
    
    
    10,839
    
    
    
    30,453
 
 (1)
    
    There are plan assets in the amount of U.S.$12,395 million that guarantee the pension plan
obligations. These assets are presented as a reduction to the net actuarial liabilities. See
Note 16 to our consolidated financial statements for the year ended December 31, 2006.   Payments due by period(in millions of U.S. dollars)less than 1
    
    
    
    
    
    
    
    
    
    more than 5TOTAL
    
    year
    
    1-3 years
    
    3-5 years
    
    yearsContractual ObligationsLong-term debt
    
    
    5,697.6
    
    
    
    1,057.5
    
    
    
    988.4
    
    
    
    704.9
    
    
    
    2,946.8Notes Payable  Long-term
    
    
    7,441.7
    
    
    
    
    
    
    
    
    
    
    
    3,927.1
    
    
    
    3,514.6Purchase obligations  Long-term
    
    
    3,272.8
    
    
    
    954.6
    
    
    
    1,129.7
    
    
    
    528.7
    
    
    
    659.8Total
    
    
    16,412.1
    
    
    
    2,012.1
    
    
    
    2,118.1
    
    
    
    5,160.7
    
    
    
    7,121.2
 116




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##### Table of Contents



Stockholders Equity
   Exchange Offering
    (in millions of U.S. dollars)Principal OutstandingPifCo Old Notes
    
    Interest Rate
    
    
    Maturity
    
    

after Exchange
    
    
    Total Amount TenderedGlobal Step-Up Notes
    
    
    12.375
    %
    
    
    2008
    
    
    
    U.S.$126.9
    
    
    
    U.S.$7.8Senior Notes
    
    
    9.875
    %
    
    
    2008
    
    
    
    224.2
    
    
    
    14.0Senior Notes
    
    
    9.750
    %
    
    
    2011
    
    
    
    235.4
    
    
    
    51.0Global Notes
    
    
    9.125
    %
    
    
    2013
    
    
    
    374.2
    
    
    
    124.1Global Notes
    
    
    7.750
    %
    
    
    2014
    
    
    
    397.9
    
    
    
    202.2U.S.$1,358.6
    
    
    
    U.S.$399.1
 (in millions of U.S. dollars)Principal OutstandingPifCo New Notes
    
    Interest Rate
    
    
    Maturity
    
    

after Exchange
    
    
    Total ReopenedGlobal Notes
    
    
    6.125
    %
    
    
    2016
    
    
    
    U.S.$899.1
    
    
    
    U.S.$399.1U.S.$899.1
    
    
    
    U.S.$399.1
 117




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##### Table of Contents



Critical Accounting Policies and Estimates
   Oil and Gas Reserves
    Impact of Oil and Gas Reserves on Depreciation and Depletion
  118




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##### Table of Contents



Impact of Oil and Gas Reserves and Prices on Testing for Impairment
    Pension and Other Post-Retirement Benefits
      119




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##### Table of Contents



Litigation, Tax Assessments and Other Contingencies
  Asset Retirement Obligations and Environmental Remediation
  120




---



##### Table of Contents



Derivative transactions
   
 Impact of New Accounting Standards
        121




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##### Table of Contents



Research and Development
      122




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##### Table of Contents




    
    decrease and control the environmental impact caused by our activities;
    
    increase our oil reserves and production through the improvement of our oil recovery levels;
    
    reduce the geological risk and the exploration costs associated with the exploration
of hydrocarbons;
    
    create oil products meeting new market demands and stricter environmental controls;
    
    improve the reliability, performance and duration of pipelines and reduce the
operational costs, investments and risks associated with pipelines;
    
    improve refining systems and procedures to reduce the costs associated with refining;
    
    develop technologies for the exploration and production of heavy oils in offshore fields;
    
    promote the use of natural gas; and
    
    provide and anticipate technological solutions and knowledge in physical and
numerical simulations of geological processes, and in data base management of
parameters for basin modeling.
   
 Market Trend
 Crude oil prices
  
    
    the substantial growth in demand for oil products, with little impact resulting from
the oil price increase;
    
    increased pressure on oil production and refining facilities; and
 123




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##### Table of Contents




    
    conflicts in the Middle East.
  Oil products prices
  Refining
    
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
 Directors and Senior Management
 Directors of Petrobras
    124




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##### Table of Contents



BOARD OF DIRECTORS OF PETROBRAS
 Name
    
    Date of Birth
    
    Position
    
    Current Term
    
    Business AddressDilma Vana Rousseff (1)
    
    Dec. 14, 1947
    
    Chair
    
    March 2008
    
    Casa Civil  Praça dos Três Poderes  Palácio do
Planalto  4o andar
Salas 57 e 58
Brasília  DF
Cep 70.150-900Silas Rondeau Cavalcanti 
Silva (1)
    
    Dec. 15, 1952
    
    Member
    
    March 2008
    
    Esplanada dos Ministérios Bloco U  8o andar Sala 809
Brasília  DF
Cep 70.065-900Guido Mantega (1)
    
    Apr. 7, 1949
    
    Member
    
    March 2008
    
    Esplanada dos Ministérios Bloco P  5o andar
Brasília  DF
Cep 70.048-900J.S. Gabrielli de Azevedo (1)
    
    Oct. 3, 1949
    
    Member
    
    March 2008
    
    Avenida República do Chile, no 65  23o andar
Rio de Janeiro  RJ
Cep 20.031-912Francisco Roberto de 
Albuquerque
    
    May, 17, 1937
    
    Member
    
    March 2008
    
    Alameda Carolina, 594
Itú  São Paulo
Cep 13.306-410Arthur Antonio Sendas (1)
    
    Jun. 16, 1935
    
    Member
    
    March 2008
    
    Rodovia Presidente Dutra, 4.674
São João de Meriti  RJ
Cep 25.565-350Roger Agnelli (1)
    
    May 3, 1959
    
    Member
    
    March 2008
    
    Rua Graça Aranha, 26  18o andar
Rio de Janeiro  RJ
Cep 20.030-900Fabio Colletti Barbosa (2)
    
    Oct. 3, 1954
    
    Member
    
    March 2008
    
    Av. Paulista, 1.374  3o andar Cerqueira César
São Paulo  SP
Cep 01310-916Jorge Gerdau Johannpeter (3)
    
    Dec. 8, 1936
    
    Member
    
    March 2008
    
    Av. Farrapos, 1.811
Porto Alegre  RS
Cep 90.220-005
 
 (1)
    
    Appointed by the controlling shareholder.(2)
    
    Appointed by the minority common shareholders.(3)
    
    Appointed by the minority preferred shareholders. Dilma Vana Rousseff  Conselho de Desenvolvimento Econômico e Social  CDES Fundação de Economia e
Estatística do Estado do Rio Grande do Sul
 125




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##### Table of Contents



Silas Rondeau Cavalcante Silva 
 Guido Mantega Conselho de
Desenvolvimento Econômico e Social  CDES Banco Nacional de Desenvolvimento Econômico e Social  BNDES
 J.S. Gabrielli de Azevedo 
 Francisco Roberto de Albuquerque Academia Militar das Agulhas Negras Escola de
Aperfeiçoamento de Oficiais Escola de Comando e
Estado-Maior do Exército
 Arthur Antonio Sendas  Grupo Sendas Associação Brasileira de Supermercados  Abras Conselho Monetário Nacional -
CMN
 126




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##### Table of Contents



Roger Agnelli Associação Nacional dos Bancos de Investimento  ANBID Conselho de
Desenvolvimento Econômico e Social  CDES Fundação Armando Álvares Penteado
 Fabio Colletti Barbosa  Real Federação Brasileira das Associações de Bancos
 Jorge Gerdau Johannpeter  th Ação Empresarial Programa Gaúcho da Qualidade e Produtividade Fundação
Nacional da Qualidade  FNQ Movimento
Brasil Competitivo Instituto Brasileiro de Siderurgia  IBS Conselho de
Desenvolvimento Econômico e Social  CDES
 127




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##### Table of Contents



Universidade Federal do Rio Grande do Sul
 Directors of PifCo
   BOARD OF DIRECTORS OF PifCo
 Name
    
    Date of Birth
    
    Position
    
    Year of AppointmentDaniel Lima de Oliveira
    
    December 29, 1951
    
    Chairman
    
    2005Marcos Antonio Silva
Menezes
    
    March 24, 1952
    
    Director
    
    2003Nilo Carvalho Vieira Filho
    
    October 26, 1954
    
    Director
    
    2003
 Daniel Lima de Oliveira
 Marcos Antonio Silva Menezes BRASKEM S.A. Instituto Brasileiro de Petróleo e Gás Organização Nacional das
Indústrias de PetróleoONIP Associação Brasileira das Companhias Abertas
 Nilo Carvalho Vieira Filho.
 128




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##### Table of Contents



Executive Officers of Petrobras
   EXECUTIVE OFFICERS OF PETROBRAS
 Name
    
    Date of Birth
    
    Position
    
    Current TermJosé Sérgio Gabrielli de Azevedo
    
    October 3, 1949
    
    President
    
    April 2008Almir Guilherme Barbassa
    
    May 19, 1947
    
    Chief Financial Officer and
Investor Relations Officer
    
    April 2008Renato de Souza Duque
    
    September 29, 1955
    
    Manager of Corporate Services
    
    April 2008Guilherme de Oliveira Estrella
    
    April 18, 1942
    
    Manager of Exploration and
Production
    
    April 2008Paulo Roberto Costa
    
    January 1, 1954
    
    Manager of Refining,
Transportation and Marketing
    
    April 2008Ildo Luís Sauer
    
    September 3, 1954
    
    Manager of Gas and Power
    
    April 2008Nestor Cuñat Cerveró
    
    August 15, 1951
    
    Manager of International
Activities
    
    April 2008
 J. S. Gabrielli de Azevedo.
 Almir Guilherme Barbassa
 Renato de Souza Duque
 129




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##### Table of Contents



Guilherme de Oliveira Estrella.
 Paulo Roberto Costa
 Ildo Luis Sauer
 Nestor Cuñat Cerveró Programa de Termelétricas Presidência da Comercializadora
Brasileira de Energía Emergencial
 130




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##### Table of Contents



Executive Officers of PifCo
   EXECUTIVE OFFICERS OF PifCo
 Name
    
    Date of Birth
    
    Position
    
    Year of AppointmentDaniel Lima de Oliveira
    
    December 29, 1951
    
    Chairman
    
    2005Guilherme Pontes Galvão França
    
    January 18, 1959
    
    Commercial Manager
    
    2005Sérvio Túlio da Rosa Tinoco
    
    June 21, 1955
    
    Financial Manager
    
    2005Mariângela Monteiro Tizatto
    
    August 9, 1960
    
    Accounting Manager
    
    1998Nilton Antônio de Almeida Maia
    
    June 21, 1957
    
    Legal Manager
    
    2000Gérson Luiz Gonçalves
    
    September 29, 1953
    
    Auditor Manager
    
    2000Ana Claudia Medeiros Borges
    
    December 27, 1967
    
    Secretary
    
    2006
 Daniel Lima de Oliveira
 Guilherme Pontes Galvão França.
 Sérvio Túlio da Rosa Tinoco.
 Mariângela Monteiro Tizatto.
 Nilton Antônio de Almeida Maia.
 131




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##### Table of Contents



Gerson Luiz Gonçalves.
 Ana Claudia Medeiros Borges
 
 Compensation
 Petrobras
    PifCo
  
 Share Ownership
 Petrobras
  132




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##### Table of Contents



PifCo
  
 Fiscal Council
 conselho fiscal)
  FISCAL COUNCIL
 Year of FirstName
    
    AppointmentMarcus Pereira Aucélio
    
    2005Erenice Alves Guerra
    
    2006Túlio Luiz Zamin
    
    2003Nelson Rocha Augusto
    
    2003Maria Lúcia de Oliveira Falcón
    
    2003
  Year of FirstName
    
    AppointmentEduardo Coutinho Guerra
    
    2005Marcelo Cruz
    
    2006Edison Freitas de Oliveira
    
    2002Maria Auxiliadora Alves da Silva
    
    2003Celso Barreto Neto
    
    2002
 
 Audit Committee Petrobras
    133




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##### Table of Contents



Comitê de Remuneração e Sucessão Comitê de Meio Ambiente
 
 PifCo
  
 Employees and Labor Relations
 Petrobras
     Índice do Custo de Vida
   134




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135




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##### Table of Contents



136




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##### Table of Contents



PifCo
  
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
 Major Shareholders
 Petrobras
     Shareholder
    
    Common
 Shares
    
    %
    
    Preferred
 Shares
    
    %
    
    Total
 Shares
    
    %Brazilian government
    
    
    1,413,258,228
    
    
    
    55.7
    
    
    
    
    
    
    
    
    
    
    
    1,413,258,228
    
    
    
    32.2BNDES Participações S.A.-BNDESPAR
    
    
    47,246,164
    
    
    
    1.9
    
    
    
    287,023,667
    
    
    
    15.5
    
    
    
    334,269,831
    
    
    
    7.6Other Brazilian public sector entities
    
    
    1,779,280
    
    
    
    0.1
    
    
    
    775,072
    
    
    
    0.04
    
    
    
    2,554,352
    
    
    
    0.1All directors and executive officers
as a Group (15 persons)
    
    
    9,904
    
    
    
    
    
    
    
    27,792
    
    
    
    
    
    
    
    37,696
    
    
    
    Others
    
    
    1,074,380,096
    
    
    
    42.3
    
    
    
    1,562,538,167
    
    
    
    84.5
    
    
    
    2,636,918,263
    
    
    
    60.1Total
    
    
    2,536,673,672
    
    
    
    100.0
    
    
    
    1,850,364,698
    
    
    
    100.0
    
    
    
    4,387,038,370
    
    
    
    100.0
  PifCo
  
 Petrobras Related Party Transactions
 Board of Directors
  137




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##### Table of Contents



Brazilian Government and PETROS
      
 PifCo Related Party Transactions
   138




---



##### Table of Contents



December 31, 2006
    
    
    December 31, 2005Assets
    
    
    Liabilities
    
    
    Assets
    
    
    Liabilities(in millions of U.S. dollars)AssetsCurrentAccounts receivable
    
    
    10,658.9
    
    
    
    
    
    
    
    8,681.1
    
    
    
    Notes receivable(1)
    
    
    6,114.7
    
    
    
    
    
    
    
    3,329.3
    
    
    
    Marketable Securities
    
    
    627.3
    
    
    
    
    
    
    
    
    
    
    
    Exports Prepayment
    
    
    67.8
    
    
    
    
    
    
    
    414.5
    
    
    
    Others
    
    
    1.5
    
    
    
    
    
    
    
    1.5
    
    
    
    Other non currentMarketable securities
    
    
    1,151.6
    
    
    
    
    
    
    
    2,165.7
    
    
    
    Notes receivable
    
    
    239.7
    
    
    
    
    
    
    
    580.0
    
    
    
    Exports prepayment
    
    
    464.4
    
    
    
    
    
    
    
    529.4
    
    
    
    LiabilitiesCurrentTrade accounts Payable
    
    
    
    
    
    
    1,142.9
    
    
    
    
    
    
    
    950.7Notes payable(1)
    
    
    
    
    
    
    5,386.8
    
    
    
    
    
    
    
    4,346.1Unearned income
    
    
    
    
    
    
    248.7
    
    
    
    
    
    
    
    176.5Long-term liabilitiesNotes payable (1)
    
    
    
    
    
    
    7,441.7
    
    
    
    
    
    
    
    3,734.1Total
    
    
    19,325.9
    
    
    
    14,220.1
    
    
    
    15,701.5
    
    
    
    9,207.4Current
    
    
    17,470.2
    
    
    
    6,778.4
    
    
    
    12,426.4
    
    
    
    5,473.3Long-term
    
    
    1,855.7
    
    
    
    7,441.7
    
    
    
    3,275.1
    
    
    
    3,734.1
 
 (1)
    
    PifCos notes receivable from and payable to us for the majority of the loans bear interest
at LIBOR plus 3.0% per year. 139




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##### Table of Contents



Year ended December 31,2006
    
    
    2005
    
    
    2004(in millions of U.S. dollars)Income
    
    
    Expense
    
    
    Income
    
    
    Expense
    
    
    Income
    
    
    ExpenseSales of crude oil and oil
products and servicesPETROBRAS
    
    
    9,729.9
    
    
    
    
    
    
    
    7,025.7
    
    
    
    
    
    
    
    6,374.3
    
    
    
    REFAP S.A.
    
    
    1,484.1
    
    
    
    
    
    
    
    1,405.1
    
    
    
    
    
    
    
    972.1
    
    
    
    Petrobras America, Inc.PAI
    
    
    2,967.8
    
    
    
    
    
    
    
    5,487.9
    
    
    
    
    
    
    
    2,734.5
    
    
    
    BR Distribuidora
    
    
    
    
    
    
    
    
    
    
    1.8
    
    
    
    
    
    
    
    3.5
    
    
    
    EG3 S.A.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12.9
    
    
    
    PESA
    
    
    47.4
    
    
    
    
    
    
    
    49.5
    
    
    
    
    
    
    
    21.1
    
    
    
    Petrobras Bolívia
    
    
    5.8
    
    
    
    
    
    
    
    4.4
    
    
    
    
    
    
    
    
    
    
    
    Petrobras Paraguay
Distribución
    
    
    1.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cost of salesPETROBRAS
    
    
    
    
    
    
    (6,044.3
    )
    
    
    
    
    
    
    (5,931.6
    )
    
    
    
    
    
    
    (3,236.7
    )Petrobras America, Inc.PAI
    
    
    
    
    
    
    (227.2
    )
    
    
    
    
    
    
    (459.4
    )
    
    
    
    
    
    
    (375.3
    )Braspetro Oil Services
CompanyBRASOIL
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (74.7
    )Companhia MEGA S.A.
    
    
    
    
    
    
    (505.8
    )
    
    
    
    
    
    
    (367.5
    )
    
    
    
    
    
    
    (299.4
    )Eg3 S.A.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60.4
    )PESA
    
    
    
    
    
    
    (257.5
    )
    
    
    
    
    
    
    (187.8
    )
    
    
    
    
    
    
    (72.1
    )PIB B.V
    
    
    
    
    
    
    (14.1
    )
    
    
    
    
    
    
    (152.0
    )
    
    
    
    
    
    
    (158.3
    )PEBIS
    
    
    
    
    
    
    (226.0
    )
    
    
    
    
    
    
    (164.3
    )
    
    
    
    
    
    
    (110.3
    )REFAP
    
    
    
    
    
    
    (206.1
    )
    
    
    
    
    
    
    (109.9
    )
    
    
    
    
    
    
    (4.1
    )Ecuadortlc S.A.
    
    
    
    
    
    
    (252.6
    )
    
    
    
    
    
    
    (211.8
    )
    
    
    
    
    
    
    Petrobras Colombia
    
    
    
    
    
    
    (271.5
    )
    
    
    
    
    
    
    (196.0
    )
    
    
    
    
    
    
    Others
    
    
    
    
    
    
    (116.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Selling, general and
administrative expensePETROBRAS
    
    
    
    
    
    
    (176.4
    )
    
    
    
    
    
    
    (158.0
    )
    
    
    
    
    
    
    (97.0
    )Others
    
    
    
    
    
    
    (13.3
    )
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    (1.7
    )Financial incomePETROBRAS
    
    
    623.8
    
    
    
    
    
    
    
    580.9
    
    
    
    
    
    
    
    466.1
    
    
    
    REFAP S.A.
    
    
    28.3
    
    
    
    
    
    
    
    24.2
    
    
    
    
    
    
    
    16.8
    
    
    
    Braspetro Oil
CompanyBOC
    
    
    4.9
    
    
    
    
    
    
    
    15.6
    
    
    
    
    
    
    
    11.0
    
    
    
    Braspetro Oil Services
CompanyBRASOIL
    
    
    2.3
    
    
    
    
    
    
    
    11.5
    
    
    
    
    
    
    
    15.4
    
    
    
    PIB B.V
    
    
    161.7
    
    
    
    
    
    
    
    82.8
    
    
    
    
    
    
    
    56.7
    
    
    
    PNBV
    
    
    118.3
    
    
    
    
    
    
    
    29.9
    
    
    
    
    
    
    
    0.7
    
    
    
    AGRI BV
    
    
    56.1
    
    
    
    
    
    
    
    17.1
    
    
    
    
    
    
    
    Others
    
    
    3.8
    
    
    
    
    
    
    
    3.5
    
    
    
    
    
    
    
    1.9
    
    
    
    Financial expensePETROBRAS
    
    
    
    
    
    
    (722.4
    )
    
    
    
    
    
    
    (409.5
    )
    
    
    
    
    
    
    (168.4
    )Others
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    (0.6
    )Other Income and ExpensePNBV
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.5
    )Total
    
    
    15,235.7
    
    
    
    (9,034.1
    )
    
    
    14,739.9
    
    
    
    (8,348.2
    )
    
    
    10,687.0
    
    
    
    (4,659.5
    )
 
 ITEM 8. FINANCIAL INFORMATION
 
 Petrobras Consolidated Statements and Other Financial Information
  
 PifCo Consolidated Statements and Other Financial Information
  140




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##### Table of Contents



Legal Proceedings
 Petrobras
  As of December 31,2006
    
    
    2005(in millions of U.S. dollars)Labor claims
    
    
    38
    
    
    
    7Tax claims
    
    
    47
    
    
    
    87Civil claims
    
    
    97
    
    
    
    79Commercial claims and other contingencies
    
    
    51
    
    
    
    62Total
    
    
    233
    
    
    
    235
 
 (1)
    
    Excludes provisions for contractual contingencies and tax assessments by the INSS.   Civil claims
 Programa Nacional de Desestatização
  141




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##### Table of Contents



ação popular
  agravos de instrumento
  Labor Claims
  142




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##### Table of Contents



Tax Claims
  Delegacia da Receita Federal Delegacia da Receita Federal recurso de ofício conselho de
contribuintes
 câmara superior de
recursos fiscais
  auto de
infração Contribuição de Intervenção no Domínio Econômico
 143




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##### Table of Contents



Environmental Claims
   Superior Tribunal de Justiça
   
    
    on August 1, 2000, IBAMA imposed fines in the amount of R$168 million. We contested
these fines, but IBAMA subsequently upheld them. On February 3, 2003, we filed a
lawsuit in order to challenge these fines and obtained an injunction that allows us to
pursue a decision to this claim without posting a bond in the amount of the fines. The
judge decided in favor of the joinder of this proceeding with other civil petitions,
and we asked to the Regional Federal Court of Appeals (TRF) to reverse this decision.
We are currently awaiting a final disposition of this case;
    
    several civil actions have been filed against us, the most important of which is a
civil action filed on January 1, 2001 by the Federal Public Ministry and the Paraná
State Public Ministry seeking damages of approximately R$2,300 million. On April 4,
2001, we filed our response and are still awaiting a decision. At present, the
proceedings have been suspended, while awaiting the results of the technical survey;
and
    
    the Federal Public Ministry instituted a criminal action against us, our former
president and our former superintendent of the REPAR refinery. A habeas corpus petition
has currently suspended the action in favor of us, our former president and the former
superintendent of the REPAR refinery. In addition, with respect to our former president
and REPAR refinerys former superintendent, the STF and STJ
have each concluded their criminal proceedings. The habeas corpuspetition was judged
by the STJ on September 2, 2006, and the court granted habeas corpusto Luiz Eduardo
Valente Moreira, the former superintendent of REPAR. In the same decision, the STJ
suspended the penal action against us and our former President (Henri Philippe
Reichstul).
 144




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##### Table of Contents




    
    the Instituto Ambiental do Paraná, or IAP fined us approximately R$150 million. We
contested this fine, and IAP reduced the fine to R$90 million. We contested the reduced
fine, but the legal proceeding was suspended by decision of the court;
    
    the Federal Public Ministry and the Paraná State Public Ministry filed a public
civil action against us seeking damages of approximately R$3.7 billion and to oblige us
to take certain remedial steps to prevent future accidents. On July 19, 2002, we filed
our response, but the legal proceeding was suspended by decision of the court;
    
    in the civil action presented by the Federal Public Ministry, the judge determined
that the action must be sent to the State Court, which has authority over this case.
The Federal Public Ministry appealed to the Federal Regional Court. The proceeding has
been handled by the attorney for the Federal Public Ministry since October 21, 2005.
Although the Federal Regional Court has not yet decided if the authority to make a
determination belongs to the Federal Court or to the State Court, the State Court of
Morretes judge has decided to suspend the lawsuit;
    
    the Instituto Ambiental do Paraná (IAP) presented a civil action requiring the
recovery of the damages and the indemnity of those for whom damages could not be
recovered, in the value of R$150 million. On October 5, 2006, the judge decided to
suspend the lawsuit and the upcoming hearing, in which the terms of the planned survey
were to be discussed. That hearing will instead be held after the judgment by the
Federal Regional Court as to the proper jurisdiction of the Federal and State Courts;
and
    
    the Federal Police office in the State of Paraná conducted a criminal
investigation, which has been concluded.
   
    
    the Federal Public Ministry filed a lawsuit on January 23, 2002 seeking the payment
of R$100 million as environmental damages, among other demands. We have presented our
defense to these claims and are awaiting a decision; and
    
    IBAMA fined us approximately R$7 million. We are contesting these fines through
administrative proceedings. One of these proceedings has ended and the fine (in the
amount of R$2 million) has been upheld by IBAMA. We shall, in the near future, file a
lawsuit seeking the cancellation of this fine.
  Programa de Excelência Operacional, or PEO
 
    
    we executed a Termo de Ajustamento de Conduta(Agreement for Regularization of
Conduct), or TAC, with IBAMA, relating to our production activities in the Campos
Basin, pursuant to a Presidential
 145




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##### Table of Contents



Decree enacted on December 12, 2002. Under the TAC,
we agreed to conduct certain actions in the Campos Basin to reduce the risk of
environmental damage;
    
    following the FPSO P-34 accident, the Comissão Estadual de Controle Ambiental(State
Commission for Environment Control, or CECA) fined us in R$1 million because our
exploration license in Campos Basin had allegedly expired. We are contesting this fine
through administrative proceedings; and
    
    on January 16, 2003, the Federal Public Ministry filed a motion for a protective
order with a request for an injunction against us, IBAMA and Agência Nacional do
Petróleo(National Petroleum Agency, or ANP), in order to challenge the validity of the
letter of intent and of the TAC and prevent us from obtaining from IBAMA new licenses
for our platforms located in the Campos Basin. The trial judge partially accepted the
plaintiffs request for an injunction. The court suspended the injunction, upholding
the validity of the TAC, which is not subject to appeal. The proceedings at the trial
court will continue until the trial judge makes a final decision on the merits of the
complaint, a decision that would be subject to further appeals.
  termo de ajustamento de conduta termo de
ajustamento de conduta
  União dos
Defensores da Terra
 PifCo
  146




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##### Table of Contents



Dividend Distribution
 Petrobras
  For the Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(in millions of U.S. dollars)Dividends paid to shareholders
    
    
    3,144
    
    
    
    2,104
    
    
    
    1,785
    
    
    
    941
    
    
    
    999Dividends paid to minority interests
    
    
    69
    
    
    
    6
    
    
    
    24
    
    
    
    2
    
    
    
    193,213
    
    
    
    2,110
    
    
    
    1,809
    
    
    
    943
    
    
    
    1,018
  PifCo
  
 ITEM 9. THE OFFER AND LISTING
 
 Petrobras
 Trading Markets
  Common Shares
    
    São Paulo Stock Exchange (BOVESPA)  São Paulo (ticker symbol
PETR3); Mercado de Valores Latinoamericanos en Euros
(LATIBEX)  Madrid, Spain (ticker symbol XPBR)Preferred Shares
    
    São Paulo Stock Exchange (BOVESPA)  São Paulo (ticker symbol
PETR4); Mercado de Valores Latinoamericanos en Euros
(LATIBEX)  Madrid, Spain (ticker symbol XPBRA)Common ADSs
    
    New York Stock Exchange (NYSE)  New York (ticker symbol PBR)Preferred ADSs
    
    New York Stock Exchange (NYSE)  New York (ticker symbol PBRA)Common Shares
    
    Bolsa de Comercio de Buenos Aires (BCBA)  Buenos Aires,
Argentina (ticker symbol APBR)Preferred Shares
    
    Bolsa de Comercio de Buenos Aires (BCBA)  Buenos Aires, Argentina (ticker symbol APBRA)
  Bolsa de Comercio de Buenos Aires
 147




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##### Table of Contents



Price Information
  reais
 COMMON SHARES TRADED ON BOVESPAU.S. dollars
    
    Average Number ofreaisper Common Share
    
    per Common Share
    
    Common SharesHigh
    
    Low
    
    High
    
    Low
    
    Traded per Day2002
    
    
    15.78
    
    
    
    9.47
    
    
    
    6.73
    
    
    
    2.45
    
    
    
    1,630,5622003
    
    
    21.13
    
    
    
    11.50
    
    
    
    7.26
    
    
    
    3.22
    
    
    
    1,290,2352004
    
    
    26.93
    
    
    
    19.14
    
    
    
    10.09
    
    
    
    5.99
    
    
    
    1,330,1912005
    
    
    41.80
    
    
    
    25.40
    
    
    
    18.37
    
    
    
    9.39
    
    
    
    973,1312006
    
    
    55.40
    
    
    
    40.65
    
    
    
    26.85
    
    
    
    17.69
    
    
    
    1,127,0492005:First Quarter
    
    
    33.08
    
    
    
    25.40
    
    
    
    12.40
    
    
    
    9.39
    
    
    
    1,224,093Second Quarter
    
    
    31.50
    
    
    
    26.08
    
    
    
    13.21
    
    
    
    10.16
    
    
    
    894,337Third Quarter
    
    
    41.80
    
    
    
    29.58
    
    
    
    18.33
    
    
    
    12.49
    
    
    
    996,648Fourth Quarter
    
    
    41.30
    
    
    
    33.31
    
    
    
    18.37
    
    
    
    14.82
    
    
    
    782,6002006:First Quarter
    
    
    51.69
    
    
    
    42.30
    
    
    
    23.34
    
    
    
    18.09
    
    
    
    1,092,195Second Quarter
    
    
    55.40
    
    
    
    40.65
    
    
    
    26.85
    
    
    
    17.69
    
    
    
    1,212,664Third Quarter
    
    
    51.79
    
    
    
    42.15
    
    
    
    23.74
    
    
    
    19.09
    
    
    
    973,913Fourth Quarter
    
    
    54.49
    
    
    
    42.69
    
    
    
    25.51
    
    
    
    19.72
    
    
    
    1,241,2732007:First Quarter
    
    
    55.75
    
    
    
    44.85
    
    
    
    26.16
    
    
    
    21.02
    
    
    
    1,576,8722006:November
    
    
    51.00
    
    
    
    46.75
    
    
    
    23.56
    
    
    
    21.82
    
    
    
    1,200,516December
    
    
    54.49
    
    
    
    50.50
    
    
    
    25.51
    
    
    
    23.31
    
    
    
    1,103,0422007:January
    
    
    55.75
    
    
    
    48.25
    
    
    
    26.16
    
    
    
    22.60
    
    
    
    1,705,886February
    
    
    52.45
    
    
    
    47.85
    
    
    
    24.91
    
    
    
    22.58
    
    
    
    1,622,411March
    
    
    51.74
    
    
    
    44.85
    
    
    
    25.14
    
    
    
    21.02
    
    
    
    1,416,464April
    
    
    54.49
    
    
    
    50.75
    
    
    
    26.80
    
    
    
    24.89
    
    
    
    1,154,640May
    
    
    53.40
    
    
    
    50.30
    
    
    
    27.45
    
    
    
    24.91
    
    
    
    1,312,968
 148




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##### Table of Contents



PREFERRED SHARES TRADED ON BOVESPAU.S. dollars
    
    Average Number ofreaisper Preferred Share
    
    per Preferred Share
    
    Preferred SharesHigh
    
    Low
    
    High
    
    Low
    
    Traded per Day2002
    
    
    15.08
    
    
    
    8.79
    
    
    
    6.43
    
    
    
    2.27
    
    
    
    4,269,4812003
    
    
    19.37
    
    
    
    10.40
    
    
    
    6.67
    
    
    
    2.90
    
    
    
    4,584,2032004
    
    
    24.47
    
    
    
    16.80
    
    
    
    9.17
    
    
    
    5.26
    
    
    
    4,825,4762005
    
    
    37.21
    
    
    
    22.74
    
    
    
    16.50
    
    
    
    8.37
    
    
    
    4,578,8772006
    
    
    49.80
    
    
    
    36.50
    
    
    
    23.33
    
    
    
    15.89
    
    
    
    6,559,6012005:First Quarter
    
    
    28.94
    
    
    
    22.74
    
    
    
    10.86
    
    
    
    8.37
    
    
    
    4,957,720Second Quarter
    
    
    27.70
    
    
    
    22.98
    
    
    
    11.62
    
    
    
    8.87
    
    
    
    3,952,243Third Quarter
    
    
    37.01
    
    
    
    26.03
    
    
    
    16.25
    
    
    
    10.84
    
    
    
    4,638,194Fourth Quarter
    
    
    37.21
    
    
    
    29.46
    
    
    
    16.50
    
    
    
    13.11
    
    
    
    4,790,2162006:First Quarter
    
    
    47.00
    
    
    
    38.09
    
    
    
    21.50
    
    
    
    16.29
    
    
    
    6,257,082Second Quarter
    
    
    48.15
    
    
    
    36.50
    
    
    
    23.33
    
    
    
    15.89
    
    
    
    6,735,861Third Quarter
    
    
    46.25
    
    
    
    38.14
    
    
    
    21.26
    
    
    
    17.20
    
    
    
    6,058,653Fourth Quarter
    
    
    49.80
    
    
    
    38.80
    
    
    
    23.31
    
    
    
    17.92
    
    
    
    7,238,6682007:First Quarter
    
    
    50.45
    
    
    
    40.17
    
    
    
    23.67
    
    
    
    18.76
    
    
    
    9,664,9422006November
    
    
    45.83
    
    
    
    42.45
    
    
    
    21.17
    
    
    
    19.82
    
    
    
    7,452,290December
    
    
    49.80
    
    
    
    45.30
    
    
    
    23.31
    
    
    
    20.91
    
    
    
    6,584,9572007:January
    
    
    50.45
    
    
    
    43.35
    
    
    
    23.67
    
    
    
    20.31
    
    
    
    9,388,510February
    
    
    47.30
    
    
    
    42.60
    
    
    
    22.46
    
    
    
    20.18
    
    
    
    9,860,462March
    
    
    46.14
    
    
    
    40.17
    
    
    
    22.46
    
    
    
    18.76
    
    
    
    9,768,836April
    
    
    48.65
    
    
    
    45.20
    
    
    
    23.93
    
    
    
    22.24
    
    
    
    8,920,665May
    
    
    47.20
    
    
    
    44.36
    
    
    
    24.26
    
    
    
    21.97
    
    
    
    9,239,191
 149




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##### Table of Contents



COMMON SHARE ADS TRADED ON THE NYSEU.S. dollars per
    
    Average Numberreaisper ADS representing
    
    ADS representing
    
    of ADS representingFour Common Shares
    
    Four Common Shares
    
    Four CommonHigh
    
    Low
    
    High
    
    Low
    
    Shares Traded per Day2002
    
    
    63.58
    
    
    
    36.91
    
    
    
    27.30
    
    
    
    9.55
    
    
    
    1,223,5092003
    
    
    84.77
    
    
    
    46.22
    
    
    
    29.27
    
    
    
    12.94
    
    
    
    1,044,1892004
    
    
    107.74
    
    
    
    77.77
    
    
    
    40.37
    
    
    
    24.35
    
    
    
    1,371,6042005
    
    
    167.06
    
    
    
    101.24
    
    
    
    73.40
    
    
    
    37.41
    
    
    
    1,754,3012006
    
    
    220.63
    
    
    
    161.25
    
    
    
    106.92
    
    
    
    70.18
    
    
    
    2,594,7272005:First Quarter
    
    
    131.47
    
    
    
    101.24
    
    
    
    49.81
    
    
    
    37.41
    
    
    
    1,967,233Second Quarter
    
    
    126.29
    
    
    
    104.29
    
    
    
    52.97
    
    
    
    41.00
    
    
    
    1,313,044Third Quarter
    
    
    167.06
    
    
    
    118.03
    
    
    
    73.37
    
    
    
    49.54
    
    
    
    1,808,566Fourth Quarter
    
    
    166.45
    
    
    
    132.48
    
    
    
    73.40
    
    
    
    58.95
    
    
    
    1,941,2632006:First Quarter
    
    
    209.26
    
    
    
    173.71
    
    
    
    94.50
    
    
    
    74.72
    
    
    
    2,267,705Second Quarter
    
    
    220.63
    
    
    
    161.25
    
    
    
    106.92
    
    
    
    70.18
    
    
    
    3,320,289Third Quarter
    
    
    206.76
    
    
    
    165.57
    
    
    
    94.94
    
    
    
    76.67
    
    
    
    2,486,914Fourth Quarter
    
    
    219.96
    
    
    
    169.98
    
    
    
    102.99
    
    
    
    78.51
    
    
    
    2,298,8082007:First Quarter
    
    
    213.22
    
    
    
    180.16
    
    
    
    101.32
    
    
    
    84.52
    
    
    
    3,099,1142006:November
    
    
    203.79
    
    
    
    186.40
    
    
    
    94.15
    
    
    
    86.98
    
    
    
    2,131,052December
    
    
    219.96
    
    
    
    203.46
    
    
    
    102.99
    
    
    
    93.90
    
    
    
    1,834,8652007:January
    
    
    213.22
    
    
    
    194.09
    
    
    
    99.66
    
    
    
    90.93
    
    
    
    3,082,485February
    
    
    209.41
    
    
    
    189.34
    
    
    
    99.46
    
    
    
    89.68
    
    
    
    2,800,289March
    
    
    207.96
    
    
    
    180.16
    
    
    
    101.32
    
    
    
    84.52
    
    
    
    3,372,308April
    
    
    218.69
    
    
    
    203.63
    
    
    
    107.58
    
    
    
    99.87
    
    
    
    2,467,030May
    
    
    212.50
    
    
    
    200.53
    
    
    
    109.22
    
    
    
    99.30
    
    
    
    2,832,331
 150




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##### Table of Contents



PREFERRED SHARE ADS TRADED ON THE NYSEU.S. dollars per
    
    Average Numberreaisper ADS representing
    
    ADS representing
    
    of ADS representingFour Preferred Shares
    
    Four Preferred Shares
    
    Four Preferred SharesHigh
    
    Low
    
    High
    
    Low
    
    Traded per Day2002
    
    
    60.81
    
    
    
    34.40
    
    
    
    25.95
    
    
    
    8.90
    
    
    
    683,4032003
    
    
    77.50
    
    
    
    41.57
    
    
    
    26.79
    
    
    
    11.63
    
    
    
    671,2362004
    
    
    97.94
    
    
    
    66.59
    
    
    
    36.70
    
    
    
    20.85
    
    
    
    818,1452005
    
    
    150.34
    
    
    
    89.91
    
    
    
    66.20
    
    
    
    33.43
    
    
    
    1,184,7892006
    
    
    199.84
    
    
    
    144.98
    
    
    
    93.55
    
    
    
    63.10
    
    
    
    1,252,6952005:First Quarter
    
    
    115.73
    
    
    
    90.84
    
    
    
    43.62
    
    
    
    33.43
    
    
    
    1,567,575Second Quarter
    
    
    110.87
    
    
    
    89.91
    
    
    
    46.50
    
    
    
    35.60
    
    
    
    904,878Third Quarter
    
    
    147.74
    
    
    
    103.74
    
    
    
    64.93
    
    
    
    42.78
    
    
    
    1,161,931Fourth Quarter
    
    
    150.34
    
    
    
    118.14
    
    
    
    66.20
    
    
    
    52.57
    
    
    
    1,121,7292006:First Quarter
    
    
    190.88
    
    
    
    157.93
    
    
    
    86.20
    
    
    
    67.75
    
    
    
    1,317,177Second Quarter
    
    
    193.04
    
    
    
    144.98
    
    
    
    93.55
    
    
    
    63.10
    
    
    
    1,612,795Third Quarter
    
    
    185.66
    
    
    
    153.18
    
    
    
    85.09
    
    
    
    69.16
    
    
    
    1,101,849Fourth Quarter
    
    
    199.84
    
    
    
    154.80
    
    
    
    93.28
    
    
    
    71.50
    
    
    
    979,9832007:First Quarter
    
    
    194.44
    
    
    
    161.62
    
    
    
    90.88
    
    
    
    75.51
    
    
    
    1,619,2252006:November
    
    
    183.77
    
    
    
    168.87
    
    
    
    84.90
    
    
    
    78.80
    
    
    
    984,610December
    
    
    199.84
    
    
    
    183.05
    
    
    
    93.28
    
    
    
    84.48
    
    
    
    788,1952007:January
    
    
    194.44
    
    
    
    173.33
    
    
    
    90.88
    
    
    
    81.20
    
    
    
    1,512,015February
    
    
    189.39
    
    
    
    169.77
    
    
    
    90.11
    
    
    
    80.41
    
    
    
    1,627,249March
    
    
    186.26
    
    
    
    161.62
    
    
    
    90.75
    
    
    
    75.51
    
    
    
    1,709,760April
    
    
    194.36
    
    
    
    181.36
    
    
    
    95.61
    
    
    
    89.22
    
    
    
    1,438,028May
    
    
    187.73
    
    
    
    177.15
    
    
    
    96.49
    
    
    
    87.72
    
    
    
    1,530,198
 Markets
  Companhia
Brasileira de Liquidação e Custódia
 Sistema de Negociação
Assistida por Computador
  151




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companhia aberta companhia fechada
   152




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##### Table of Contents



PifCo
  
 ITEM 10. ADDITIONAL INFORMATION
 
 Memorandum and Articles of Incorporation of Petrobras
 General
  Qualification of Directors
  Allocation of Net Income
    153




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##### Table of Contents




    
    first, a percentage of net profits may be allocated to a contingency reserve for
anticipated losses that are deemed probable in future years. Any amount so allocated in
a prior year must be either reversed in the fiscal year in which the reasons justifying
the reserve cease to exist, or written off in the event that the anticipated loss
occurs;
    
    second, if the mandatory distributable amount exceeds the sum of realized net
profits in a given year, this excess may be allocated to an unrealized revenue reserve.
The Brazilian Corporate Law defines realized net profits as the amount of net profits
that exceeds the sum of the net positive result of equity adjustments and profits or
revenues from operations whose financial results take place after the end of the next
succeeding fiscal year; and
    
    third, a portion of our net profits that exceeds the minimum mandatory distribution
may be allocated to fund working capital needs and investment projects, as long as such
allocation is based on a capital budget previously approved by our shareholders.
Capital budgets for more than one year must be reviewed at each annual shareholders
meeting.
 Mandatory Distribution
   Payment of Dividends and Interest on Shareholders Equity
  pro rata
  
    
    50% of net income (before taking into account such distribution and any deductions
for income taxes and after taking into account any deductions for social contributions
on net profits) for the period in respect of which the payment is made; or
    
    50% of retained earnings.
 154




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Shareholders Meetings
  Diário Oficial da União Jornal do Commercio Gazeta Mercantil Valor Econômico
   Voting Rights
   155




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
    
    amend our bylaws;
    
    approve any capital increase beyond the amount of the authorized capital;
    
    approve any capital reduction;
    
    approve the appraisal of any assets used by a shareholder to subscribe for our shares;
    
    elect or dismiss members of our board of directors and Fiscal Council, subject to
the right of our preferred shareholders to elect or dismiss one member of our board of
directors and to elect one member of our Fiscal Council;
    
    receive the yearly financial statements prepared by our management and accept or
reject managements financial statements, including the allocation of net profits for
payment of the mandatory dividend and allocation to the various reserve accounts;
    
    authorize the issuance of debentures, except for the issuance of non-convertible
unsecured debentures, which may be approved by our board of directors;
    
    suspend the rights of a shareholder who has not fulfilled the obligations imposed by
law or by our bylaws;
    
    accept or reject the valuation of assets contributed by a shareholder in
consideration for issuance of capital stock;
    
    pass resolutions to approve corporate restructurings, such as mergers, spin-offs and
transformation into another type of company;
    
    participate in a centralized group of companies;
    
    approve the disposal of the control of our subsidiaries;
    
    approve the disposal of convertible debentures issued by our subsidiaries and held by us;
    
    establish the compensation of our senior management;
    
    approve the cancellation of our registration as a publicly-traded company;
    
    decide on our dissolution or liquidation;
    
    waive the right to subscribe to shares or convertible debentures issued by our
subsidiaries or affiliates; and
    
    choose a specialized company to work out the appraisal of our shares by economic
value, in cases of the canceling of our registry as a publicly-traded company or
deviation from the standard rules of corporate governance defined by a stock exchange
or an entity in charge of maintaining an organized over-the-counter market registered
with the CVM, in order to comply with such corporate governance rules and with
contracts that may be executed by us and such entities.
   
    
    reduction of the mandatory dividend distribution;
 156




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
    
    merger into another company or consolidation with another company, subject to the
conditions set forth in the Brazilian Corporate Law;
    
    participation in a group of companies subject to the conditions set forth in the
Brazilian Corporate Law;
    
    change of our corporate purpose, which must be preceded by an amendment in our
bylaws by federal law as we are controlled by the government and our corporate purpose
is established by law;
    
    cessation of the state of liquidation;
    
    spin-off of a portion of our company, subject to the conditions set forth in the
Brazilian Corporate Law;
    
    transfer of all our shares to another company or receipt of shares of another
company in order to make the company whose shares are transferred a wholly-owned
subsidiary of such company, known as incorporação de ações; and
    
    approval of our liquidation.
  
    
    creation of preferred shares or increase in the existing classes of preferred
            shares, without preserving the proportions to any other class of preferred shares,
except as set forth in or authorized by the companys bylaws;
    
    change in the preferences, privileges or redemption or amortization conditions of
any class of preferred shares; and
    
    creation of a new class of preferred shares entitled to more favorable conditions
than the existing classes.
      157




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Preemptive Rights
    Redemption and Rights of Withdrawal
   
    
    to create preferred shares or to increase the existing classes of preferred shares,
without preserving the proportions to any other class of preferred shares, except as
set forth in or authorized by our bylaws; or
    
    to change the preferences, privileges or redemption or amortization conditions of
any class of preferred shares or to create a new class of preferred shares entitled to
more favorable conditions than the existing classes.
  
    
    to merge into another company or to consolidate with another company, subject to the
conditions set forth in the Brazilian Corporate Law; or
    
    to participate in a centralized group of companies as defined under the Brazilian
Corporate Law and subject to the conditions set forth therein.
  
    
    to reduce the mandatory distribution of dividends;
    
    to change our corporate purposes;
    
    to spin-off a portion of our company, subject to the conditions set forth in the
Brazilian Corporate Law;
 158




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
    
    to transfer all of our shares to another company or to receive shares of another
company in order to make the company whose shares are transferred a wholly-owned
subsidiary of our company, known as incorporação de ações; or
    
    to acquire control of another company at a price, which exceeds the limits set forth
in the Brazilian Corporate Law, subject to, the conditions set forth in the Brazilian
Corporate Law.
 incorporação de ações
  Other Shareholders Rights
  
    
    the right to participate in the distribution of profits;
    
    the right to participate equally and ratably in any remaining residual assets in the
event of liquidation of the company;
    
    the right to supervise the management of the corporate business as specified in the
Brazilian Corporate Law;
    
    the right to preemptive rights in the event of a subscription of shares, debentures
convertible into shares or subscription bonuses (other than with respect to a public
offering of such securities, as may be set out in the bylaws); and
    
    the right to withdraw from the company in the cases specified in the Brazilian
Corporate Law.
 Liquidation
  Conversion Rights
  Liability of Our Shareholders for Further Capital Calls
  159




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Form and Transfer
   Dispute Resolution
 Câmara de Arbitragem do Mercado
  Self-dealing Restrictions
  
    
    refrain from dealing with our securities either in the one-month period prior to any
fiscal year-end, up to the date when our financials are published, or in the period
between any corporate decision to raise or reduce our stock capital, to distribute
dividends or stock, and to issue any security, up to the date when the respective
public releases are published; and
    
    communicate to us and to the stock exchange their periodical dealing plans with
respect to our securities, if any, including any change or default in these plans. If
the communication is an investment or divestment plan, the frequency and planned
quantities must be included.
 
 Restrictions on Non-Brazilian Holders
    160




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Transfer of Control
  
 Disclosure of Shareholder Ownership
  
 Memorandum and Articles of Association of PifCo
 Register
 th
 Objects and Purposes
   Directors
    Rights and Obligations of Shareholders
   161




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
    
    set a fair value on PifCos assets, divide all or part of PifCos assets among the
shareholders and determine how the assets will be divided among shareholders or classes
of shareholders; and
    
    vest all or part of PifCos assets in trustees.
      
    
    getting the written consent of two-thirds of the shareholders of that class; or
    
    passing a special resolution at a meeting of the shareholders of that class.
  General Meetings
  
    
    by the directors at any time; or
    
    by any two shareholders holding not less than 10% of the paid-up voting share
capital of PifCo, by written request.
  162




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
    
    sanctioning a dividend;
    
    consideration of the accounts, balance sheets, and ordinary report of the directors and auditors;
    
    appointment and removal of directors; and
    
    fixing of remuneration of the auditors.
   Liability of Shareholders
  Changes in Capital
   
    
    consolidate and divide all or any of its share capital into shares of a larger
amount than its existing shares;
    
    convert all or any part of its paid-up shares into stock and reconvert that stock
into paid-up shares of any denomination;
    
    split existing shares into shares of a smaller amount, subject to the provisions of
Section 13 of the Companies Law; and
    
    cancel any shares, which, at the date of the resolution, are not held or agreed to
be held by any person and diminish the amount of its share capital by
the amount of the shares so cancelled.
  Indemnity
  163




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Accounts
  Amendment of the Articles
  Transfer out of Jurisdiction
  
 Material Contracts
 Petrobras
       
    
    signature bonuses;
    
    royalties;
    
    special participation charge; and
 164




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
    
    rentals for the occupation or retention of areas.
    PifCo
   
 Exchange Controls Petrobras
  Companhia Brasileira de liquidação e
    
    
    appoint at least one representative in Brazil, with powers to perform actions
relating to its investment;
    
    appoint an authorized custodian in Brazil for its investments;
    
    register as a foreign investor with the CVM; and
    
    register its foreign investment with the Central Bank of Brazil.
 165




---



##### Table of Contents



reais
   PifCo
  
    
    no governmental laws, decrees or regulations in Cayman Islands that restrict the
export or import of capital, including dividend and other payments to holders of notes
who are not residents of the Cayman Islands, provided that such holders are not
resident in countries subject to certain sanctions by the United Nations or the
European Union, and
    
    no limitations on the right of nonresident or foreign owners imposed by Cayman
Island law or PifCos Memorandum of Association to hold or vote PifCos shares.
 
 Taxation relating to our ADSs and common and preferred shares
   Prospective purchasers of
 166




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common or preferred shares or ADSs
should consult their own tax advisors as to the tax consequences of the acquisition, ownership and
disposition of common or preferred shares or ADSs
  Brazilian Tax Considerations
           167




---



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reais
 168




---



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reais reais reais reais
         169




---



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Contribuição Provisória sobre Movimentação Financeira reais
  Comissão de Valores Mobiliários
   Registered Capital
  
    
    the average price of a preferred or common share on the Brazilian stock exchange on
which the greatest number of such shares were sold on the day of withdrawal; or
    
    if no preferred or common shares were sold on that day, the average price on the
Brazilian stock exchange on which the greatest number of preferred or common shares
were sold in the 15 trading sessions immediately preceding such withdrawal.
 real
 170




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U.S. Federal Income Tax Considerations
  EACH HOLDER SHOULD CONSULT SUCH HOLDERS OWN TAX ADVISOR CONCERNING THE OVERALL TAX CONSEQUENCES TO
IT, INCLUDING THE CONSEQUENCES UNDER LAWS OTHER THAN U.S. FEDERAL INCOME TAX LAWS, OF AN INVESTMENT
IN COMMON OR PREFERRED SHARES OR ADSs.
   
    
    is a citizen or resident of the United States of America,
    
    is a corporation organized under the laws of the United States of America or any state thereof; or
    
    is otherwise subject to U.S. federal income taxation on a net basis with respect to
the shares or the ADS.
  reais reais reais reais
 171




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##### Table of Contents




    
    such gain is effectively connected with the conduct by the holder of a trade or
business in the United States; or
    
    such holder is an individual who is present in the United States of America for 183
days or more in the taxable year of the sale and certain other conditions are met.
 172




---



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Taxation relating to PifCos notes
  Prospective purchasers of notes should consult their own tax
advisors as to the tax consequences of the acquisition, ownership and disposition of notes
  Cayman Islands Taxation
     173




---



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Brazil Taxation
  INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS AS TO THE CONSEQUENCES OF PURCHASING THE NOTES,
INCLUDING, WITHOUT LIMITATION, THE CONSEQUENCES OF THE RECEIPT OF INTEREST AND THE SALE, REDEMPTION
OR REPAYMENT OF THE NOTES OR COUPONS.
      U.S. Federal Income Taxation
  174




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EACH HOLDER SHOULD CONSULT SUCH HOLDERS OWN TAX ADVISOR CONCERNING THE OVERALL TAX CONSEQUENCES TO
IT, INCLUDING THE CONSEQUENCES UNDER LAWS OTHER THAN U.S. FEDERAL INCOME TAX LAWS, OF AN INVESTMENT
IN THE NOTES.
  de minimis
     175




---



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Documents on Display
    The Prepayment Agreement
  The Master Export Contract
  176




---



##### Table of Contents




    
    in an amount equal to at least 80% of the total volume of all fuel oil (Heavy Fuel
Oil) exported by us during that quarterly period; and
    
    with a value (based upon the net invoice price at which such Eligible Products are
actually sold by PFL) equal to at least:(a) the highest aggregate amount scheduled to be paid by the Trustee in any
quarterly period during the remaining term of any series of Senior Trust Certificates at
the time outstanding, with respect to interest, principal and other amounts due under
the Senior Trust Certificates multiplied by(b) a factor that fluctuates between 2.0 and 3.0, depending upon the level of
sales of Eligible Products by PFL that are contracted to be made under arrangements that
provide for a minimum price per barrel or other hedging arrangements and the relevant
minimum price or price established by such hedging arrangements.
 force majeure
  
 ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
 
 Petrobras
 General
  reais
 reais
 Risk Management
  177




---



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Commodity Price Risk
        178




---



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force majeure
     179




---



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Petrobras
    
    Petrobras America Inc.
    
    PifCo
    
    TotalFair
    
    
    
    
    
    Fair
    
    
    
    
    
    Fair
    
    
    
    
    
    Fair
    
    +10%Quantity
    
    Value(1)
    
    
    
    
    
    Value(1)
    
    
    
    
    
    Value (1)
    
    
    
    
    
    Value(1)
    
    Sensitivity(1,000
    
    (U.S.$
    
    Quantity
    
    (U.S.$
    
    Quantity
    
    (U.S.$
    
    Quantity
    
    (U.S.$
    
    (U.S.$Maturing in 2006
    
    bbl)
    
    millions)
    
    (1,000 bbl)
    
    millions)
    
    (1,000 bbl)
    
    millions)
    
    (1,000 bbl)
    
    millions
    
    millions)OptionsBuy contracts
    
    
    0,000
    
    
    
    0,000
    
    
    
    0,000
    
    
    
    0,000
    
    
    
    0,000
    
    
    
    0,000
    
    
    
    0,000
    
    
    
    0,000
    
    
    
    0,000Sell contracts
    
    
    0,000
    
    
    
    
    
    
    
    0,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0,000
    
    
    
    
    
    
    
    FuturesBuy contracts
    
    
    7,464
    
    
    
    (5,902
    )
    
    
    172
    
    
    
    0,692
    
    
    
    4,565
    
    
    
    0,001
    
    
    
    12,201
    
    
    
    (5,209
    )
    
    
    (4,688
    )Sell contracts
    
    
    4,840
    
    
    
    
    
    
    
    435
    
    
    
    
    
    
    
    4,371
    
    
    
    
    
    
    
    9,646
    
    
    
    
    
    
    
    SwapsReceive
variable/ pay
fixed
    
    
    2,754
    
    
    
    3,340
    
    
    
    0,000
    
    
    
    0,000
    
    
    
    2,164
    
    
    
    0,246
    
    
    
    4,918
    
    
    
    3,586
    
    
    
    3,227Receive fixed/
pay variable
    
    
    5,458
    
    
    
    
    
    
    
    0,000
    
    
    
    
    
    
    
    1,551
    
    
    
    
    
    
    
    7,009
    
    
    
    
    
    
    
    Options
maturing
2007-2008(2)Sell contracts
    
    
    13000
    
    
    
    0,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0,000
 
 (1)
    
    Fair value represents an estimate of gain or loss that would be realized if contracts were
settled at the balance sheet date.(2)
    
    13 million barrels per year. Interest Rate and Exchange Rate Risk
 reais reais Taxa de Juros de Longo Prazo
  real real
 180




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Total Debt Portfolio2006
    
    2005Realdenominated
    
    
    17.9
    %
    
    
    9.6
    %o/w* fixed rate
    
    
    0.0
    
    
    
    0.0o/w floating rate
    
    
    17.9
    
    
    
    9.6Dollar denominated
    
    
    78.1
    
    
    
    87.3o/w fixed rate
    
    
    37.4
    
    
    
    44.7o/w floating rate (includes short-term debt)
    
    
    40.7
    
    
    
    42.6Other currencies (primarily Yen)
    
    
    4.0
    
    
    
    3.1o/w fixed rate
    
    
    3.6
    
    
    
    2.8o/w floating rate
    
    
    0.4
    
    
    
    0.3Total
    
    
    100.0
    %
    
    
    100.0
    %
 Total Debt Portfolio2006
    
    2005Floating Rate DebtRealdenominated
    
    
    17.8
    %
    
    
    9.6
    %Foreign Currency Denominated
    
    
    41.2
    
    
    
    42.9Fixed Rated DebtRealdenominated
    
    
    0.0
    
    
    
    0.0Foreign Currency Denominated
    
    
    41.0
    
    
    
    47.5
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 Total Debt Portfolio2006
    
    2005U.S. dollars
    
    
    78.12
    %
    
    
    87.32
    %Euro
    
    
    1.08
    
    
    
    0.86Japanese Yen
    
    
    2.93
    
    
    
    2.20Brazilian reais
    
    
    17.87
    
    
    
    9.62Total
    
    
    100.0
    %
    
    
    100.0
    %
 
 *
    
    o/w signifies of which 181




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Certificado de Depósito Interbancário
 (in million of U.S. dollars, except for percentages)
 Fair Valueas ofDecember 31,2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012-2023
    
    Total
    
    2006Debt in EURO:Fixed rate debt
    
    
    168
    
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171
    
    
    
    171Average
interest rate
    
    
    6.6
    %
    
    
    5.7
    %
    
    
    5.7
    %
    
    
    
    
    
    
    
    
    
    
    Variable rate
debt
    
    
    7
    
    
    
    7
    
    
    
    7
    
    
    
    7
    
    
    
    7
    
    
    
    26
    
    
    
    59
    
    
    
    59Average
interest rate
    
    
    4.8
    %
    
    
    4.8
    %
    
    
    4.8
    %
    
    
    4.8
    %
    
    
    4.8
    %
    
    
    4.8
    %Debt in Japanese Yen:Fixed rate debt
    
    
    62
    
    
    
    87
    
    
    
    47
    
    
    
    27
    
    
    
    25
    
    
    
    344
    
    
    
    591
    
    
    
    606Average
interest rate
    
    
    2.6
    %
    
    
    2.4
    %
    
    
    2.2
    %
    
    
    1.8
    %
    
    
    1.7
    %
    
    
    2.1
    %Variable rate
debt
    
    
    2
    
    
    
    2
    
    
    
    9
    
    
    
    15
    
    
    
    8
    
    
    
    
    
    
    
    35
    
    
    
    35Average
interest rate
    
    
    4.1
    %
    
    
    4.1
    %
    
    
    4.7
    %
    
    
    4.8
    %
    
    
    4.8
    %
    
    
    Debt in U.S. dollars:Fixed rate debt
    
    
    2,004
    
    
    
    832
    
    
    
    382
    
    
    
    700
    
    
    
    606
    
    
    
    3,455
    
    
    
    7,978
    
    
    
    8,751Average
interest rate
    
    
    7.5
    %
    
    
    9.6
    %
    
    
    8.9
    %
    
    
    9.0
    %
    
    
    8.9
    %
    
    
    7.6
    %Variable rate
debt
    
    
    2,146
    
    
    
    1,785
    
    
    
    1,207
    
    
    
    988
    
    
    
    523
    
    
    
    2,042
    
    
    
    8,690
    
    
    
    8,778Average
interest rate
    
    
    6.7
    %
    
    
    6.1
    %
    
    
    6.5
    %
    
    
    6.7
    %
    
    
    6.2
    %
    
    
    6.7
    %Debt in Brazilianreais:Variable rate
debt
    
    
    1,424
    
    
    
    252
    
    
    
    366
    
    
    
    656
    
    
    
    132
    
    
    
    983
    
    
    
    3,813
    
    
    
    4,134Average
interest rate
    
    
    11.4
    %
    
    
    12.6
    %
    
    
    10.8
    %
    
    
    13.8
    %
    
    
    11.7
    %
    
    
    12.9
    %Total debt
obligations
    
    
    5,812
    
    
    
    2,967
    
    
    
    2,018
    
    
    
    2,392
    
    
    
    1,300
    
    
    
    6,850
    
    
    
    21,338
    
    
    
    22,534
  182




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Notional amount of debt (U.S.$ in millions)
    
    
    177.2Contractual rates(EUR/USD)Interest paymentsFloor
    
    
    0.94Ceiling
    
    
    1.18Final principal paymentsFloor
    
    
    1.0725Ceiling
    
    
    1.1800Fair value as of December 31, 2006 (U.S.$ in millions)Put Option
    
    
    (0.001
    )Call Option
    
    
    21.29Expiration date
    
    
    2007
 
 PifCo
       183




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CALENDAR YEAR OF EXPECTED MATURITY DATE FOR DEBT
(in thousands of U.S. dollars, except for percentages)
 December 31, 2006
 Fair ValueDec 31,Debt Obligations
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012
    
    2013-2018
    
    Total
    
    2006Debt in U.S. Dollars:Fixed rate debt
    
    
    441,698
    
    
    
    67,718
    
    
    
    68,738
    
    
    
    356,164
    
    
    
    70,928
    
    
    
    2,299,669
    
    
    
    3,304,915
    
    
    
    3,679,951Average interest rate
    
    
    10.0
    %
    
    
    5.5
    %
    
    
    5.5
    %
    
    
    8.9
    %
    
    
    5.5
    %
    
    
    7.8
    %Variable rate debt
    
    
    329,500
    
    
    
    149,500
    
    
    
    259,500
    
    
    
    20,500
    
    
    
    22,250
    
    
    
    260,000
    
    
    
    1,041,250
    
    
    
    1,074,014Average interest rate
    
    
    6.9
    %
    
    
    7.3
    %
    
    
    6.8
    %
    
    
    7.8
    %
    
    
    7.4
    %
    
    
    7.2
    %Debt in Japanese Yen:Fixed rate debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    293,969
    
    
    
    293,969
    
    
    
    293,969Average interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.2
    %Total debt obligations
    
    
    771,198
    
    
    
    217,218
    
    
    
    328,238
    
    
    
    376,664
    
    
    
    93,178
    
    
    
    2,853,638
    
    
    
    4,640,134
    
    
    
    5,047,634
 December 31,
    
    December 31,Total Debt Portfolio
    
    2006
    
    2005U.S. Dollars:Fixed rate debt
    
    
    74.5
    %
    
    
    79.8
    %Floating rate debt
    
    
    20.5
    %
    
    
    20.2
    %Japanese Yen:Fixed rate debt
    
    
    5.0
    %
    
    
    0.0
    %Floating rate debt
    
    
    0.0
    %
    
    
    0.0
    %Total debt portfolio
    
    
    100.0
    %
    
    
    100.0
    %
  
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  
 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
 Disclosure Controls and Procedures
  184




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Managements Report on Internal Control over Financial Reporting
       185




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##### Table of Contents



Integrated Internal Control Systems and Methods ProgramPrisma
     
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
  186




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##### Table of Contents



ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 Principal Accountant Fees
 
 Audit and Non-Audit Fees
 Petrobras
  Year ended December 31,2006
    
    2005(in thousand of reais)Audit fees
    
    
    17,254
    
    
    
    10,876Audit-related fees
    
    
    3,939
    
    
    
    3,441Tax fees
    
    
    1,467
    
    
    
    584Total fees
    
    
    22,660
    
    
    
    14,901
   PifCo
  Year ended December 31,2006
    
    2005(in thousand of reais)Audit fees
    
    
    252.8
    
    
    
    318.3Audit-related fees
    
    
    39.8
    
    
    
    Total fees
    
    
    292.6
    
    
    
    318.3
  187




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##### Table of Contents



Audit Committee Approval Policies and Procedures
  
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
 Petrobras
  
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
  188




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##### Table of Contents



ITEM 19. EXHIBITS
 No.
    
    Description1.1
    
    Amended By-Laws of Petróleo Brasileiro S.A.-Petrobras (together with an English
version) (incorporated by reference to the Annual Report on Form 20-F of Petróleo
Brasileiro S.A.Petrobras, filed with the Securities and Exchange Commission on
June 30, 2004 (File No. 1-15106)).1.2
    
    Memorandum and Articles of Association of Petrobras International Finance Company
(incorporated by reference to Exhibit 1 to the Annual Report on Form 20-F of
Petrobras International Finance Company, filed with the Securities and Exchange
Commission on July 1, 2002, and amendments to which were filed on December 13, 2002
and March 20, 2003 (File No. 333-14168)). PifCos Memorandum and Articles of
Association were last amended on May 7, 2007. PifCos Registered Office is
currently working with the Companys Registrar in the Cayman Islands to file
PifCos new Amended Memorandum and Articles of Association that reflect the
following changes: a) a total capital contribution in the amount of
U.S.$300,050,000.00; b) the resulting new number of 300,050,000 shares, with the
par value of U.S.$1.00; and c) wider objects through which the company plans to
carry out its business in the near future.2.1
    
    Deposit Agreement dated as of July 14, 2000, among Petrobras and Citibank, N.A., as
depositary, and registered holders and beneficial owners from time to time of the
American Depositary Shares, representing the common shares of Petrobras
(incorporated by reference to exhibit of Petrobras Registration Statement on Form
F-6 filed with the Securities and Exchange Commission on July 17, 2000 (File No.
333-123000)).2.2
    
    Amended and Restated Deposit Agreement dated as of February 21, 2001, among
Petrobras and Citibank, N.A., as depositary, and the registered holders and
beneficial owners from time to time of the American Depositary Shares, representing
the preferred shares of Petrobras (incorporated by reference to exhibit 4.1 of
Amendment No. 1 to Petrobras Registration Statement on Form F-1 filed with the
Securities and Exchange Commission on July 3, 2001 (File No. 333-13660)).2.3
    
    Amendment No. 1, dated as of March 23, 2001, to the Amended and Restated Deposit
Agreement, dated as of February 21, 2001, among Petrobras, Citibank N.A., as
depositary, and the registered holders and beneficial owners from time to time of
the American Depositary Shares representing the preferred shares of Petrobras
(incorporated by reference to Exhibit 4.2 of Amendment No. 1 to Petrobras
Registration Statement on Form F-1 filed with the Securities and Exchange
Commission on July 3, 2001 (File No. 333-13660)).2.4
    
    Indenture, dated as of July 19, 2002, between Petrobras and JPMorgan Chase Bank, as
Trustee (incorporated by reference to exhibit 4.4 of the Registration Statement of
Petrobras International Finance Company and Petrobras on Form F-3, filed with the
Securities and Exchange Commission on July 5, 2002, and amendments to which were
filed on July 19, 2002 and August 14, 2002 (File No. 333-92044-01)).2.5
    
    Indenture, dated as of July 19, 2002, between Petrobras International Finance
Company and JPMorgan Chase Bank, as Trustee (incorporated by reference to exhibit
4.5 of the Registration Statement of Petrobras International Finance Company and
Petrobras on Form F-3, filed with the Securities and Exchange Commission on July 5,
2002, and amendments to which were filed on July 19, 2002 and August 14, 2002 (File
No. 333-92044-01)).2.6
    
    First Supplemental Indenture, dated as of March 31, 2003, between Petrobras
International Finance Company (PifCo) and JPMorgan Chase Bank, as Trustee, relating
to the 9.00% Global Step-Up Notes due 2008 (incorporated by reference to exhibit
2.6 of Petrobras annual report on Form 20-F for the fiscal year ended December 31,
2002, filed with the Securities and Exchange Commission on June 19, 2002 (File No.
1-15106)).2.7
    
    Second Supplemental Indenture, dated as of July 2, 2003, between Petrobras
International Finance Company (PifCo) and JPMorgan Chase Bank, as Trustee, relating
to the 9.125% Global Notes due 2013 (incorporated by reference to the Annual Report
on Form 20-F of Petróleo Brasileiro S.A.Petrobras, filed with the Securities and
Exchange Commission on June 30, 2004 (File No. 1-15106)).2.8
    
    Amended and Restated Second Supplemental Indenture, initially dated as of July 2,
2003, as amended and restated as of September 18, 2003, between Petrobras
International Finance Company (PifCo) and JPMorgan Chase Bank, as Trustee, relating
to the 9.125% Global Notes due 2013 (incorporated by reference to the Annual Report
on Form 20-F of Petróleo Brasileiro S.A.Petrobras, filed with the Securities and
Exchange Commission on June 30, 2004 (File No. 1-15106)).
 189




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No.
    
    Description2.9
    
    Third Supplemental Indenture, dated as of December 10, 2003, between Petrobras
International Finance Company (PifCo) and JPMorgan Chase Bank, as Trustee, relating
to the 8.375% Global Notes due 2018 (incorporated by reference to the Annual Report
on Form 20-F of Petróleo Brasileiro S.A.Petrobras, filed with the Securities and
Exchange Commission on June 30, 2004 (File No. 1-15106)).2.10
    
    2.10-Indenture, dated as of May 9, 2001, between Petrobras International Finance
Company and The Bank of New York, as Trustee, relating to the 9 7/8%
Senior Notes due 2008 (incorporated by reference to Exhibit 4.1 to the Registration
Statement of Petrobras International Finance Company and Petróleo Brasileiro
S.A.Petrobras on Form F-4, filed with the Securities and Exchange Commission on
December 6, 2001 (File No. 333-14168)).2.11
    
    Supplemental Indenture, dated as of November 26, 2001, between Petrobras
International Finance Company and The Bank of New York, as Trustee, relating to the
9 7/8% Senior Notes due 2008 (incorporated by reference to Exhibit 4.2
to the Registration Statement of Petrobras International Finance Company and
Petróleo Brasileiro S.A.Petrobras on Form F-4, filed with the Securities and
Exchange Commission on December 6, 2001 (File No. 333-14168)).2.12
    
    Indenture, dated as of July 6, 2001, between Petrobras International Finance
Company and The Bank of New York, as Trustee, relating to the 9 3/4% Senior Notes due
2011 (incorporated by reference to Exhibit 4.1 to the Registration Statement of
Petrobras International Finance Company and Petróleo Brasileiro S.A.Petrobras on
Form F-4, filed with the Securities and Exchange Commission on December 6, 2001
(File No. 333-14170)).2.13
    
    Supplemental Indenture, dated as of November 26, 2001, between Petrobras
International Finance Company and The Bank of New York, as Trustee, relating to the
9 3/4% Senior Notes due 2011 (incorporated by reference to Exhibit 4.2 to the
Registration Statement of Petrobras International Finance Company and Petróleo
Brasileiro S.A.Petrobras on Form F-4, filed with the Securities and Exchange
Commission on December 6, 2001 (File No. 333-14170)).2.14
    
    Indenture, initially dated as of February 4, 2002, as amended and restated as of
February 28, 2002, between Petrobras International Finance Company and The Bank of
New York, as Trustee, relating to the 9 1/8% Senior Notes due 2007
(incorporated by reference to Exhibit 2.19 to the amended Annual Report on Form
20-F of Petrobras International Finance Company, filed with the Securities and
Exchange Commission on December 13, 2002 (File No. 333-14168)).2.15
    
    Registration Rights Agreement, dated as of May 9, 2001, among Petrobras
International Finance Company, Petróleo Brasileiro S.A.Petrobras, and USB Warburg
LLC, Banc of America Securities LLC, J.P. Morgan Securities Inc., RBC Dominion
Securities Corporation and Santander Central Hispano Investment Securities Inc.
(incorporated by reference to Exhibit 4.4 to the Registration Statement of
Petrobras International Finance Company and Petróleo Brasileiro S.A.Petrobras on
Form F-4 filed with the Securities and Exchange Commission on December 6, 2001
(File No. 333-14168)).2.16
    
    Registration Rights Agreement, dated as of July 6, 2001, among Petrobras
International Finance Company, Petróleo Brasileiro S.A.Petrobras, and USB Warburg
LLC, Banc of America Securities LLC, J.P. Morgan Securities Inc., RBC Dominion
Securities Corporation and Santander Central Hispano Investment Securities Inc.
(incorporated by reference to Exhibit 4.4 to the Registration Statement of
Petrobras International Finance Company and Petróleo Brasileiro S.A.Petrobras on
Form F-4, filed with the Securities and Exchange Commission on December 6, 2001
(File No. 333-14170)).2.17
    
    Registration Rights Agreement, initially dated as of February 4, 2002, as amended
and restated as of February 28, 2002, among Petrobras International Finance
Company, Petróleo Brasileiro S.A.Petrobras, UBS Warburg LLC and Morgan Stanley &
Co. Incorporated (incorporated by reference to Exhibit 2.20 to the amended Annual
Report on Form 20-F of Petrobras International Finance Company, filed with the
Securities and Exchange Commission on December 13, 2002 (File No. 333-14168)).2.18
    
    Standby Purchase Agreement, dated as of May 9, 2001, between Petróleo Brasileiro
S.A.Petrobras and The Bank of New York (incorporated by reference to Exhibit 4.5
to the Registration Statement of Petrobras International Finance Company and
Petróleo Brasileiro S.A.Petrobras on Form F-4, filed with the Securities and
Exchange Commission on December 6, 2001 (File No. 333-14168)).2.19
    
    Amendment No. 1 to the Standby Purchase Agreement, dated as of November 26, 2001,
between Petróleo Brasileiro S.A.Petrobras and The Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.6 to the Registration Statement of
Petrobras International Finance Company and Petróleo Brasileiro S.A.Petrobras on
Form F-4, filed with the Securities and Exchange Commission on December 6, 2001
(File No. 333-14168)).2.20
    
    Standby Purchase Agreement, dated as of July 6, 2001, between Petróleo Brasileiro
S.A.Petrobras and The Bank of New York (incorporated by reference to Exhibit 4.5
to the Registration Statement of Petrobras International Finance
 190




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##### Table of Contents



No.
    
    DescriptionCompany and
Petróleo Brasileiro S.A.Petrobras on Form F-4, filed with the Securities and
Exchange Commission on December 6, 2001 (File No. 333-14170)).2.21
    
    Standby Purchase Agreement, initially dated as of February 4, 2002, as amended and
restated as of February 28, 2002, between Petróleo Brasileiro S.A.Petrobras and
The Bank of New York, as Trustee (incorporated by reference to Exhibit 2.21 to the
amended Annual Report on Form 20-F of Petrobras International Finance Company,
filed with the Securities and Exchange Commission on December 13, 2002 (File No.
333-14168)).2.22
    
    Standby Purchase Agreement dated as of March 31, 2003, between Petróleo Brasileiro
S.A.Petrobras and JPMorgan Chase Bank, as Trustee (incorporated by reference to
Exhibit 2.15 to the Annual Report on Form 20-F of Petrobras International Finance
Company, filed with the Securities and Exchange Commission on June 19, 2003 (File
No. 333-14168)).2.23
    
    Standby Purchase Agreement dated as of July 2, 2003, between Petróleo Brasileiro
S.A.Petrobras and JPMorgan Chase Bank, as Trustee (incorporated by reference to
the Annual Report on Form 20-F of Petrobras International Finance Company, filed
with the Securities and Exchange Commission on June 30, 2004 and amendment filed on
July 26, 2004 (File No. 333-14168)).2.24
    
    Amended and Restated Standby Purchase Agreement initially dated as of July 2, 2003,
as amended and restated as of September 18, 2003, between Petróleo Brasileiro
S.A.Petrobras and JPMorgan Chase Bank, as Trustee (incorporated by reference to
the Annual Report on Form 20-F of Petrobras International Finance Company, filed
with the Securities and Exchange Commission on June 30, 2004 and amendment filed on
July 26, 2004 (File No. 333-14168)).2.25
    
    Standby Purchase Agreement dated as of December 10, 2003, between Petróleo
Brasileiro S.A.Petrobras and JPMorgan Chase Bank, as Trustee (incorporated by
reference to the Annual Report on Form 20-F of Petrobras International Finance
Company, filed with the Securities and Exchange Commission on June 30, 2004 and
amendment filed on July 26, 2004 (File No. 333-14168)).2.26
    
    Notes Purchase Agreement, dated as of January 29, 2002, between Petrobras
International Finance Company and UBS Warburg LLC and Morgan Stanley & Co.
Incorporated (incorporated by reference to Exhibit 2.13 to the Annual Report on
Form 20-F of Petrobras International Finance Company, filed with the Securities and
Exchange Commission on July 1, 2002, and amendments to which were filed on December
13, 2002 and March 20, 2003 (File No. 333-14168)).2.27
    
    Master Export Contract, dated as of December 21, 2001, between Petróleo Brasileiro
S.A.Petrobras and Petrobras Finance Ltd. (incorporated by reference to Exhibit
2.14 to the Annual Report on Form 20-F of Petrobras International Finance Company,
filed with the Securities and Exchange Commission on July 1, 2002, and amendments
to which were filed on December 13, 2002 and March 20, 2003 (File No. 333-14168)).2.28
    
    Amendment to the Master Export Contract, dated as of May 21, 2003, among Petróleo
Brasileiro S.A.Petrobras and Petrobras Finance Ltd. (incorporated by reference to
Exhibit 2.18 to the Annual Report on Form 20-F of Petrobras International Finance
Company, filed with the Securities and Exchange Commission on June 19, 2003 (File
No. 333-14168)).2.29
    
    Depositary Agreement, dated as of December 21, 2001, among U.S. Bank, National
Association, Cayman Islands Branch, in capacity as Trustee of the PF Export
Receivables Master Trust, Citibank, N.A., in capacity as Securities Intermediary,
and Petrobras Finance Ltd. (incorporated by reference to Exhibit 2.15 to the Annual
Report on Form 20-F of Petrobras International Finance Company, filed with the
Securities and Exchange Commission on July 1, 2002, and amendments to which were
filed on December 13, 2002 and March 20, 2003 (File No. 333-14168)).2.30
    
    Letter Agreement relating to the Depositary Agreement, dated as of May 16, 2003
(incorporated by reference to Exhibit 2.20 to the Annual Report on Form 20-F of
Petrobras International Finance Company, filed with the Securities and Exchange
Commission on June 19, 2003 (File No. 333-14168)).2.31
    
    Administrative Services Agreement, dated as of December 21, 2001, between Petróleo
Brasileiro S.A.Petrobras, as Delivery and Sales Agent, and Petrobras Finance Ltd.
(incorporated by reference to Exhibit 2.16 to the Annual Report on Form 20-F of
Petrobras International Finance Company, filed with the Securities and Exchange
Commission on July 1, 2002, and amendments to which were filed on December 13, 2002
and March 20, 2003 (File No. 333-14168)).2.32
    
    Letter Agreement relating to the Administrative Services Agreement, dated as of May
16, 2003 (incorporated by reference to Exhibit 2.22 to the Annual Report on Form
20-F of Petrobras International Finance Company, filed with the Securities and
Exchange Commission on June 19, 2003 (File No. 333-14168)).
 191




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No.
    
    Description2.33
    
    Amended and Restated Trust Deed, dated as of December 21, 2001, among U.S. Bank,
National Association, Cayman Islands Branch, in capacity as Trustee of the PF
Export Receivables Master Trust, Citibank, N.A., in capacity as Paying Agent,
Transfer Agent, Registrar and Depositary Bank, and Petrobras International Finance
Company, as Servicer (incorporated by reference to Exhibit 2.17 to the Annual
Report on Form 20-F of Petrobras International Finance Company, filed with the
Securities and Exchange Commission on July 1, 2002, and amendments to which were
filed on December 13, 2002 and March 20, 2003 (File No. 333-14168)).2.34
    
    Receivables Purchase Agreement, dated as of December 21, 2001, among Petrobras
Finance Ltd., Petróleo Brasileiro S.A.Petrobras and U.S. Bank, National
Association, Cayman Islands Branch, solely in capacity as Trustee of the PF Export
Receivables Master Trust (incorporated by reference to Exhibit 2.18 to the Annual
Report on Form 20-F of Petrobras International Finance Company, filed with the
Securities and Exchange Commission on July 1, 2002, and amendments to which were
filed on December 13, 2002 and March 20, 2003 (File No. 333-14168)).2.35
    
    Amended and Restated Receivables Purchase Agreement, dated as of May 21, 2003,
among Petrobras Finance Ltd., Petróleo Brasileiro S.A.Petrobras and U.S. Bank,
National Association, Cayman Islands Branch, solely in capacity as Trustee of the
PF Export Receivables Master Trust (incorporated by reference to Exhibit 2.25 to
the Annual Report on Form 20-F of Petrobras International Finance Company, filed
with the Securities and Exchange Commission on June 19, 2003 (File No. 333-14168)).2.36
    
    Prepayment Agreement, dated as of December 21, 2001, between Petróleo Brasileiro
S.A.Petrobras and Petrobras Finance Ltd. (incorporated by reference to Exhibit
2.26 to the Annual Report on Form 20-F of Petrobras International Finance Company,
filed with the Securities and Exchange Commission on June 19, 2003 (File No.
333-14168)).2.37
    
    Amended and Restated Prepayment Agreement, dated as of May 2, 2003, between
Petróleo Brasileiro S.A.Petrobras and Petrobras Finance Ltd. (incorporated by
reference to Exhibit 2.27 to the Annual Report on Form 20-F of Petrobras
International Finance Company, filed with the Securities and Exchange Commission on
June 19, 2003 (File No. 333-14168)).2.38
    
    Fourth Supplemental Indenture, dated as of September 15, 2004, between Petrobras
International Finance Company (PifCo) and JPMorgan Chase Bank, as Trustee, and
Petróleo Brasileiro S.A.Petrobras relating to the 7.75% Global Notes due 2014
(incorporated by reference to Exhibit 2.38 to the Annual Report on Form 20-F of
Petrobras and Petrobras International Finance Company, filed with the Securities
and Exchange Commission on June 30, 2005 (File No. 333-14168)).2.39
    
    Standby Purchase Agreement dated as of September 15, 2004, between Petróleo
Brasileiro S.A.Petrobras and JPMorgan Chase Bank, as Trustee (incorporated by
reference to Exhibit 2.39 to the Annual Report on Form 20-F of Petrobras and
Petrobras International Finance Company, filed with the Securities and Exchange
Commission on June 30, 2005 (File No. 333-14168)).2.40
    
    Fifth Supplemental Indenture, dated as of October 6, 2006, between Petrobras
International Finance Company (PifCo) and JPMorgan Chase Bank, as Trustee, and
Petróleo Brasileiro S.A.Petrobras relating to the 6.125% Global Notes due 2016.2.41
    
    Standby Purchase Agreement dated as of October 6, 2006, between Petróleo Brasileiro
S.A.Petrobras and JPMorgan Chase Bank, as Trustee.2.42
    
    Amended and Restated Fifth Supplemental Indenture, initially dated as of October 6,
2006, as amended and restated as of February 7, 2007, between Petrobras
International Finance Company (PifCo) and the Bank of New York, as successor to
JPMorgan Chase Bank, N.A., as Trustee, and Petróleo Brasileiro S.A.Petrobras
relating to the 6.125% Global Notes due 2016.2.43
    
    Standby Purchase Agreement, initially dated as of October 6, 2006, as amended and
restated as of February 7, 2007, between Petróleo Brasileiro S.A.Petrobras and the
Bank of New York, as successor to JPMorgan Chase Bank, N.A., as Trustee.The amount of long-term debt securities of Petrobras authorized under any given
instrument does not exceed 10% of its total assets on a consolidated basis.
Petrobras hereby agrees to furnish to the SEC, upon its request, a copy of any
instrument defining the rights of holders of its long-term debt or of its
subsidiaries for which consolidated or unconsolidated financial statements are
required to be filed.4.1
    
    Form of Concession Agreement for Exploration, Development and Production of crude
oil and natural gas executed
 192




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No.
    
    Descriptionbetween Petrobras and ANP (incorporated by reference
to Exhibit 10.1 of Petrobras Registration Statement on Form F-1 filed with the
Securities and Exchange Commission on July 14, 2000 (File No. 333-12298)).4.2
    
    Purchase and Sale Agreement of natural gas, executed between Petrobras and
Yacimientos Petroliferos Fiscales Bolivianos-YPFB (together with and English
version) (incorporated by reference to Exhibit 10.2 to Petrobras Registration
Statement on Form F-1 filed with the Securities and Exchange Commission on July 14,
2000 (File No. 333-12298)).8.1
    
    List of subsidiaries.10.1
    
    Consent letter of DeGolyer and MacNaughton.12.1
    
    Petrobras Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.12.2
    
    PifCos Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.13.1
    
    Petrobras Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.13.2
    
    PifCos Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 193




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##### Table of Contents



GLOSSARY OF PETROLEUM INDUSTRY TERMS
  barrels or bbls
    
    Barrels of crude oil.catalytic cracking
    
    A process by which hydrocarbon molecules are broken
down (cracked) into lighter fractions by the action
of a catalyst.cmpd
    
    Cubic meters per daycondensate
    
    Light hydrocarbon substances produced with natural
gas, which condense into liquid at normal
temperatures and pressures, associated with surface
production equipment.crude oil
    
    Crude oil, including NGLs.distillation
    
    A process by which liquids are separated or refined
by vaporization followed by condensation.heavy crude oil
    
    Crude oil with API density less than or equal to 27°.light crude oil
    
    Crude oil with API density higher than 27°.LPG
    
    Liquefied petroleum gas, which is a mixture of
saturated and unsaturated hydrocarbons, with up to
five carbon atoms, used as domestic fuel.NGLs
    
    Natural gas liquids, which are light hydrocarbon
substances produced with natural gas, which condense
into liquid at normal temperatures and pressures.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 reservoirs
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 on escalations based upon
future conditions.Proved developed 
reserves
    
    Proved developed 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 the natural
forces and mechanisms of primary recovery are
included as proved developed reserves only after
testing by a pilot project or after the operation of
an installed program has confirmed through
production response that increased recovery will be
achieved.Proved undeveloped 
reserves
    
    Proved undeveloped reserves are reserves that are
expected to be recovered from new wells on undrilled
acreage, or from existing wells where a relatively
major 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
proved effective by actual tests 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 are claimed only where it is
demonstrated with certainty that there is continuity
of production from the existing productive
formation.
 194




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##### Table of Contents



ABBREVIATIONS
 Bbl
    
    BarrelBcf
    
    Billion cubic feetBoe
    
    Barrels of oil equivalentBpd
    
    Barrels per dayCf
    
    Cubic feetKm
    
    KilometerKm2
    
    Square kilometersMbbl
    
    Thousand barrelsMboe
    
    Thousand barrels of oil equivalentMbpd
    
    Thousand barrels per dayMcf
    
    Thousand cubic feetMMbbl
    
    Million barrelsMMboe
    
    Million barrels of oil equivalentMMbtu
    
    Million British thermal unitsMMcf
    
    Million cubic feetMMcmd
    
    Million cubic meters per dayMMcfpd
    
    Million cubic feet per dayMMscfd
    
    Million standard cubic feet per dayMW
    
    Megawattsm3
    
    Cubic metersP$
    
    Argentine pesosR$
    
    Brazilian reaisU.S.$
    
    the United States dollars
 
 CONVERSION TABLE
 1 barrel
    
    =
    
    42 U.S. gallons1 domestic barrel of oil equivalent
    
    =
    
    1 barrel of crude oil
    
    =
    
    5,614.4 cubic feet of natural
gas through December 31, 1999
and 6,000 cubic feet of natural
gas as of December 31, 2000.1 international barrel of oil equivalent
    
    =
    
    1 barrel of crude oil
    
    =
    
    6,000.0 cubic feet of natural gas1 cubic meter of natural gas
    
    =
    
    35.314 cubic feet
    
    =
    
    0.0063 barrels of oil equivalent1 Km
    
    =
    
    0.625 miles1 acre
    
    =
    
    0.004047 km 21 Km2
    
    =
    
    247.1 acres1 ton of crude oil
    
    =
    
    1 metric ton (1,000
kilograms of crude
oil)
    
    =
    
    Approximately 7.5 barrels of
crude oil (assuming an
atmospheric pressure index
gravity of 37° API)1 meter
    
    =
    
    3.2808 feet
 195




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##### Table of Contents



SIGNATURES
  Petróleo Brasileiro S.A.  PETROBRASBy:
    /s/ JOSÉ SÉRGIO GABRIELLI DE AZEVEDOName:
    José Sérgio Gabrielli de AzevedoTitle:
    Chairman and Chief Executive OfficerBy:
    /s/ ALMIR GUILHERME BARBASSAName:
    Almir Guilherme BarbassaTitle:
    Chief Financial Officer 196




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##### Table of Contents



SIGNATURES
  Petrobras International Finance Company  PifCoBy:
    /s/ DANIEL LIMA DE OLIVEIRAName:
    Daniel Lima de OliveiraTitle:
    Chairman and Chief Executive OfficerBy:
    /s/ SÉRVIO TÚLIO DA ROSA TINOCOName:
    Sérvio Túlio da Rosa TinocoTitle:
    Chief Financial Officer 197




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##### Table of Contents



Petróleo Brasileiro S.A.  Petrobras and subsidiaries




---



##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
   Report of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets
    
    
    F-3Consolidated Statements of Income
    
    
    F-5Consolidated Statements of Cash Flows
    
    
    F-7Consolidated Statements of Changes in Shareholders Equity
    
    
    F-9Notes to the Consolidated Financial Statements1. The Company and its Operations
    
    
    F-112. Summary of Significant Accounting Policies
    
    
    F-123. Income Taxes
    
    
    F-254. Cash and Cash Equivalents
    
    
    F-295. Marketable Securities
    
    
    F-306. Accounts Receivable, Net
    
    
    F-317. Inventories
    
    
    F-328. Recoverable Taxes
    
    
    F-339. Property, Plant and Equipment, Net
    
    
    F-3410. Investments in Non-Consolidated Companies and Other Investments
    
    
    F-4111. Petroleum and Alcohol Account  Receivable from Federal Government
    
    
    F-4312. Financings
    
    
    F-4413. Financial Income (Expenses), Net
    
    
    F-5314. Project Financings
    
    
    F-5415. Capital Lease Obligations
    
    
    F-5916. Employees Post-retirement Benefits and Other Benefits
    
    
    F-6017. Shareholders Equity
    
    
    F-7518. Domestic and International Acquisitions
    
    
    F-8319. Commitments and Contingencies
    
    
    F-9120. Derivative Instruments, Hedging and Risk Management Activities
    
    
    F-10721. Natural Gas Derivative Contract
    
    
    F-11222. Financial Instruments
    
    
    F-11323. Segment Information
    
    
    F-11424. Related Party Transactions
    
    
    F-12625. Accounting for Suspended Exploratory Wells
    
    
    F-12826. Subsequent Events
    
    
    F-132Supplementary Information on Oil and Gas Exploration and Production
    
    
    F-138




---



##### Table of Contents



c
  F-1




---



##### Table of Contents



Employers Accounting for Defined Benefit Pension and Other Postretirement Plans,
  
 F-2




---



##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 
 As of December 31,2006
    
    2005AssetsCurrent assetsCash and cash equivalents (Note 4)
    
    
    12,688
    
    
    
    9,871Marketable securities (Note 5)
    
    
    346
    
    
    
    456Accounts receivable, net (Note 6)
    
    
    6,311
    
    
    
    6,184Inventories (Note 7)
    
    
    6,573
    
    
    
    5,305Deferred income taxes (Note 3)
    
    
    653
    
    
    
    479Recoverable taxes (Note 8)
    
    
    2,593
    
    
    
    2,087Advances to suppliers
    
    
    948
    
    
    
    652Other current assets
    
    
    843
    
    
    
    75030,955
    
    
    
    25,784Property, plant and equipment, net (Note 9)
    
    
    58,897
    
    
    
    45,920Investments in non-consolidated companies and other investments (Note 10)
    
    
    3,262
    
    
    
    1,810Other assetsAccounts receivable, net (Note 6)
    
    
    513
    
    
    
    642Advances to suppliers
    
    
    852
    
    
    
    462Petroleum and alcohol account  receivable
from Federal Government (Note 11)
    
    
    368
    
    
    
    329Government securities
    
    
    479
    
    
    
    364Marketable securities (Note 5)
    
    
    94
    
    
    
    129Restricted deposits for legal proceedings and guarantees (Note 19 (a))
    
    
    816
    
    
    
    775Recoverable taxes (Note 8)
    
    
    1,292
    
    
    
    639Deferred income taxes (Note 3)
    
    
    61
    
    
    
    7Goodwill (Note 18)
    
    
    243
    
    
    
    237Prepaid expenses
    
    
    244
    
    
    
    246Inventories (Note 7)
    
    
    210
    
    
    
    236Fair value asset of gas hedge (Note 20)
    
    
    
    
    
    
    547Other assets
    
    
    394
    
    
    
    5115,566
    
    
    
    5,124Total assets
    
    
    98,680
    
    
    
    78,638
  F-3




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 As of December 31,2006
    
    2005Liabilities and shareholders equityCurrent liabilitiesTrade accounts payable
    
    
    5,418
    
    
    
    3,838Short-term debt (Note 12)
    
    
    1,293
    
    
    
    950Current portion of long-term debt (Note 12)
    
    
    2,106
    
    
    
    1,428Current portion of project financings (Note 14)
    
    
    2,182
    
    
    
    2,413Current portion of capital lease obligations (Note 15)
    
    
    231
    
    
    
    239Accrued interest
    
    
    247
    
    
    
    221Income taxes payable
    
    
    235
    
    
    
    409Taxes payable, other than income taxes
    
    
    3,122
    
    
    
    3,014Deferred income taxes (Note 3)
    
    
    8
    
    
    
    6Payroll and related charges
    
    
    1,192
    
    
    
    918Dividends and interest on capital payable (Note 17)
    
    
    3,693
    
    
    
    3,068Contingencies (Note 19)
    
    
    25
    
    
    
    72Advances from customers
    
    
    880
    
    
    
    609Employees post-retirement benefits obligation  Pension (Note 16)
    
    
    198
    
    
    
    206Other payables and accruals
    
    
    956
    
    
    
    77021,786
    
    
    
    18,161Long-term liabilitiesLong-term debt (Note 12)
    
    
    10,510
    
    
    
    11,503Project financings (Note 14)
    
    
    4,192
    
    
    
    3,629Capital lease obligations (Note 15)
    
    
    824
    
    
    
    1,015Employees post-retirement benefits obligation  Pension (Note 16)
    
    
    4,645
    
    
    
    3,627Employees post-retirement benefits obligation  Health care (Note 16)
    
    
    5,433
    
    
    
    3,004Deferred income taxes (Note 3)
    
    
    2,916
    
    
    
    2,166Provision for abandonment (Note 9 (d))
    
    
    1,473
    
    
    
    842Contingencies (Note 19)
    
    
    208
    
    
    
    238Deferred purchase incentive (Note 21)
    
    
    
    
    
    
    144Other liabilities
    
    
    428
    
    
    
    31830,629
    
    
    
    26,486Minority interest
    
    
    1,966
    
    
    
    1,074Shareholders equityShares authorized and issued (Note 17)Preferred share  2006  1,850,394,698 shares and 2005  1,849,478,028 shares
    
    
    7,718
    
    
    
    4,772Common share  2006 and 2005  2,536,673,672 shares
    
    
    10,959
    
    
    
    6,929Capital reserve  fiscal incentive (Note 17)
    
    
    174
    
    
    
    159Retained earningsAppropriated (Note 17)
    
    
    23,704
    
    
    
    20,095Unappropriated
    
    
    10,541
    
    
    
    11,968Accumulated other comprehensive incomeCumulative translation adjustments
    
    
    (6,202
    )
    
    
    (9,432
    )Postretirement benefit reserves adjustments net of tax  pension cost
    
    
    (2,052
    )
    
    
    (1,930
    )Postretirement benefit reserves adjustments net of tax- health care cost
    
    
    (987
    )
    
    
    Unrealized gains on available-for-sale securities, net of tax
    
    
    446
    
    
    
    356Unrecognized loss on cash flow hedge, net of tax
    
    
    (2
    )
    
    
    44,299
    
    
    
    32,917Total liabilities and shareholders equity
    
    
    98,680
    
    
    
    78,638
  F-4




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 
 Year ended December 31,2006
    
    2005
    
    2004Sales of products and services
    
    
    93,893
    
    
    
    74,065
    
    
    
    51,954Less:Value-added and other taxes on sales and services
    
    
    (17,906
    )
    
    
    (14,694
    )
    
    
    (10,906
    )Contribution of intervention in the economic domain
charge  CIDE
    
    
    (3,640
    )
    
    
    (3,047
    )
    
    
    (2,620
    )Net operating revenues
    
    
    72,347
    
    
    
    56,324
    
    
    
    38,428Cost of sales
    
    
    40,061
    
    
    
    29,828
    
    
    
    21,279Depreciation, depletion and amortization
    
    
    3,673
    
    
    
    2,926
    
    
    
    2,481Exploration, including exploratory dry holes
    
    
    934
    
    
    
    1,009
    
    
    
    613Selling, general and administrative expenses
    
    
    4,989
    
    
    
    4,474
    
    
    
    2,901Impairment (Note 9 (e))
    
    
    21
    
    
    
    156
    
    
    
    65Research and development expenses
    
    
    727
    
    
    
    399
    
    
    
    248Other operating expenses
    
    
    1,081
    
    
    
    1,453
    
    
    
    480Total costs and expenses
    
    
    51,486
    
    
    
    40,245
    
    
    
    28,067Equity in results of non-consolidated companies (Note 10)
    
    
    28
    
    
    
    139
    
    
    
    172Financial income (Note 13)
    
    
    1,165
    
    
    
    710
    
    
    
    956Financial expenses (Note 13)
    
    
    (1,340
    )
    
    
    (1,189
    )
    
    
    (1,733
    )Monetary and exchange variation on monetary assets and
liabilities, net (Note 13)
    
    
    75
    
    
    
    248
    
    
    
    450Employee benefit expense for non-active participants (Note 16)
    
    
    (1,017
    )
    
    
    (994
    )
    
    
    (650
    )Other taxes
    
    
    (594
    )
    
    
    (373
    )
    
    
    (440
    )Other expenses, net
    
    
    (17
    )
    
    
    (28
    )
    
    
    (181
    )(1,700
    )
    
    
    (1,487
    )
    
    
    (1,426
    )Income before income taxes, minority interest and extraordinary
item
    
    
    19,161
    
    
    
    14,592
    
    
    
    8,935
  F-5




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 Year ended December 31,2006
    
    2005
    
    2004Income tax expense (Note 3)Current
    
    
    (5,011
    )
    
    
    (4,223
    )
    
    
    (2,114
    )Deferred
    
    
    (680
    )
    
    
    (218
    )
    
    
    (117
    )(5,691
    )
    
    
    (4,441
    )
    
    
    (2,231
    )Minority interest in results of consolidated subsidiaries
    
    
    (644
    )
    
    
    35
    
    
    
    (514
    )Income before extraordinary item
    
    
    12,826
    
    
    
    10,186
    
    
    
    6,190Extraordinary gain net of tax (Note 10 (b))
    
    
    
    
    
    
    158
    
    
    
    Net income for the year
    
    
    12,826
    
    
    
    10,344
    
    
    
    6,190Net income applicable to each class of sharesCommon
    
    
    7,417
    
    
    
    5,982
    
    
    
    3,580Preferred
    
    
    5,409
    
    
    
    4,362
    
    
    
    2,610Net income for the year
    
    
    12,826
    
    
    
    10,344
    
    
    
    6,190Basic and diluted earnings per share (Note 17 (c))Common and preferredBefore effect of extraordinary item
    
    
    2.92
    
    
    
    2.32
    
    
    
    1.41
    *After effect of extraordinary item
    
    
    2.92
    
    
    
    2.36
    
    
    
    1.41
    *Basic and diluted earnings per ADSBefore effect of extraordinary item
    
    
    11.68
    
    
    
    9.28
    
    
    
    5.64
    *After effect of extraordinary item
    
    
    11.68
    
    
    
    9.44
    
    
    
    5.64
    *Weighted average number of shares outstandingCommon
    
    
    2,536,673,672
    
    
    
    2,536,673,672
    
    
    
    2,536,673,672
    *Preferred
    
    
    1,849,903,144
    
    
    
    1,849,478,028
    
    
    
    1,849,478,028
    *
 
 *
    
    Restated for the effect of the 4-1 stock split on September 1, 2005 (see Note 17).  F-6




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 
 Year ended December 31,2006
    
    2005
    
    2004Cash flows from operating activitiesNet income for the year
    
    
    12,826
    
    
    
    10,344
    
    
    
    6,190Adjustments to reconcile net income to net cash provided by
operating activitiesDepreciation, depletion and amortization
    
    
    3,673
    
    
    
    2,926
    
    
    
    2,481Dry hole costs
    
    
    493
    
    
    
    597
    
    
    
    520Loss on property, plant and equipment
    
    
    225
    
    
    
    292
    
    
    
    231Minority interest in results of consolidated subsidiaries
    
    
    644
    
    
    
    (35
    )
    
    
    514Deferred income taxes
    
    
    680
    
    
    
    218
    
    
    
    117Foreign exchange and monetary loss (gain)
    
    
    465
    
    
    
    140
    
    
    
    23Accretion expense  asset retirement obligation
    
    
    32
    
    
    
    51
    
    
    
    33Impairment of oil and gas properties
    
    
    21
    
    
    
    156
    
    
    
    65Provision for uncollectible accounts
    
    
    78
    
    
    
    118
    
    
    
    164Equity in the results of non-consolidated companies
    
    
    (28
    )
    
    
    (139
    )
    
    
    (172
    )Financial income (loss) on hedge operations
    
    
    434
    
    
    
    170
    
    
    
    (466
    )Others
    
    
    
    
    
    
    (8
    )
    
    
    23Decrease (increase) in operating assetsAccounts receivable
    
    
    308
    
    
    
    (1,510
    )
    
    
    (1,027
    )Petroleum and alcohol account
    
    
    (7
    )
    
    
    (9
    )
    
    
    (20
    )Interest receivable on government securities
    
    
    4
    
    
    
    3
    
    
    
    (38
    )Inventories
    
    
    (533
    )
    
    
    38
    
    
    
    (1,527
    )Advances to suppliers
    
    
    (552
    )
    
    
    (167
    )
    
    
    3Prepaid expenses
    
    
    32
    
    
    
    38
    
    
    
    (70
    )Recoverable taxes
    
    
    (552
    )
    
    
    (540
    )
    
    
    (578
    )Others
    
    
    261
    
    
    
    82
    
    
    
    173Increase (decrease) in operating liabilitiesTrade accounts payable
    
    
    1,385
    
    
    
    275
    
    
    
    838Payroll and related charges
    
    
    200
    
    
    
    215
    
    
    
    (20
    )Taxes payable, other than income taxes
    
    
    (133
    )
    
    
    566
    
    
    
    (65
    )Income taxes payable
    
    
    (190
    )
    
    
    (56
    )
    
    
    120Employees post-retirement benefits obligation  Pension
    
    
    489
    
    
    
    647
    
    
    
    353Employees post-retirement benefits obligation  Health care
    
    
    656
    
    
    
    557
    
    
    
    380Accrued interest
    
    
    21
    
    
    
    8
    
    
    
    18Contingencies
    
    
    (79
    )
    
    
    (65
    )
    
    
    81Provision for abandonment
    
    
    (57
    )
    
    
    325
    
    
    
    (171
    )Other liabilities
    
    
    281
    
    
    
    (122
    )
    
    
    (18
    )Net cash provided by operating activities
    
    
    21,077
    
    
    
    15,115
    
    
    
    8,155
  F-7




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 Year ended December 31,2006
    
    2005
    
    2004Cash flows from investing activitiesAdditions to property, plant and equipment
    
    
    (14,643
    )
    
    
    (10,365
    )
    
    
    (7,718
    )Investment in non-consolidated companies
    
    
    (187
    )
    
    
    (71
    )
    
    
    (142
    )Investment in marketable securities
    
    
    205
    
    
    
    169
    
    
    
    678Acquisition of Liquigás Distribuidora S.A.
    
    
    
    
    
    
    
    
    
    
    (511
    )Acquisition of USA trading and refining companies
    
    
    (416
    )
    
    
    
    
    
    
    Received cash related to investment in Nigeria
    
    
    199
    
    
    
    
    
    
    
    Dividends received from non-consolidated companies
    
    
    130
    
    
    
    60
    
    
    
    53Restricted deposits for legal proceedings
    
    
    31
    
    
    
    
    
    
    
    (103
    )Net cash used in investing activities
    
    
    (14,681
    )
    
    
    (10,207
    )
    
    
    (7,743
    )Cash flows from financing activitiesShort-term debt, net issuances and repayments
    
    
    228
    
    
    
    (1,058
    )
    
    
    (680
    )Proceeds from issuance and draw-down of long-term debt
    
    
    2,251
    
    
    
    1,697
    
    
    
    1,457Principal payments of long-term debt
    
    
    (2,555
    )
    
    
    (1,120
    )
    
    
    (1,160
    )Repurchase of securities  Notes (see Note 12(c))
    
    
    (1,046
    )
    
    
    
    
    
    
    Proceeds from project financings
    
    
    1,524
    
    
    
    1,492
    
    
    
    971Payments of project financings
    
    
    (1,209
    )
    
    
    (1,392
    )
    
    
    (652
    )Payment of capital lease obligations
    
    
    (334
    )
    
    
    (134
    )
    
    
    (331
    )Dividends paid to shareholders
    
    
    (3,144
    )
    
    
    (2,104
    )
    
    
    (1,785
    )Dividends paid to minority interests
    
    
    (69
    )
    
    
    (6
    )
    
    
    (24
    )Net cash provided by (used) in financing activities
    
    
    (4,354
    )
    
    
    (2,625
    )
    
    
    (2,204
    )Increase (decrease) in cash and cash equivalents
    
    
    2,042
    
    
    
    2,283
    
    
    
    (1,792
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    775
    
    
    
    732
    
    
    
    304Cash and cash equivalents at beginning of year
    
    
    9,871
    
    
    
    6,856
    
    
    
    8,344Cash and cash equivalents at end of year
    
    
    12,688
    
    
    
    9,871
    
    
    
    6,856
 Year ended December 31,2006
    
    2005
    
    2004Supplemental cash flow information:Cash paid during the year forInterest, net of amount capitalized
    
    
    877
    
    
    
    1,083
    
    
    
    995Income taxes
    
    
    4,686
    
    
    
    3,843
    
    
    
    2,054Withholding income tax on financial investments
    
    
    26
    
    
    
    29
    
    
    
    69Non-cash investing and financing transactions during the yearRecognition of asset retirement obligation  SFAS 143
    
    
    632
    
    
    
    356
    
    
    
    158Consummation of gas hedge asset with deferred purchase incentive
liability
    
    
    
    
    
    
    
    
    
    
    169
  F-8




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 
 Year ended December 31,2006
    
    2005
    
    2004Preferred sharesBalance at January 1,
    
    
    4,772
    
    
    
    4,772
    
    
    
    2,973Capital increase from undistributed earnings reserve (Note 17(a))
    
    
    2,939
    
    
    
    
    
    
    
    1,799Capital increase from issue of preferred shares (Note 17(b))
    
    
    7
    
    
    
    
    
    
    
    Balance at December 31,
    
    
    7,718
    
    
    
    4,772
    
    
    
    4,772Common sharesBalance at January 1,
    
    
    6,929
    
    
    
    6,929
    
    
    
    4,289Capital increase from undistributed earnings reserve (Note 17( c ))
    
    
    4,030
    
    
    
    
    
    
    
    2,640Balance at December 31,
    
    
    10,959
    
    
    
    6,929
    
    
    
    6,929Capital reserve  fiscal incentiveBalance at January 1,
    
    
    159
    
    
    
    134
    
    
    
    118Transfer from unappropriated retained earnings
    
    
    15
    
    
    
    25
    
    
    
    16Balance at December 31,
    
    
    174
    
    
    
    159
    
    
    
    134Accumulated other comprehensive lossCumulative translation adjustmentsBalance at January 1,
    
    
    (9,432
    )
    
    
    (12,539
    )
    
    
    (14,450
    )Change in the year
    
    
    3,230
    
    
    
    3,107
    
    
    
    1,911Balance at December 31,
    
    
    (6,202
    )
    
    
    (9,432
    )
    
    
    (12,539
    )Postretirements benefit reserves adjustments net of taxs   pension costBalance at January 1,
    
    
    (1,930
    )
    
    
    (1,975
    )
    
    
    (1,588
    )Accounting change  SFAS 158
    
    
    (131
    )
    
    
    
    
    
    
    Other decreases (increases)
    
    
    (38
    )
    
    
    68
    
    
    
    (586
    )Tax effect on above
    
    
    47
    
    
    
    (23
    )
    
    
    199Balance at December 31,
    
    
    (2,052
    )
    
    
    (1,930
    )
    
    
    (1,975
    )Postretirements benefit reserves adjustments net of tax  health care costBalance at January 1,
    
    
    
    
    
    
    
    
    
    
    Accounting change  SFAS 158
    
    
    (987
    )
    
    
    
    
    
    
    Balance at December 31,
    
    
    (987
    )
    
    
    
    
    
    
    Unrecognized gains (losses) on available-for-sale securities, net of taxBalance at January 1,
    
    
    356
    
    
    
    460
    
    
    
    157Unrealized gains (losses)
    
    
    137
    
    
    
    (158
    )
    
    
    459Tax effect on above
    
    
    (47
    )
    
    
    54
    
    
    
    (156
    )Balance at December 31,
    
    
    446
    
    
    
    356
    
    
    
    460
 
 F-9




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 Year ended December 31,2006
    
    2005
    
    2004Unrecognized loss on cash flow hedge, net of tax (Note 20 (e))Balance at January 1
    
    
    
    
    
    
    
    
    
    
    Unrealized losses
    
    
    (3
    )
    
    
    
    
    
    
    Tax effect on above
    
    
    1
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    Appropriated retained earningsLegal reserveBalance at January 1,
    
    
    2,225
    
    
    
    1,520
    
    
    
    1,089Transfer from unappropriated
retained earnings, net of gain or
loss on translation
    
    
    820
    
    
    
    705
    
    
    
    431Balance at December 31,
    
    
    3,045
    
    
    
    2,225
    
    
    
    1,520Undistributed earnings reserveBalance at January 1,
    
    
    17,439
    
    
    
    9,688
    
    
    
    9,372Capital increase
    
    
    (6,969
    )
    
    
    
    
    
    
    (4,439
    )Transfer from unappropriated
retained earnings, net of gain or
loss on translation
    
    
    9,604
    
    
    
    7,751
    
    
    
    4,755Balance at December 31,
    
    
    20,074
    
    
    
    17,439
    
    
    
    9,688Statutory reserveBalance at January 1,
    
    
    431
    
    
    
    318
    
    
    
    235Transfer from unappropriated retained earnings, net of gain or loss
on translation
    
    
    154
    
    
    
    113
    
    
    
    83Balance at December 31,
    
    
    585
    
    
    
    431
    
    
    
    318Total appropriated retained earnings
    
    
    23,704
    
    
    
    20,095
    
    
    
    11,526Unappropriated retained earningsBalance at January 1,
    
    
    11,968
    
    
    
    13,199
    
    
    
    14,141Net income for the year
    
    
    12,826
    
    
    
    10,344
    
    
    
    6,190Dividends (per share: 2006  US$0.83 to common and preferred share;
2005  US$0.68 to common and preferred shares; 2004  US$0.42 to
common and preferred shares)
    
    
    (3,660
    )
    
    
    (2,982
    )
    
    
    (1,847
    )Appropriation to fiscal incentive reserve
    
    
    (15
    )
    
    
    (24
    )
    
    
    (16
    )Appropriation to reserves
    
    
    (10,578
    )
    
    
    (8,569
    )
    
    
    (5,269
    )Balance at December 31,
    
    
    10,541
    
    
    
    11,968
    
    
    
    13,199Total shareholders equity
    
    
    44,299
    
    
    
    32,917
    
    
    
    22,506Comprehensive income (loss) is comprised as follows:Net income for the year
    
    
    12,826
    
    
    
    10,344
    
    
    
    6,190Cumulative translation adjustments
    
    
    3,230
    
    
    
    3,107
    
    
    
    1,911Postretirements benefit reserves adjustments net of tax   pension cost
    
    
    (25
    )
    
    
    45
    
    
    
    (387
    )Unrealized gains (losses) on available-for-sale securities
    
    
    90
    
    
    
    (104
    )
    
    
    303Unrecognized loss on cash flow hedge
    
    
    (2
    )
    
    
    
    
    
    
    Total comprehensive income
    
    
    16,119
    
    
    
    13,392
    
    
    
    8,017
  F-10




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 
 
 1.
    
    The Company and its OperationsPETRÓLEO BRASILEIRO S.A.  PETROBRAS is Brazils national oil company and, directly or through
its subsidiaries (collectively, Petrobras or the Company), is engaged in the exploration,
exploitation and production of oil from reservoir wells, shale and other rocks, and in the
refining, processing, trade and transport of oil and oil products, natural gas and other fluid
hydrocarbons, in addition to other energy related activities. Additionally, Petrobras may
promote the research, development, production, transport, distribution and marketing of all
sectors of energy, as well as other related or similar activities.Petrobras was incorporated under Law No. 2,004 on October 3, 1953. Until November of 1995,
Petrobras was the exclusive agent of the Brazilian Federal Government (the Federal
Government) for purposes of exploiting the Federal Governments constitutional and statutory
control over activities involving exploration, production, refining, distribution, import,
export, marketing and transportation of hydrocarbons and oil products in Brazil and its
continental waters. When adopted in 1953, the relevant provisions of the Brazilian
constitution and statutory law gave the Federal Government a monopoly in these areas subject
only to the right of companies then engaged in oil refining and the distribution of oil and
oil products to continue those activities in Brazil. Therefore, except for limited competition
from those companies in their grandfathered activities, Petrobras had a monopoly over its
businesses for approximately 42 years. As a result of a change in the Brazilian constitution
in November of 1995, and the subsequent and ongoing implementation of that change, Petrobras
has ceased to be the Federal Governments exclusive agent in Brazils hydrocarbons sector and
up to 2001 had been operating in an environment of gradual deregulation and increasing
competition.In accordance with Law No. 9,478 (Petroleum Law) and Law No. 9,990, dated August 6, 1997 and
July 21, 2000, respectively, the fuel market in Brazil was totally liberalized beginning
January 1, 2002 permitting other companies to produce and sell on the domestic market, and
also to import and export oil products.The Company also has oil and gas operations in international locations, with the most
significant international operations being in other Latin American countries.
 F-11




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 
 2.
    
    Summary of Significant Accounting PoliciesIn preparing these consolidated financial statements, the Company has followed accounting
policies that are in accordance with accounting principles generally accepted in the United
States of America (U.S. GAAP). The preparation of these financial statements requires the
use of estimates and assumptions that affect the assets, liabilities, revenues and expenses
reported in the financial statements, as well as amounts included in the notes thereto.Estimates adopted by management include: oil and gas reserves, pension and health care
liabilities, environmental obligations, depreciation, depletion and amortization, abandonment
costs, contingencies and income taxes. While the Company uses its best estimates and
judgments, actual results could differ from those estimates as future confirming events occur.Certain prior years amounts have been reclassified to conform to current year presentation
standards. These reclassifications had no impact on the Companys net income.
 (a)
    
    Basis of financial statements preparationThe accompanying consolidated financial statements of PETRÓLEO BRASILEIRO S.A. -
PETROBRAS (the Company) have been prepared in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP) and the rules and
regulations of the Securities and Exchange Commission (SEC). U.S. GAAP differs in certain
respects from Brazilian accounting practice as applied by Petrobras in its statutory
financial statements prepared in accordance with Brazilian Corporate Law and regulations
promulgated by the Brazilian Securities and Exchange Commission (CVM).
 F-12




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 2.
    
    Summary of Significant Accounting Policies(Continued)
 (a)
    
    Basis of financial statements preparation(Continued)The U.S. dollar amounts for the years presented have been translated from the Brazilian
Real amounts in accordance with Statement of Financial Accounting Standards SFAS No. 52 -
Foreign Currency Translation (SFAS 52) as applicable to entities operating in
non-hyperinflationary economies. Transactions occurring in foreign currencies are first
remeasured to the Brazilian Real and then translated to the U.S. dollar, with
remeasurement gains and losses being recognized in the statements of income. While
Petrobras has selected the U.S. Dollar as its reporting currency, the functional currency
of Petrobras and all Brazilian subsidiaries is the Brazilian Real. The functional
currency of PIFCo and certain of the special purpose companies is the U.S. dollar, and
the functional currency of Petrobras Energia Participaciones S.A.  PEPSA is the
Argentine Peso.The Company has translated all assets and liabilities into U.S. dollars at the current
exchange rate (R$2.138 and R$2.3407 to US$1.00 at December 31, 2006 and 2005,
respectively), and all accounts in the statements of income and cash flows (including
amounts relative to local currency indexation and exchange variances on assets and
liabilities denominated in foreign currency) at the average rates prevailing during the
year. The net translation gain in the amount of US$3,230 in 2006 (2005  US$3,107 and
2004  US$1,911) resulting from this remeasurement process was excluded from income and
presented as a cumulative translation adjustment (CTA) within Accumulated Other
Comprehensive Income in the consolidated statements of changes in shareholders equity.(b)
    
    Basis of consolidationThe consolidated financial statements include the accounts of the Company and all
majority-owned subsidiaries in which (a) the Company directly or indirectly has either a
majority of the equity of the subsidiary or otherwise has management control, or (b) the
Company has determined itself to be the primary beneficiary of a variable interest entity
in accordance with FIN 46(R).
 F-13




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 2.
    
    Summary of Significant Accounting Policies(Continued)
 (b)
    
    Basis of consolidation(Continued)The following majority-owned subsidiaries and variable interest entities are
consolidated:
 Subsidiary companies
    
    ActivityPetrobras Química S.A.  PETROQUISA and subsidiaries
    
    PetrochemicalPetrobras Distribuidora S.A.  BR and subsidiaries
    
    DistributionBRASPETRO Oil Services Company  BRASOIL and subsidiaries
    
    International operationsBRASPETRO Oil Company  BOC and subsidiaries
    
    International operationsPetrobras International BRASPETRO B.V.  PIB and subsidiaries (1)
    
    International operationsPetrobras Gás S.A.  GASPETRO and subsidiaries
    
    Gas transportationPetrobras International Finance Company  PIFCo and subsidiaries
    
    FinancingPetrobras Transporte S.A.  TRANSPETRO and subsidiaries
    
    TransportationDownstream Participações Ltda. and subsidiaries
    
    Refining and distributionPetrobras Netherlands BV  PNBV and subsidiaries
    
    Exploration and ProductionPetrobras Comercializadora de Energia Ltda.  PCEL
    
    EnergyPetrobras Negócios Eletrônicos S.A.  E-PETRO and subsidiaries
    
    Corporate5283 Participações Ltda.
    
    CorporateFundo de Investimento Imobiliário RB Logística  FII
    
    CorporateUTE Nova Piratininga Ltda.
    
    EnergyFAFEN Energia S.A.
    
    EnergyBaixada Santista Energia Ltda.
    
    EnergySociedade Fluminense de Energia Ltda.  SFE (2)
    
    EnergyTERMOAÇU S.A.
    
    EnergyTERMOBAHIA Ltda. (3)
    
    EnergyTERMOCEARÁ Ltda.
    
    EnergyTERMORIO S.A. (3)
    
    EnergyTERMOMACAÉ Ltda. (4)
    
    EnergyTERMOMACAÉ Comerc. de Energia Ltda. (4)
    
    EnergyIbiritermo S.A.
    
    Energy
 Special purpose entities consolidated according to FIN 46(R)
    
    ActivityAlbacora Japão Petróleo Ltda.
    
    Exploration and ProductionBarracuda & Caratinga Holding Company B.V.
    
    Exploration and ProductionCompanhia Petrolífera Marlim
    
    Exploration and ProductionNovaMarlim Petróleo S.A.
    
    Exploration and ProductionCayman Cabiunas Investments Co.
    
    Exploration and ProductionCia. de Desenv. e Modernização de Plantas Industriais  CDMPI
    
    Exploration and ProductionCompanhia Locadora de Equipamentos Petrolíferos S.A.  CLEP
    
    Exploration and ProductionPDET Off-shore S.A.
    
    Exploration and ProductionCompanhia de Recuperação Secundária S.A.
    
    Exploration and ProductionEVM Leasing Corporation
    
    Exploration and ProductionNova Transportadora do Nordeste S.A.
    
    TransportationNova Transportadora do Sudeste S.A.
    
    TransportationGasene Participações Ltda.
    
    TransportationManaus Geração Termelétrica Participações Ltda.
    
    EnergyBlade Securities Limited.
    
    CorporateCodajás Coari Participações Ltda.
    
    TransportationCharter Development  CDC (5)
    
    Exploration and ProductionCompanhia Mexilhão do Brasil (6)
    
    Exploration and Production
 F-14




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 2.
    
    Summary of Significant Accounting Policies(Continued)
 (b)
    
    Basis of consolidation(Continued)
 (1)
    
    Parent Company of Petrobras Energia S.A.  PEPSA others international
companies.(2)
    
    Consolidated according to ARB 51, commencing December 31, 2005.
Consolidated according to FIN 46(R), commencing December 31, 2003 until September
30, 2005. Formerly were not consolidated in Petrobras financial statements.(3)
    
    Consolidated according to ARB 51, commencing December 31, 2005.
Consolidated according to FIN 46(R), commencing December 31, 2003 until September
30, 2005. Formerly were accounted for as capital leases pursuant to SFAS 13.(4)
    
    Former Macaé Merchant. Consolidated according to ARB 51, commencing
December 31, 2005. Macaé Merchant formerly was consolidated according to FIN 46(R).
(see Note 18(l)).(5)
    
    Consolidated according to FIN 46(R). Company is a new SPE formed in 2005
to support project finance.(6)
    
    Consolidated according to FIN 46(R). Company is a new SPE formed in 2006
to support project finance.
 (c)
    
    Cash and cash equivalentsCash and cash equivalents consist of highly liquid investments that are readily
convertible into cash and have an original maturity of three months or less at date of
acquisition.(d)
    
    Marketable securitiesMarketable securities are accounted for under SFAS No. 115  Accounting for Certain
Investments in Debt and Equity Securities (SFAS 115) and have been classified by the
Company as available-for-sale, held-to-maturity or trading based upon intended strategies
with respect to such securities. The marketable securities classified as trading are
short term in nature as the investments are expected to be liquidated, sold, or used for
current cash requirements. The marketable securities classified as available-for-sale
are long term in nature as the investments are not expected to be sold or otherwise
liquidated in the next twelve months. Debt securities that management has the intent and
the ability to hold to maturity are classified as held-to-maturity.Trading securities are marked-to-market through current period earnings,
available-for-sale securities are marked-to-market through other comprehensive income,
and held-to-maturity securities are recorded at amortized cost.
 F-15




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 2.
    
    Summary of Significant Accounting Policies(Continued)
 (d)
    
    Marketable securities(Continued)The Company has certain available-for-sale investments in
companies with publicly traded shares. The Company also has available-for-sale and trading securities arising from its
consolidation of investments in an exclusive fund. There were no transfers between
categories of investments.(e)
    
    Accounts receivableAccounts receivable is stated at estimated realizable values. An allowance for doubtful
accounts is provided in an amount considered by management to be sufficient to meet
probable future losses related to uncollectible accounts.(f)
    
    InventoriesInventories are stated as follows:
 
    
    Raw materials are comprised principally of crude oil inventories, which
are stated at the lower of average cost or market value.
    
    Oil products and fuel alcohol are stated, respectively, at average
refining and purchase cost, adjusted when applicable to their realizable value.
    
    Materials and supplies are stated at average purchase cost, not
exceeding replacement value and imports in transit are stated at identified cost.
 (g)
    
    Investments in non-consolidated companiesThe Company uses the equity method of accounting for all long-term investments for which
it owns between 20% and 50% of the investees outstanding voting stock or has the ability
to exercise significant influence over operating and financial policies of the investee.
The equity method requires periodic adjustments to the investment account to recognize
the Companys proportionate share in the investees results, reduced by receipt of
investees dividends.
 F-16




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 2.
    
    Summary of Significant Accounting Policies(Continued)
 (h)
    
    Property, plant and equipment
 
    
    Costs incurred in oil and gas producing activitiesThe costs incurred in connection with the exploration, development and production of
oil and gas are recorded in accordance with the successful efforts method. This
method requires that costs the Company incurs in connection with the drilling of
developmental wells and facilities in proved reserve production areas and successful
exploratory wells be capitalized. In addition, costs the Company incurs in connection
with geological and geophysical activities are charged to the statements of income in
the year incurred, and the costs relating to exploratory dry wells on unproven reserve
properties are charged to the statements of income when determined as dry or
uneconomical.
    
    Capitalized costsThe capitalized costs are depreciated based on the unit-of-production method using
proved developed reserves. These reserves are estimated by the Companys geologists
and petroleum engineers in accordance with SEC standards and are reviewed annually, or
more frequently when there are indications of significant changes in the Companys
reserves.
    
    Property acquisition costsCosts of acquiring developed or undeveloped leaseholds including lease bonus,
brokerage, and other fees are capitalized. The costs of undeveloped properties that
become productive are transferred to a producing property account.
    
    Exploratory costsExploratory wells that find oil and gas in an area requiring a major capital
expenditure before production begins are evaluated annually to assure that commercial
quantities of reserves have been found or that additional exploration work is underway
or planned. Exploratory costs related to areas where commercial quantities have been
found are capitalized, and exploratory costs where additional work is underway or
planned continue to be capitalized pending final evaluation. Exploratory well costs
not meeting either of these tests are charged to expense. All other exploratory costs
(including geological and geophysical costs) are expensed as incurred. Exploratory dry
holes are expensed.
 F-17




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 2.
    
    Summary of Significant Accounting Policies(Continued)
 (h)
    
    Property, plant and equipment(Continued)
 
    
    Development costsCosts of development wells including dry holes, platforms, well equipment and
attendant production facilities are capitalized.
    
    Production costsCosts incurred with producing wells are recorded as inventories and are expensed when
the products are sold.
    
    Abandonment costsThe Company makes its annual reviews and revision of its estimated costs associated
with well abandonment and the demobilization of oil and gas production areas,
considering new information about date of expected abandonment and revised cost
estimates to abandon. The changes in estimated asset retirement obligation are
principally related to the commercial declaration of new fields, certain changes in
cost estimates, and revisions to abandonment information provided for non-operated
joint ventures.
    
    Depreciation, depletion and amortizationDepreciation, depletion and amortization of leasehold costs of producing properties
are recorded using the unit-of-production method applied on a field by field basis as
a ratio of proved developed reserves. Production platform under capital lease are
depreciated on a straight-line basis over the estimated useful lives of the platforms.
Depreciation, depletion and amortization of all other capitalized costs (both tangible
and intangible) of proved oil and gas producing properties is recorded using the
unit-of-production method applied on a field by field basis as a ratio of proved
developed reserves produced. The straight-line method is used for assets with a useful
life shorted than the life of the field.
 F-18




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 2.
    
    Summary of Significant Accounting Policies(Continued)
 (h)
    
    Property, plant and equipment(Continued)
 
    
    Depreciation, depletion and amortization (Continued)Other plant and equipment are depreciated on a straight-line basis over the following
estimated useful lives:
 Building and improvements
    
    25-40 yearsEquipment and other assets
    
    3-30 yearsPlatforms (1)
    
    15-25 yearsPipelines
    
    30 years
 
 (1)
    
    In 2006 the Company reviewed prospectively the estimation of
depreciation and changed the rate from 10-25 to years to 15-25 years and the
effect in the result was US$67. 
    
    ImpairmentIn accordance with SFAS No. 144  Impairment of Long-Lived Assets (SFAS 144),
management reviews long-lived assets, primarily property, plant and equipment to be
used in the business and capitalized costs relating to oil and gas producing
activities, whenever events or changes in circumstances indicate that the carrying
value of an asset or group of assets may not be recoverable on the bases of
undiscounted future cash flows. The reviews are carried out at the lowest level of
assets to which the Company is able to attribute identifiable future cash flows. The
net book value of the underlying assets is adjusted to their fair value using a
discounted future cash flows model, if the sum of the expected undiscounted future
cash flows is less than the book value.
    
    Maintenance and repairsThe actual costs of major maintenance, including turnarounds at refineries and
vessels, as well as other expenditures for maintenance and repairs, are expensed as
incurred.
 F-19




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 2.
    
    Summary of Significant Accounting Policies(Continued)
 (h)
    
    Property, plant and equipment(Continued)
 
    
    Capitalized interestInterest is capitalized in accordance with SFAS No. 34  Capitalization of Interest
Cost (SFAS 34). Interest is capitalized on specific projects when a construction
process involves considerable time and involves major capital expenditures.
Capitalized interest is allocated to property, plant and equipment and amortized over
the estimated useful lives or unit-of-production method of the related assets.
Interest is capitalized at the Companys weighted average cost of borrowings.
 (i)
    
    Revenues, costs and expensesRevenues from sales of crude oil and oil products, petrochemical products and others are
recognized on an accrual basis when the title is transferred to the customer. Revenues
from sales of natural gas are accounted for when the natural gas is transferred to the
customer. Subsequent adjustments to revenues based on production sharing agreements or
volumetric delivery differences are not significant. Costs and expenses are accounted for
on an accrual basis.(j)
    
    Income taxesThe Company accounts for income taxes in accordance with SFAS No. 109  Accounting for
Income Taxes (SFAS 109), which requires an asset and liability approach to recording
current and deferred taxes. The effects of differences between the tax bases of assets
and liabilities and the amounts recognized in the financial statements have been treated
as temporary differences for the purpose of recording deferred income taxes.The Company records the tax benefit of all net operating losses as a deferred tax asset
and recognizes a valuation allowance for any part of this benefit which management
believes will not be recovered against future taxable income using a more likely than
not criterion.
 F-20




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 2.
    
    Summary of Significant Accounting Policies(Continued)
 (k)
    
    Employees post-retirement benefitsThe Company sponsors a contributory defined-benefit pension plan covering substantially
all of its employees, which is accounted for by the Company in accordance with SFAS No.
87  Employers Accounting for Pensions (SFAS 87) and SFAS 158  Employers Accounting
for Defined Benefit Pension and Other Postretirement Plans  an Amendment of FASB
Statements No. 87, 88, 106 and 132(R) (SFAS 158). Disclosures related to the plan are
according to FASB Statement No. 132-R, Employers Disclosures about Pensions and Other
Post-retirement Benefits (SFAS No. 132-R) (see Note 2 (r)).In addition, the Company provides certain health care benefits for retired employees and
their dependents. The cost of such benefits is recognized in accordance with SFAS No. 106
  Post-retirement Benefits Other Than Pensions (SFAS 106) and SFAS 158.The Company also contributes to the Brazilian pension and government sponsored pensions
of international subsidiaries, social security and redundancy plans at rates based on
payroll, and such contributions are expensed as incurred. Further indemnities may be
payable upon involuntary severance of employees but, based on current operating plans,
management does not believe that any amounts payable under this plan will be significant.(l)
    
    Environmental and remediation costsEnvironmental and remediation costs relating to current operations are expensed or
capitalized, as appropriate, depending on whether such costs are expected to provide
future economic benefits. Liabilities are recognized when the costs are considered
probable and can be reasonably estimated.(m)
    
    Compensated absencesThe liability for future compensation of employees for vacations is accrued as earned.
 F-21




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 2.
    
    Summary of Significant Accounting Policies(Continued)
 (n)
    
    Earnings per shareEarnings per share are computed using the two-class method, which is an earnings
allocation formula that determines earnings per share for both preferred shares, which
are participating securities and common shares. The preferred shares participate in
dividends and undistributed earnings with the common shares at a predetermined formula.
Such formula allocates the net income, as if all of the net income for each year had been
distributed, first to the preferred shares in an amount equal to the preferred shares
priority minimum annual dividend of the higher of 3% of their shareholders equity or 5%
of their paid-in capital as stated in the statutory accounting records, then to common
shares in an amount equal to the preferred shares priority dividend on a per share basis
and any remaining net income is allocated equally to the common and preferred shares. As
a result of a 2005 stock split, each American Depositary Share (ADS) for common shares
represents four shares of the Companys common shares or four shares of the Companys
preferred shares.(o)
    
    Research and development costsResearch and development costs are charged to expense when incurred.(p)
    
    Accounting for derivatives and hedging activitiesThe Company applies SFAS No. 133  Accounting for Derivative Instruments and Hedging
Activities, together with its amendments and interpretations, referred to collectively
herein as SFAS 133. SFAS 133 requires that all derivative instruments be recorded in
the balance sheet of the Company as either an asset or a liability and measured at fair
value. SFAS 133 requires that changes in the derivatives fair value be recognized in the
income statement unless specific hedge accounting criteria are met; and the Company
designates. For derivatives designated as accounting hedges, fair value adjustments are
recorded either in the income statements or Accumulated Other Comprehensive Income, a
component of shareholders equity, depending upon the type of accounting hedge and the
degree of hedge effectiveness.
 F-22




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 2.
    
    Summary of Significant Accounting Policies(Continued)
 (p)
    
    Accounting for derivatives and hedging activities(Continued)The Company uses derivative financial instruments for economic hedging purposes to
mitigate the risk of unfavorable price movements for crude oil purchases. These
instruments are marked-to-market with the associated gains or losses recognized as
Financial Income or Financial Expense.The Company may also use derivative financial instruments for economic hedging purposes
to mitigate the risk of unfavorable exchange-rate movements on its foreign
currency-denominated funding. Gains and losses from changes in the fair value of these
contracts are recognized as Financial Income or Financial Expense.For cash flow hedges, the gains and losses associated with the derivative instruments are
deferred and recorded in Accumulated Other Comprehensive Income until such time as the
hedged transaction impacts earnings, with the exception of any hedge ineffectiveness;
which is recorded directly in earnings.(q)
    
    Recently issued accounting pronouncements
 
    
    FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes,
An Interpretation of FASB Statement 109 (FIN 48)
 In July 2006, the FASB issued FIN 48, that clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial statements and prescribes a
threshold of more-likely-than-not for recognition of tax benefits of uncertain tax
positions taken or expected to be taken in a tax return. FIN 48 also provides related
guidance on measurement, derecognition, classification, interest and penalties, and
disclosure. The provisions of FIN 48 will be effective for the Company on January 1,
2007, with any cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. The Company is in the process of assessing the
impact of adopting FIN 48 on its results of operations and financial position. The
Company does not expect that the adoption of FIN 48 will have a material effect on the
Companys financial position or results from operations.
 F-23




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 2.
    
    Summary of Significant Accounting Policies(Continued)
 (q)
    
    Recently issued accounting pronouncements(Continued)
 
    
    FASB Statement No. 157, Fair Value Measurements (SFAS 157)In September 2006, the FASB issued SFAS 157, which will become effective for the
Company on January 1, 2008. This standard defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements. SFAS
157 does not require any new fair value measurements but would apply to assets and
liabilities that are required to be recorded at fair value under other accounting
standards. The impact, if any, to the Company from the adoption of SFAS 157 in 2008
will depend on the Companys assets and liabilities at that time that are required to
be measured at fair value.
    
    FASB Statement 159 The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS 159In February 2007, the FASB issued SFAS 159 The Fair Value Option for Financial Assets
and Financial Liabilities. SFAS 159, that permits the measurement of certain
financial instruments at fair value. Entities may choose to measure eligible items at
fair value at specified election dates, reporting unrealized gains and losses on such
items at each subsequent reporting period. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently evaluating the potential
impact of the fair value option but it is not expected to have a significant effect on
reported financial position or statements of income.
 (r)
    
    Recently adopted accounting pronouncements
 
    
    FASB Statement 158  Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans  an Amendment of FASB Statements No. 87, 88, 106 and
132(R) (SFAS 158)In September 2006, the FASB issued SFAS 158, which became effective for the Company on
December 31, 2006. See Note 16(d).
 F-24




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 
 3.
    
    Income TaxesIncome taxes in Brazil comprise federal income tax and social contribution, which is an
additional federal income tax. The statutory enacted tax rates for income tax and social
contribution have been 25% and 9%, respectively for the years ended December 31, 2006, 2005 and
2004.The Companys taxable income is substantially generated in Brazil and is therefore subject to
the Brazilian statutory tax rate. The following table reconciles the tax calculated based upon
statutory tax rates to the income tax expense recorded in these consolidated financial
statements.
 Year ended December 31,2006
    
    2005
    
    2004Income before income taxes, minority interest and
extraordinary item:Brazil
    
    
    18,589
    
    
    
    13,739
    
    
    
    8,168International
    
    
    572
    
    
    
    853
    
    
    
    76719,161
    
    
    
    14,592
    
    
    
    8,935Tax expense at statutory rates
    
    
    (6,515
    )
    
    
    (4,961
    )
    
    
    (3,038
    )Adjustments to derive effective tax rate:Non-deductible post-retirement health-benefits
    
    
    (277
    )
    
    
    (244
    )
    
    
    (157
    )Change in valuation allowance
    
    
    101
    
    
    
    76
    
    
    
    159Tax benefit on interest on shareholders equity
    
    
    994
    
    
    
    791
    
    
    
    650Others
    
    
    6
    
    
    
    (103
    )
    
    
    155Income tax expense per consolidated statement of income
    
    
    (5,691
    )
    
    
    (4,441
    )
    
    
    (2,231
    )
 F-25




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 3.
    
    Income Taxes(Continued)The following table shows a breakdown between domestic and international income tax and social
contribution expense (benefit) recorded in these consolidated financial statements:
 Year ended December 31,2006
    
    2005
    
    2004Income tax expense per consolidated statement of income:BrazilCurrent
    
    
    (4,750
    )
    
    
    (3,973
    )
    
    
    (1,922
    )Deferred
    
    
    (686
    )
    
    
    (179
    )
    
    
    (258
    )(5,436
    )
    
    
    (4,152
    )
    
    
    (2,180
    )InternationalCurrent
    
    
    (261
    )
    
    
    (250
    )
    
    
    (192
    )Deferred
    
    
    6
    
    
    
    (39
    )
    
    
    141(255
    )
    
    
    (289
    )
    
    
    (51
    )(5,691
    )
    
    
    (4,441
    )
    
    
    (2,231
    )
   F-26




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 3.
    
    Income Taxes(Continued)Annually PEPSAs management evaluates the recovery of tax loss carryforwards taking into
consideration, among other elements, the projected business profits, tax planning strategies,
temporariness of future taxable income, considering the term of expiration of the loss
carryforwards, the future reversions of the existing temporary differences and the recent-year
tax history. All the evidence available both positive and negative is duly weighted and
considered in the analysis.At December 31, 2006 and 2005, the PEPSAs management partially reversed the tax loss
carryforward allowance booked in prior years recognizing a tax benefit of US$17 and US$63,
respectively. PEPSAs management will continue analyzing the feasibility of recovering the tax
loss carryforwards for which the allowance was recognized.The deferred tax amounts recorded are principally generated through transactions occurring in
Brazil and there are no significant deferred tax amounts from international locations. There
is no netting of taxes between international jurisdictions.The major components of the deferred income tax accounts in the consolidated balance sheet are
as follows:
 As of December 31,2006
    
    2005Current assetsInventories
    
    
    101
    
    
    
    (12
    )Lease obligations
    
    
    53
    
    
    
    58Provision for profit sharing
    
    
    159
    
    
    
    131Employees post-retirement benefits
    
    
    65
    
    
    
    86Other temporary differences
    
    
    295
    
    
    
    219673
    
    
    
    482Current liabilitiesOther temporary differences
    
    
    (28
    )
    
    
    (9
    )(28
    )
    
    
    (9
    )Net current deferred tax assets
    
    
    645
    
    
    
    473Current deferred tax liabilities
    
    
    (8
    )
    
    
    (6
    )Current deferred tax assets
    
    
    653
    
    
    
    479
 F-27




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 3.
    
    Income Taxes(Continued)
 As of December 31,2006
    
    2005Non-current assetsEmployees post-retirement benefits, net of Accumulated
postretirements benefit reserves adjustments
    
    
    2,101
    
    
    
    1,291Interest on shareholders equity
    
    
    
    
    
    
    159Deferred charges
    
    
    159
    
    
    
    124Tax loss carryforwards
    
    
    514
    
    
    
    592Investments
    
    
    53
    
    
    
    102Lease obligations
    
    
    51
    
    
    
    61Inventories revaluation
    
    
    37
    
    
    
    37Derivatives
    
    
    11
    
    
    
    60Allowance for doubtful accounts
    
    
    47
    
    
    
    47Provision for contingencies
    
    
    67
    
    
    
    28Project financings
    
    
    95
    
    
    
    64Other temporary differences, not significant individually
    
    
    328
    
    
    
    110Valuation allowance
    
    
    (426
    )
    
    
    (524
    )3,037
    
    
    
    2,151Non-current liabilitiesCapitalized exploration and development costs
    
    
    (4,041
    )
    
    
    (2,995
    )Property, plant and equipment
    
    
    (1,140
    )
    
    
    (584
    )Hedge
    
    
    (21
    )
    
    
    (199
    )Investments
    
    
    (88
    )
    
    
    (81
    )Tax effect on unrealized loss on investments available-for-sale
    
    
    (186
    )
    
    
    (168
    )Other temporary differences, not significant individually
    
    
    (416
    )
    
    
    (283
    )(5,892
    )
    
    
    (4,310
    )Net non-current deferred tax liabilities
    
    
    (2,855
    )
    
    
    (2,159
    )Non-current deferred tax assets
    
    
    61
    
    
    
    7Non-current deferred tax liabilities
    
    
    (2,916
    )
    
    
    (2,166
    )Net deferred tax liabilities
    
    
    (2,210
    )
    
    
    (1,686
    )
 F-28




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 3.
    
    Income Taxes(Continued)Although realization of net deferred tax assets is not assured, management believes that,
except where a valuation allowance has been provided, such realization is more likely than not
to occur. The amount of the deferred tax asset considered realizable could, however, be reduced
if estimates of future taxable income are reduced. Tax loss carryforwards generated in Brazil
do not expire and are available for offset against future taxable income, limited to 30% of
taxable income in any individual year. PEPSA tax loss carryfoward principally expire in years
beyond 2007, and may be offset against future taxable income without limitation. The following
presents the changes in the valuation allowance for the years ended December 31, 2006, 2005 and
2004:
 Year ended December 31,2006
    
    2005
    
    2004Balance at January 1,
    
    
    (524
    )
    
    
    (596
    )
    
    
    (749
    )Reductions
    
    
    101
    
    
    
    76
    
    
    
    159Cumulative translation adjustments
    
    
    (3
    )
    
    
    (4
    )
    
    
    (6
    )Balance at December 31,
    
    
    (426
    )
    
    
    (524
    )
    
    
    (596
    )
 The Company has not recognized a deferred tax liability of approximately US$190 for the
undistributed earnings of its foreign operations that arose in 2006 and prior years as the
Company considers these earnings to be indefinitely reinvested. A deferred tax liability will
be recognized when the Company no longer demonstrates that it plans to permanently reinvest
the undistributed earnings. As of December 31, 2006 the undistributed earnings of these
subsidiaries were approximately US$560.
 
 4.
    
    Cash and Cash Equivalents
 As of December 31,2006
    
    2005Cash
    
    
    1,692
    
    
    
    1,539Investments  Brazilian reais(1)
    
    
    4,072
    
    
    
    6,280Investments  U.S. dollars (2)
    
    
    6,924
    
    
    
    2,05212,688
    
    
    
    9,871
 
 (1)
    
    Comprised primarily federal public bonds with immediate liquidity and the securities are
tied to the American dollar quotation or to the remuneration of the Interbank Deposits  DI.(2)
    
    Comprised primarily by Time Deposit and securities with fixed income. F-29




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 
 5.      Marketable Securities
 As of December 31,2006
    
    2005Marketable securities classification:Available-for-sale
    
    
    185
    
    
    
    163Trading
    
    
    112
    
    
    
    361Held-to-maturity
    
    
    143
    
    
    
    61440
    
    
    
    585Less: Current portion of marketable securities
    
    
    (346
    )
    
    
    (456
    )Long-term portion of marketable securities
    
    
    94
    
    
    
    129
 Marketable securities are comprised primarily of amounts the Company has invested in an
exclusive fund, excluding the Companys own securities, which are considered repurchased. The
exclusive fund is consolidated, and the equity and debt securities within the portfolio are
classified as trading or available-for-sale under SFAS 115 based on managements intent.
Trading securities are principally Brazilian bonds, which are bought and sold frequently with
the objective of making short-term-profits on market price changes. Available-for-sale
securities are principally, LCN (Credit Liquid Note) agreements and certain other bonds for
which the Company does not have current expectations to trade actively. Trading securities are
presented as current assets, as they are expected to be used in the near term for cash funding
requirements. Available-for-sale securities are presented as other assets, as they are not
expected to be sold or liquidated within the next twelve months.The Company holds National Treasury Bonds Series P (NTN-P) issued by the Federal Government
which are accounted for as available-for-sale securities in accordance with SFAS 115.
 F-30




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 
 6.
    
    Accounts Receivable, NetAccounts receivable, net consisted of the following:
 As of December 31,2006
    
    2005Trade
    
    
    7,944
    
    
    
    7,889Less: Allowance for uncollectible accounts
    
    
    (1,120
    )
    
    
    (1,063
    )6,824
    
    
    
    6,826Less: Long-term accounts receivable, net
    
    
    (513
    )
    
    
    (642
    )Current accounts receivable, net
    
    
    6,311
    
    
    
    6,184
 As of December 31,2006
    
    2005
    
    2004Allowance for uncollectible accounts
Balance at January 1,
    
    
    (1,063
    )
    
    
    (904
    )
    
    
    (780
    )Additions
    
    
    (78
    )
    
    
    (118
    )
    
    
    (164
    )Write-offs
    
    
    60
    
    
    
    10
    
    
    
    66Cumulative translation adjustments
    
    
    (39
    )
    
    
    (51
    )
    
    
    (26
    )Balance at December 31,
    
    
    (1,120
    )
    
    
    (1,063
    )
    
    
    (904
    )Allowance on short-term receivables
    
    
    (584
    )
    
    
    (196
    )
    
    
    (150
    )Allowance on long-term receivables
    
    
    (536
    )
    
    
    (867
    )
    
    
    (754
    )
 F-31




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 6.
    
    Accounts Receivable, Net(Continued)At December 31, 2006 and 2005, long-term receivables include US$608 and US$599 respectively
relating to payments made by the Company to suppliers and subcontractors on behalf of certain
contractors. These contractors had been hired by the subsidiary BRASOIL for the
construction/conversion of vessels into FPSO (Floating Production, Storage and Offloading)
and FSO (Floating, Storage and Offloading) and failed to make the payments to their suppliers
and subcontractors. The Company made the payments to avoid further delays in the
construction/conversion of the vessels and consequent losses to BRASOIL.Based on consultations with legal advisers, the Companys management has determined that these
payments can be reimbursed, since they represent BRASOILs rights with respect to the
contractors, for which reason judicial action was filed with international courts to seek
reimbursement. However, as a result of the uncertainties related to the realization of such
receivables, the Company recorded an allowance for all credits not backed by collateral. Such
allowance amounted to US$536 and US$527 as of December 31, 2006 and 2005, respectively.
 
 7.
    
    Inventories
 As of December 31,2006
    
    2005ProductsOil products
    
    
    2,220
    
    
    
    2,020Fuel alcohol
    
    
    160
    
    
    
    662,380
    
    
    
    2,086Raw materials, mainly crude oil
    
    
    2,989
    
    
    
    2,266Materials and supplies
    
    
    1,274
    
    
    
    1,047Others
    
    
    140
    
    
    
    1426,783
    
    
    
    5,541Current inventories
    
    
    6,573
    
    
    
    5,305Long-term inventories
    
    
    210
    
    
    
    236
 F-32




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 
 8.
    
    Recoverable TaxesRecoverable taxes consisted of the following:
 As of December 31,2006
    
    2005Local:Domestic value-added tax (ICMS) (1)
    
    
    2,829
    
    
    
    1,830Income tax and social contribution
    
    
    357
    
    
    
    275PASEP/COFINS (2)
    
    
    291
    
    
    
    157Foreign value-added tax (IVA)
    
    
    104
    
    
    
    123Other recoverable taxes
    
    
    304
    
    
    
    3413,885
    
    
    
    2,726Less: Long-term recoverable taxes
    
    
    (1,292
    )
    
    
    (639
    )Current recoverable taxes
    
    
    2,593
    
    
    
    2,087
 
 (1)
    
    Domestic value-added sales tax are composed of credits generated by commercial
operations and by the acquisition of property, plant and equipment and can be offset with
taxes of the same nature.(2)
    
    PASEP and COFINS are social security contributions payable in respect of sales of
products and services and financial revenues.These contributions and the domestic value-added tax (ICMS) are not cumulative and
amounts paid related to these taxes in the acquisition of products and/or services can
be offset when these products and services are sold, which means a tax credit is
generated when the purchase is made and such credit is then offset upon sale to final
customer.The income tax and social contribution recoverable will be offset against future taxable
income.Petrobras plans to fully recover these taxes, and as such, no allowance has been
provided. F-33




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 
 9.
    
    Property, Plant and Equipment, Net
 (a)
    
    Composition of balanceProperty, plant and equipment, at cost, are summarized as follows:
 As of December 31,2006
    
    2005Accumulated
    
    
    
    
    
    
    
    
    
    AccumulatedCost
    
    depreciation
    
    Net
    
    Cost
    
    depreciation
    
    NetBuildings and improvements
    
    
    2,422
    
    
    
    (935
    )
    
    
    1,487
    
    
    
    1,696
    
    
    
    (755
    )
    
    
    941Oil and gas assets
    
    
    26,274
    
    
    
    (10,605
    )
    
    
    15,669
    
    
    
    21,500
    
    
    
    (9,589
    )
    
    
    11,911Equipment and other assets
    
    
    34,654
    
    
    
    (16,996
    )
    
    
    17,658
    
    
    
    28,359
    
    
    
    (14,902
    )
    
    
    13,457Capital lease  platforms and vessels
    
    
    2,660
    
    
    
    (1,322
    )
    
    
    1,338
    
    
    
    2,651
    
    
    
    (1,233
    )
    
    
    1,418Rights and concessions
    
    
    1,828
    
    
    
    (336
    )
    
    
    1,492
    
    
    
    1,492
    
    
    
    (210
    )
    
    
    1,282Land
    
    
    262
    
    
    
    
    
    
    
    262
    
    
    
    226
    
    
    
    
    
    
    
    226Materials
    
    
    1,253
    
    
    
    
    
    
    
    1,253
    
    
    
    820
    
    
    
    
    
    
    
    820Expansion projects -Construction and installations in progress:Exploration and production
    
    
    10,731
    
    
    
    
    
    
    
    10,731
    
    
    
    9,553
    
    
    
    
    
    
    
    9,553Supply
    
    
    5,152
    
    
    
    
    
    
    
    5,152
    
    
    
    4,546
    
    
    
    
    
    
    
    4,546Gas and energy
    
    
    3,231
    
    
    
    
    
    
    
    3,231
    
    
    
    1,356
    
    
    
    
    
    
    
    1,356Distribution
    
    
    195
    
    
    
    
    
    
    
    195
    
    
    
    185
    
    
    
    
    
    
    
    185International
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    Corporate
    
    
    424
    
    
    
    
    
    
    
    424
    
    
    
    225
    
    
    
    
    
    
    
    22589,091
    
    
    
    (30,194
    )
    
    
    58,897
    
    
    
    72,609
    
    
    
    (26,689
    )
    
    
    45,920
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 9.
    
    Property, Plant and Equipment, Net(Continued)
 (b)
    
    New Hydrocarbons Law of BoliviaThe new Bolivian Hydrocarbons Law 3,058 has been in force since May 19, 2005. This law revokes
the former Hydrocarbons Law 1,689 dated April 30, 1996.The new law establishes, among other matters, a higher tax burden for companies of the sector,
through royalties of 18% and a direct tax on hydrocarbons (IDH) of 32%, to be applied directly
on 100% of the production, on top of taxes in force by operation of Law No. 843. In addition,
the new legislation determines substitution of shared risk contracts for new contracts
observing the models established in the Law, and introduces changes in the oil products
distribution activity.On May 20, 2005, contracts were entered into for association among Yacimientos Petrolíferos
Fiscales Bolivianos  YPFB (Bolivian state-owned company) and fuel distribution companies to
extend the term of Distributors operations up until YPFB accumulates sufficient funds to
develop this segment all over the Bolivian territory. On June 30, 2006 the contracts term
expired through which the major distribution companies distributed hydrocarbons in Bolivia.
YPFB took over national distribution as from that date. The company Petrobras Bolívia
Distribución, which allowed the ownership of a major part of this business, is still operating
in the sector through the service stations it owns.As of May 1, 2006, Supreme Decree 28,701 was enacted in Bolivia, through which, the natural
hydrocarbon resources were nationalized. As a consequence, the companies that are currently
engaged in gas and petroleum production activities, will have to transfer the ownership of all
hydrocarbon production to Yacimientos Petrolíferos Fiscales Bolivianos (YPFB). A transition
period has also been established of 180 days as from the date the aforementioned decree is
enacted, in which companies that are currently operating should execute the new contracts
established by YPFB. Companies which have not executed these contracts by the end of this term
may be unable to continue operating in the country.
 F-35




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 9.
    
    Property, Plant and Equipment, Net(Continued)
 (b)
    
    New Hydrocarbons Law of Bolivia(Continued)The aforementioned Decree establishes that fields with a certified average natural gas
production of over 100 million cubic feet per day in 2005, as is the case with the San Alberto
and San Antonio fields where the Company operates, an additional amount will be paid to YPFB of
32% over of the production value, rising to a total of 82% of the Bolivian governments
interest. The Bolivian Ministry of Hydrocarbons and Energy shall determine on a case-by-case
basis via auditing the final share to be paid to the Companies in the contract to be executed.
Up to December 31, 2006 the Company had recorded a provision to pay the additional share to
YPFB of 32% on the hydrocarbon production, to an amount equal to US$99. The regulatory decrees
which among other matters shall establish the means for paying this share have not yet been
issued.Furthermore, according to this decree the State is nationalizing the shares required for YPFB
to control, with a minimum of 50% plus one share, Petrobras Bolívia Refinación S.A.  PBR, in
which Petrobras has an indirect interest of 100% (Petrobras International Braspetro B.V.  51%
and Petrobras Energia S.A.  49%). The equity interest will be transferred to YPFB when the
parties reach an agreement about the amount of economic compensation to be paid by YPFB to
Petrobras, besides the former compliance of some legal and statutory assumptions. The parties
have not yet commenced the assessment process.On October 28, 2006 Petrobras Bolívia and its partners executed operating contracts with YPFB
for San Alberto and San Antonio fields. These contracts establish that the revenues,
royalties, profit shares, IDH, shipment and compression will be absorbed by YPFB, and the cost
of production and investments made by the companies should be reimbursed as remuneration to the
owner. Any difference which may exist will be distributed between the Bolivian state company
and the companies, at percentages varying according to production and the investment recovery
factor. These contracts will come into force as from approval by the Bolivian National Congress
and their official registration.In a document attached to contracts entitled Investments made, Petrobras and its partners
state the investment amounts net of amortization, which will be reviewed taking into account
the results of the audits contracted by the Hydrocarbons Ministry, that are currently in
progress. To date, the Company is not aware of the result of these audits and the possible
effects on its investments.
 F-36




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 9.
    
    Property, Plant and Equipment, Net(Continued)
 (b)
    
    New Hydrocarbons Law of Bolivia(Continued)Supreme Decree 28,900-A issued October 28, 2006 established that the companies will continue
operating in Bolivia in accordance with Supreme Decree 28,701, including article 3, paragraph 1
which establishes the additional payment of 32% for the San Alberto and San Antonio fields
until the aforementioned contracts have been registered.On November 28, 2006 the National Congress approved the 44 oil contracts (exploration and
production), which include the contracts that Petrobras participates in/or operates, which
mainly include the San Alberto and San Antonio fields. On January 11, 2007 Laws were published
by which the Bolivian Legislative Branch approved these contracts, including those referring to
the San Alberto and San Antonio fields. To date the contracts have not been registered at a
registry office, despite the fact there is no justifiable reason for the delay. The contracts
will come into force after they have been effectively registered.PBR and PEBIS continue their normal operations under the control and management of the Company,
and hence their consolidated financial statements are still being included in the Companys
consolidated financial statements. The consolidated total assets balance of PEBIS as of
December 31, 2006 amounted to US$1,173.(c)
    
    Review of operating agreements in VenezuelaIn March of 2006, PESA, through its controlled and associated companies in Venezuela, entered
into Memoranda of Understanding (MOU) with PDVSA and Corporación Venezolana del Petróleo S.A.
(CVP) in order to finalize the migration of operational agreements to mixed-capital companies.
The MOUs establish that the interest of private partners in mixed-capital corporate companies
should be limited to 40%, while the Venezuelan government participates with the remaining 60%.
Thus, PESAs indirect interest in the fields of Oritupano Leona, La Concepción, Acema and Mata
Areas was defined as being of 22%, 36%, 34.5% and 34.5%, respectively.Pursuant to the terms of the MOU, CVP shall acknowledge dividable and transferable credits in
favor of the private companies with interest in the mixed-capital companies, which shall not be
subject to interest and may be used in payment of the acquisition bonus of new areas for
petroleum exploration and production activities or for a license to engage in gas exploration
and production.
 F-37




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 9.
    
    Property, Plant and Equipment, Net(Continued)
 (c)
    
    Review of operating agreements in Venezuela(Continued)During the transition period and until the mixed capital companies are in operation, the
consortias operations have been conducted and supported by Petrobras Energia Venezuela under
the supervision of an integrated operating committee, on which PDVSA representatives shall form
the majority.Due to the change in structure of shareholding interest in the mixed capital companies, from
April 1, 2006 the Company no longer consolidates the assets, liabilities and results of the
aforesaid operations in its consolidated statements, but presents them as equity investments in
non-consolidated companies and other investments, which increased the balance of such account
by US$878.(d)
    
    New Hydrocarbons Law in EcuadorIn April 2006, the Law which amended the Hydrocarbons Law (Ley de Hidrocarburos) was enacted in
Ecuador, which establishes the Government shall hold a minimum share of 50% in the
extraordinary revenues, generated by increases to the sale price of Ecuadorian oil (average
monthly effective FOB sale price) as compared to the monthly average oil sale price established
in the contract, stated in the currency of the month of settlement. In July, 2006 the
regulations of said Law were published which Ecuadortlc S.A., a subsidiary of PESA, and
Petroecuador interpreted differently. The application of this law is being disputed by
Ecuadortlc and Petroecuador.(e)
    
    SFAS No. 143  Accounting for asset retirement obligationsSince January 1, 2003, Petrobras adopted SFAS No. 143  Accounting for Asset Retirement
Obligations (SFAS 143). Under SFAS 143, the fair value of asset retirement obligations are
recorded as liabilities on a discounted basis when they are incurred, which is typically at the
time the related assets are installed. Amounts recorded for the related assets will be
increased by the amount of these obligations and depreciated over the related useful lives of
such assets. Over time, the amounts recognized as liabilities will be accreted for the change
in their present value until the related assets are retired or sold.Measurement of asset retirement obligations is based on currently enacted laws and regulations,
existing technology and site-specific costs. There are no assets legally restricted to be used
in the settlement of asset retirement obligations.
 F-38




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 9.
    
    Property, Plant and Equipment, Net(Continued)
 (e)
    
    SFAS No. 143  Accounting for asset retirement obligations(Continued)A summary of the annual changes in the abandonment provision is presented as follows:
 LiabilitiesBalance as of December 31, 2004
    
    
    403Depreciation and impairment
    
    
    Accretion expenses
    
    
    51Liabilities incurred
    
    
    356Liabilities settled
    
    
    (4
    )Revision of provision
    
    
    (21
    )Cumulative translation adjustment
    
    
    57Balance as of December 31, 2005
    
    
    842Depreciation and impairment
    
    
    Accretion expenses
    
    
    32Liabilities incurred
    
    
    632Liabilities settled
    
    
    (4
    )Revision of provision
    
    
    (112
    )Cumulative translation adjustment
    
    
    83Balance as of December 31, 2006
    
    
    1,473
 (f)
    
    ImpairmentFor the years ended December 31, 2006, 2005 and 2004, the Company recorded impairment charges
of US$21, US$156 and US$65, respectively. During 2006, the impairment charge was primarily
related to producing properties in Brazil and principle amounts were related to Petrobras
Córrego de Pedras on-shore field. During 2005, the impairment charge was primarily related to
investments in Venezuela (US$134), due to the tax and legal changes implemented by the Ministry
of Energy and Petroleum of Venezuela (MEP), previously mentioned. During 2004, the impairment
charge was related to producing properties in Brazil, principle amounts were related to the
Companys Ciobas off-shore field (US$30). The impairment expenses recorded in 2004 were
primarily due to capital expenditures made in 2004 to producing fields with only marginal
reserves.
 F-39




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 9.
    
    Property, Plant and Equipment, Net(Continued)
 (g)
    
    Return of exploration areas to the ANPIn the 2006 financial year, Petrobras returned to the National Petroleum Agency  ANP the rights
over:
      (h)
    
    Return to ANP of fields at the Production Stage operated by PetrobrasIn the 2006 financial year, Petrobras returned to the National Petroleum Agency  ANP the rights
over the fields Beija-Flor, Dias DÁvila, Fazenda Gameleira, Miranga Leste and Vale do Quiricó,
all located in the state of Bahia.(i)
    
    8th bidding for exploratory blocks of ANPIn November of 2006, Petrobras acquired twenty-one new exploratory blocks of the twenty-two
areas it competed for in the 8th Round of Bidding conducted by the National Petroleum Agency -
ANP.Petrobras acquired exclusive rights for seven blocks and a further fourteen blocks in
consortium with other companies, two of which the Company will operate.The bonuses offered by Petrobras and its partners amounted to US$130, with the Company
accounting for US$116. This Bid has been suspended in full, because of the injunction awarded
by the Federal Courts of the Federal District. The bonuses will be paid when this issue is
resolved.
 F-40




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 
 10.
    
    Investments in Non-Consolidated Companies and Other InvestmentsPetrobras conducts portions of its business through investments in companies accounted for using
the equity and cost methods. These non-consolidated companies are primarily engaged in the
petrochemicals and product transportation businesses.
 InvestmentsTotal ownership
    
    2006
    
    2005Equity method
    
    
    20 % - 50
    %(1)
    
    
    1,883
    (2)
    
    
    974Investments available-for-sale
    
    
    8% - 17
    %
    
    
    715
    
    
    
    647Investments at cost
    
    
    
    
    
    
    664
    
    
    
    189Total
    
    
    
    
    
    
    3,262
    
    
    
    1,810
 
 (1)
    
    As described further in this Note, certain thermoelectrics with ownership of 10% to 50%
are also accounted as equity investments due to particularities of significant influence.(2)
    
    Includes US$878 related to investments in Venezuela, excluded from consolidation in
2006. (See Note 9 (c)). At December 31, 2006 and 2005, the Company had investments in companies with publicly traded shares: BRASKEM S.A., Petroquímica União S.A.  PQU and Companhia Petroquímica do Sul S.A. -
COPESUL. The Companys investments in these companies with publicly traded shares amounts to less
than 20% of the investees total voting shares, are classified as available-for-sale and have
been recorded at market value. The Company has recorded unrealized gains (losses) for the
difference between the fair value and the cost of the investment on these investments of US$548
and US$494 as of December 31, 2006 and 2005, respectively. These holding gains are reflected as a
component of shareholders equity, net of tax, with changes in the unrealized balance recorded as
a component of comprehensive income.The Company also has investments in companies for the purpose of developing, constructing,
operating, maintaining and exploring thermoelectric plants included in the federal governments
Priority Thermoelectric Energy Program, with equity interests of between 10% and 50%. The balance
of these investments as of December 31, 2006 and 2005 includes US$20 and US$179 respectively, and
are included as equity method investments due to the Companys ability to exercise significant
influence over such operations.The Companys investments in equity of non-consolidated companies generated equity earnings
(losses) in results of non-consolidated companies of US$28 for the year ended December 31, 2006
(2005  US$139; 2004  US$172).
 (a)
    
    Acquisition of interest of CEG RIOPetrobras, through its subsidiary Petrobras Gás S.A.  GASPETRO, concluded on July 11, 2005 the
acquisition of 12.41% of the shares (common and preferred) of Distribuidora de Gás Natural
Canalizado CEG-RIO, for US$17. With this acquisition, the shareholdings of GASPETRO in said
company were increased to 37.41%. The Company has accounted for its investment using the equity
method, retrospectively from the date of the initial investment. Due to the immateriality of
the involved amounts the Company has not retrospectively applied the equity method to the 2004
Financial Statements.The acquisition of the additional interest in CEG RIO was recorded using
the purchase method of accounting.(b)
    
    Exchange of assets  Petrobras and REPSOL  YPFOn December 28, 2000, Petrobras and Repsol YPF entered into a Contract for the Exchange of
Assets, under which Petrobras, in exchange of shares of EG3 in Argentina, assigned to Repsol
YPF a 30% shareholding in Refinaria Alberto Pasqualini  REFAP, the right to sell fuels in
approximately 230 gas stations of BR Distribuidora and a 10% interest in the Albacora Leste
field.
 F-41




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 10.
    
    Investments in Non-Consolidated Companies and Other Investments(Continued)The contract established in its 4th clause that the parties receiving the shares of EG3 and
REFAP should, in the course of eight years after January 1, 2001, review every year the
reference values of EG3 Group and REFAP S.A. (denominated escalators) to adjust them
observing the conditions of said clause and to allow determining at the end of the period the
definitive value of the shares of EG3 and REFAP, as well as definitive assets position and
payment thereof to the creditor, under common agreement between the parties. Under the
Escalators Liquidation Agreement entered into on December 29, 2005, and effective as from
January 1, 2006, the companies performed early and definitive liquidation of the escalators.The final value, including monetary restatement, due by Repsol YPF to Petrobras, related to EG3
share, for the full period of 8 (eight) years, including the projections for 2006, 2007 and
2008 amounted to US$335. Of this amount US$95 was applied to reduce property, plant and
equipment and US$158 was recorded as extraordinary gain, net of US$82 of income tax on December
31, 2005.
 F-42




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 10.
    
    Investments in Non-Consolidated Companies and Other Investments(Continued)
 (b)
    
    Exchange of assets  Petrobras and REPSOL  YPF(Continued)The final value, including monetary restatement, due by Petrobras to Repsol YPF, related to the
30% shareholding in REFAP, for the full period of 8 (eight) years, including the projections
for 2006, 2007 and 2008 amounted to US$255. This amount was recorded as component of other
expenses, net.Those amounts are definitive, and not subject to review or verification by any of the parties,
thus liquidating application and quantification of escalators, as provided for in the
Escalators Liquidation Agreement.
 
 11.
    
    Petroleum and Alcohol Account  Receivable from Federal Government
 (a)
    
    Changes in the Petroleum and Alcohol accountThe following summarizes the changes in the Petroleum and Alcohol account for the years ended
December 31, 2006 and 2005:
 Year ended December 31,2006
    
    2005Opening balance
    
    
    329
    
    
    
    282Financial income (Note 24)
    
    
    7
    
    
    
    9Translation gain
    
    
    32
    
    
    
    38Ending balance
    
    
    368
    
    
    
    329
 The Petroleum and Alcohol account arose in periods previous to December 31, 2002 as a
result of regulation in the fuels market. The Federal Government has certified the balance and
placed a portion of the amount (US$53) in a restricted use account.(b)
    
    Settlement of the Petroleum and Alcohol Accounts with the Federal GovernmentAs defined in Law No. 10,742 dated October 06, 2003, the settlement of the Petroleum and
Alcohol account with the Federal Government should have been completed by June 30, 2004.
Petrobras has been working with the Ministry of Mines and Energy  MME and Secretary of the
National Treasury  STN in order to resolve remaining issues necessary to conclude the
settlement process.
 F-43




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 11.
    
    Petroleum and Alcohol Account  Receivable from Federal Government(Continued)
 (b)
    
    Settlement of the Petroleum and Alcohol Accounts with the Federal Government(Continued)The remaining balance of the Petroleum and Alcohol account may be paid as follows: (1)
National Treasury Bonds issued at the same amount as the final balance of the Petroleum and
Alcohol account; (2) offset of the balance of the Petroleum and Alcohol account, with any
other amount owed by Petrobras to the Federal Government, including taxes; or (3) by a
combination of the above options.
 
 12.
    
    Financings
 (a)
    
    Short-term debtThe Companys short-term borrowings are principally sourced from commercial banks and include
import and export financing denominated in United States dollars, as follows:
 As of December 31,2006
    
    2005Import  oil and equipment
    
    
    148
    
    
    
    340Working capital
    
    
    1,145
    
    
    
    6101,293
    
    
    
    950
 The weighted average annual interest rates on outstanding short-term borrowings were
4.68% and 4.09% at December 31, 2006 and 2005, respectively.
 F-44




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 12.
    
    Financings(Continued)
 (b)
    
    Long-term debt
 
    
    Composition
 As of December 31,2006
    
    
    2005Foreign currencyNotes
    
    
    4,217
    
    
    
    5,871Financial institutions
    
    
    3,550
    
    
    
    3,215Sale of future receivables
    
    
    680
    
    
    
    1,241Suppliers credits
    
    
    1,215
    
    
    
    1,349Senior exchangeable notes
    
    
    330
    
    
    
    330Assets related to export program to be offset against
sales of future receivables
    
    
    (150
    )
    
    
    (300
    )Repurchased securities (1)
    
    
    (19
    )
    
    
    (356
    )9,823
    
    
    
    11,350Local currencyNational Economic and Social Development
Bank  BNDES (state-owned company, see Note 24)
    
    
    865
    
    
    
    298Debêntures:BNDES (state-owned company, see Note 24)
    
    
    626
    
    
    
    291Other banks
    
    
    1,093
    
    
    
    935Others
    
    
    209
    
    
    
    572,793
    
    
    
    1,581Total
    
    
    12,616
    
    
    
    12,931Current portion of long-term debt
    
    
    (2,106
    )
    
    
    (1,428
    )10,510
    
    
    
    11,503
 
 (1)
    
    At December 31, 2006 and 2005, the Company had amounts invested abroad in an
exclusive investment fund that held debt securities of some of the Petrobras group
companies and some of the SPEs that the Company consolidates according to FIN 46(R), in
the total amount of US$245 (US$2,078 in 2005). These securities are considered to be
extinguished, and thus the related amounts, together with applicable interest have been
removed from the presentation of marketable securities and long-term debt, of US$19
(US$356 in 2005), and project financings, of US$226 (US$1,722 in 2005), respectively. (see
also Note 14). Gains and losses on the extinguishment are recognized as incurred.
Subsequent reissuances of notes at amounts greater or lower than are recorded as premium
or discounts and are amortized over the life of the notes. Petrobras incurred in expenses
in the total amount of US$160 on the extinguishment of debt during 2006 and US$17 during
2005. As of December 31, 2006 and 2005, the Company had an outstanding balance of net
premiums on reissuance that amounted to US$45 and US$56, respectively. F-45




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 12.
    
    Financings(Continued)
 (b)
    
    Long-term debt(Continued)
 
    
    Composition of foreign currency denominated debt by currency
 As of December 31,2006
    
    2005CurrenciesUnited States dollars
    
    
    8,928
    
    
    
    10,679Japanese Yen
    
    
    626
    
    
    
    409Euro
    
    
    269
    
    
    
    262Others
    
    
    
    
    
    
    9,823
    
    
    
    11,350
 
    
    Maturities of the principal of long-term debt
  2008
    
    
    1,4662009
    
    
    7992010
    
    
    1,5432011
    
    
    8102012
    
    
    1,7882013 and thereafter
    
    
    4,10410,510
 
    
    Composition of long-term debt by annual interest rateInterest rates on long-term debt were as follows:
 As of December 31,2006
    
    2005Foreign currency6% or less
    
    
    2,373
    
    
    
    3,686Over 6% to 8%
    
    
    3,805
    
    
    
    2,603Over 8% to 10%
    
    
    3,321
    
    
    
    4,491Over 10% to 15%
    
    
    324
    
    
    
    5709,823
    
    
    
    11,350Local currency6% or less
    
    
    470
    
    
    
    85Over 6% to 8%
    
    
    167
    
    
    
    266Over 8% to 10%
    
    
    858
    
    
    
    264Over 10% to 15%
    
    
    1,298
    
    
    
    9662,793
    
    
    
    1,58112,616
    
    
    
    12,931
 F-46




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 12.
    
    Financings(Continued)
 (b)
    
    Long-term debt(Continued)
 
    
    Structured finance of exportsPetrobras and Petrobras Finance Ltd.  PFL have certain contracts (Master Export Contract and
Prepayment Agreement) between themselves and a special purpose entity not related to
Petrobras, PF Export Receivables Master Trust (PF Export), relating to the prepayment of
export receivables to be generated by PFL by means of sales on the international market of
fuel oil and other products acquired from Petrobras.As stipulated in the contracts, PFL assigned the rights to future receivables in the amount
of US$1,800 (1st and 2nd tranches) to PF Export, which, in turn, issued
and delivered to PFL the following securities, also in the amount of US$1,800:
 
    
    US$1,500 in Senior Trust Certificates, which were negotiated by PFL on the
international market at face value. The amount was transferred to Petrobras as
prepayment for exports to be made to PFL, according to the prepayment agreement.
    
    US$300 in Junior Trust Certificates, which are held in the portfolio of PFL. If PF
Export incurs any losses on the receipt of the value of the exports transferred by PFL,
these losses will be compensated by the Junior Trust Certificates.
 The assignment of rights to future export receivables represents a liability of PFL, which
will be settled by the transfer of the receivables to PF Export as and when they are
generated. This liability will bear interest on the same basis as the Senior and Junior Trust
Certificates, as described above. The Junior Trust Certificates form a 20% guarantee to the
Senior Trust Certificates.On September, 2005 Petrobras prepaid an amount of US$330 to PETROBRAS FINANCE LTD.  PFL
respective to the export prepayments. Subsequent, PETROBRAS FINANCE LTD.  PFL paid on
September 1, 2005 an equal amount related to the Senior Trust Certificates series A2 and C
with floating rates, issued by PF Export, maturing on 2010 and 2013, respectively.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 12.
    
    Financings(Continued)
 (b)
    
    Long-term debt(Continued)
 
    
    Structured finance of exports (Continued)On March 1, 2006 Petrobras prepaid US$334 to PETROBRAS FINANCE LTD.  PFL respective to the
export prepayments. Subsequent, PETROBRAS FINANCE LTD.  PFL paid on March 1, 2006 an equal
amount related to the Senior Trust Certificates series A1 and B with fixed rates, issued by
PF Export, maturing in 2010 and 2011, respectively.On May 26, 2006, PFL has successfully completed a solicitation of consents from holders of
the Series 2003-A 6.4% Senior Trust Certificates due 2015 issued by PF Export Receivables
Master Trust. The amendments sought to eliminate exports of bunker fuel from the transaction
so that the securities have been collateralized only by receivables from sales of fuel oil
exported by Petrobras and to reduce the minimum average daily gross exports of fuel oil for
any rolling twelve-month period. PFL also obtained the consent from the holders of Series
2003-B 3.75% due 2013. The amendments became effective on June 1, 2006.As a result of these amendments, the premium rate of the guarantee of the Series 2003-B was
reduced from 1.8% to 1.1%.
 
    
    GASENE Project, Urucu-Coari-Manaus gas pipeline project and Urucu-Coari liquefied
petroleum gas line projectOn December 5, 2005, Petrobras obtained a bridge loan from the National Bank for Economic and
Social Development (BNDES), in the amount of US$342, for the special purpose company
Transportadora GASENE S.A., responsible for the project aimed at interconnecting the
Southeastern and Northeastern gas pipeline networksGASENE, and US$342 for the special purpose
company Transportadora Urucu Manaus S.A. proceeding with the financial structuring of the
projects Urucu-Coari-Manaus gas pipeline and the Urucu-Coari liquefied petroleum gas (LPG)
line.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 12.
    
    Financings(Continued)
 (b)
    
    Long-term debt(Continued)
 
    
    Financing for P-51 and P-52 platformsOn November 25, 2004, the Board of Directors of Petrobras approved the execution of a contract
in the amount of up to US$379 between the National Bank for Economic and Social Development
(BNDES) and the wholly-owned subsidiary PETROBRAS NETHERLANDS B.V.  PNBV for the financing of
Brazilian assets and services to be used in the construction of the P-52 production platform.The amount is provided by BNDES within the BNDES-Exim post-shipment program, under the buyer
credit standards, which includes financing no other than Brazilian national goods and services
within the investment. The financing will be amortized over a 10-year period after conclusion
of the platform construction work, expected for May 2007. The interest rate is 36-month LIBOR
plus 2% during the grace period and the 60-month LIBOR plus 2% thereafter.On December 17, 2004, PETROBRAS NETHERLANDS B.V.  PNBV, a wholly-owned subsidiary of
Petrobras, entered into a credit facility of US$280 for financing of the construction of
platforms P-51 and P-52. This loan is guaranted by export credit agencies of Norway, United
Kingdon and Italy. The Agreement states either a floating rate (Libor plus 0.6%) or a fixed
interest rate (4.86%).On November 17, 2004, PETROBRAS NETHERLANDS B.V.  PNBV, a wholly-owned subsidiary of
Petrobras, entered into a additional Commercial Loan Facility Agreement with BNP Paribas to
grant to PETROBRAS NETHERLANDS B.V.  PNBV a credit facility of US$100 for financing of the
construction of platforms P-51 and P-52. The agreement states a floating interest rate of
Libor plus 1.4%.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 12.
    
    Financings(Continued)
 (b)
    
    Long-term debt(Continued)
 
    
    Global NotesOn October 06, 2006, PIFCo issued Global Notes to the amount of US$500. The notes have an
effective rate of 6.185% per annum and a ten-year term. This is the lowest borrowing cost for
PIFCo over this term and represented a rate of 1.55% over and above the US T-bond for a
similar term. The Global Notes were offered at 99.557% of the face value with a stated of
6.125% per annum. PIFCo used the proceeds from this issuance principally to repay
trade-related debt.
 (c)
    
    Debt repurchase offer (Tender) of notesOn July 24, 2006, (PIFCo), a wholly owned subsidiary of the Company, concluded its debt
repurchase offer (Tender) announced on July 18, 2006. The amount of notes tendered for five
series of notes was US$888. The repurchased securities related to 2006 amount to US$1,046.
Including the notes previously repurchased by the Company and its affiliates, also included in
the tender, the total value reached US$1,215. The purpose of this initiative was to reduce
total debt outstanding and simplify the debt profile, thus benefiting from the Companys
current strong cash generation. The transaction was settled on July 27, 2006 and all the notes
tendered were canceled from this date. Upon conclusion of the Tender PIFCo incurred expenses in
the total amount of US$160.(d)
    
    Debentures issueOn August 02, 2006 the Extraordinary General Meeting held by ALBERTO PASQUALINI  REFAP S.A., a
subsidiary of the Company, approved the value of the private issue of simple, nominative and
book-entered debentures in the amount of US$391. The debentures are being issued in order to
expand and modernize REFAPs industrial facilities and to raise its oil processing capacity
from 20,000 m3/day to 30,000 m3/day, in addition to increasing the portion of national oils
being processed.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 12.
    
    Financings(Continued)
 (d)
    
    Debentures issue(Continued)The issue was be made under the following terms up to December 30, 2006 and amortization over
96 months plus a 6-month grace period; 90% of the debentures shall be subscribed by the BNDES
yielding interest at the Long-term Interest Rate +3.8% p.a.; 10% of the debentures shall be
subscribed by BNDES Participações S.A. (BNDESPAR) at the interest rate of the BNDES basket of
currencies + 2.3% p.a..On September 08, 2006, the Financing Contract was executed and the first installment was made
available in the amount of US$278. On December 19, 2006 was made available the remaining amount
of US$113.(e)
    
    Japanese Yen BondsOn September 27, 2006, PIFCo concluded a private placement of securities in the Japanese
capital market (Shibosai) for a total of ¥ 35 billion (US$298) due September 2016. The issue
was a private placement in Japanese market with a partial guarantee of Japan Bank for
International Cooperation (JBIC) and bears interest at the rate of 2.15% per annum, payable
semiannually. In the same date, PIFCo entered into a swap agreement with Citibank, swapping
the total amount of this debt to a U.S. dollar denominated debt. PIFCo used the proceeds
principally to finance PNBV, an affiliate, for construction of lines interconnecting the P-51,
P-52 and P-53 production platforms to the PRA-1 autonomous repumping unit. See note 20(e).(f)
    
    Guarantees and covenantsFinancial institutions abroad do not require guarantees from the Company. The financing
granted by BNDES  National Bank for Social and Economic Development is guaranteed by a lien
on the assets being financed.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 12.
    
    Financings(Continued)
 (f)
    
    Guarantees and covenants(Continued)The Companys debt agreements contain affirmative covenants regarding, among other things,
provision of information; financial reporting; conduct of business; maintenance of corporate
existence; maintenance of government approvals; compliance with applicable laws; maintenance of
books and records; maintenance of insurance; payment of taxes and claims; and notice of certain
events. The Companys debt agreements also contain negative covenants, including, without
limitation, limitations on the incurrence of indebtedness; limitations on the incurrence of
liens; limitations on transactions with affiliates; limitations on the disposition of assets;
limitation on consolidations, mergers, sales and/or conveyances; negative pledge restrictions;
change in ownership limitations; ranking; use of proceeds limitations; and required receivables
coverages. Petrobras management affirms that the Company is in compliance with the covenants
within debt agreements.At December 31, 2006 and 2005, GASPETRO had secured certain debentures issued to finance the
purchase of the transportation rights in the Bolivia/Brazil pipeline with 3,000 shares of its
interest in TBG, a subsidiary of GASPETRO responsible for the operation of the pipeline.The Federal Government guarantees TBGs Multilateral Credit Agency debt, which had an
outstanding balance of US$367 and US$402 at December 31, 2006 and 2005, respectively. During
2000, the Federal Government, the Company, TBG, PETROQUISA and Banco do Brasil S.A. entered
into an agreement whereby the revenues of TBG will serve as a counter-guarantee to this debt
until the debt has been extinguished.Petrobras entered into standby purchase agreements in support of the obligations of its
wholly-owned subsidiary, PIFCo, under the note issuances in 2001, 2002 and 2003 and their
respective indentures. Petrobras has the obligation to purchase from the noteholders any
unpaid amounts of principal, interest or other amounts due under the notes and the indenture
applies, subject to certain limitations, irrespective of whether any such amounts are due at
maturity of the notes or otherwise.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 12.
    
    Financings(Continued)
 (g)
    
    Lines of creditAt December 31, 2006 and 2005, the Company had fully utilized all available lines of credit
for the purchase of imports. Outstanding lines of credit at December 31, 2006 and 2005 were
US$1,370 and US$1,688, respectively. Lines of credit are included in short-term debt and
long-term debt.
 
 13.
    
    Financial Income (Expenses), NetFinancial expenses, financial income and monetary and exchange variation on monetary assets and
liabilities, net, allocated to income for the years ended at December 31, 2006, 2005 and 2004
are shown as follows:
 Year ended December 31,2006
    
    2005
    
    2004Financial expensesLoans and financings
    
    
    (1,076
    )
    
    
    (1,135
    )
    
    
    (1,055
    )Capitalized interest
    
    
    1,001
    
    
    
    612
    
    
    
    267Leasing
    
    
    (105
    )
    
    
    (98
    )
    
    
    (94
    )Project financings
    
    
    (370
    )
    
    
    (334
    )
    
    
    (316
    )Losses on derivative instruments
    
    
    (481
    )
    
    
    (103
    )
    
    
    (233
    )Repurchased securities losses
    
    
    (160
    )
    
    
    (17
    )
    
    
    (137
    )Other
    
    
    (149
    )
    
    
    (114
    )
    
    
    (165
    )(1,340
    )
    
    
    (1,189
    )
    
    
    (1,733
    )Financial incomeInvestments
    
    
    566
    
    
    
    337
    
    
    
    199Customers
    
    
    231
    
    
    
    84
    
    
    
    24Government securities
    
    
    79
    
    
    
    90
    
    
    
    42Advances to suppliers
    
    
    27
    
    
    
    33
    
    
    
    32Gain on fair value hedge
    
    
    
    
    
    
    93
    
    
    
    553Other
    
    
    262
    
    
    
    73
    
    
    
    1061,165
    
    
    
    710
    
    
    
    956Monetary and exchange variation on
monetary assets and liabilities,
net
    
    
    75
    
    
    
    248
    
    
    
    450(100
    )
    
    
    (231
    )
    
    
    (327
    )
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 
 14.
    
    Project FinancingsSince 1997, the Company has utilized project financings to provide capital for the continued
development of the Companys exploration and production and related projects.The special purpose entities associated with the project finance projects are consolidated based
on FIN 46(R) and the project financing obligation represents the debt of the consolidated SPEs
with the third-party lender.The Companys responsibility under these contracts is to complete the development of the oil and
gas fields, operate the fields, pay for all operating expenses related to the projects and remit
a portion of the net proceeds generated from the fields to fund the special purpose companies
debt and return on equity payments. At the conclusion of the term of each financing project, the
Company will have the option to purchase the leased or transferred assets from the consolidated
special purpose company.The following summarizes the liabilities related to the projects that were in progress at
December 31, 2006 and 2005:
 As of December 31,2006
    
    2005Barracuda/Caratinga
    
    
    1,405
    
    
    
    2,435Charter Development  CDC (1)
    
    
    876
    
    
    
    346Cabiúnas
    
    
    683
    
    
    
    799PDET Offshore S.A.
    
    
    662
    
    
    
    188Transportadora Gasene
    
    
    617
    
    
    
    236Nova Transportadora do Sudeste  NTS (2)
    
    
    543
    
    
    
    461Nova Transportadora do Nordeste  NTN (2)
    
    
    449
    
    
    
    385Codajás (3)
    
    
    411
    
    
    
    215Espadarte/Voador/Marimbá (EVM)
    
    
    282
    
    
    
    399Companhia Locadora de Equipamentos Petrolíferos  CLEP
    
    
    226
    
    
    
    1,700Cia. de Desenvolvimento e Modernização de Plantas Industriais  CDMPI
    
    
    175
    
    
    
    Nova Marlim
    
    
    142
    
    
    
    286Cia Petrolífera Marlim
    
    
    57
    
    
    
    139Albacora
    
    
    46
    
    
    
    55Pargo, Carapeba, Garoupa and Cherne (PCGC)
    
    
    26
    
    
    
    35Fundo de Investimemento Imobiliário  FII (4)
    
    
    
    
    
    
    85Repurchased securities (5)
    
    
    (226
    )
    
    
    (1,722
    )6,374
    
    
    
    6,042Current portion of project financings
    
    
    (2,182
    )
    
    
    (2,413
    )4,192
    
    
    
    3,629
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 14.
    
    Project Financings(Continued)
 (1)
    
    Charter Development  CDC is responsible for Marlim Leste (P-53 project).(2)
    
    Nova Transportadora do Sudeste  NTS and Nova Transportadora do Nordeste  NTN take part
in the consortium responsible for Malhas Project.(3)
    
    Codajás consolidates Transportadora Urucu  Manaus S.A. which is responsible for the
Amazonia Project.(4)
    
    Investment Fund for Fixed Assets  FII is responsible for Certified Receipts of
Acceptance of Fixed Assets  CRI Macaé Project.(5)
    
    At December 31, 2006 and 2005, the Company had amounts invested abroad in an exclusive
investment fund. These securities are considered to be extinguished, and thus the related
amounts, together with applicable interest have been removed from the presentation of
marketable securities and project financings (see also Note 5).
 The Company has received certain advances amounting to US$376 which are recorded as project
financings obligations and are related to assets under agreements with investors, which are
included to the property, plant and equipment balance. Such asset and obligation amounts are
presented gross as the obligation can only be settled through delivery of the fully constructed
asset.At December 31, 2006, the long-term portion of project financings becomes due in the
following years:
 2008
    
    
    1,2522009
    
    
    9932010
    
    
    6662011
    
    
    4012012
    
    
    1582013 and thereafter
    
    
    7224,192
 As of December 31, 2006, the amounts of cash outlay commitments assumed related to consolidated
structured project financings are presented as follows:
 Cia. de Desenvolvimento e Modernização de Plantas Industriais  CDMPI
    
    
    733Transportadora Gasene
    
    
    601PDET Offshore S.A.
    
    
    378Charter Development  CDC
    
    
    2241,936
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 14.
    
    Project Financings(Continued)The following summarizes the projects, their purposes, the guarantees and estimated investments
of each project:
 Total estimatedProject
    
    Purpose
    
    Main guarantees
    
    investmentsBarracuda/ Caratinga
    
    To allow
development of
production in the
fields of Barracuda
and Caratinga in
the Campos Basin
the SPC Barracuda
and Caratinga
Leasing Company
B.V. (BCLC), is in
charge of building
all of the assets
(wells, submarine
equipment and
production units)
required by the
project and is also
the owner of them.
    
    Guarantee provided by
Brasoil to cover BCLCs
financial requirements.
    
    US$3,100CLEP
    
    Companhia Locadora
de Equipamentos
Petrolíferos  CLEP
furnishes assets
related to oil
production located
in the Campos Basin
through a lease
agreement for the
period of 10 years,
and at the end of
which period
Petrobras will have
the right to buy
shares of the SPC
or project assets.
    
    Lease prepayments in case
revenue is not sufficient
to cover payables to the
lenders.
    
    US$1,250Cabiúnas
    
    Project with the
objective of
increasing gas
production
transportation from
the Campos Basin.
Cayman Cabiunas
Investment Co. Ltd.
(CCIC), supplies
assets to Petrobras
under an
international lease
agreement.
    
    Pledge of 10.4 billion
m3 of gas.
    
    US$850Malhas Project  (NTN / NTS)
    
    Consortium between
TRANSPETRO,
Transportadora
Nordeste Sudeste
(TNS), Nova
Transportadora do
Sudeste (NTS) and
Nova Transportadora
do Nordeste (NTN).
NTS and NTN supply
assets related to
natural gas
transportation. TNS
(a 100% GASPETRO
company) supplies
assets that have
already been
previously set up.
TRANSPETRO is the
gas pipes operator.
    
    Prepayments based on
transportation capacity
to cover any consortium
cash insufficiencies
    
    US$1,000EVM
    
    Project with the
objective of
allowing set up of
submarine oil
production
equipment in the
fields Espadarte,
Voador, Marimbá and
other seven smaller
fields in the
Campos Basin. EVM
Leasing Co.
(EVMLC), supplies
assets to Petrobras
under an
international lease
agreement.
    
    Pledge of certain oil
volumes.
    
    US$1,070NovaMarlim
    
    Consortium with
NovaMarlim Petróleo
S.A. (NovaMarlim)
which supplies
submarine oil
production
equipment and
refunds Petrobras
for operating costs
resulting from the
operation and
maintenance of
field assets.
    
    30% of the field
production limited to 720
days.
    
    US$933PDET
    
    PDET Offshore S.A. is the future
owner of the Project assets whose objective is that of improving the
infrastructure to transfer oil produced in the Campos Basin to the
oil refineries in the Southeast Region and export. The assets will be
later leased to Petrobras for 12 years.
    
    All of the projects assets
will be pledged as collateral.
    
    US$1,270Marlim
    
    Consortium between Companhia
Petrolífera Marlim (CPM), which furnishes to Petrobras submarine
equipment for oil production of the Marlim
field.
    
    70% of the field
production limited to 720
days.
    
    US$1,500
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 14.
    
    Project Financings(Continued)
 Total estimatedProject
    
    Purpose
    
    Main guarantees
    
    investmentsAlbacora
    
    Consortium between
Petrobras and
Albacora Japão
Petróleo Ltda.
(AJPL), which
furnishes to
Petrobras oil
production assets
of the Albacora
field in the Campos
Basin.
    
    Pledge of assets
    
    US$170Albacora/ PETROS
    
    Consortium between
Petrobras and
Fundação PETROS de
Seguridade Social,
which furnishes to
Petrobras oil
production assets
of the Albacora
field in the Campos
Basin.
    
    Pledge of assets
    
    US$240PCGC
    
    Companhia de
Recuperação
Secundária (CRSec)
supplies assets to
be used by
Petrobras in the
fields Pargo,
Carapeba, Garoupa,
Cherne and others
through a lease
agreement with
monthly payments.
    
    Additional lease
payment if revenue
is not sufficient
to cover payables
to lenders.
    
    US$134Marlim Leste (P-53) Project  (CDC)
    
    To develop
production in the
Marlim Leste field,
Petrobras will use
Floating Production
Unit P-53, to be
chartered from
Charter Development
LLC, a company
incorporated in the
state of Delaware,
U.S.A. The Bare
Boat Charter
agreement will be
effective for a
15-year period
counted from the
date of signature.
    
    Completion: the flow of charter
payments to be made by Petrobras
will begin at a certain date.Cost Overrun: Any increase in P-53
construction costs will represent
an increase in charter amounts
payable by Petrobras.
    
    US$1,180Amazônia (Codajás)
    
    Construction of a
gas pipeline with
length of 385 km,
between Coari and
Manaus, and a GLP
pipeline with
length of 285 Km
between Urucu and
Coari, both under
the responsibility
of Transportadora
Urucu  Manaus S.A.
and the
construction of a
thermoelectric
plant, in Manaus,
with capacity of
488 MW through
Companhia de
Geração
Termelétrica
Manauara S.A.
    
    Being negotiated
    
    US$1,300GASENE
    
    Transportadora
Gasene S.A. is
responsible for the
construction and
future ownership of
pipelines to
transport natural
gas with a total
length of 1.4
thousand km and
transportation
capacity of 20
million cubic
meters per day,
connecting the
Cabiúnas Terminal
in Rio de Janeiro
to the city of
Catu, in Bahia
state.
    
    To be defined.
    
    US$2,000
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 14.
    
    Project Financings(Continued)
 Total estimatedProject
    
    Purpose
    
    Main guarantees
    
    investmentsCDMPI
(modernization of
REVAP)
    
    This project has
the objective of
raising the
Henrique Lage
(REVAP) refinerys
national heavy oil
processing
capacity, bringing
the diesel it
produces into line
with the new
national
specifications and
reducing pollution
levels. To achieve
this, the SPE Cia.
de Desenvolvimento
e Modernização de
Plantas Industriais
- CDMPI was
founded, which
shall construct and
lease to Petrobras
a Retarded Coking
plant, a Coke
Naphtha
Hydrotreatment
plant and related
plants to be
installed at this
refinery.
    
    Prepaid rental to
cover any cash
deficiencies of
CDMPI.
    
    US$900Mexilhão
    
    Construction of a
platform (PMXL-1)
to produce natural
gas at Campos de
Mexilhão and Cedro,
located in the
Bacia de Santos,
State of São Paulo,
which shall be held
by Companhia
Mexilhão do Brasil
(CMB), responsible
for obtaining the
funds necessary to
build such
platform. After
building the PMXL-1
shall be leased to
Petrobras, holder
of the exploration
and production
concession in the
aforementioned
fields
    
    To be defined
    
    US$595P-55 and P-57
    
    To develop
production at
Module 3 in the
Roncador field
(P-55) and Phase 2
of Jubarte field
(P-57). A Deepwater
charter LLC and a
Deepblue Charter
LLC are responsible
for jointly
contracting four
SPCs to build the
UEP: one for the
P-55 hull, another
for the P-57 hull,
as well as two
other for
Generation and
Compression Modules
for both UEPs. At
the end, PNBV shall
charter the P-55
from Deepwater and
the P-57 from
Deepblue and will
sub-charter them to
Petrobras.

Undergoing
selection process
for the SPCs (IDB
with interaction).
    
    Future chartering
commitment of
Petrobras with PNBV
and PNBV with the
owner of UEP
(Deepwater and
Deepblue).
    
    US$1,960Termobahia
    
    Acquisition of 49%
of the interest
held by
ABB-EV-Equity
Venture (ABB-EV) in
TERMOBAHIA,
comprised of shares
and credits via the
financial
structuring agreed
with the
Interamerican
Development Bank.
An SPE was
structured called
BLADE Securities
Ltd (BLADE),
headquartered in
Ireland, which
shall be the
successor of the
rights held by
ABB-EV until
Petrobras presents
a strategic
partner.
    
    None given.
    
    US$39.6
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 14.
    
    Project Financings(Continued)Blade Securities LimitedThe Special Purpose Company (SPC) BLADE Securities Ltd (BLADE), was created by the Deutsche
Bank (DB), in order to support Petrobras in its transactions related to the acquisition of a 49%
interest held by ABB-EV in TERMOBAHIA power plant. (See Note 18 (h)). The financial structuring
involves two simultaneous operations: the acquisition of ABB-EVs rights and the sale of such
rights to a private institution, DB, until a strategic partner is introduced by Petrobras within
a maximum period of one year.Under the agreements, PIFCo paid to Blade US$1, and in return, Blade transferred to PIFCo the
right to any dividends to be received from TERMOBAHIA and the rights to the shares of TERMOBAHIA
either for PIFCo or a Petrobras subsidiary. Additionally, PIFCo paid to Blade US$38, and in
return, Blade transferred to PIFCo any amounts received from TERMOBAHIA related to the
subordinated loan recorded as notes receivable, which has an interest rate of 8% p.a. and an
expiry date of 2023, and the right to the loans receivable for PIFCo or a Petrobras subsidiary.
(See Note 18(h)).As a result of the trasaction series, Petrobras recognized a US$4 gain on debt extinguishment on
December 31, 2005, related to the fact it will no longer be paying 18.79% interest to a third
party lender. Due to immateriality, the Company has not applied step acquisition accounting to
the purchase of the interest in TERMOBAHIA.
 
 15.
    
    Capital Lease ObligationsThe Company leases certain offshore platforms and vessels, which are accounted for as capital leases. At December 31, 2006, assets under capital leases had a net book value of US$1,338 (US$1,419 at December 31, 2005).
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 15.
    
    Capital Lease Obligations(Continued)The following is a schedule by year of the future minimum lease payments at December 31, 2006:
 2007
    
    
    3002008
    
    
    3132009
    
    
    2842010
    
    
    2302011
    
    
    1122012
    
    
    622013 and thereafter
    
    
    36Estimated future lease payments
    
    
    1,337Less amount representing interest at 6.2% to 12.0% annual
    
    
    (282
    )Present value of minimum lease payments
    
    
    1,055Less current portion of capital lease obligations
    
    
    (231
    )Long-term portion of capital lease obligations
    
    
    824
 
 16.
    
    Employees Post-retirement Benefits and Other Benefits
 (a)
    
    Employees post-retirement benefits balancesThe balances related to Employees Post-retirement Benefits are represented as follows:
 As of December 31,2006
    
    2005Health
    
    
    
    
    
    HealthPension
    
    care
    
    Pension
    
    carebenefits
    
    benefits
    
    benefits
    
    benefitsCurrent liabilities
    
    
    198
    
    
    
    
    
    
    
    206
    
    
    
    Long-term liabilities
    
    
    4,645
    
    
    
    5,433
    
    
    
    3,627
    
    
    
    3,004Employees post-retirement projected
benefit obligation
    
    
    4,843
    
    
    
    5,433
    
    
    
    3,833
    
    
    
    3,004Accumulated other comprehensive
income
    
    
    3,110
    
    
    
    1,495
    
    
    
    2,941
    
    
    
    Tax effect
    
    
    (1,058
    )
    
    
    (508
    )
    
    
    (1,011
    )
    
    
    Net balance recorded in shareholders equity
    
    
    2,052
    
    
    
    987
    
    
    
    1,930
    
    
    
    
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 16.
    
    Employees Post-retirement Benefits and Other Benefits(Continued)
 (b)
    
    Pension plan  Fundação Petrobras de Seguridade Social  PETROSThe Fundação Petrobras de Seguridade Social (PETROS) was established by Petrobras as a
private, legally separate nonprofit pension entity with administrative and financial autonomy.
As such, PETROS has the following principle objectives:
 (i)
    
    institute, manage and execute benefit plans for the companies or entities with which
it has signed agreements;(ii)
    
    provide administration and execution services for benefit plans focused on
post-retirement payments; and(iii)
    
    promote the well-being of its members, especially with respect to post-retirement
payments.
 The PETROS plan is a contributory defined-benefit pension plan introduced by Petrobras in July
of 1970, to supplement the social security pension benefits of employees of Petrobras and its
Brazilian subsidiaries and affiliated companies. In order to fund its objectives, PETROS
receives monthly contributions from the sponsoring companies of the PETROS Plan amounting to
12.93% of the salaries of participants in the plan. Additionally PETROS is funded by income
resulting from the investment of these contributions. The Companys funding policy is to
contribute to the plan annually the amount determined by actuarial calculations. In the
calendar 2006 year, benefits paid totaled US$713 (US$570 in 2005).The Companys liability related to future benefits to plan participants is calculated on an
annual basis by an independent actuary, based on the Projected Unit Credit method. The assets
that guarantee the pension plan are presented as a reduction to the net actuarial liabilities.The actuarial gains and losses generated by the differences between the values of the
obligation and assets determined based on projections and the actual figures, are respectively
included or excluded from the calculation of the net actuarial liability and recorded as
Postretirements benefit reserves adjustments net of tax  pension cost, in shareholders
equity. Actuarial gains and losses are amortized during the average remaining service period
of the active employees of approximately 10 years at December 31, 2006, in accordance with the
procedure established by SFAS 87.
 The relation between contributions by the sponsors and participants of the PETROS Plan,
considering only those attributable to the Company and subsidiaries in the 2006 and 2005
financial years, was 1.00 to 1.00. The Companys best estimate of contributions expected to be
paid in 2007 respective to the pension plan approximates US$194, with total pension benefit
payments in 2007 expected to be US$830.According to Constitutional Amendment No. 20, the computation of any deficit in the
defined-benefit plan in accordance with the actuarial method of the current plan (which
differs from the method defined in SFAS 87), must be equally shared between the sponsor and
the participants, by an adjustment to the normal contributions.The PETROS Plan is closed to new employees of the Petrobras system joining from September 2002
and the Company contracted a group life insurance policy to cover employees commencing
employment with the Company subsequent to closure of the of the PETROS plan; this policy will
remain in effect until a new private pension plan is implemented.Plan assetsPlan assets are invested primarily in government securities, investment funds, equity
instruments and properties.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 16.
    
    Employees Post-retirement Benefits and Other Benefits(Continued)
 (b)
    
    Pension plan  Fundação Petrobras de Seguridade Social  PETROS(Continued)The table below describes the types of plan assets:
 As of December 31,2006
    
    2005Government securities
    
    
    44
    %
    
    
    45
    %Investments funds
    
    
    27
    %
    
    
    26
    %Equity instruments
    
    
    20
    %
    
    
    18
    %Other
    
    
    9
    %
    
    
    11
    %100
    %
    
    
    100
    %
 Plan assets include the following securities of related parties:
 As of December 31,2006
    
    2005Petrobras common shares
    
    
    304
    
    
    
    178Petrobras preferred shares
    
    
    429
    
    
    
    343Government controlled companies
    
    
    54
    
    
    
    14Government securities
    
    
    4,952
    
    
    
    3,899Securities of other related parties
    
    
    171
    
    
    
    1835,910
    
    
    
    4,617
 PETROS provided certain financing for the continued development of the Albacora oil and gas
field located in the Campos basin, that is classified as securities of other related parties
(see Note 14).
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 16.
    
    Employees Post-retirement Benefits and Other Benefits(Continued)
 (b)
    
    Pension plan  Fundação Petrobras de Seguridade Social  PETROS(Continued)Plan assets(Continued)The Company uses 6.19% as the expected long-term rate of return over inflation on PETROS
assets. The PETROS portfolio of investments as of December 31, 2006 was comprised of 71%
securities, 44% of which were held-to-maturity government securities that earn interest at 6%
annually plus the IPCA (Consumer Price Index) variation and 27% of which were Investments Funds
that earn interest approximate to the CDI (Certificado de Depósito Interbancário, or Interbank
Deposit Certificate), which has been yielding more than 6% annually. Thus, the Company
considers a 6.19% long term interest rate appropriate to calculate the expected return on
assets, as such aligns with the composition of the PETROS asset portfolio.PETROS has a significant volume of investments in government securities, mainly NTN-B bonds,
which by an agreement with the Supplementary Social Security Department will be
held-to-maturity being recorded at fair value, for which a net present adjustment was required.
Thus, the percentage of assets allocated in this investment will remain the same over the short
term.New benefits planIn May of 2001, the Board of Directors of Petrobras approved the creation of a mixed social
security plan, for current and new employees, based on defined contribution formula for
programmable benefits and a defined benefit formula for risk benefits. However, the migration
of participants and beneficiaries of the previous plan (PETROS) to the new plan was suspended,
pursuant to a Federal Judicial ruling arising from an injunction filed by the employee union. A
court order in 2004 granted the injunction ruling against the new plan and invalidating any
changes to the PETROS plan premised upon intended migration to a new plan. This court decision
is under appeal.In 2003, the Company formed a task force with representatives of the National Union of Oil
Workers (FUP), unions and PETROS, among others, in order to evaluate alternatives to a new
model for the Companys supplementary pension plan, including analyses of negotiated
arrangements for the settlement of actuarial deficits.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 16.
    
    Employees Post-retirement Benefits and Other Benefits(Continued)
 (b)
    
    Pension plan  Fundação Petrobras de Seguridade Social  PETROS(Continued)New benefits plan(Continued)On April 19, 2006, the Company, aiming to achieve an agreement regarding its Supplementary
Pension Plan, presented to employee participants and retirees a proposal to bring equilibrium
to the actual PETROS Plan and the implementation of a new plan, denominated PETROS Plan 2.Execution of the proposal presented by the Companys Executive Board was subject to a number of
conditions, including the renegotiation of the PETROS Plan Regulations, in relation to the
means of readjusting the benefits and pensions, considering a significant rate of individual
accession of employees and dependants.The overall renegotiation target previously set by the Company had not been achieved. As a
result the proposal presented by Petrobras became null and void.On January 08, 2007, the Petrobras Board of Directors approved the reopening of the PETROS Plan
renegotiation process, in order to meet the claims of the trade unions, as most participants
were in favor of the renegotiation.The new target for the minimum accession number to the renegotiation was set at 2/3
(two-thirds) of the members and the final deadline for them to make their choice was February
28, 2007. The renegotiation target was met and the proposal submitted by the Company became
effective, and PETROS is calculating the amounts to be funded by the sponsors, that will reduce
the deficit of the PETROS Plan, as established by Brazilian pension law.On October 20, 2006, the Board of Directors of Petrobras approved the introduction of PETROS
Plan 2 for employees currently with no pension plan.The New Supplementary pension plan was formulated according to the Variable Contribution model.
In this model, the contributions are capitalized in individuals accounts, and the pension
benefits are established according to the account balances. This plan also includes risk
benefits with coverage for illness, incapacity and death, and a lifetime income.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 16.
    
    Employees Post-retirement Benefits and Other Benefits(Continued)
 (b)
    
    Pension plan  Fundação Petrobras de Seguridade Social  PETROS(Continued)New benefits plan(Continued)The PETROS Plan 2 also includes a minimum benefit for payment of annuities which guarantees
coverage of the benefit to ensure it does not have a monetary value of under 30% of the average
contribution salary.On December 20, 2006 the Department for Coordinating and Controlling State Companies (DEST)
decided to approve the proposed PETROS Plan 2, which was also approved on January 05, 2007 by
the Ministry of Mines and Energy.On January 19, 2007, the PETROS Decision-making Board approved the PETROS Plan 2, which will be
referred for assessment and statement by the Supplementary Pensions Office  SPC, for the proper
final approval, whereupon it may be offered to the employees who are not presently covered by a
supplementary pension plan sponsored by the Company.Petrobras and the other sponsors will fully assume the contributions corresponding to the period
in which the new participants had no plan. This past service shall consider the period from the
date of admission to the date enrolment commenced in the PETROS Plan 2. The disbursements will
be conducted over the first months for contributions up to the total months the participant had
no plan, and shall cover the portion relating to the participants and sponsor. The maximum
estimated value of this actuarial commitment as of December 31, 2006 if the plan is approved by
SPC and accepted by all new employees was US$109.This New Plan also allows the Company to maintain the pension coverage it offers, mitigates the
risks presented by the defined benefit model adopted and considerably reduces the possibility of
future deficits. The impact of joining the new plan and its related benefit costs will be valued
according to the standards established in SFAS 87, 132 and 158 and will only be computed and
recognized in the accounts when the plan is implemented.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 16.
    
    Employees Post-retirement Benefits and Other Benefits(Continued)
 (b)
    
    Pension plan  Fundação Petrobras de Seguridade Social  PETROS(Continued)TRANSPETROTRANSPETRO maintains a defined-contribution private pension scheme with PETROS called Plano
TRANSPETRO, which receives monthly contributions equivalent to 5.32% of the payroll of the
members and is equal to the contributions made by the participants.
 (c)
    
    PETROBRAS ENERGIA  PEPSA (including PESA)Defined contribution planSupplementary Pension Plan for PersonnelIn November 2005, the Board of Directors of Petrobras Energía approved the implementation of a
defined voluntary contributions plan which all of the Companys employees may elect to join
Petrobras Energia. Through this plan, Petrobras Energía will make contributions to a trust
equivalent to the contributions made by the employees that will subscript to the plan to a
mutual fund or AFJP, at their choice, in conformity with a scheme defined for each salary
level. The participating employees may make voluntary contributions exceeding those established
in the mentioned scheme, which will not be considered for purposes of the contributions to be
made by Petrobras Energia.In the fiscal years ended December 31, 2006 and 2005, Petrobras Energía recorded an expense of
US$1 and US$2, respectively, attributable to such benefits.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 16.
    
    Employees Post-retirement Benefits and Other Benefits(Continued)
 (c)
    
    PETROBRAS ENERGIA  PEPSA (including PESA)(Continued)Defined benefit planIndemnity PlanThis is a defined benefit plan for all the employees who fulfill certain conditions, and
consists of granting, upon retirement, a one-month salary per years of service at the Company,
in conformity with a decreasing scale considering the years of effectiveness of the plan.Compensating FundThis is a defined benefit plan for all employees of Petrobras Energía who have joined the
Company prior to May 31, 1995, and have reached a certain number of years of service. The
employee benefit is based on the last computable salary and years of service of each employee
included in the fund.The plan is of a supplemental nature, that is to say the benefit to the employee is represented
by the amount determined under the provisions of this plan, after deducting benefits payable to
the employee under the contribution plan and the public retirement system, in order that the
aggregate benefit to each employee equals the one stipulated in this plan.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 16.
    
    Employees Post-retirement Benefits and Other Benefits(Continued)
 (c)
    
    PETROBRAS ENERGIA  PEPSA (including PESA)(Continued)Defined benefit plan(Continued)The plan calls for a contribution to a fund exclusively by Petrobras Energía and without any
contribution by the employees, provided that they should make contributions to the retirement
system for their whole salary. As provided in Petrobras Energías By-laws, the Company makes
contributions to the fund on the basis of a Board of Directors proposal to the Shareholders
Meeting up to 1.5% of net income for each year. The assets of the fund were contributed to a
trust. The goals with respect to asset investment are: (i) the preservation of capital in US
dollars, (ii) the maintenance of high levels of liquidity, and (iii) the attainment of the
highest yields possible on a 30-days basis. For this reason, the assets are invested mainly in
bonds, corporate bonds, mutual funds, and certificates of deposits. The Bank of New York is the
trustee and Watson Wyatt is the managing agent. Should there be an excess (duly certified by an
independent actuary) of the funds under the trust agreement to be used to settle the benefits
granted by the plan, Petrobras Energía will be entitled to make a choice and use it, in which
case it would have to notify the trustee thereof.(d)
    
    SFAS 158  Employers Accounting for Defined Benefit Pension and Other Postretirement
PlansIn September 2006, the FASB issued SFAS 158  Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans  an Amendment of FASB Statements No. 87, 88, 106 and
132(R) (SFAS 158), which became effective for the Company on December 31, 2006. This
standard requires the Company to recognize the overfunded or underfunded status of each of its
defined benefit pension and other postretirement benefit plans as an asset or liability and to
reflect changes in the funded status through Accumulated other comprehensive income, as a
separate component of shareholders equity.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 16.
    
    Employees Post-retirement Benefits and Other Benefits(Continued)
 (d)
    
    SFAS 158  Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans(Continued)The incremental effect of applying SFAS 158 on individual line items of the balance sheet as
of December 31, 2006 were as follows:
 Pre-FAS 158with MinimumLiabilities
    
    FAS 158 AdoptionAdjustments
    
    Adjustments
    

Post-FAS 158Deferred taxes
    
    
    3,459
    
    
    
    (543
    )
    
    
    2,916Employees post-retirement projected
benefits obligation  Pension
    
    
    4,712
    
    
    
    131
    
    
    
    4,843Employees post-retirement projected
benefits obligation  Health care
    
    
    3,938
    
    
    
    1,495
    
    
    
    5,433Accumulated other comprehensive
income  pension adjustments
    
    
    (1,956
    )
    
    
    (96
    )
    
    
    (2,052
    )Accumulated other comprehensive
income  health care adjustments
    
    
    
    
    
    
    (987
    )
    
    
    (987
    )Total Liabilities and shareholders
equity
    
    
    98,680
    
    
    
    
    
    
    
    98,680Total shareholders equity
    
    
    45,382
    
    
    
    (1,083
    )
    
    
    44,299
 (e)
    
    Health care benefits  Assistência Multidisciplinar de Saúde (AMS)Petrobras and its Brazilian subsidiaries maintain a health care benefit plan (AMS), which
offers defined benefits and covers all employees (active and inactive) together with their
dependents. The plan is managed by the Company, with the employees contributing fixed amounts
to cover principal risks and a portion of the costs relating to other types of coverage in
accordance with participation tables defined by certain parameters including salary levels.The Companys commitment related to future benefits to plan participants is calculated on an
annual basis by an independent actuary, based on the Projected Unit Credit method. The health
care plan is not funded or otherwise collateralized by assets. Instead, the Company makes
benefit payments based on annual costs incurred by plan participants.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 16.
    
    Employees Post-retirement Benefits and Other Benefits(Continued)
 (e)
    
    Health care benefits  Assistência Multidisciplinar de Saúde (AMS)(Continued)Until 2006, the actuarial gains and losses generated by the differences between the values of
the obligation determined based on projections and the actual figures, were respectively
included or excluded when defining the net actuarial obligation.As of December 31, 2006, according to SFAS 158 (See Note 16(d)), the actuarial gains and losses
generated by the differences between the values of the obligation determined based on
projections and the actual figures, are respectively included or excluded from the calculation
of the actuarial obligation and recorded as Postretirements benefit reserves adjustments net
of tax- health care cost, as Accumulated Other Comprehensive Income,in shareholders equity.The gains and losses recorded as Accumulated Other Comprehensive Income are amortized over the
average remaining service period of the active employees.Upon adoption of SFAS 158, as of December 31, 2006 the liabilities related to health care
increased by US$1,495 and shareholders equity reduced by US$987, net of income taxes.On December 15, 2006, Petrobras implemented the Medicine Benefit, which provides special terms
on the acquisition of certain medicines by members of the AMS from participating drugstores,
located throughout Brazil.Following the introduction of this benefit, the unrecognized prior service cost estimated by
independent actuary, as of December 31, 2006 was US$86, and wil be amortized over the average
remaining service period of the active employees. The unrecognized prior service cost was
included in Accumulated Other Comprehensive Income and presented in Change in Benefit
Obligations, as Plan Amendments.For measurement purposes, a 10% annual rate of increase in the per capita cost of covered
health care benefits was assumed upon adoption of SFAS 106. The annual rate was assumed to
decrease to 4.5% from 2007 to 2036.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 16.
    
    Employees Post-retirement Benefits and Other Benefits(Continued)
 (e)
    
    Health care benefits  Assistência Multidisciplinar de Saúde (AMS)(Continued)Assumed health care cost trend rates have a significant effect on the amounts reported for the
post-retirement health care plans. A one-percentage-point change in assumed health care cost
trend rates would have the following effects:
 One percentage
    
    One percentagepoint-increase
    
    point-decreaseEffect on total of services and interest cost
component
    
    
    113
    
    
    
    (91
    )Effect on post-retirement benefit obligation
    
    
    832
    
    
    
    (679
    )
 LIQUIGÁS DISTRIBUIDORA S.A.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 16.
    
    Employees Post-retirement Benefits and Other Benefits(Continued)
 (f)
    
    Funded status of the plansThe funded status of the plans at December 31, 2006 and 2005, based on the report of the
independent actuary, and amounts recognized in the Companys balance sheets at those dates, are
as follows:
 As of December 31,2006
    
    2005Health
    
    
    
    
    
    HealthPension
    
    Care
    
    Pension
    
    careBenefits
    
    Benefits
    
    Benefits
    
    Benefits(2)
    
    (3)
    
    (2)
    
    (3)Change in benefit obligation:Benefit obligation at beginning of year
    
    
    14,422
    
    
    
    4,974
    
    
    
    11,509
    
    
    
    4,025Service cost
    
    
    174
    
    
    
    81
    
    
    
    146
    
    
    
    74Interest cost
    
    
    1,712
    
    
    
    595
    
    
    
    1,381
    
    
    
    489Actuarial loss (gain)
    
    
    244
    
    
    
    (599
    )
    
    
    363
    
    
    
    (28
    )Benefits paid
    
    
    (713
    )
    
    
    (175
    )
    
    
    (570
    )
    
    
    (141
    )Plan amendments  Medicine benefit
    
    
    
    
    
    
    86Others
    
    
    7
    
    
    
    
    
    
    
    (2
    )
    
    
    Gain on translation
    
    
    1,392
    
    
    
    471
    
    
    
    1,595
    
    
    
    555Benefit obligation at end of year (1)
    
    
    17,238
    
    
    
    5,433
    
    
    
    14,422
    
    
    
    4,974Change in plan assets:Fair value of plan assets at beginning of year
    
    
    9,413
    
    
    
    
    
    
    
    7,104
    
    
    
    Actual return on plan assets
    
    
    2,447
    
    
    
    
    
    
    
    1,609
    
    
    
    Companys contributions
    
    
    187
    
    
    
    175
    
    
    
    155
    
    
    
    141Employees contributions
    
    
    135
    
    
    
    
    
    
    
    112
    
    
    
    Benefits paid
    
    
    (713
    )
    
    
    (175
    )
    
    
    (570
    )
    
    
    (141
    )Others
    
    
    (1
    )
    
    
    
    
    
    
    (2
    )
    
    
    Gain on translation
    
    
    927
    
    
    
    
    
    
    
    1,005
    
    
    
    Fair value of plan assets at end of year
    
    
    12,395
    
    
    
    
    
    
    
    9,413
    
    
    
    Reconciliation:Funded status
    
    
    (4,843
    )
    
    
    (5,433
    )
    
    
    (5,009
    )
    
    
    (4,974
    )Unrecognized actuarial loss
    
    
    
    
    
    
    
    
    
    
    4,117
    
    
    
    1,970Net amount recognized
    
    
    
    
    
    
    
    
    
    
    (892
    )
    
    
    (3,004
    )Amounts recognized in the balance sheet consist of:Employees post-retirement benefits obligation
    
    
    (4,843
    )
    
    
    (5,433
    )
    
    
    (3,833
    )
    
    
    (3,004
    )Accumulated other comprehensive income
    
    
    3,110
    
    
    
    1,495
    
    
    
    2,941
    
    
    
    Net amount recognized
    
    
    (1,733
    )
    
    
    (3,938
    )
    
    
    (892
    )
    
    
    (3,004
    )
 
 (1)
    
    Projected benefit obligation, measured at December 31, 2006 and 2005. The TRANSPETRO
plan has no participants to date and the PEPSA plan is defined contribution for employees
above a specified salary level, and thus such plans have no effect on projected benefit
obligation. Thus, the projected benefit obligation disclosed above is aggregated to all
Petrobras group companies.(2)
    
    Includes PETROS (Petrobras group companies), PEPSA and PELSA pension benefits
obligations.(3)
    
    Includes AMS (Petrobras group companies) and Liquigás health care benefits
obligations. F-72




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PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 16.
    
    Employees Post-retirement Benefits and Other Benefits (Continued)
 (f)
    
    Funded status of the plans(Continued)Net periodic benefit cost includes the following components:
 As of December 31,2006
    
    2005Health
    
    
    
    
    
    HealthPension
    
    Care
    
    Pension
    
    Carebenefits
    
    benefits
    
    benefits
    
    benefitsService cost-benefits earned during the year
    
    
    174
    
    
    
    81
    
    
    
    146
    
    
    
    74Interest cost on projected benefit obligation
    
    
    1,712
    
    
    
    595
    
    
    
    1,381
    
    
    
    489Expected return on plan assets
    
    
    (1,157
    )
    
    
    
    
    
    
    (887
    )
    
    
    Gain on translation
    
    
    30
    
    
    
    11
    
    
    
    56
    
    
    
    22Recognized actuarial loss
    
    
    322
    
    
    
    140
    
    
    
    376
    
    
    
    1411,081
    
    
    
    827
    
    
    
    1,072
    
    
    
    726Employees contributions
    
    
    (133
    )
    
    
    
    
    
    
    (112
    )
    
    
    Net periodic benefit cost
    
    
    948
    
    
    
    827
    
    
    
    960
    
    
    
    726
  2006
    
    2005Pension benefits
    
    Health care benefits
    
    Pension benefits
    
    Health care benefitsDiscount rates
    
    Inflation:  4.5% + 6%
    
    Inflation: 4.5% + 6%
    
    Inflation:  5% + 6%
    
    Inflation:  5% + 6%Rates of increase in
compensationlevels
    
    Inflation: 4.5% + 2.02%
    
    Inflation: 4.5% + 2.02%
    
    Inflation: 5% + 2.08%
    
    Inflation: 5% + 2.08%Expected long-term rate of
returnon assets
    
    Inflation: 4.5% + 6.19%
    
    Not applicable
    
    Inflation:  5% + 6.19%
    
    Not applicableMortality table
    
    AT 2000*
    
    AT 2000*
    
    AT 2000
    
    AT 2000
 
 (*)
    
    Segregated by sex (male and female).  F-73




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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 16.
    
    Employees Post-retirement Benefits and Other Benefits(Continued)
 (f)
    
    Funded status of the plans(Continued)The determination of the expense and liability relating to the Companys pension plan involves
the use of judgment in the determination of actuarial assumptions. These include estimates of
future mortality, withdrawal, changes in compensation and discount rate to reflect the time
value of money as well as the rate of return on plan assets. These assumptions are reviewed at
least annually and may differ materially from actual results due to changing market and
economic conditions, regulatory events, judicial rulings, higher or lower withdrawal rates or
longer or shorter life spans of participants.According to the requirements of SFAS 87, and subsequent interpretations, the discount rate
should be based on current prices for settling the pension obligation. Applying the precepts of
SFAS 87 in historically inflationary environments such as Brazil creates certain issues as the
ability for a company to settle a pension obligation at a future point in time may not exist as
long-term financial instruments of suitable grade may not exist locally as they do in the
United States.Although the Brazilian market has been demonstrating signs of stabilization under the present
economic model, as reflected in market interest rates, it is not yet prudent to conclude that
market interest rates will be stable.In 2004, Petrobras approved a change to a new mortality table of the actuarial assumptions of
the pension and healthcare plans in Brazil; this new mortality table reflects updated
assumptions and changes relative to the profile of employees, retirees and pensioners, based on
longevity, age of invalidity and invalid mortality tables.(g)
    
    Cash contributions and benefit paymentsIn 2006, the Company contributed US$187 to its pension plans. In 2007, the Company expects
contributions to be approximately US$194. Actual contribution amounts are dependent upon
investment returns, changes in pension obligations and other economic factors. Additional
funding may ultimately be required if investment returns are insufficient to offset increases
in plan obligations.
 F-74




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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 16.
    
    Employees Post-retirement Benefits and Other Benefits(Continued)
 (g)
    
    Cash contributions and benefit payments(Continued)The following benefit payments, which include estimated future service, are expected to be paid
by the pension fund in the next 10 years:
 Pension benefits
    
    Health care benefits2007
    
    
    830
    
    
    
    1962008
    
    
    902
    
    
    
    2242009
    
    
    985
    
    
    
    2562010
    
    
    1,082
    
    
    
    2922011
    
    
    1,192
    
    
    
    332Subsequent five years
    
    
    7,949
    
    
    
    2,371
 
 17.
    
    Shareholders Equity
 (a)
    
    CapitalThe Companys subscribed and fully paid-in capital at December 31, 2006 consisted of
2,536,673,672 common shares and 1,850,364,698 preferred shares, and at December 31, 2005
consisted of 2,536,673,672 common shares and 1,849,478,028 preferred shares, as retroactively
restated for stock split, mentioned below. The preferred shares do not have any voting rights
and are not convertible into common shares and vice-versa. Preferred shares have priority in
the receipt of dividends and return of capital.On May 13, 2005, Petrobras management approved the proposed share split and the related
amendment to article 4 of the Companys by-laws. These issues were discussed by the
shareholders at the Extraordinary General Meeting (EGM) held on June 15, 2005.The Extraordinary General Meeting held on July 22, 2005 decided to effect a split of each
Companys share into four, resulting in a free distribution of 3 (three) new shares of the same
type for each original share, based on the shareholding structure at August 31, 2005. At the
same date, an amendment to article 4 of the Companys by-laws to cause capital be divided into
4,386,151,700 shares, of which 2,536,673,672 are common shares and
1,849,478,028 are preferred shares, with no nominal value, was approved. This amendment to the Companys bylaws is
effective from September 1, 2005.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 17.
    
    Shareholders Equity(Continued)
 (a)
    
    Capital(Continued)The relation between the American Depository Receipt (ADS) and shares of each class was changed
from one to four shares for one ADS. All share and per share information in the accompanying
financial statements and notes has been adjusted to reflect the result of the share split.Current Brazilian law requires that the Federal Government retain ownership of 50% plus one
share of the Companys voting shares.Shareholders at the Extraordinary General Meeting held June 01, 2006 approved the incorporation
of shares in PETROQUISA by Petrobras, pursuant to the re-ratification of the Protocol of Merger
and Incorporation on the share incorporation transaction executed by the two companies. The
Board of Directors of the Company approved the issue of 886,670 preferred shares of the Company
in connection with the incorporation of shares in PETROQUISA by Petrobras.To implement the transaction, the exchange ratio for the shares to be used was based on the net
equity value of both companies at the base date of December 31,
2005, when 4.496 preferred shares issued by Petrobras were attributed to each batch of 1,000 common or preferred shares
issued by PETROQUISA.No Petrobras shareholders had stated their intention to exercise the right withdraw by the
legal deadline of July 07, 2006. Five PETROQUISAs shareholders with a total interest of
1,015,910 shares exercised the right to withdraw by the established deadline (by July 05, 2006)
and were reimbursed at the rate of R$153.47 (US$71) per batch of 1,000 shares, using funds
provided by PETROQUISA, on July 10, 2006. Petrobras then acquired the shares for the same
price, thereby transferring ownership.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 17.
    
    Shareholders Equity(Continued)
 (a)
    
    Capital(Continued)On December 15, 2006, pursuant to article 29, section II of the Company By-laws, the Board of
Directors authorized the buyback of part of the preferred shares in circulation for future
cancellation, using funds from the profit reserves subject to the following terms:
 
    
    Objective: reduce the excess of cash and enhance the capital structure, helping to reduce the cost of Petrobras capital.
    
    Amount: up to 91,500,000 preferred shares, corresponding to 4.9% of the total of this class of share in circulation, which is 1,850,364,700 shares.
    
    Price: the acquisition will occur on the Stock Exchange, at market values on the acquisition dates throughout the buyback term.
    
    Term: up to 365 (three hundred and sixty-five) days as from December 15, 2006.
   F-77




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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 17.
    
    Shareholders Equity(Continued)
 (a)
    
    Capital(Continued)At an Extraordinary General Meeting held together with the General Ordinary Meeting, on April
3, 2006, the shareholders of the Company approved an increase in the Companys capital to
US$22,397 (R$48,248) through the capitalization of retained earnings accrued during previous
financial years, in the amount of US$6,969 (R$15,012), and without the issuance of new shares,
in accordance with article 169, paragraph 1, Law no. 6,404/76. This capitalization aimed to
bring the Companys capital in line with the investments of an oil company given intensive use
of capital and extended operating cycles.The General Extraordinary Meeting, held together with the General Ordinary meeting on March 29,
2004, increased the Companys capital to US$11,701, through the capitalization of revenue
reserves accrued during previous financial years, in the amount of US$4,439, and without the
issuance of new shares, in accordance with article 169, paragraph 1, Law No. 6,404/76. This
capitalization was made in order to bring the Companys capital in line with the investment
requirements of an oil company given intensive use of capital and extended operating cycles.The Extraordinary General Meeting held on March 29, 2004 also approved an increase in the
Companys authorized capital (paragraph 1, article 4, of the Companys by-laws) from R$30.000
million to R$60.000 million, through the issuance of up to 200,000,000 (two hundred million)
preferred shares for payment in cash, assets and credit capitalization.(b)
    
    Dividends and interest on shareholders equityIn accordance with the Companys by-laws, holders of preferred and common shares are entitled
to a minimum dividend of 25% of annual net income as adjusted under Brazilian Corporate Law. In
addition, the preferred shareholders have priority in the receipt of an annual dividend of at
least 3% of the book value of the shares or 5% of the paid-in capital in respect of the
preferred shares as stated in the statutory accounting records. As of January 1, 1996 amounts
attributed to shareholders as interest (see below) can be deducted from the minimum dividend
computation. Dividends are paid in Brazilian reais. The Company paid US$760 in dividends during
the year ended December 31, 2006 (2005  US$275  2004  US$366). No withholding tax is payable
on distributions of dividends made since January 1, 1996.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 17.
    
    Shareholders Equity(Continued)
 (b)
    
    Dividends and interest on shareholders equity(Continued)Brazilian corporations are permitted to attribute interest on shareholders equity, which may
either be paid in cash or be used to increase capital stock. The calculation is based on
shareholders equity amounts as stated in the statutory accounting records and the interest
rate applied may not exceed the Taxa de Juros de Longo Prazo (long-term interest rate or the
TJLP) as determined by the Brazilian Central Bank. Such interest may not exceed the greatest
of 50% of net income or 50% of retained earnings plus revenue reserves. Interest on
shareholders equity, is subject to withholding tax at the rate of 15%, except for untaxed or
exempt shareholders, as established by Law No. 9,249/95. The Company paid US$2,453 in interest
on shareholders equity during the year ended December 31, 2006 (2005  US$1,835  2004 -
US$1,443).The dividends related to the fiscal year ended December 31,2006 approved at the Ordinary
General Meeting held on April 2, 2007, in the amount of US$3,693, corresponding to US$0.84 per
common and preferred share and US$3.36 per ADS conforms to the by-laws in regard to guaranteed
rights of preferred shares (article 5), and distributes dividends calculated on the adjusted
net income to common and preferred shareholders. This dividend includes interest on capital
approved by the Board of Directors on October 20, 2006, in the amount of US$2,052, which was
made available to shareholders on January 4, 2007, based on the shareholding position of
October 31, 2006.The second portion of interest on capital, approved by the Board of Directors on December 15,
2006, was made available to shareholders on March 30, 2007, based on the shareholding position
of December 28, 2006, amounting to US$923. The final portion of dividends in the amount of
US$718, approved by the Board of Directors on February 12, 2007, which will be made available
based on the shareholding position of April 2, 2007, when occured the Ordinary General Meeting
which resolved the matter.Interest on capital amounts are subject to withholding tax at the rate of 15%, except for
untaxed or exempt shareholders, as established by Law No. 9,249/95. The dividends and the final
portion of the interest on shareholders equity will be paid until June 1, 2007 as established
by the General Shareholders Meeting. These amounts will be monetarily restated from December
31, 2006 to the initial date of payment, according to the variation in the SELIC rate.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 17.
    
    Shareholders Equity(Continued)
 (b)
    
    Dividends and interest on shareholders equity(Continued)Interest on shareholders equity was included with the proposed dividend for the year, as
established in the Companys by-laws, generated an income tax and social contribution credits
of US$1,012 (US$791 in 2005, and US$650 in 2004).The dividends related to the fiscal year ended December 31, 2005, approved at the General
Shareholders Meeting held April 3, 2006, in the amount of US$2,998, (including the portions of
interest on shareholders equity, in the amount of US$933, paid to the shareholders on January
5, 2006, and in the amount of US$939, paid to the shareholders on March 22, 2006) were made
available to shareholders on May 23, 2006.The dividends related to the fiscal year ended December 31, 2004, approved at the General
Shareholders Meeting held March 31, 2005, in the amount of US$1,900, (including the portion of
interest on shareholders equity, in the amount of US$1,239, paid to the shareholders on
February 15, 2005) were made available to shareholders on May 17, 2005.Brazilian law permits the payment of dividends only from retained earnings as stated in the
statutory accounting records. At December 31, 2006, the Company had appropriated all such
retained earnings.In addition, at December 31, 2006, the undistributed reserve in appropriated retained earnings,
amounting to US$20,074, may be used for dividend distribution purposes, if so approved by the
shareholders, however, the Companys stated intent is to use such reserve to fund working
capital and capital expenditures.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 17.
    
    Shareholders Equity(Continued)
 (c)
    
    Basic and diluted earnings per shareBasic and diluted earnings per share amounts have been calculated as follows:
 Year ended December 31,2006
    
    2005
    
    2004Income before extraordinary item
    
    
    12,826
    
    
    
    10,186
    
    
    
    6,190Extraordinary gain, net of taxes
    
    
    
    
    
    
    158
    
    
    
    Net income for the period
    
    
    12,826
    
    
    
    10,344
    
    
    
    6,190Less priority preferred share dividends
    
    
    (577
    )
    
    
    (426
    )
    
    
    (297
    )Less common shares dividends, up to the
priority preferred
Shares dividends on a per-share basis
    
    
    (791
    )
    
    
    (584
    )
    
    
    (407
    )Remaining net income to be equally allocated to
common and preferred shares
    
    
    11,458
    
    
    
    9,334
    
    
    
    5,486Weighted average number of shares outstandingCommon/ADS
    
    
    2,536,673,672
    
    
    
    2,536,673,672
    
    
    
    2,536,673,672Preferred/ADS
    
    
    1,849,903,144
    
    
    
    1,849,478,028
    
    
    
    1,849,478,028Basic and diluted earnings per share
Common and preferred (*) (**)
    
    
    2.92
    
    
    
    2.32
    
    
    
    1.41Basic and diluted earnings per ADS (*) (**)
    
    
    11.68
    
    
    
    9.28
    
    
    
    5.64
 
 (*)
    
    Per share data is presented after extraordinary item .(**)
    
    Considers effect of 4 for 1 stock split that occurred on September 1, 2005. (d)
    
    Capital reserves
 
    
    AFRMMRelates to the Merchant Marine (AFRMM) freight surcharges levied in accordance with relevant
legislation. These funds are used to purchase, enlarge or repair vessels of the Companys
transport fleet.
    
    Fiscal incentive reserveThis reserve consists of investments in tax incentives in the Northeast Investment Fund
(FINOR), arising from allocations of part of the Companys income tax.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 17.
    
    Shareholders Equity(Continued)
 (e)
    
    Appropriated retained earningsBrazilian Law and the Companys by-laws require that certain appropriations be made from
retained earnings to reserve accounts annually. The purpose and basis of appropriation to such
reserves are as follows:
 
    
    Legal reserveThis reserve is a requirement for all Brazilian corporations and represents the annual
appropriation of 5% of net income as stated in the statutory accounting records up to a limit
of 20% of capital stock. The reserve may be used to increase capital or to compensate for
losses, but may not be distributed as cash dividends.
    
    Undistributed earnings reserveThis reserve is established in accordance with Article 196 of Law No. 6,404/76 to fund the
Companys annual investment program. The appropriation of income for the year ended December
31, 2004 included a retention of earnings in the amount of US$4,396, of which US$4,392 related
to net income for the year and US$4 to the remaining balance of retained earnings, approved by
the General Shareholders Meeting held on March 31, 2005. This proposal was intended to cover
partially the annual investment program established in the capital budget for 2005.The destination of net income for the year ended December 31, 2005 included retention of
profits of US$6,453, with a US$6,449 amount, arising from net income for the year, and the
US$4 retaining earnings remaining balance. This retention was intended to cover partially the
annual investment program established in the 2006 capital budget, ad referendum of the General
Shareholders Meeting of April 3, 2006.The destination of net income for the year ended December 31, 2006 includes retention of
profits of US$8,004 with a US$7,775 amount, arising from net income for the year, and the
US$229 retaining earnings remaining balance. This proposal is intended cover to partially meet
the annual investment program established in the 2007 capital budget, ad referendum of the
General Shareholders Meeting of April 2, 2007.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 17.
    
    Shareholders Equity(Continued)
 (e)
    
    Appropriated retained earnings(Continued)
 
    
    Statutory reserveThis reserve is provided through an amount equivalent to a minimum of 0.5% of subscribed and
fully paid in capital at year-end. The reserve is used to fund the costs incurred with
research and technological development programs. The accumulated balance of this reserve
cannot exceed 5% of the capital stock, according to Article 55 of the Companys by-laws.
 
 18.
    
    Domestic and International Acquisitions
 (a)
    
    Acquisition of Pasadena RefineryOn September 1, 2006, the Company, through its wholly owned subsidiary Petrobras America Inc.,
concluded the acquisition of 50% of the shares of Pasadena Refinery System, Inc., a US based
refining and trading company owned by the Belgian group Compagnie Nationale a Portefeuille SA -
CNP. The purchase price was of approximately US$416 and was based on economic valuation model
of expected future earnings of the refinery. Due to immateriality, proforma information has
not been presented.The acquisition was consumated principally to expand Petrobras international activities
according to the Strategic Plan.The current capacity of the Pasadena Refinery is of about 100,000 bpd. The Company and the
other partner are already conducting studies to expand its capacity and install units that will
enable it to process heavy oils, including Petrobras Marlim production, and deliver high
quality products.With Petrobras entering as a partner in the enterprise, the refinery will be modified in order
to process approximately additional 70,000 bbl/day of heavy oil and other batches, including
production in the Marlim field. The refinerys operational modernization process should be
completed in four years and all of the by-products to be produced will comply with the highest
standards of quality adopted in the United States.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 18.
    
    Domestic and International Acquisitions(Continued)
 (b)
    
    Acquisition of Liquigás Distribuidora S.A.On August 9, 2004, the Companys subsidiary, Petrobras Distribuidora S.A.  BR, acquired from
ENI B.V. 100% of the capital of its Brazilian subsidiary Liquigás Distribuidora S.A. (former
Sophia do Brasil S.A. and Agip do Brasil S.A.), assuming its control from that date.The purchase price paid for Liquigás Distribuidora S.A. was based on an economic valuation
model of expected future earnings of Liquigás Distribuidora S.A., which considered relevant
factors, including the potential effects of the economic situation of Brazil. The acquisition
of Liquigás Distribuidora S.A. totaled US$511. The Company paid US$225 in cash, and settled a
debt of US$225 that the former Agip do Brasil had with ENI BV. An additional amount of US$61
related to subsequent purchase price adjustments was paid on December 10, 2004.The acquisition of Liquigás Distribuidora S.A. was recorded using the purchase method of
accounting and the financial statements of Liquigás Distribuidora S.A. were included in the
consolidated Petrobras financial statements, beginning in August of 2004. The purchase price
allocation was based on the fair market value.Liquigás Distribuidora S.A. is a liquefied petroleum gas (LPG), fuel and lubricant distributor,
and has 21.5% share in the LPG market in Brazil, 3.8% of total fuel distribution domestic
market with a network of more than 1,500 service stations and 3% share in the Brazilian
lubricant distribution market.The acquisition of Liquigás Distribuidora S.A. contributes toward achieving the objectives
established in Petrobras Strategic Planning for its subsidiary BR of expanding its share in
the LPG distribution segment, and also of consolidating its penetration in the automotive fuel
distribution market in certain regions of the country.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 18.
    
    Domestic and International Acquisitions(Continued)
 (b)
    
    Acquisition of Liquigás Distribuidora S.A.(Continued)The following unaudited pro forma summary financial information presents the consolidated
results of operations as if the acquisition of Liquigás Distribuidora S.A. had occurred at the
beginning of the years presented.
 2004Pro-formaAs reported
    
    (unaudited)Net operating revenues
    
    
    38,428
    
    
    
    39,529Cost of Sales
    
    
    (21,279
    )
    
    
    (22,222
    )Net income for the period
    
    
    6,190
    
    
    
    6,182Basic and diluted earnings per common and
preferred share (*)
    
    
    1.41
    
    
    
    1.41Basic and diluted earnings per ADS (*)
    
    
    5.64
    
    
    
    5.64
 
 (*)
    
    Considers effect of 4 for 1 stock split that occurred on September 1, 2005. (c)
    
    Acquisition of Triunfos shares by PETROQUISAThe Companys subsidiary, Petrobras Química S.A.  PETROQUISA decided to exercise its
preemptive right in the acquisition of shares held by PRIMERA Indústria e Comércio Ltda. in the
capital of Petroquímica Triunfo S.A. (Triunfo) in response to the put option.After exercise of its preemptive right on May 14, 2004, PETROQUISA, which had previously held
45.22% of voting capital and 59.92% of capital stock of Petroquímica Triunfo increased its
interest to 70.45% of voting capital and 85.04% of its capital stock. The results of Triunfo
have been included to the Petrobras Consolidated Financial Statements since May of 2004. Due to
immateriality, the Company has not prepared pro forma information respective to this business
combination.The acquisition was consummated principally to expand Petrobras petrochemical activities
according to the Strategic Plan approved in May 14, 2004.The Company paid US$32 (R$101 million) in cash and this purchase price was based on an economic
valuation model of expected future earnings of Petroquímica Triunfo S.A.Petroquímica Triunfo S.A. produces low-density polyethylene and has an installed capacity of
160,000 tons per year. Triunfos activities are exclusively in Brazil.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 18.
    
    Domestic and International Acquisitions(Continued)
 (d)
    
    Acquisition of FAFEN Energia S.A.On December 27, 2004, Petrobras approved the acquisition of the remaining 80% interest in the
FAFEN Energia S.A. thermoelectric power plant, thus bringing its ownership interest to 100%.
Petrobras will pay EDP Brasil S.A. US$36 for the acquisition, payable as follows: 50%  30 days
after the closing of the operation, 25% one year thereafter and the remaining 25%  two years
thereafter. This thermoelectric power plant has an installed capacity of 133 MW for electricity
generation and 42 ton/hour for steam generation and is located in the State of Bahia.The acquisition of FAFEN was recorded using the purchase method of accounting and the assets
and liabilities were included in the consolidated Petrobras financial statements as of December
31, 2004. Results of operations were included in the consolidated Petrobras financial
statements beginning on January 2005.The purchase price for FAFEN was allocated based on the fair market value of the assets
acquired and the liabilities assumed as of the acquisition date as determined by independent
appraisers. Due to immateriality, the Company has not prepared pro-forma information respective
to this business combination.(e)
    
    Acquisition of Baixada Santista Energia Ltda.  BSEOn March 9, 2005, Petrobras approved the conditions agreed with Marubeni Corporation, for the
purchase of quotas held by Marubeni Corporation in Baixada Santista Energia Ltda.  BSE, a
special purpose company incorporated within the UTE Cubatão Project. This operation involves
approximately US$90, and project resumption will meet the present requirements for the energy
and steam power generation system renewal for the Cubatão Refinery (RPBC). Upon conclusion,
this plant will have an installed capacity of 200 MW for electricity generation and 400
ton/hours for steam generation.The Thermoelectric Plant of Cubatão is expected to start operating in October 2007 and will
supply 47 MW and 415 t/h of steam to Refinaria Presidente Bernardes in Cubatão (RPBC),
belonging to Petrobras. Electricity surplus will be made available to the market. Due to
immateriality, the Company has not prepared pro forma information respective to this business
combination.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 18.
    
    Domestic and International Acquisitions(Continued)
 (f)
    
    Acquisition of new businesses in Colombia, Paraguay and UruguayIn December 2005, Petrobras signed three Share Purchase Agreements for the acquisition of fuel
businesses (retail and trade markets) in Colombia and of total operations conducted by Shell in
Paraguay and Uruguay.In March 2006, Petrobras, through its controlled company Petrobras International Braspetro
B.V., acquired the business of commercialization and distribution of Shell in Paraguay, related
to fuel operations (retail and commercial market), including gas stations with convenience
stores in all Paraguayan territory; LPG commercialization assets; installations for
commercialization of aviation products for the airports in Asunción and Cidade Del Este.On April 28, 2006 Petrobras concluded the purchase of the assets of Shell in Colombia, relating
to the fuel distribution and commercialization. The acquisition comprises 39 service stations
and convenience shops in Bogotá and surrounding areas, storage base and lubricant mixing plant
in Puente Aranda, and one terminal in Santa Marta.In June 2006, Petrobras acquired, via its subsidiary Petrobras International Braspetro B.V. -
PIB BV, Shells assets in Uruguay relating to the distribution and sale of fuel throughout
Uruguay.The Company paid US$116 for these acquisitions that are part of a package involving the assets
of Shell in Colombia, in Paraguay and in Uruguay.Due to immateriality, the Company has not prepared pro-forma information respective to this
business combination.(g)
    
    Acquisition of a 49% interest in TERMOBAHIAThe Special Purpose Company (SPC) BLADE Securities Ltd (BLADE), was created by the Deutsche
Bank (DB), in order to support Petrobras in its transactions related to the acquisition of a
49% interest held by ABB-EV in TERMOBAHIA power plant. (See note 14).
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 18.
    
    Domestic and International Acquisitions(Continued)
 (g)
    
    Acquisition of a 49% interest in TERMOBAHIA(Continued)On December 28, 2005, Petrobras exercised its preemptive right and concluded the acquisition
of a 49% interest held by ABB-EV in TERMOBAHIA, comprising shares and amounts receivable in
the total amount of US$45, under a financial structuring agreed upon with the IDB.This financial structuring involves two simultaneous operations: the acquisition of ABB-EVs
rights and the sale of such rights to a private institution until a strategic partner is
introduced by Petrobras within a maximum period of one year. The Companys previous investment
on TERMOBAHIA was being accounted for in accordance to FIN 46 ( R )On August 10, 2006, Petrobras concluded the acquisition of the equity interest and the credits
relating to the Subordinated Loan of EIC Electricity S.A. in TERMOBAHIA for the amount of
US$2, raising its interest to 31%.At the conclusion of this operation, the equity interests in TERMOBAHIAs were held as
follows: Petrobras 31%, PETROS 20% and BLADE 49%.Due to the immateriality, proforma information has not been presented (see Note 14 discussion
regarding Blade).(h)
    
    Agreement for sale and association with Teikoku Oil Co. Ltd. in operations in EcuadorOn January 11, 2007 the Ministry of Energy and Mines of Ecuador approved the agreement between
Petrobras Energia S.A.  PESA and Teikoku for sale of 40% of the rights and obligations in
the participation contracts in Blocks 18 and 31 in Ecuador. The Company does not expect to
have a material impact on its Financial Statements as a result of this agreement.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 18.
    
    Domestic and International Acquisitions(Continued)
 (i)
    
    EletroboltOn August 13, 2004, the Board of Directors of Petrobras approved the financial conditions for
the acquisition of 100% interest of Eletrobolt Thermoelectric plant from Sociedade Fluminense
de Energia, with a share purchase price of US$65. The Companys previous variable interest in
Eletrobolt was being accounted for in accordance with FIN 46(R) and the 2004 share acquisition
was accounted for as a business combination but had no material impact on Petrobras
consolidated accounting records. Due to immateriality, proforma information has not been
presented.(j)
    
    TermorioIn February, 2005, in order to facilitate the financial restructuring process of Termorio,
Petrobras acquired the remaining 50% interest of Termorio  ́s voting capital from NRG for US$83
bringing its ownership to 100% of total and voting capital. The Companys previous variable
interest in Termorio was being accounted for in accordance with FIN 46(R) and the 2005 share
acquisition was accounted for as a business combination but had no material impact on
Petrobras consolidated accounting records. Due to immateriality, proforma information has not
been presented.(k)
    
    TermocearáOn June 24, 2005, Petrobras acquired Termoceará Ltda., a plant with net generation capacity of
220 MW/h. The acquisition price was equal to US$137, of which US$81 related to the purchase of
tangible assets of the thermoelectric plant and US$56 was designated to settle payables to the
lenders of the project (BNDES and Eximbank). The excess of amounts paid over fair value of
assets acquired is attributable to intangible assets and goodwill.The Companys previous variable interest in Termoceará was being accounted for in accordance
with FIN 46(R) and the 2005 share acquisition was accounted for as a business combination but
had no material impact on Petrobras consolidated accounting records. Due to immateriality,
proforma information has not been presented.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 18.
    
    Domestic and International Acquisitions(Continued)
 (l)
    
    TermoMacaé Ltda. and TermoMacaé Comercializadora de Energia Ltda. (former Macaé
Merchant)In February 2005, the arbitration proceedings began related to the dispute between Petrobras
and El Paso arising from the economic and financial imbalance deemed to exist relative to the
construction and operation of the Macaé Merchant Thermoelectric Plant. Petrobras claims such
contract to be invalid and require re-negotiation as a result of changed economics. Related to
the disputes, Petrobras made a court ordered bank deposit related to unpaid contingency the
amounts, while awaiting final decision of the Arbitration proceedings.In March 2006 Petrobras and El Paso agreed to settle certain disputes involving the Macaé
Merchant Consortium. Under this settlement, the capital participation contract was terminated
and El Paso finalized the sale of the plant to Petrobras, which in April 2006 paid US$357 to
acquire the companies TermoMacaé Ltda (f.k.a. El Paso Rio Claro Ltda.) and TermoMacaé
Comercializadora de Energia Ltda. (f.k.a. El Paso Rio Grande Ltda.), terminating the Macaé
Merchant Consortium Contract and thereby settling the controversies.Under the acquisition process, El Paso gave guarantees to Petrobras relating to certain
liabilities, limited to US$120, including approximately US$78, referring to a federal tax
assessment, which El Paso believes it has excellent chances of successfully contesting, and for
which it has presented its defense to the Brazilian tax authorities. In respect of the
acquisition of the assets, any successes involving given tax benefits, tax receivables and
potential recoveries on financial revenues shall be prorated between Petrobras and El Paso as
mutually agreed.On July 05, 2006 Petrobras was reimbursed for the amounts deposited by virtue of the preliminary
decision pronounced by the Arbitral Tribunal, to the amount of US$259, including financial
yields, given the dismissal of the Arbitration Proceeding.The Companys previous variable interest in TermoMacaé was being accounted for in accordance
with FIN 46(R) and the 2006 share acquisition was accounted for as a business combination but
had no material impact on Petrobras consolidated accounting records. Due to immateriality,
proforma information has not been presented.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 18.
    
    Domestic and International Acquisitions(Continued)
 (m)
    
    Acquisition of shares in Gaseba Uruguai S.A.In November 2005, the Board of Directors of Petrobras approved the acquisition of 51% of the
capital of Gaseba Uruguay  Grupo Gaz de France S.A. (Gaseba), a natural gas distribution
concession company in Montevideo, Uruguay from GDF International.In June 2006, Petrobras acquired 66% of the shares in Gaseba. The share acquisition took place
over two stages: 51% of the shares held by Grupo Gaz de France were acquired on June 2, 2006
and 15% of the shares held by Acodike Supergas S.A. were acquired on June 29, 2006. The
acquisition price was equal to US$14 and due to immateriality, proforma information has not
been presented.
 
 19.
    
    Commitments and ContingenciesPetrobras is subject to a number of commitments and contingencies arising in the normal course of
its business. Additionally, the operations and earnings of the Company have been, and may be in
the future, affected from time to time in varying degrees by political developments and laws and
regulations, such as the Federal Governments continuing role as the controlling shareholder of
the Company, the status of the Brazilian economy, forced divestiture of assets, tax increases and
retroactive tax claims, and environmental regulations. The likelihood of such occurrences and
their overall effect upon the Company are not predictable.The Company currently has several contracts to purchase crude oil, diesel fuel and other oil
products, which require the Company to purchase a minimum of approximately 129,925 barrels per
day at respective current market prices.Petrobras provided guarantees to the ANP for the minimum exploration program defined in the
concession contracts for exploration areas, totaling US$2,425 (US$2,244 in 2005). Out of this
total, US$1,137(US$1,875 in 2005) represents a pledge on the oil to be extracted from previously
identified fields already in production, for areas in which the Company had already made
commercial discoveries or investments. For areas whose concessions were obtained by bidding from
the ANP, Petrobras has given bank guarantees totaling US$372 through December 31, 2006 (US$369 in
2005).
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 19.
    
    Commitments and Contingencies(Continued)In 1993, the Company signed a long-term contract to buy gas (The Gas Supply Agreement or GSA)
with Yacimientos Petrolíferos Fiscales Bolivianos, the Bolivian state oil company for the
purchase of natural gas. Under this contract, with maturity in 2019, the Company is required to
purchase 80% of the natural gas transported through the Bolivia/Brazil natural gas pipeline over
a 20 year term at contract prices ranging from US$1.07 per MMBTU to US$1.17 MMBTU, based upon
throughput. The pipeline achieved an average throughput of 24.4 million cubic meters per day
during 2006.The Company has exclusive supply contracts with certain service stations. These contracts are
typically for seven years and require the Company to sell product at market prices.
 (a)
    
    LitigationThe Company is a defendant in numerous legal actions involving civil, tax, labor, corporate and
environment issues arising in the normal course of its business. Based on the advice of its
internal legal counsel and managements best judgment, the Company has recorded accruals in
amounts sufficient to provide for losses that are considered probable and reasonably estimable.
At December 31, 2006 and 2005, the respective amounts accrued by type of claims are as follows:
 As of December 31,2006
    
    2005Labor claims
    
    
    38
    
    
    
    7Tax claims
    
    
    47
    
    
    
    87Civil claims
    
    
    97
    
    
    
    79Commercials claims and other contingencies
    
    
    51
    
    
    
    62233
    
    
    
    235Contingencies for joint liability
    
    
    
    
    
    
    75Total
    
    
    233
    
    
    
    310Current contingencies
    
    
    (25
    )
    
    
    (72
    )Long-term contingencies
    
    
    208
    
    
    
    238
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 19.
    
    Commitments and Contingencies(Continued)
 (a)
    
    Litigation(Continued)As of December 31, 2006 and 2005, in accordance with Brazilian law, the Company had paid US$816
and US$775, respectively, into federal depositories to provide collateral for these and other
claims until they are settled. These amounts are reflected in the balance sheet as restricted
deposits for legal proceedings and guarantees.The Company is a party to several contracts related to the acquisition and upgrade of
production Platform P-36, which was lost in its entirety in 2001. Pursuant to those contracts,
the Company had an obligation to pay the insurance proceeds to a Security Agent for
distribution according to specified clauses established in the contracts. The Company contends
that it is entitled to the insurance proceeds under the contractual arrangements, and other
parties contend that they are also entitled to such proceeds. The issue is subject to
international proceedings in a British court. Pending determination of the issue by the
international court, the Company committed to deposit cash collateral in the amount of US$175,
in order to facilitate the issuance of a guarantee by a Security Agent, for the payment of
creditors. At December 31, 2006, this amount was included in the balance sheet as restricted
deposits for legal proceedings and guarantees.Plaintiff: Kallium Mineração S.A.On May 28, 1981, Kallium Mineração S.A. brought an action against Petromisa, a former
subsidiary of Petrobras, in the Federal Court of the State of Rio de Janeiro alleging damages
of approximately US$450 relating to the rescission of a contract to develop a potassium salt
mine. On August 10,1999, a decision was handed down that considered most of the plaintiffs
petitions to be without grounds (losses, damages and loss of profit), requiring only the
Company to reimburse all expenses incurred as a result of the prospecting research carried
out, in accordance with amounts to be calculated in the final award. No award for loss of
profit was established in the decision. In September of 1999 both parties filed appeals with
the appeals court in the state of Rio de Janeiro. Granted by the lower court, both parties
filed appeals, which were rejected. Petrobras is awaiting judgment of the Extraordinary Appeal
filed before the STF and the special appeal on December 18, 2003. A special appeal brought by
Kallium is also pending judgment. Based on the opinion of its legal advisers, management does
not expect an unfavorable outcome in this case and considers the risk of loss with respect to
this lawsuit to be possible.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 19.
    
    Commitments and Contingencies(Continued)
 (a)
    
    Litigation(Continued)Plaintiff: PORTO SEGURO IMÓVEIS LTDA.On November 23, 1992, PORTO SEGURO IMÓVEIS LTDA., a minority shareholder of PETROQUISA, filed a
suit against Petrobras in the State Court of Rio de Janeiro related to alleged losses resulting
from the sale of a minority holding by PETROQUISA in various petrochemical companies included
in the National Privatization Program introduced by Law No. 8,031/90.In this suit, the plaintiff claims that Petrobras, as the majority shareholder in PETROQUISA,
should be obliged to reinstate the loss caused to the net worth of PETROQUISA, as a result of
the acts that approved the minimum sale price of its holding in the capital of privatized
companies. A decision was handed down on January 14, 1997 that considered Petrobras liable with
respect to PETROQUISA for losses and damages in an amount equivalent to US$3,406.In addition to this amount, Petrobras was required to pay the plaintiff 5% of the value of the
compensation as a premium (see art. 246, paragraph 2 of Law No. 6,404/76), in addition to
attorneys fees of approximately 20% of the same amount. However, since the award would be
payable to PETROQUISA and Petrobras holds 99.0% of its capital, the effective disbursement if
the ruling is not reversed will be restricted to 25% of the total award. Petrobras filed an
appeal with the State Court of Rio de Janeiro, and received a favorable decision from the Third
Civil Court on February 11, 2003, which, by a majority vote, accepted Petrobras appeal to
reverse the judgment and ruled the plaintiffs case to be without grounds, the revising judges
decision that held the case to be partially with grounds to reduce the amount of compensation
to US$1,538 being overruled. Against this decision, Porto Seguro filed another appeal (motion
to reverse or annul) with the State Court of Rio de Janeiro, and the Fourth Civil Court handed
down a unanimous decision on March 30, 2004 requiring Petrobras to indemnify PETROQUISA and
Porto Seguro the amounts of US$2,359 and US$590 respectively (the latter representing 5% in
premium and 20% in attorneys fees). Due to this result, Petrobras lodged appeal with high and
supreme courts, which was dismissed. In view of this decision, interlocutory appeal was filed
with High Court  STJ and Supreme Court  STF, which was converted into Special Appeal by STJ.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 19.
    
    Commitments and Contingencies(Continued)
 (a)
    
    Litigation(Continued)Plaintiff: PORTO SEGURO IMÓVEIS LTDA. (Continued)On May 6, 2005, the Superior Court of Justice (STJ) accepted the interlocutory appeal and
determined that the special appeal was to be proceeded with. Porto Seguro lodged an appeal
against the interlocutory decision, which was accepted by a majority vote on December 15, 2005,
and suspension of the special appeal filed by Petrobras was reinstated. The Company filed an
Interlocutory appeal against this latest decision, which was ruled on April 4, 2006 and which
unanimously overturned a decision which restored the impediment on the Special Appeal brought
by Petrobras, due to an impediment on one of the justices, determining another decision be
pronounced. Special Appeal by PORTO SEGURO rejected under a judgment delivered on September 05,
2006. In performance of the decision published on June 05, 2006, we are now awaiting assignment
of the agenda to re-examine the matter relating to the blocking of Petrobras Special Appeal.
If the award is not reversed, the indemnity estimated to PETROQUISA, including monetary
correction and interest, would be US$4,612. As Petrobras owns 100% of PETROQUISAs share
capital, a portion of the indemnity estimated at US$3,044, will not represent a disbursement
from Petrobras Group. In case of loss, Petrobras would have to pay US$201 to Porto Seguro and
US$922 to Lobo & Ideas by means of attorneys fees, however based on the opinion of its legal
advisers, the Company does not expect to obtain an unfavorable ruling in this case and
considers the risk of loss with respect to this lawsuit to be possible.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 19.
    
    Commitments and Contingencies(Continued)
 (a)
    
    Litigation(Continued)Plaintiff: The Fishermans Federation of the State of Rio de Janeiro (FEPERJ)The Fishermans Federation of the State of Rio de Janeiro (FEPERJ) filed a civil suit against
the Company with the Rio de Janeiro State Court for compensation of miscellaneous damages
amounting to US$224, which it is claiming in the name of its members, as a result of the oil
spill in Guanabara Bay on January 18, 2000. At that time, Petrobras paid out extrajudicial
indemnification to everyone who proved to be fishermen when the accident occurred. According
to the records of the national fishermens register, only 3.339 could claim indemnification. A
decision was handed down on February 7, 2002 which ruled the claim partially without grounds,
rejecting pain and suffering, and requiring the Company to pay compensation for material
damages and loss of profit to be calculated at the award phase. The ruling expressly declares
that it is not reasonable to consider an award based on the amount claimed, since it was
without economic base. On February 02, 2007 a decision, partly accepting the expert report, was
published. That expert report was prepared to stablish the parameters for calculating the
award, which amounts to US$516 at that date. Petrobras will appeal before Rio de Janeiros
Supreme Court, because the parameters set in the decision differs from those already defined by
that same court. In accordance with the Companys expert assistant calculation, the recorded
amount of US$12 represents the award that will be set by the court at the end of the process.
Based on its legal counsels opinion, the Company  ́s Administration believes it is possible that
the Company will not prevail in this case.Plaintiff: São Paulo State tax authoritiesThe São Paulo tax authorities filed a tax suit against the Company, to demand payment of ICMS
on naphta-petrochemical operations carried out in the state for the period from September 1984
to February 1989. The suit was tried at all levels and the legal system eventually opposed the
argument defended by the Company, having understood that, in the specific case of these
operations, ICMS would apply.The case was settled and the Company entered into an agreement to pay US$122 plus interest,
totaling US$151, in 60 equal successive installments beginning April 2005.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 19.
    
    Commitments and Contingencies(Continued)
 (a)
    
    Litigation(Continued)Plaintiff: São Paulo State tax authorities(Continued)Taking advantage of the tax benefits awarded by Law 12.399/06, in November 2006 the Company
settled the debt in advance by paying the amount of US$53, reducing the fine amount by 80% and
the interest amount by 50%, generating a real saving of US$101.Plaintiff: Unions of Petroleum WorkersPetrobras is a defendant in three labor claims filed by the UNIONS OF PETROLEUM WORKERS of
three federal states (Rio de Janeiro, São Paulo and Sergipe), alleging that official inflation
rates for 1987, 1989 and 1990 (understatement of the official inflation rate  Bresser, Summer
and Collor Plans) were not fully included in the workers salaries.The suits are in different procedural phases, as described below:UNIONS OF PETROLEUM WORKERS of federal state of Sergipe (SINDIPETRO/SE): Case ruled to have
grounds. Process on enforcement phase. The judge granted decision determining SINDIPETRO/SE to
present new calculations, which is pending. This is awaited. The maximum exposure including
monetary restatement for Petrobras as of December 31, 2006 is US$47 calculations, which is
pending. Based on the opinion of its legal advisers, the Company considers the risk of loss
with respect to this lawsuit to be possible.UNIONS OF PETROLEUM WORKERS of federal state of Rio de Janeiro (SINDIPETRO/RJ): Petrobras
understands there is no debt, since corresponding amounts were paid by the clause of the
collective bargain in 1993. The maximum exposure including monetary restatement for Petrobras
as of December 31, 2006 is US$86. Based on the opinion of its legal advisers, the Company
considers the risk of loss with respect to this lawsuit to be remote.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 
 19.
    
    Commitments and Contingencies(Continued)
 (a)
    
    Litigation(Continued)Plaintiff: Unions of Petroleum Workers(Continued)UNIONS OF PETROLEUM WORKERS of federal state of São Paulo (SINDIPETRO/SP): Case ruled to have
grounds, with final and unappealable decision delivered. Petrobras filed Termination Action -
denied. Appeal by Petrobras was accepted and decision granted suspending agreement and issuing
new decision to deny plaintiffs request on Labor Claim. Extraordinary Appeal filed by
SINDIPETRO, which was denied entertainment, and is now pending judgment on the Interlocutory
Appeal subsequently filed.The maximum exposure including monetary restatement for Petrobras as of December 31, 2006 is
US$45. Based on the opinion of its legal advisers, the Company considers the risk of loss with
respect to this lawsuit to be remote.Based on previous favorable ruling on similar cases and TST abridgment of law, Company
management does not expect an unfavorable outcome on the cases. Petrobras contested the expert
report determining the amount of indemnification, which is pending judgment. Management
assesses risk of loss to be possible.Plaintiff: Adailton de Oliveira Bittencourt and OthersAdailton de Oliveira Bittencourt and Others, filed Labor claims for payment of break and lunch
hour, after introduction of 6 working hours per day by 1988 Brazilian Constitution. Period
claimed: September 28, 1989 to November 30, 1992 due to the introduction of a six-hour working
day by the 1988 Federal Constitution. Denied in first instance. Appeal granted by the Regional
Labor Tribunal (TRT). Petrobras filed appeal for clarification of decision, denied on
September 25, 2002 and October 24, 2002 respectively. A Motion for Clarification was lastly
filed on October 15, 2004 to obtain further clarification without changing the ruling. Final
and unappealable decision pronounced. The case is currently at the award calculation stage, at
which the amounts due to the plaintiffs are determined. The maximum exposure including
monetary restatement for Petrobras as of December 31, 2006 is US$3. Based on the opinion of its
legal advisers, the Company considers the risk of loss with respect to this lawsuit to be
possible.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 19.
    
    Commitments and Contingencies(Continued)
 (a)
    
    Litigation(Continued)Plaintiff: Distribution CompaniesThe Company was sued in court by certain small oil distribution companies under the allegation
that it does not pass on to state governments the State Value-Added Tax (ICMS) collected
according to the legislation upon fuel sales. These suits were filed in the states of Goiás,
Tocantins, Bahia, Pará, Maranhão and in the Federal District.Of the total amount related to legal actions of approximately US$419, up to December 31, 2006
some US$38 (US$34 in 2005) had been withdrawn from the Companys accounts as a result of
judicial rulings of advance relief, which were annulled as a result of an appeal filed by the
Company.The Company, with the support of the state and federal authorities, has succeeded in stopping
the execution of other withdrawals, and is making all possible efforts to obtain reimbursement
of the amounts that were previously withdrawn from its accounts.(b)
    
    Notification from the INSS  joint liabilityThe Company received various tax assessments related to social security amounts payable as a
result of irregularities in presentation of documentation required by the INSS, to eliminate
its joint liability in contracting civil construction and other services, stipulated in
paragraphs 5 and 6 of article 219 and paragraphs 2 and 3 of article 220 of Decree No. 3,048/99.In order to guarantee the appeals filing and/or the obtainment from INSS of Debt Clearance
Certificate, US$55 from the amounts disbursed by the Company is recorded as sheet as restricted
deposits for legal proceedings and guarantees and may be recovered under the respective
proceedings in progress, which are related to 343 assessments amounting to US$178. Petrobras
legal department expects a possible defeat regarding these assessments, as it considers the
risk of future disbursement to be possible.Petrobras had disbursed during 2006 US$35 (US$85 in 2005), referring to administrative suits
filed by the INSS claiming the Companys joint liability.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 19.
    
    Commitments and Contingencies(Continued)
 (b)
    
    Notification from the INSS  joint liability(Continued)Internally, procedures were revised to improve the inspection of contracts and require the
presentation of documents, as stipulated in the legislation, to substantiate the payment of
INSS amounts due by contractors. Petrobras continues to analyze each tax assessment received in
order to recover amounts, as permitted through administrative processes of the INSS.(c)
    
    Tax assessmentsPlaintiff: Internal Revenue Service of Rio de Janeiro  Withholding Tax related to charter of
vesselsThe Internal Revenue Service of Rio de Janeiro filed two Tax Assessments against the Company in
connection with Withholding Tax (IRRF) on foreign remittances of payments related to charter of
vessels of movable platform types for the years 1998 through 2002.The Internal Revenue Service, based on Law No. 9,537/97, Article 2, considers that drilling and
production platforms cannot be classified as sea-going vessels and therefore should not be
chartered but leased. Based on this interpretation, overseas remittances for servicing
chartering agreements would be subject to withholding tax at the rate of 15% or 25%.The Company disagrees with the Internal Revenue Services interpretation as to charter
contracts, given that the Federal Supreme Court has already ruled that, in the context of its
judgment with respect to the IPI (Federal VAT) tax, offshore platforms are to be classified as
sea-going vessels. Additionally, the 1994 and 1999 Income Tax Regulations support the
non-taxation (RIR/1994) and the zero tax rate (RIR/1999) for the remittances in question.On June 27, 2003, the Internal Revenue Service served a tax assessment notice on the Company
amounting to R$3,064 million (US$1,066) covering the period from 1999 to 2002. Using the same
arguments, on February 17, 2003, another tax assessment notice had already been issued for R$93
million (US$32) with respect to 1998, against which, on March 20, 2003, the Company filed an
appeal. According to the fiscal authorities, the Company should have withheld that tax,
incident on remittances made to abroad for payment of the hiring of vessels of the mobile
platform type, used in oil exploration and production.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 19.
    
    Commitments and Contingencies(Continued)
 (c)
    
    Tax assessments(Continued)Plaintiff: Internal Revenue Service of Rio de Janeiro  Withholding Tax related to charter of
vessels(Continued)Petrobras has defended itself against these tax assessments. Administrative appeals were lodged
with High Court of Appeals for Fiscal Matters, last administrative level, which still await
trial. The maximum exposure including monetary restatement for Petrobras as of December 31,
2006 for the period 1998 is US$55 and for the period 1999 to 2002 is US$1,831. Based on its
legal counsels advice, the Company has assessed risk of loss to be possible.Plaintiff: Federal finance authorities  State Value-Added Tax related to the Sinking of P-36
PlatformRio de Janeiro state finance authorities filed a Tax Assessment against the Company in
connection with State Value-Added Tax (ICMS) related to the Sinking of P-36 Platform. The
maximum exposure including monetary restatement for Petrobras as of December 31, 2006 is US$253
Petrobras filed a Voluntary Appeal, pending examination. To allow the appeal to proceed an
amount of US$20 was deposited and a bank guarantee to the amount of US$31 taken out, which
corresponds to 30% of the total amount. The voluntary appeal was accepted. However, the
assessment was upheld under the Special Appeal brought by the State Treasury. On October 02,
2006, the appeal deposit and bank guarantee were converted into income for the state. The
matter was then referred to the courts. The remaining amount deriving from the tax credit, duly
restated, relating to the final quarter of 2006 is around US$149, which corresponds to 70% of
the total claim. As the administrative proceedings have reached a conclusion and the amount
will be recorded as an overdue federal reliability, 20% will be added as attorneys fees. Based
on its legal counsels advice, the Company has assessed risk of loss to be possible.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 19.
    
    Commitments and Contingencies(Continued)
 (c)
    
    Tax assessments(Continued)Plaintiff: Rio de Janeiro state finance authorities  II and IPI Tax related to the Sinking of
P-36 PlatformRio de Janeiro state finance authorities filed a Tax Assessment against the Company in
connection with II (Import Tax) and IPI (Federal VAT) related to the Sinking of P-36 Platform.
Trial court ruling against Petrobras. An appeal was lodged, which is pending judgment.
Petrobras filed for a writ of mandamus and obtained an injunction that barred tax collection.
Pending special appeal filed by the Federal Reserve/National Finance Secretary. The maximum
exposure including monetary restatement for Petrobras as of December 31, 2006 is US$203. Due to
the favorable decision the Company obtained under the Writ of Mandamus, the administrative
proceeding has been stayed, meaning the parties have not had the chance to submit the Voluntary
Appeal. Based on its legal counsels advice, the Company has assessed risk of loss to be
possible.Plaintiff: Rio de Janeiro state finance authorities  II and IPI Tax related to TERMORIO
equipmentsRio de Janeiro state finance authorities filed a Tax Assessment against the Company in
connection with II (Import Tax) and IPI (Federal VAT) contesting the tax classification as
Other Electricity Generation Groups for the import of the equipment belonging to the
thermoelectric power station TERMORIO S.A. On August 15, 2006, TERMORIO submitted a
contestation of the tax assessment to the Federal Revenue Department.On September 15, 2006, the case was referred to the Federal Revenue Service in Florianópolis,
where it is still being examined under administrative proceedings. The maximum exposure
including monetary restatement for Petrobras as of December 31, 2006 is US$227. Based on its
legal counsels advice, the Company has assessed risk of loss to be possible.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 19.
    
    Commitments and Contingencies(Continued)
 (c)
    
    Tax assessments(Continued)Plaintiff: Internal Revenue ServicesInternal Revenue Services denied PASEP base reduction. Internal Revenue Services Appeal denied
in 2nd instance and voluntary appeal of Petrobras accepted. Pending special appeal filed by the
Internal Revenue Services. The maximum exposure including monetary restatement for Petrobras as
of December 31, 2006 is US$13. Based on its legal counsels advice, the Company has assessed
risk of loss to be possible.Plaintiff Alagoas state finance authoritiesAlagoas state finance authorities filed a Tax Assessment against the Company in connection with
reversal of ICMS Credit. Petrobras is awaiting judgment of the appeal by the second
administrative level. The maximum exposure including monetary restatement for Petrobras as of
December 31, 2006 is US$32. Based on its legal counsels advice, the Company has assessed risk
of loss to be possible.(d)
    
    Environmental mattersThe Company is subject to various environmental laws and regulations. These laws regulate the
discharge of oil, gas or other materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of such materials at
various sites.The Companys management considers that any expenses incurred to correct or mitigate possible
environmental impacts should not have a significant effect on operations or cash flows.PEGASO  (Programa de Excelência em Gestão Ambiental e Segurança Operacional).During 2000 the Company implemented an environmental excellence and operational safety program
  PEGASO  (Programa de Excelência em Gestão Ambiental e Segurança Operacional). The Company
made expenditures of approximately US$4,081 from 2000 to December 31, 2006 under this program.
During the years ended December 31, 2006 and 2005 the Company made expenditures of
approximately US$562 and US$545 respectively. The Company believes that future payments related
to environmental clean-up activities resulting from these incidents, if any, will not be
material.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 19.
    
    Commitments and Contingencies(Continued)
 (d)
    
    Environmental matters(Continued)Guanabara Bay pipeline ruptureOn January 18, 2000, a pipeline from one of the Companys terminals to a refinery in the
Guanabara Bay ruptured, causing a release of crude oil into the bay. On January 19, 2001, the
Rio de Janeiro State Prosecutor filed a criminal lawsuit against the Company. The Company is
contesting the legal basis for the criminal lawsuit. Additionally, the Federal Prosecutor has
filed criminal lawsuits against the former president of the Company (that finished) and 9 other
employees. The Company cannot predict if the outcome of these proceedings will have a material
adverse effect on the financial condition, results of operations or cash flows of the Company.The local federal tribunal dismissed the complaint against the Companys former president, and
this dismissal is not subject to appeal.On April 30, 2002, the judge determined that the Company could not appear as a defendant in
this criminal proceeding as a result of an injunction the Company obtained from the court,
although the decision is still subject to appeal.On October of 2003 the judge determined that in regard to one of the employees the suit will be
suspended for the period of 2 years, under certain conditions that defendant will have to
observe.In addition, as a result of the spill, on January 27, 2000, the National Council for the
Environment enacted a resolution that obligated the IBAMA (Brazilian Institute for the
Environment and Renewable Resources), state environmental agencies and local environmental
agencies and non-governmental agencies to evaluate the control and prevention measures and
environmental licensing status of all industrial facilities for the production of oil and oil
products in Brazil. This resolution also mandated that the Company perform an independent
environmental audit of all of its industrial installations located in the State of Rio de
Janeiro.Since 2000, the Company implemented independent environmental audits in all of the Companys
plants located in Brazil that was concluded during December of 2003. The Company implemented
almost all of the auditors recommendations.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 19.
    
    Commitments and Contingencies(Continued)
 (d)
    
    Environmental matters(Continued)Presidente Getúlio Vargas refinery oil spillOn July 16, 2000, an oil spill occurred at the Presidente Getúlio Vargas refinery releasing
crude oil in the surrounding area. The Federal and State of Paraná Prosecutors have filed a
civil lawsuit against the Company seeking US$1,176 in damages, which have already been
contested by the Company. Additionally, there are two other actions pending, one by the
Instituto Ambiental do Paraná (Paraná Environmental Institute) and by another civil association
called AMAR that have already been contested by the Company. Awaiting initiation of the expert
investigation to quantify the amount. The maximum exposure including monetary restatement for
Petrobras as of December 31, 2006 is US$39. The court determined that the suits brought by
AMAR and the Federal and State Prosecutors be tried as one. Based on its legal counsels advice,
the Companys Administration has assessed risk of loss to be possible.Cypriot flag vessel Vergina II collisionOn November 4, 2000, the Cypriot flag vessel Vergina II chartered by Petrobras collided with
the south pier at the Companys Almirante Barroso terminal in São Sebastião and spilled oil in
the São Sebastião canal. As a result of the accident, the Company was fined approximately US$30
by various local environmental agencies. The Company is currently contesting these fines.Araucária-Paranaguá pipeline ruptureOn February 16, 2001, the Companys Araucária-Paranaguá pipeline ruptured and as a result fuel
oil was spilled into the Sagrado, Meio, Neves and Nhundiaquara Rivers located in the state of
Paraná. As a result of the accident, the Company was fined approximately US$80 by the Instituto
Ambiental do Paraná (Paraná Environmental Institute), which was contested by the Company
through administrative proceeding but the appeal was rejected. The court determined that the
suits brought by AMAR and the Federal and State Prosecutors be tried as one. Based on its
legal counsels advice, the Companys Administration has assessed risk of loss to be possible.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 19.
    
    Commitments and Contingencies(Continued)
 (d)
    
    Environmental matters(Continued)Oil spill related to the sinking of P-36 PlatformOn March 15, 2001, a spill resulting from the accident involving the P-36 platform occurred,
causing a release of diesel fuel and crude oil. The Company was fined by the IBAMA US$3 in
April of 2001 for the spill and improper use of chemicals to disperse the oil. The Company is
currently contesting these fines.Rupture of production line at well on the Belém Farm fieldOn May 12, 2003, the rupture of a connection socket on a production line at well FZB-71, on the
Belém Farm field, in the city of Aracati-CE, resulted in the spill of approximately 7 (seven)
thousand liters of oil at an area located far from any communities or water sources. The
Companys Contingency Plan was immediately activated and cleaning work for the area was carried
out. Petrobras was charged with a penalty of US$0.04 by the Environment Superintendence of the
State of Ceará (Semace) and up to 90% of this amount can be reduced by compliance with a
Commitment Term entered into with the referred environmental entity.Fault in the connection of arms of vessel Nordic Marita, anchored at the Maritime Terminal
Almirante Barroso (Tebar), in São Sebastião, on the North coast of São PauloOn June 3, 2003, a fault in the connection of one of the unloading arms of vessel Nordic
Marita, anchored at the Maritime Terminal Almirante Barroso (Tebar), in São Sebastião, on the
North coast of São Paulo, caused a spill of approximately 27 thousand liters of oil from Campos
basin. As a result of this accident, Petrobras was charged with a penalty of US$0.17 by the
IBAMA and of US$0.12 by Basic Sanitation, Technology and Environment Protection Agency of the
State of São Paulo (CETESB). An appeal was filed against both charges based on the
understanding that the Company acted in the most efficient possible manner in order to minimize
possible impacts on the environment.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 19.
    
    Commitments and Contingencies(Continued)
 (d)
    
    Environmental matters(Continued)Rupture of a pipeline between Cabiúnas and Duque de Caxias RefineryOn August 26, 2003, the rupture of a pipeline between TRANSPETROs terminal in Cabiúnas (Macaé)
and Duque de Caxias Refinery caused the spill of 20 (twenty) liters of oil in an area of the
city of Cachoeiras de Macacu. The Company immediately determined that the oil located in the
service area of the pipeline should be removed, and took preventive measures to protect a
creek, near to the Soarinhos River, with checks and oil-absorbing materials. In spite of the
effective procedures adopted by Petrobras and the non-existence of environmental damages, the
Company received a fine from IBAMA in the amount of US$0.69, but filed an administrative
proceeding with this entity.(e)
    
    Minimum operating lease paymentsThe Company is committed to make the following minimum payments related to operating leases as
of December 31, 2006:
 2008
    
    
    2,2732009
    
    
    1,5272010
    
    
    7622011
    
    
    4022012
    
    
    3172013 and thereafter
    
    
    390Minimum operating lease payment commitments
    
    
    5,671
 The Company incurred US$2,016, US$1,417 and US$1,247, in rental expense on operating
leases at December 31, 2006, 2005 and 2004, respectively.
 
 20.
    
    Derivative Instruments, Hedging and Risk Management ActivitiesThe Company is exposed to a number of market risks arising from its normal course of business.
Such market risks principally involve the possibility that changes in interest rates, foreign
currency exchange rates or commodity prices will adversely affect the value of the Companys
financial assets and liabilities or future cash flows and earnings. The Company maintains a
corporate risk management policy that is executed under the direction of the Companys executive
officers.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 20.
    
    Derivative Instruments, Hedging and Risk Management Activities(Continued)The Company may use derivative and non-derivative instruments to implement its corporate risk
management strategy. However, by using derivative instruments, the Company exposes itself to
credit and market risk. Credit risk is the failure of a counterparty to perform under the terms
of the derivative contract. Market risk is the possible adverse effect on the value of an assets
or liability, including financial instruments that results from changes in interest rates,
currency exchange rates, or commodity prices. The Company addresses credit risk by restricting
the counterparties to such derivative financial instruments to major financial institutions.
Market risk is managed by the Companys executive officers. The Company does not hold or issue
financial instruments for trading purposes.In 2004, the Petrobras Executive Board organized a Risk Management Committee comprising executive
managers of all business areas and of several corporate areas for the purpose of ensuring
integrated management of risk exposures and formalization of the main guidelines adopted by the
Company to manage significant risks and uncertainties associated with its activities. The Risk
Management Committee was created with a view towards concentrating risk management information
and discussions and facilitating communications with the Board of Directors and the Executive
Board.
 (a)
    
    Foreign currency risk managementThe Companys foreign currency risk management strategy may involve the use of derivative
instruments to protect against foreign exchange rate volatility which may impact the value of
certain of the Companys obligations.During 2000, the Company entered into three zero cost foreign exchange rate collars to reduce
its exposure to variations between the U.S. Dollar and the Japanese Yen, and between the U.S.
Dollar and the EURO, relative to long-term debt denominated in foreign currencies with a face
value of approximately US$470. The Company did not apply hedge accounting for these
relationships. The collars were constructed by the simultaneous purchase of a call option and
sale of a put option with the same counterparty and with equal premiums.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 20.
    
    Derivative Instruments, Hedging and Risk Management Activities(Continued)
 (a)
    
    Foreign currency risk management(Continued)These collars establish a price ceiling and a price floor for the associated exchange rates. If
the exchange rate falls below the floor, the counterparties will pay the Company the difference
between the spot rate at the maturity date and the floor, calculated based on the notional
amount of the contracts. Conversely, if the exchange rate increases above the ceiling, the
Company will pay the counterparties the difference between the spot rate at the maturity date
and the ceiling, calculated based on the notional amount of the contracts on the notional
amount. The maturity dates of the derivatives contracts coincide with the maturity dates of
each of the notes.The Yen zero cost collar contracts were settled on September 8, 2003, with a cash payment of
US$68. One of the Euro zero cost collars was settled on December 31, 2004, with a cash receipt
of US$18.The call option component of the Companys zero cost foreign exchange collars at December 31,
2006 had a fair value of US$21 (US$12 at December 31, 2005) and the put option components a
fair value of zero at December 31, 2006 (US$(1) at December 31, 2005).(b)
    
    Commodity price risk managementPetroleum and oil productsThe Company is exposed to commodity price risks as a result of the fluctuation of crude oil and
oil product prices. The Companys commodity risk management activities are primarily
undertaking through the uses of future contracts traded on stock exchanges; and options and
swaps entered into with major financial institutions. The futures contracts provide economic
hedges for anticipated crude oil purchases and sales, generally forecasted to occur within a 30
to 360 day period, and reduce the Companys exposure to volatility of such prices.The Companys exposure from these contracts is limited to the difference between the contract
value and market value on the volumes contracted. Crude oil future contracts are
marked-to-market and related gains and losses are recognized in currently period earnings,
irrespective of when the physical crude sales occur. For the years ended December 31, 2006,
2005 and 2004, the Company entered into commodity derivative transactions for 26.42%, 26.79%
and 33.06%, respectively, of its total import and export trade volumes.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 20.
    
    Derivative Instruments, Hedging and Risk Management Activities(Continued)
 (b)
    
    Commodity price risk management(Continued)The open positions in the futures market, compared to spot market values, resulted in
recognized losses of US$2, US$1 and US$2 for the years ended December 31, 2006, 2005 and 2004,
respectively.A long-term position was opened in January 2001 via the sale of put options for 52 million
barrels of West Texas Intermediate (WTI) oil, over a period extending from 2004 to 2007, with
the objective of obtaining price protection for this quantity of oil and to provide the funding
institutions of the Barracuda/Caratinga project with a minimum guaranteed margin to cover the
debt servicing. The put options were structured to ensure that the financial institutions
participating in the financing of the development of the fields receive the price required to
generate the minimum required return on investment. The Company accounts for the put options on
a mark to market basis. During 2006, 2005 and 2004 the Company realized no gain or loss.(c)
    
    Interest rate risk managementThe Companys interest rate risk is a function of the Companys long-term debt and to a lesser
extent, its short-term debt. The Companys foreign currency floating rate debt is principally
subject to fluctuations in LIBOR and the Companys floating rate debt denominated in Reais is
principally subject to fluctuations in the Brazilian long-term interest rate (TJLP) as fixed by
the National Monetary Counsel. The Company currently does not utilize derivative financial
instruments to manage its exposure to fluctuations in interest rates. However, the Company will
consider assessing the use of various types of derivatives to reduce its exposure to interest
rate fluctuations and may use such financial instruments in the future.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 20.
    
    Derivative Instruments, Hedging and Risk Management Activities(Continued)
 (d)
    
    Risk Management activity at PEPSAPEPSA uses derivative instruments such as options, swaps and others, mainly to mitigate the
risk of changes in crude oil prices, interest rates and foreign exchange rates. Such derivative
instruments are designed to mitigate specific exposures, and when designated as accounting
hedges are assessed periodically to assure high correlation of the derivative instrument to the
hedged risk exposure identified and to ensure that the derivative is highly effective in
achieving offsetting changes in the cash flows of the hedged risk. PEPSA in the past designated
certain relationships as accounting hedges for its crude oil derivative instruments and its
interest rate swaps derivative instruments, but holds no such instruments at December 31, 2006;
nor are any implemented accounting hedges outstanding.As of December 31, 2006, PEPSA did not have commodity derivative transactions that qualify for
hedge accounting purposes in accordance with SFAS No. 133  Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). PEPSA accounted for a loss of US$103 for the
year ended December 31, 2005 due to derivative financial instruments that did not qualify for
hedge accounting.At December 31, 2006, PEPSA had forward sales of US dollars in exchange for Argentine pesos.
During the current fiscal year, the Company recognized a US$2 gain. As of December 31, 2006 and
2005 the face value of effective contracts amounts to US$18 and US$52, respectively, at the
average exchange rate of 3.26 and 3 Argentine pesos per US dollar, respectively. Without
considering the above-mentioned operations, as of December 31, 2006, the Company did not have
any other positions in derivatives instruments.(e)
    
    Cash flow hedgeIn September, 2006 PIFCo entered into cross currency swap under which it swaps principal and
interest payments on Yen denominated bonds for U.S. dollar amounts. Under U.S. GAAP, foreign
currency cash flow hedges can only be designated as such when hedging the risk to the entitys
functional currency, and therefore, this cross currency swaps is qualified for hedge accounting
designation take into account that PIFCos functional currency is the US dollar, and the
assessment of hedge effectiveness indicates that the change in fair value of the designated
hedging instrument is highly effective.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 20.
    
    Derivative Instruments, Hedging and Risk Management Activities(Continued)
 (e)
    
    Cash flow hedge(Continued)The hedged item is ¥ 35 billion bond, ten-year maturity, carrying a semi-annual coupon of 2.15%
p.a. The hedge instrument is a cross currency swap, ten year maturity, under which US dollars is
paid and Japanese Yen is received mirroring the Yen bond conditions. The effectiveness test was
made at the inception at the hedge based on the hypothetical derivative method. The
effectiveness test will be made on an ongoing basis on a quarterly basis.The transaction gain or loss arising from the remeasurement of Yen denominated bonds is offset
by the reclassification relating to the remeasurement of the hedged item at spot rates from
other comprehensive income to earnings. The cross currency swap at December 31, 2006 had a fair
value of (US$9) due to the devaluation of the Japanese Yen when compared to US dollar since the
inception of the instrument.
 
 21.
    
    Natural Gas Derivative ContractIn connection with the long-term contract to buy gas (The Gas Supply Agreement or GSA) to
supply thermoelectric plants and for other uses in Brazil, the Company entered into a contract,
with the company Empresa Petrolera ANDINA, a gas producer in Bolivia, that constituted a
derivative financial instrument under SFAS 133. This contract, the Natural Gas Price Volatility
Reduction Contract (the PVRC), was executed with the purpose of reducing the effects of price
volatility under the GSA.The terms of the PVRC provided for a price collar for the period from 2005 to 2019, with the
Company receiving cash payments when the calculated price is above the established ceiling, and
the Company making cash payments when the price is below the established floor, with no cash
payments being made when the price is between the ceiling and the floor.As of December 31, 2005, the Company recorded an asset based on the fair value of the derivative
in the amount of US$547 and a liability of US$144, which was deemed a deferred purchase
incentive.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 21.
    
    Natural Gas Derivative Contract(Continued)Due to the new Hydrocarbons Law of Bolivia (see Note 9(b)), the other party to the PVRC contested
the contract, alleging among others, force majeure and excessive onus. On August 12, 2006, the
parties agreed to cancel the PVRC. As a result, on August 14, 2006 the Company received US$41 and
wrote-off accounts receivable related to the PVRC amounting to US$77.The Company adjusted the fair value asset and liabilities related to the PVRC by recording a
financial expense of US$328 during the first quarter of 2006 as a result of the tax increases in
Bolivia. In the second quarter of 2006, the Company wrote-off the remaining fair value asset of
US$94 as a consequence of the cancellation of contract.
 
 22.
    
    Financial InstrumentsIn the normal course of its business activities, the Company acquires various types of financial
instruments.
 (a)
    
    Concentrations of credit riskSubstantial portions of the Companys assets including financial instruments are located in
Brazil while substantially all of the Companys revenues and net income are generated in
Brazil. The Companys financial instruments that are exposed to concentrations of credit risk
consist primarily of its cash and cash equivalents, government securities, the Petroleum and
Alcohol account, trade receivables and futures contracts.The Company takes several measures to reduce its credit risk to acceptable levels. All cash and
cash equivalents in Brazil are maintained with major banks. Time deposits in U.S. dollars are
placed with creditworthy institutions in the United States. Additionally, all of the Companys
available-for-sale securities and derivative contracts are either exchange traded or maintained
with creditworthy financial institutions. The Company monitors its credit risk associated with
trade receivables by routinely assessing the creditworthiness of its customers. At December 31,
2006 and December 31, 2005, the Companys trade receivables were primarily maintained with
large distributors.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 22.
    
    Financial Instruments(Continued)
 (b)
    
    Fair valueFair values are derived either from quoted market prices where available, or, in their absence,
the present value of expected cash flows. Fair values reflect the cash that would have been
either received or paid if the instruments were settled at year end in an arms length
transaction between willing parties. Fair values of cash and cash equivalents, trade
receivables, the Petroleum and Alcohol account, short-term debt and trade payables approximate
their carrying values. The fair value for the Companys available-for-sale government
securities equals their carrying value.The fair values of other long-term receivables and payables do not differ materially from their
carrying values.The Companys debt including project financing obligations, resulting from FIN 46(R)
consolidation amounted to US$14,702 at December 31, 2006 and US$15,132 at December 31, 2005 and
had estimated fair values of US$13,984 and U$15,239, respectively.
 
 23.
    
    Segment InformationThe following segment information has been prepared in accordance with SFAS No. 131  Disclosure
about Segments of an Enterprise and Related information (SFAS 131). The Company operates under
the following segments, which are described as follows:
 
    
    Exploration and Production  This segment includes the Companys exploration, production
development and production activities of oil, liquefied natural gas and natural gas in
Brazil, for the purpose of supplying refineries in Brazil as well as selling surplus
Brazilian production in domestic and foreign markets and limited oil trading activities and
transfers of natural gas to the Companys Gas and Energy segment.
    
    Supply  This segment includes the Companys refining, logistic, transportation,
exportation and the purchase of crude oil, as well as the purchase and commercialization
activities for oil, oil products and fuel alcohol. Additionally, this segment includes
petrochemical and fertilizers division, which includes investments in domestic petrochemical
companies and the Companys two domestic fertilizer plants.
 
    
    Distribution  This segment represents the oil product and fuel alcohol distribution
activities conducted by the Companys majority owned subsidiary, Petrobras Distribuidora
S.A.  BR in Brazil. In accordance with the Companys strategic objectives to increase
market share in the LPG distribution segment and consolidate the automotive fuels
distribution market in certain regions of Brazil, its distribution business includes the
operations of Liquigás Distribuidora S.A (formerly known as Sophia do Brasil S.A. and Agip
do Brasil S.A.), which was acquired on August 9, 2004.
    
    Gas and Energy  This segment currently encompasses the purchase, sale, transportation
and distribution of natural gas produced in or imported into Brazil. Additionally, this
segment includes the Companys participation in domestic electricity production, including
investments in domestic natural gas transportation companies, state owned natural gas
distributors and thermoelectric companies.
    
    International  This segment represents the Companys international Exploration and
Production, Supply, Distribution and Gas and Energy activities conducted in 15 countries
outside Brazil .
 The items that cannot be attributed to the other areas are allocated to the group of corporate
entities, especially those linked with corporate financial management, overhead related with
central administration and other expenses, including actuarial expenses related with the pension
and health-care plans for non-active participants.The accounting information by business area was prepared based on the assumption of
controllability, for the purpose of attribution to the business areas only items over which these
areas have effective control.The main criteria used to record the results and assets by business segments are summarized as
follows:
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 23.
    
    Segment Information(Continued)
 
    
    Net operating revenues: these were considered to be the revenues from sales to third
parties, plus revenues between the business segments, based on the internal transfer prices
established by the areas;
    
    Costs and expenses includes the costs of products and services sold, calculated per
business segment, based on the internal transfer price and the other operating costs of each
segment, as well as operating expenses, based on the expenses actually incurred in each
segment;
    
    Assets: covers the assets relating to each segment.
 The following presents the Companys assets by segment:
 As of December 31, 2006Exploration
    
    
    
    
    
    
    
    
    
    
    Internationaland
    
    
    
    
    
    
    Gas and
    
    
    (see separateProduction
    
    
    Supply
    
    
    Energy
    
    
    disclosure)
    
    
    Distribution
    
    
    Corporate
    
    
    Eliminations
    
    
    TotalCurrent assets (1)
    
    
    2,966
    
    
    
    9,668
    
    
    
    1,256
    
    
    
    2,371
    
    
    
    1,978
    
    
    
    15,413
    
    
    
    (2,697
    )
    
    
    30,955Cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,688
    
    
    
    
    
    
    
    12,688Other current assets
    
    
    2,966
    
    
    
    9,668
    
    
    
    1,256
    
    
    
    2,371
    
    
    
    1,978
    
    
    
    2,725
    
    
    
    (2,697
    )
    
    
    18,267Investments in non-consolidated companies
and other investments
    
    
    33
    
    
    
    970
    
    
    
    394
    
    
    
    1,721
    
    
    
    20
    
    
    
    124
    
    
    
    
    
    
    
    3,262Property, plant and equipment, net
    
    
    33,979
    
    
    
    9,828
    
    
    
    6,828
    
    
    
    5,722
    
    
    
    1,468
    
    
    
    1,072
    
    
    
    
    
    
    
    58,897Non current assets
    
    
    1,388
    
    
    
    354
    
    
    
    1,119
    
    
    
    460
    
    
    
    209
    
    
    
    2,523
    
    
    
    (487
    )
    
    
    5,566Petroleum and Alcohol account
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    368
    
    
    
    
    
    
    
    368Government securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    479
    
    
    
    
    
    
    
    479Other assets (1)
    
    
    1,388
    
    
    
    354
    
    
    
    1,119
    
    
    
    460
    
    
    
    209
    
    
    
    1,676
    
    
    
    (487
    )
    
    
    4,719Total assets
    
    
    38,366
    
    
    
    20,820
    
    
    
    9,597
    
    
    
    10,274
    
    
    
    3,675
    
    
    
    19,132
    
    
    
    (3,184
    )
    
    
    98,680
 
 (1)
    
    In order to align the financial statements of each business segment with the best practices
of companies in the Oil & Gas sector and to improve the understanding of Petrobras management, the
Company, since the first quarter of 2006, switched to allocating all financial results and items of
financial nature to the corporate level. F-115




---



##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 23. Segment Information
 As of December 31, 2006InternationalExplorationand
    
    
    
    
    
    
    Gas andProduction
    
    
    Supply
    
    
    Energy
    
    
    Distribution
    
    
    Corporate
    
    
    Eliminations
    
    
    TotalCurrent assets (1)
    
    
    1,486
    
    
    
    1,019
    
    
    
    954
    
    
    
    134
    
    
    
    219
    
    
    
    (1,441
    )
    
    
    2,371Cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other current assets
    
    
    1,486
    
    
    
    1,019
    
    
    
    954
    
    
    
    134
    
    
    
    219
    
    
    
    (1,441
    )
    
    
    2,371Investments in non-consolidated companies
and other investments
    
    
    990
    
    
    
    360
    
    
    
    280
    
    
    
    66
    
    
    
    25
    
    
    
    
    
    
    
    1,721Property, plant and equipment, net
    
    
    4,436
    
    
    
    834
    
    
    
    216
    
    
    
    162
    
    
    
    94
    
    
    
    (20
    )
    
    
    5,722Non current assets
    
    
    546
    
    
    
    36
    
    
    
    49
    
    
    
    13
    
    
    
    669
    
    
    
    (853
    )
    
    
    460Other assets (1)
    
    
    546
    
    
    
    36
    
    
    
    49
    
    
    
    13
    
    
    
    669
    
    
    
    (853
    )
    
    
    460Total assets
    
    
    7,458
    
    
    
    2,249
    
    
    
    1,499
    
    
    
    375
    
    
    
    1,007
    
    
    
    (2,314
    )
    
    
    10,274
 
 (1)
    
    In order to align the financial statements of each business segment with the best practices
of companies in the Oil & Gas sector and to improve the understanding of Petrobras management, the
Company, since the first quarter of 2006, switched to allocating all financial results and items of
financial nature to the corporate level. F-116




---



##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 23.
    
    Segment Information(Continued)
 As of December 31, 2005Exploration
    
    
    
    
    
    
    
    
    
    
    Internationaland
    
    
    
    
    
    
    Gas and
    
    
    (see separateProduction
    
    
    Supply
    
    
    Energy
    
    
    disclosure)
    
    
    Distribution
    
    
    Corporate
    
    
    Eliminations
    
    
    TotalCurrent assets (1)
    
    
    2,770
    
    
    
    8,116
    
    
    
    1,052
    
    
    
    1,815
    
    
    
    1,918
    
    
    
    12,644
    
    
    
    (2,531
    )
    
    
    25,784Cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,871
    
    
    
    
    
    
    
    9,871Other current assets
    
    
    2,770
    
    
    
    8,116
    
    
    
    1,052
    
    
    
    1,815
    
    
    
    1,918
    
    
    
    2,773
    
    
    
    (2,531
    )
    
    
    15,913Investments in non-consolidated companies
and other investments
    
    
    9
    
    
    
    822
    
    
    
    438
    
    
    
    418
    
    
    
    20
    
    
    
    103
    
    
    
    
    
    
    
    1,810Property, plant and equipment, net
    
    
    25,876
    
    
    
    8,098
    
    
    
    5,328
    
    
    
    4,655
    
    
    
    1,238
    
    
    
    768
    
    
    
    (43
    )
    
    
    45,920Non current assets
    
    
    971
    
    
    
    396
    
    
    
    1,349
    
    
    
    459
    
    
    
    392
    
    
    
    1,780
    
    
    
    (223
    )
    
    
    5,124Petroleum and Alcohol account
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    329
    
    
    
    
    
    
    
    329Government securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    364
    
    
    
    
    
    
    
    364Other assets (1)
    
    
    971
    
    
    
    396
    
    
    
    1,349
    
    
    
    459
    
    
    
    392
    
    
    
    1,087
    
    
    
    (223
    )
    
    
    4,431Total assets
    
    
    29,626
    
    
    
    17,432
    
    
    
    8,167
    
    
    
    7,347
    
    
    
    3,568
    
    
    
    15,295
    
    
    
    (2,797
    )
    
    
    78,638
 
 (1)
    
    In order to align the financial statements of each business segment with the best
practices of companies in the Oil & Gas sector and to improve the understanding of Petrobras
management, the Company, since the first quarter of 2006, switched to allocating all financial
results and items of financial nature to the corporate level. F-117




---



##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS  AND SUBSIDIARIES
 
 23.
    
    Segment Information(Continued)
 As of December 31, 2005InternationalExplorationand
    
    
    
    
    
    
    Gas andProduction
    
    
    Supply
    
    
    Energy
    
    
    Distribution
    
    
    Corporate
    
    
    Eliminations
    
    
    TotalCurrent assets (1)
    
    
    1,486
    
    
    
    660
    
    
    
    552
    
    
    
    72
    
    
    
    227
    
    
    
    (1,182
    )
    
    
    1,815Cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other current assets
    
    
    1,486
    
    
    
    660
    
    
    
    552
    
    
    
    72
    
    
    
    227
    
    
    
    (1,182
    )
    
    
    1,815Investments in non-consolidated companies
and other investments
    
    
    141
    
    
    
    51
    
    
    
    204
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    418Property, plant and equipment, net
    
    
    3,801
    
    
    
    530
    
    
    
    192
    
    
    
    78
    
    
    
    59
    
    
    
    (5
    )
    
    
    4,655Non current assets
    
    
    483
    
    
    
    34
    
    
    
    57
    
    
    
    22
    
    
    
    2,173
    
    
    
    (2,310
    )
    
    
    459Other assets (1)
    
    
    483
    
    
    
    34
    
    
    
    57
    
    
    
    22
    
    
    
    2,173
    
    
    
    (2,310
    )
    
    
    459Total assets
    
    
    5,911
    
    
    
    1,275
    
    
    
    1,005
    
    
    
    172
    
    
    
    2,481
    
    
    
    (3,497
    )
    
    
    7,347
 
 (1)
    
    In order to align the financial statements of each business segment with the best practices of
companies in the Oil & Gas sector and to improve the understanding of Petrobras management, the
Company, since the first quarter of 2006, switched to allocating all financial results and items of
financial nature to the corporate level. F-118




---



##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 23.
    
    Segment Information(Continued)Revenues and net income by segment are as follows:
 Year ended December 31, 2006Exploration
    
    
    
    
    
    
    
    
    
    Internationaland
    
    
    
    
    
    Gas and
    
    (see separateProduction
    
    Supply
    
    Energy
    
    disclosure)
    
    Distribution
    
    Corporate
    
    Eliminations
    
    TotalNet operating revenues to third parties
    
    
    3,351
    
    
    
    42,831
    
    
    
    2,833
    
    
    
    4,938
    
    
    
    18,394
    
    
    
    
    
    
    
    
    
    
    
    72,347Inter-segment net operating revenues
    
    
    32,387
    
    
    
    15,128
    
    
    
    1,257
    
    
    
    1,133
    
    
    
    287
    
    
    
    
    
    
    
    (50,192
    )
    
    
    Net operating revenues
    
    
    35,738
    
    
    
    57,959
    
    
    
    4,090
    
    
    
    6,071
    
    
    
    18,681
    
    
    
    
    
    
    
    (50,192
    )
    
    
    72,347Cost of sales
    
    
    (13,635
    )
    
    
    (51,802
    )
    
    
    (3,531
    )
    
    
    (4,088
    )
    
    
    (16,967
    )
    
    
    
    
    
    
    49,962
    
    
    
    (40,061
    )Depreciation, depletion and amortization
    
    
    (2,166
    )
    
    
    (669
    )
    
    
    (197
    )
    
    
    (417
    )
    
    
    (143
    )
    
    
    (81
    )
    
    
    
    
    
    
    (3,673
    )Exploration, including exploratory dry holes
    
    
    (501
    )
    
    
    
    
    
    
    
    
    
    
    (433
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (934
    )Impairment
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21
    )Selling, general and administrative expenses
    
    
    (465
    )
    
    
    (1,357
    )
    
    
    (360
    )
    
    
    (540
    )
    
    
    (982
    )
    
    
    (1,306
    )
    
    
    21
    
    
    
    (4,989
    )Research and development expenses
    
    
    (346
    )
    
    
    (141
    )
    
    
    (78
    )
    
    
    (2
    )
    
    
    (5
    )
    
    
    (155
    )
    
    
    
    
    
    
    (727
    )Other operating expenses
    
    
    (22
    )
    
    
    (40
    )
    
    
    (270
    )
    
    
    (22
    )
    
    
    (77
    )
    
    
    (662
    )
    
    
    12
    
    
    
    (1,081
    )Costs and expenses
    
    
    (17,155
    )
    
    
    (54,009
    )
    
    
    (4,436
    )
    
    
    (5,503
    )
    
    
    (18,174
    )
    
    
    (2,204
    )
    
    
    49,995
    
    
    
    (51,486
    )Equity in results of non-consolidated companies
    
    
    
    
    
    
    5
    
    
    
    (1
    )
    
    
    37
    
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    28Financial income (expenses), net (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100
    )
    
    
    
    
    
    
    (100
    )Employee benefit expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,017
    )
    
    
    
    
    
    
    (1,017
    )Other taxes
    
    
    (45
    )
    
    
    (73
    )
    
    
    (49
    )
    
    
    (63
    )
    
    
    (79
    )
    
    
    (285
    )
    
    
    
    
    
    
    (594
    )Other expenses, net
    
    
    (73
    )
    
    
    (20
    )
    
    
    (15
    )
    
    
    30
    
    
    
    23
    
    
    
    38
    
    
    
    
    
    
    
    (17
    )Income before income taxes, minority interest,
extraordinary item and accounting change
    
    
    18,465
    
    
    
    3,862
    
    
    
    (411
    )
    
    
    572
    
    
    
    451
    
    
    
    (3,581
    )
    
    
    (197
    )
    
    
    19,161Income tax benefits (expense)
    
    
    (6,278
    )
    
    
    (1,312
    )
    
    
    140
    
    
    
    (255
    )
    
    
    (153
    )
    
    
    2,100
    
    
    
    67
    
    
    
    (5,691
    )Minority interest in results of consolidated
subsidiaries
    
    
    (229
    )
    
    
    (10
    )
    
    
    (231
    )
    
    
    (194
    )
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    (644
    )Net income for the year
    
    
    11,958
    
    
    
    2,540
    
    
    
    (502
    )
    
    
    123
    
    
    
    298
    
    
    
    (1,461
    )
    
    
    (130
    )
    
    
    12,826
 
 (1)
    
    In order to align the financial statements of each business segment with the best practices
of companies in the Oil & Gas sector and to improve the understanding of Petrobras
management, the Company, since the first quarter of 2006, switched to allocating all financial
results and items of financial nature to the corporate level. 
 F-119




---



##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 23.
    
    Segment Information(Continued)
 Year ended December 31, 2006InternationalExplorationand
    
    
    
    
    
    Gas andProduction
    
    Supply
    
    Energy
    
    Distribution
    
    Corporate
    
    Eliminations
    
    TotalNet operating revenues to third parties
    
    
    685
    
    
    
    2,068
    
    
    
    719
    
    
    
    1,440
    
    
    
    26
    
    
    
    
    
    
    
    4,938Inter-segment net operating revenues
    
    
    1,831
    
    
    
    1,450
    
    
    
    41
    
    
    
    6
    
    
    
    
    
    
    
    (2,195
    )
    
    
    1,133Net operating revenues
    
    
    2,516
    
    
    
    3,518
    
    
    
    760
    
    
    
    1,446
    
    
    
    26
    
    
    
    (2,195
    )
    
    
    6,071Cost of sales
    
    
    (948
    )
    
    
    (3,307
    )
    
    
    (577
    )
    
    
    (1,433
    )
    
    
    (26
    )
    
    
    2,203
    
    
    
    (4,088
    )Depreciation, depletion and amortization
    
    
    (309
    )
    
    
    (65
    )
    
    
    (14
    )
    
    
    (16
    )
    
    
    (13
    )
    
    
    
    
    
    
    (417
    )Exploration, including exploratory dry holes
    
    
    (433
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (433
    )Impairment
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Selling, general and administrative expenses
    
    
    (154
    )
    
    
    (85
    )
    
    
    (17
    )
    
    
    (99
    )
    
    
    (185
    )
    
    
    
    
    
    
    (540
    )Research and development expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )Other operating expenses
    
    
    (4
    )
    
    
    4
    
    
    
    13
    
    
    
    9
    
    
    
    (44
    )
    
    
    
    
    
    
    (22
    )Costs and expenses
    
    
    (1,849
    )
    
    
    (3,453
    )
    
    
    (595
    )
    
    
    (1,539
    )
    
    
    (270
    )
    
    
    2,203
    
    
    
    (5,503
    )Equity in results of non-consolidated companies
    
    
    20
    
    
    
    12
    
    
    
    2
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    37Other taxes
    
    
    (13
    )
    
    
    (8
    )
    
    
    
    
    
    
    (2
    )
    
    
    (40
    )
    
    
    
    
    
    
    (63
    )Other expenses, net
    
    
    29
    
    
    
    
    
    
    
    11
    
    
    
    33
    
    
    
    (43
    )
    
    
    
    
    
    
    30Income before income taxes, minority interest,
and accounting change
    
    
    703
    
    
    
    69
    
    
    
    178
    
    
    
    (62
    )
    
    
    (324
    )
    
    
    8
    
    
    
    572Income tax benefits (expense)
    
    
    (305
    )
    
    
    (25
    )
    
    
    (79
    )
    
    
    28
    
    
    
    130
    
    
    
    (4
    )
    
    
    (255
    )Minority interest in results of consolidated subsidiaries
    
    
    (172
    )
    
    
    (14
    )
    
    
    (22
    )
    
    
    25
    
    
    
    (11
    )
    
    
    
    
    
    
    (194
    )Net income (loss) for the year
    
    
    226
    
    
    
    30
    
    
    
    77
    
    
    
    (9
    )
    
    
    (205
    )
    
    
    4
    
    
    
    123
 F-120




---



##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 23.
    
    Segment Information(Continued)Revenues and net income by segment are as follows:
 Year ended December 31, 2005Exploration
    
    
    
    
    
    
    
    
    
    Internationaland
    
    
    
    
    
    Gas and
    
    (see separateProduction (1)
    
    Supply (1)
    
    Energy
    
    disclosure)
    
    Distribution
    
    Corporate
    
    Eliminations
    
    TotalNet operating revenues to third parties
    
    
    1,874
    
    
    
    33,229
    
    
    
    1,932
    
    
    
    3,647
    
    
    
    15,642
    
    
    
    
    
    
    
    
    
    
    
    56,324Inter-segment net operating revenues
    
    
    26,950
    
    
    
    12,286
    
    
    
    1,232
    
    
    
    880
    
    
    
    225
    
    
    
    
    
    
    
    (41,573
    )
    
    
    Net operating revenues
    
    
    28,824
    
    
    
    45,515
    
    
    
    3,164
    
    
    
    4,527
    
    
    
    15,867
    
    
    
    
    
    
    
    (41,573
    )
    
    
    56,324Cost of sales
    
    
    (11,327
    )
    
    
    (40,033
    )
    
    
    (2,484
    )
    
    
    (2,425
    )
    
    
    (14,357
    )
    
    
    
    
    
    
    40,798
    
    
    
    (29,828
    )Depreciation, depletion and amortization
    
    
    (1,571
    )
    
    
    (644
    )
    
    
    (105
    )
    
    
    (461
    )
    
    
    (100
    )
    
    
    (45
    )
    
    
    
    
    
    
    (2,926
    )Exploration, including exploratory dry holes
    
    
    (860
    )
    
    
    
    
    
    
    
    
    
    
    (149
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,009
    )Impairment
    
    
    (22
    )
    
    
    
    
    
    
    
    
    
    
    (134
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (156
    )Selling, general and administrative expenses
    
    
    (358
    )
    
    
    (1,195
    )
    
    
    (612
    )
    
    
    (424
    )
    
    
    (914
    )
    
    
    (1,026
    )
    
    
    55
    
    
    
    (4,474
    )Research and development expenses
    
    
    (153
    )
    
    
    (55
    )
    
    
    (22
    )
    
    
    (2
    )
    
    
    (1
    )
    
    
    (166
    )
    
    
    
    
    
    
    (399
    )Other operating expenses
    
    
    (45
    )
    
    
    (130
    )
    
    
    (475
    )
    
    
    (123
    )
    
    
    59
    
    
    
    (739
    )
    
    
    
    
    
    
    (1,453
    )Costs and expenses
    
    
    (14,336
    )
    
    
    (42,057
    )
    
    
    (3,698
    )
    
    
    (3,718
    )
    
    
    (15,313
    )
    
    
    (1,976
    )
    
    
    40,853
    
    
    
    (40,245
    )Equity in results of non-consolidated companies
    
    
    
    
    
    
    10
    
    
    
    56
    
    
    
    68
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    139Financial income (expenses), net (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (231
    )
    
    
    
    
    
    
    (231
    )Employee benefit expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (994
    )
    
    
    
    
    
    
    (994
    )Other taxes
    
    
    (20
    )
    
    
    (32
    )
    
    
    (23
    )
    
    
    (51
    )
    
    
    (68
    )
    
    
    (179
    )
    
    
    
    
    
    
    (373
    )Other expenses, net
    
    
    (15
    )
    
    
    (7
    )
    
    
    (11
    )
    
    
    27
    
    
    
    (15
    )
    
    
    (7
    )
    
    
    
    
    
    
    (28
    )Income before income taxes, minority interest
extraordinary item and accounting change
    
    
    14,453
    
    
    
    3,429
    
    
    
    (512
    )
    
    
    853
    
    
    
    471
    
    
    
    (3,382
    )
    
    
    (720
    )
    
    
    14,592Income tax benefits (expense)
    
    
    (4,914
    )
    
    
    (1,163
    )
    
    
    193
    
    
    
    (289
    )
    
    
    (160
    )
    
    
    1,647
    
    
    
    245
    
    
    
    (4,441
    )Minority interest in results of consolidated
subsidiaries
    
    
    (70
    )
    
    
    (21
    )
    
    
    (23
    )
    
    
    (38
    )
    
    
    
    
    
    
    187
    
    
    
    
    
    
    
    35Income before effect of change in accounting
principle
    
    
    9,469
    
    
    
    2,245
    
    
    
    (342
    )
    
    
    526
    
    
    
    311
    
    
    
    (1,548
    )
    
    
    (475
    )
    
    
    10,186Extraordinary gain net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    158
    
    
    
    
    
    
    
    158Net income for the year
    
    
    9,469
    
    
    
    2,245
    
    
    
    (342
    )
    
    
    526
    
    
    
    311
    
    
    
    (1,390
    )
    
    
    (475
    )
    
    
    10,344
 
 (1)
    
    In 2005 revenues from commercialization of oil to third parties are being classified in
accordance with the points of sale, which could be Exploration & Production or Supply
segments. Until 2004, revenues from commercialization of oil were completely allocated to
Exploration & Production. This classification generated no significant impact on the
results reported for these segments and segments information has not been restated as it is
impractical to gather and collect data for prior periods as to point of sale.(2)
    
    In order to align the financial statements of each business segment with the best
practices of companies in the Oil & Gas sector and to improve the understanding of
Petrobras management, the Company, since the first quarter of 2006, switched to allocating
all financial results and items of financial nature to the corporate level. F-121




---



##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 23.
    
    Segment Information(Continued)
 Year ended December 31, 2005InternationalExplorationand
    
    
    
    
    
    Gas andProduction
    
    Supply
    
    Energy
    
    Distribution
    
    Corporate
    
    Eliminations
    
    TotalNet operating revenues to third parties
    
    
    920
    
    
    
    1,079
    
    
    
    536
    
    
    
    1,090
    
    
    
    22
    
    
    
    
    
    
    
    3,647Inter-segment net operating revenues
    
    
    1,476
    
    
    
    1,279
    
    
    
    31
    
    
    
    4
    
    
    
    
    
    
    
    (1,910
    )
    
    
    880Net operating revenues
    
    
    2,396
    
    
    
    2,358
    
    
    
    567
    
    
    
    1,094
    
    
    
    22
    
    
    
    (1,910
    )
    
    
    4,527Cost of sales
    
    
    (665
    )
    
    
    (2,151
    )
    
    
    (452
    )
    
    
    (1,020
    )
    
    
    (22
    )
    
    
    1,885
    
    
    
    (2,425
    )Depreciation, depletion and amortization
    
    
    (360
    )
    
    
    (65
    )
    
    
    (13
    )
    
    
    (11
    )
    
    
    (12
    )
    
    
    
    
    
    
    (461
    )Exploration, including exploratory dry holes
    
    
    (142
    )
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    (149
    )Impairment
    
    
    (134
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (134
    )Selling, general and administrative expenses
    
    
    (123
    )
    
    
    (60
    )
    
    
    (7
    )
    
    
    (68
    )
    
    
    (166
    )
    
    
    
    
    
    
    (424
    )Research and development expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )Other operating expenses
    
    
    (144
    )
    
    
    11
    
    
    
    8
    
    
    
    1
    
    
    
    (47
    )
    
    
    48
    
    
    
    (123
    )Costs and expenses
    
    
    (1,568
    )
    
    
    (2,265
    )
    
    
    (464
    )
    
    
    (1,105
    )
    
    
    (249
    )
    
    
    1,933
    
    
    
    (3,718
    )Equity in results of non-consolidated companies
    
    
    4
    
    
    
    18
    
    
    
    2
    
    
    
    
    
    
    
    40
    
    
    
    4
    
    
    
    68Other taxes
    
    
    (14
    )
    
    
    (5
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (30
    )
    
    
    
    
    
    
    (51
    )Other expenses, net
    
    
    (5
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    27Income before income taxes, minority interest,
extraordinary item and accounting change
    
    
    813
    
    
    
    105
    
    
    
    104
    
    
    
    (12
    )
    
    
    (184
    )
    
    
    27
    
    
    
    853Income tax benefits (expense)
    
    
    (275
    )
    
    
    (36
    )
    
    
    (35
    )
    
    
    4
    
    
    
    62
    
    
    
    (9
    )
    
    
    (289
    )Minority interest in results of consolidated subsidiaries
    
    
    15
    
    
    
    (20
    )
    
    
    (10
    )
    
    
    3
    
    
    
    (26
    )
    
    
    
    
    
    
    (38
    )Net income (loss) for the year
    
    
    553
    
    
    
    49
    
    
    
    59
    
    
    
    (5
    )
    
    
    (148
    )
    
    
    18
    
    
    
    526
 
 (1)
    
    In order to align the financial statements of each business segment with the best
practices of companies in the Oil & Gas sector and to improve the understanding of
Petrobras management, the Company, since the first quarter of 2006, switched to allocating
all financial results and items of financial nature to the corporate level. F-122




---



##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 23.
    
    Segment Information(Continued)
 Year ended December 31, 2004Exploration
    
    
    
    
    
    
    
    
    
    InternationalAnd
    
    
    
    
    
    Gas and
    
    (see separateProduction
    
    Supply
    
    Energy
    
    Disclosure)
    
    Distribution
    
    Corporate
    
    Eliminations
    
    TotalNet operating revenues to third parties
    
    
    2,487
    
    
    
    20,981
    
    
    
    1,547
    
    
    
    3,085
    
    
    
    10,328
    
    
    
    
    
    
    
    
    
    
    
    38,428Inter-segment net operating revenues
    
    
    16,384
    
    
    
    7,786
    
    
    
    474
    
    
    
    519
    
    
    
    158
    
    
    
    
    
    
    
    (25,321
    )
    
    
    Net operating revenues
    
    
    18,871
    
    
    
    28,767
    
    
    
    2,021
    
    
    
    3,604
    
    
    
    10,486
    
    
    
    
    
    
    
    (25,321
    )
    
    
    38,428Cost of sales
    
    
    (7,093
    )
    
    
    (25,915
    )
    
    
    (1,995
    )
    
    
    (1,871
    )
    
    
    (9,470
    )
    
    
    
    
    
    
    25,065
    
    
    
    (21,279
    )Depreciation, depletion and amortization
    
    
    (1,322
    )
    
    
    (548
    )
    
    
    (100
    )
    
    
    (423
    )
    
    
    (59
    )
    
    
    (29
    )
    
    
    
    
    
    
    (2,481
    )Exploration, including exploratory dry holes
    
    
    (419
    )
    
    
    
    
    
    
    
    
    
    
    (194
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (613
    )Impairment
    
    
    (51
    )
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65
    )Selling, general and administrative expenses
    
    
    (235
    )
    
    
    (960
    )
    
    
    (178
    )
    
    
    (334
    )
    
    
    (567
    )
    
    
    (627
    )
    
    
    
    
    
    
    (2,901
    )Research and development expenses
    
    
    (109
    )
    
    
    (53
    )
    
    
    (9
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (73
    )
    
    
    
    
    
    
    (248
    )Other operating expenses
    
    
    29
    
    
    
    (57
    )
    
    
    (188
    )
    
    
    (48
    )
    
    
    (78
    )
    
    
    (138
    )
    
    
    
    
    
    
    (480
    )Costs and expenses
    
    
    (9,200
    )
    
    
    (27,533
    )
    
    
    (2,484
    )
    
    
    (2,872
    )
    
    
    (10,176
    )
    
    
    (867
    )
    
    
    25,065
    
    
    
    (28,067
    )Equity in results of non-consolidated companies
    
    
    
    
    
    
    12
    
    
    
    68
    
    
    
    92
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    172Financial income (expenses), net (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (327
    )
    
    
    
    
    
    
    (327
    )Employee benefit expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (650
    )
    
    
    
    
    
    
    (650
    )Other taxes
    
    
    (12
    )
    
    
    (25
    )
    
    
    (30
    )
    
    
    (47
    )
    
    
    (54
    )
    
    
    (272
    )
    
    
    
    
    
    
    (440
    )Other expenses, net
    
    
    (117
    )
    
    
    24
    
    
    
    (8
    )
    
    
    (10
    )
    
    
    (2
    )
    
    
    (68
    )
    
    
    
    
    
    
    (181
    )Income before income taxes, minority interest,
extraordinary item and accounting change
    
    
    9,542
    
    
    
    1,245
    
    
    
    (433
    )
    
    
    767
    
    
    
    254
    
    
    
    (2,184
    )
    
    
    (256
    )
    
    
    8,935Income tax benefits (expense)
    
    
    (3,244
    )
    
    
    (419
    )
    
    
    170
    
    
    
    (51
    )
    
    
    (86
    )
    
    
    1,312
    
    
    
    87
    
    
    
    (2,231
    )Minority interest in results of consolidated
subsidiaries
    
    
    (349
    )
    
    
    (1
    )
    
    
    (84
    )
    
    
    (148
    )
    
    
    
    
    
    
    68
    
    
    
    
    
    
    
    (514
    )Net income (loss) for the year
    
    
    5,949
    
    
    
    825
    
    
    
    (347
    )
    
    
    568
    
    
    
    168
    
    
    
    (804
    )
    
    
    (169
    )
    
    
    6,190
 
 (1)
    
    In order to align the financial statements of each business segment with the best
practices of companies in the Oil & Gas sector and to improve the understanding of
Petrobras management, the Company, since the first quarter of 2006, switched to allocating
all financial results and items of financial nature to the corporate level. F-123




---



##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 23.
    
    Segment Information(Continued)
 Year ended December 31, 2004InternationalExplorationand
    
    
    
    
    
    Gas andProduction
    
    Supply
    
    Energy
    
    Distribution
    
    Corporate
    
    Eliminations
    
    TotalNet operating revenues to third parties
    
    
    713
    
    
    
    1,084
    
    
    
    405
    
    
    
    865
    
    
    
    18
    
    
    
    
    
    
    
    3,085Inter-segment net operating revenues
    
    
    1,087
    
    
    
    1,076
    
    
    
    26
    
    
    
    15
    
    
    
    
    
    
    
    (1,685
    )
    
    
    519Net operating revenues
    
    
    1,800
    
    
    
    2,160
    
    
    
    431
    
    
    
    880
    
    
    
    18
    
    
    
    (1,685
    )
    
    
    3,604Cost of sales
    
    
    (461
    )
    
    
    (1,797
    )
    
    
    (337
    )
    
    
    (940
    )
    
    
    (17
    )
    
    
    1,681
    
    
    
    (1,871
    )Depreciation, depletion and amortization
    
    
    (326
    )
    
    
    (63
    )
    
    
    (13
    )
    
    
    (10
    )
    
    
    (11
    )
    
    
    
    
    
    
    (423
    )Exploration, including exploratory dry holes
and impairment
    
    
    (194
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (194
    )Selling, general and administrative expenses
    
    
    (111
    )
    
    
    (53
    )
    
    
    (11
    )
    
    
    (60
    )
    
    
    (99
    )
    
    
    
    
    
    
    (334
    )Research and development expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )Other operating expenses
    
    
    (75
    )
    
    
    9
    
    
    
    12
    
    
    
    (2
    )
    
    
    8
    
    
    
    
    
    
    
    (48
    )Costs and expenses
    
    
    (1,167
    )
    
    
    (1,904
    )
    
    
    (349
    )
    
    
    (1,012
    )
    
    
    (121
    )
    
    
    1,681
    
    
    
    (2,872
    )Equity in results of non-consolidated companies
    
    
    8
    
    
    
    21
    
    
    
    7
    
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    92Other taxes
    
    
    (16
    )
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )
    
    
    (17
    )
    
    
    
    
    
    
    (47
    )Other expenses, net
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24
    )
    
    
    
    
    
    
    (10
    )Income before income taxes, minority interest,
extraordinary item and accounting change
    
    
    639
    
    
    
    270
    
    
    
    89
    
    
    
    (139
    )
    
    
    (88
    )
    
    
    (4
    )
    
    
    767Income tax benefits (expense)
    
    
    (140
    )
    
    
    (60
    )
    
    
    (20
    )
    
    
    31
    
    
    
    137
    
    
    
    1
    
    
    
    (51
    )Minority interest in results of consolidated subsidiaries
    
    
    5
    
    
    
    (4
    )
    
    
    (2
    )
    
    
    (4
    )
    
    
    (143
    )
    
    
    
    
    
    
    (148
    )Net income (loss) for the year
    
    
    504
    
    
    
    206
    
    
    
    67
    
    
    
    (112
    )
    
    
    (94
    )
    
    
    (3
    )
    
    
    568
 
 (1)
    
    In order to align the financial statements of each business segment with the best
practices of companies in the Oil & Gas sector and to improve the understanding of
Petrobras management, the Company, since the first quarter of 2006, switched to allocating
all financial results and items of financial nature to the corporate level. 
 F-124




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 23.
    
    Segment Information(Continued)Capital expenditures incurred by segment for the years ended December 31, 2006, 2005 and 2004
are as follows:
 Year ended December 31,2006
    
    2005
    
    2004Exploration and Production
    
    
    7,329
    
    
    
    6,127
    
    
    
    4,574Supply
    
    
    1,936
    
    
    
    1,749
    
    
    
    1,367Gas and Energy
    
    
    1,664
    
    
    
    694
    
    
    
    782InternationalExploration and Production
    
    
    2,304
    
    
    
    1,067
    
    
    
    666Supply
    
    
    202
    
    
    
    79
    
    
    
    43Distribution
    
    
    77
    
    
    
    16
    
    
    
    12Gas and Energy
    
    
    54
    
    
    
    13
    
    
    
    6Distribution
    
    
    351
    
    
    
    207
    
    
    
    47Corporate
    
    
    726
    
    
    
    413
    
    
    
    22114,643
    
    
    
    10,365
    
    
    
    7,718
  Year ended December 31,2006
    
    2005
    
    2004Brazil
    
    
    70,733
    
    
    
    57,669
    
    
    
    40,905International
    
    
    23,160
    
    
    
    16,396
    
    
    
    11,04993,893
    
    
    
    74,065
    
    
    
    51,954
  F-125




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 
 24.
    
    Related Party Transactions
   As of December 31,2006
    
    2005Assets
    
    Liabilities
    
    Assets
    
    LiabilitiesPETROS (pension fund)
    
    
    479
    
    
    
    71
    
    
    
    362
    
    
    
    15Banco do Brasil S.A.
    
    
    5,014
    
    
    
    517
    
    
    
    5,944
    
    
    
    56BNDES (Note 12 (b))
    
    
    
    
    
    
    1,491
    
    
    
    
    
    
    
    589BNDES (Project financing)
    
    
    
    
    
    
    1,823
    
    
    
    
    
    
    
    1,336Federal Government
    
    
    
    
    
    
    1,190
    
    
    
    
    
    
    
    966Restricted deposits for legal
Proceedings
    
    
    676
    
    
    
    
    
    
    
    637
    
    
    
    Government securities
    
    
    67
    
    
    
    
    
    
    
    269
    
    
    
    Petroleum and Alcohol account  receivable
from Federal Government (Note 11)
    
    
    368
    
    
    
    
    
    
    
    329
    
    
    
    Others
    
    
    786
    
    
    
    149
    
    
    
    1,926
    
    
    
    7767,390
    
    
    
    5,241
    
    
    
    9,467
    
    
    
    3,738Current
    
    
    5,382
    
    
    
    2,957
    
    
    
    7,458
    
    
    
    2,400Long-term
    
    
    2,008
    
    
    
    2,284
    
    
    
    2,009
    
    
    
    1,338
 F-126




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 24.
    
    Related Party Transactions(Continued)These balances are included in the following balance sheet classifications:
 As of December 31,2006
    
    2005Assets
    
    Liabilities
    
    Assets
    
    LiabilitiesAssetsCurrentCash and cash equivalents
    
    
    4,497
    
    
    
    
    
    
    
    5,908
    
    
    
    Accounts receivable (Note 6)
    
    
    653
    
    
    
    
    
    
    
    308
    
    
    
    Other current assets
    
    
    232
    
    
    
    
    
    
    
    1,242
    
    
    
    OtherAccounts receivable (Note 6)
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    Government securities
    
    
    67
    
    
    
    
    
    
    
    269
    
    
    
    Petroleum and Alcohol account -
receivable
from Federal Government (Note 11)
    
    
    368
    
    
    
    
    
    
    
    329
    
    
    
    Restricted deposits for legal
proceedings
    
    
    676
    
    
    
    
    
    
    
    637
    
    
    
    Pension fund
    
    
    479
    
    
    
    
    
    
    
    362
    
    
    
    Other assets
    
    
    418
    
    
    
    
    
    
    
    380
    
    
    
    LiabilitiesCurrentCurrent portion of long-term debt
    
    
    
    
    
    
    148
    
    
    
    
    
    
    
    70Current liabilities
    
    
    
    
    
    
    68
    
    
    
    
    
    
    
    723Dividends and interest on capital payable
to Federal Government
    
    
    
    
    
    
    1,743
    
    
    
    
    
    
    
    966Current portion of project financings
    
    
    
    
    
    
    998
    
    
    
    
    
    
    
    640Long-termLong-term debt
    
    
    
    
    
    
    1,342
    
    
    
    
    
    
    
    545Project financings
    
    
    
    
    
    
    825
    
    
    
    
    
    
    
    696Other liabilities
    
    
    
    
    
    
    117
    
    
    
    
    
    
    
    987,390
    
    
    
    5,241
    
    
    
    9,467
    
    
    
    3,738
 
 F-127




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 24.
    
    Related Party Transactions(Continued)The principal amounts of business and financial operations carried out with related parties are
as follows:
 Year ended December 31,2006
    
    2005
    
    2004Income
    
    Expense
    
    Income
    
    Expense
    
    Income
    
    ExpenseSales of products and servicesBRASKEM S.A.
    
    
    1,788
    
    
    
    
    
    
    
    1,488
    
    
    
    
    
    
    
    1,049
    
    
    
    COPESUL S.A.
    
    
    1,132
    
    
    
    
    
    
    
    373
    
    
    
    
    
    
    
    501
    
    
    
    Manaus Energia S.A.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Petroquímica União S.A.
    
    
    588
    
    
    
    
    
    
    
    885
    
    
    
    
    
    
    
    828
    
    
    
    (15
    )Others
    
    
    315
    
    
    
    
    
    
    
    954
    
    
    
    
    
    
    
    582
    
    
    
    Financial income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Petroleum and Alcohol
account receivable from
Federal
Government (Note 11)
    
    
    7
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    4
    
    
    
    Government securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    Others
    
    
    71
    
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    (113
    )
    
    
    Financial expenses
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    13Other expenses, net
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (262
    )
    
    
    2
    
    
    
    3,905
    
    
    
    6
    
    
    
    3,756
    
    
    
    (251
    )
    
    
    2,856
    
    
    
    (2
    )
 
 25.
    
    Accounting for Suspended Exploratory Wells
  
 F-128




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 25.
    
    Accounting for Suspended Exploratory Wells(Continued)Costs the Company has incurred to drill exploratory wells that find commercial quantities of
oil and gas are carried as assets on its balance sheet under the classification Property,
plant and equipment as unproved oil and gas properties. Each year, the Company writes off the
costs of these wells that have not found sufficient proved reserves to justify completion as a
producing well, unless (1) the well is in an area requiring major capital expenditure before
production can begin and (2) additional exploratory drilling is under way or firmly planned to
determine whether the capital expenditure is justified.As of December 31, 2006, the total amount of unproved oil and gas properties was US$2,054, and
of that amount US$321 (US$195 of which related to projects in Brazil) represented costs that
had been capitalized for more than one year, which generally are a result of (1) extended
exploratory activities associated with offshore production and (2) the transitory effects of
deregulation in the Brazilian oil and gas industry, as described below.In 1998, the Companys government-granted monopoly ended and the Company signed concession
contracts with the Agência Nacional de Petróleo (National Petroleum Agency, or ANP) for all of
the areas the Company had been exploring and developing prior to 1998, which consisted of 397
concession blocks. Since 1998, the ANP has conducted competitive bidding rounds for
exploration rights, which has allowed the Company to acquire additional concession blocks.
After a concession block is found to contain a successful exploratory well, we must submit an
Evaluation Plan to the ANP for approval. This Evaluation Plan details the drilling plans for
additional exploratory wells. An Evaluation Plan is only submitted for those concession areas
where technical and economic feasibility analyses on existing exploration wells evidence
justification for completion of such wells. Until the ANP approves the Evaluation Plan, the
drilling of additional exploratory wells cannot commence. If companies do not find commercial
quantities of oil and gas within a specific time period, generally 4-6 years depending on the
characteristics of the exploration area, then the concession block must be relinquished and
returned to the ANP. Because the Company was required to assess a large volume of concession
blocks in a limited time frame even when an exploratory well has found sufficient reserves to
justify completion and additional wells are firmly planned, finite resources
 F-129




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 25.
    
    Accounting for Suspended Exploratory Wells(Continued)and expiring time frames in other concession blocks have dictated the timing of the planned
additional drilling.The following table shows the net changes in capitalized exploratory drilling costs during the
years ended December 31, 2006 and 2005:
 Unproved oil and gas properties (*)Year ended December,312006
    
    2005Beginning balance at January 1
    
    
    2,061
    
    
    
    1,684Additions to capitalized costs pending determination
of proved reserves
    
    
    2,186
    
    
    
    1,247Capitalized exploratory costs charged to expense
    
    
    (493
    )
    
    
    (597
    )Sales of reserves
    
    
    (199
    )
    
    
    Transfers to property, plant and equipment based
on the determination of the proved reserves
    
    
    (1,614
    )
    
    
    (423
    )Cumulative translation adjustment
    
    
    113
    
    
    
    150Ending balance at December 31,
    
    
    2,054
    
    
    
    2,061
 
 (*)
    
    Amounts capitalized and subsequently expensed in the same period have been
excluded from the above table.  Aging of capitalized exploratory well costsYear ended December 31,2006
    
    2005Capitalized exploratory well costs
that have been capitalized for a
period of one year or less
    
    
    1,733
    
    
    
    1,155Capitalized exploratory well costs
that have been capitalized for a
period greater than one year
    
    
    321
    
    
    
    906Ending balance
    
    
    2,054
    
    
    
    2,061Number of projects that have
exploratory well costs that have
been capitalized for a period
greater than one year
    
    
    50
    
    
    
    42
 F-130




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 25.
    
    Accounting for Suspended Exploratory Wells(Continued)Of the US$321 for 50 projects that include wells suspended for more than one year since the
completion of drilling, approximately US$103 are related to wells in areas for which drilling
was under way or firmly planed for the near future and that we have submitted an Evaluation
Plan to the ANP for approval and approximately US$54 incurred in costs for activities
necessary to assess the reserves and their potential development.The US321 of suspended well cost capitalized for a period greater than one year as of December
31, 2006 represents 66 exploratory wells and the table below contains the aging of these costs
on a well basis:Aging based on drilling completion date of individual wells:
 Million of
    
    Number ofdollars
    
    wells2005
    
    
    160
    
    
    
    432004
    
    
    120
    
    
    
    112003
    
    
    31
    
    
    
    32002
    
    
    
    
    
    
    2001
    
    
    10
    
    
    
    9321
    
    
    
    66
 F-131




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 
 26.
    
    Subsequent Events
 (a)
    
    Global NotesOn January 4, 2007, PIFCo, a wholly owned subsidiary of Petrobras, announced an offer for
the exchange of securities (Exchange Offering) totaling up US$500 (face value) for the
five series of notes.The objective of the Exchange was offer to the investors the opportunity to substitute the
five old notes listed below, with PIFCos new benchmark issued on October 06, 2006, with a
coupon of 6.125% per annum and maturity in 2016.The settlement of the Exchange Offering occurred on February 7, 2007 and as a result, PIFCo
received and accepted a tender amount of US$399 (face value of the Notes). All the notes
received were cancelled in the same day and as a consequence, PIFCo issued US$399 of Global
Notes due 2016 that bear interest at the rate of 6.125% per annun, payable semi-annually.
The new Notes constitute a single, fungible series with the US$500 Global Notes due 2016
and issued on October 06, 2006, amounting to US$899 in securities issued with maturity in
2016. PIFCo also paid to the investors a cash amount equivalent to US$56 as a result of the
Exchange. The table below presents the result of the Exchange.
 US$ MillionPrincipal after
    
    
    Accepted forOld notes
    
    Interest rate
    
    
    Maturity
    
    
    Settlement
    
    
    ExchangeGlobal Step-Up Notes
    
    
    12.375
    %
    
    
    2008
    
    
    
    127
    
    
    
    8Senior Notes
    
    
    9.875
    %
    
    
    2008
    
    
    
    224
    
    
    
    14Senior Notes
    
    
    9.750
    %
    
    
    2011
    
    
    
    236
    
    
    
    51Global Notes
    
    
    9.125
    %
    
    
    2013
    
    
    
    374
    
    
    
    124Global Notes
    
    
    7.750
    %
    
    
    2014
    
    
    
    398
    
    
    
    2021,359
    
    
    
    399
 US$ MillionPrincipal after
    
    
    TotalNew notes
    
    Interest rate
    
    
    Maturity
    
    
    Exchange
    
    
    ReopenedGlobal Notes
    
    
    6.125
    %
    
    
    2016
    
    
    
    899
    
    
    
    399899
    
    
    
    399
 F-132




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 26.
    
    Subsequent Events(Continued)
 (b)
    
    Leasing of the Araucária Gas Thermoelectric Power StationPetrobras announced on January 3, 2007 that it had executed two service provision and
leasing contracts with UEG Araucária and COPEL. The first contract refers to the leasing
of the Araucária Gas Thermoelectric Power Station executed by Petrobras and UEG, in force
until December 31, 2007 which may be extended for a period of up to 12 months. The second
contract involves the provision of maintenance and operating services regarding the UEG
Araucária, executed by Petrobras and COPEL Geração, in force until December 31, 2008 or
the end of the leasing agreement, whichever occurs first.Under the two contracts, a fixed monthly payment will be due of US$8.89 per MWh multiplied
by the reference voltage (428,35 MW) plus a variable monthly payment of US$15.54 per MWh,
on the effective energy generated. These proceeds are used to cover all costs and taxes
incurred by UEG.Executing these contracts will enable better allocation of the gas produced to meet the
fundamental commitments referring to the energy sold by the Company.(c)
    
    Repactuation of PETROS PlanDuring 2006 Petrobras presented to employee participants and retirees a proposal to bring
equilibrium to the actual PETROS Plan. On February 28, 2007 the target for the minimum
accession number to the renegotiation set at 2/3 (two-thirds) of the members and was met
(see Note 16 (b)).The renegotiation process consists of changing the plans regulation, particularly the
articles related to how the benefits are readjusted, disentailing the readjustment of the
benefits paid to retirees and pensioners from wage increases granted to active employees
and INSS retirees. Petros Plan benefits, disentailed from the active employees wage and
INSS retirement and pension plan readjustments, will be adjusted based on the IPCA (cost
of living index).
 F-133




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 26.
    
    Subsequent Events(Continued)
 (c)
    
    Repactuation of PETROS Plan(Continued)The financial incentive to be granted to the participants, whether employees or retirees,
as negotiated by the labor union representatives as a counterpart for the Plans
repactuation, amounted to US$425 and was paid on March 2007.The proposals approval also opens the way to reach agreements with Labor Union
Representations in order to liquidate and extinguish legal suits, particularly the Public
Civil Suit regarding Petrobras Systems complementary retirement issues. The demands that
refer to the items to be removed from the lawsuits will be attended to through the
calculation of their actuarial value and paid for by Petrobras, in 20 years, respecting
the Plans liquidity conditions.(d)
    
    Ipiranga Group AcquisitionOn March 19, 2007, Ultrapar Participações S.A. (Ultrapar) has celebrated, with the
acknowledgement of Petróleo Brasileiro S.A. (Petrobras) and Braskem S.A.(Braskem) a
contract with the controlling shareholders of Refinaria de Petróleo Ipiranga S.A,
Distribuidora de Produtos de Petróleo Ipiranga S.A. and Companhia Brasileira de Petróleo
Ipiranga for the acquisition of their total interest in those companies, including
petrochemical and distribution assets.After the completion of the acquisition, the businesses of the Ipiranga Group will be
managed by Ultrapar, Petrobras and Braskem. Ultrapar will hold 100% interest of the oil
products and lubricant distribution businesses located in the South and Southeast regions
of Brazil, Petrobras will hold 100% interest of the oil products and lubricant
distribution businesses located in the North, Northeast and Central West regions of
Brazil. Petrobras and Braskem will hold the petrochemical assets in the proportion of 40%
and 60% respectively. The assets related to refining operations will be equally shared
between Petrobras, Ultrapar and Braskem.
 F-134




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 26.
    
    Subsequent Events(Continued)
 (d)
    
    Ipiranga Group Acquisition(Continued)The conclusion of operation is estimated to occur during the fourth quarter of 2007. The
transaction will occur in some fases including acquisitions and incorporation of shares,
delisting of public companies in Brazilian Stock Exchange and segregation of the
distribution and petrochemical assets.The total value estimated for the operation is US$4.0 billion and Petrobras will pay
approximately US$1.3 billion for its interest. The transaction will be presented for
appreciation of the Brazilian Anti-trust Authorities (CADE  Administrative Board for
Economic Defense), the Secretary for Economic Rights and the Secretary for Economic
Monitoring.
 F-135




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 
       F-136




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 (i)
    
    Capitalized costs relating to oil and gas producing activitiesThe following table summarizes capitalized costs for oil and gas exploration and production
activities with the related accumulated depreciation, depletion and amortization, and asset
retirement obligation assets:
 As of December 31, 2006Brazil
    
    International
    
    WorldwideUnproved oil and gas properties
    
    
    683
    
    
    
    1,371
    
    
    
    2,054Proved oil and gas properties
    
    
    23,967
    
    
    
    4,240
    
    
    
    28,207Support equipment
    
    
    13,851
    
    
    
    454
    
    
    
    14,305Gross capitalized costs
    
    
    38,501
    
    
    
    6,065
    
    
    
    44,566Depreciation and depletion
    
    
    (14,979
    )
    
    
    (1,902
    )
    
    
    (16,881
    )23,522
    
    
    
    4,163
    
    
    
    27,685Construction and installations in progress
    
    
    10,457
    
    
    
    273
    
    
    
    10,73033,979
    
    
    
    4,436
    
    
    
    38,415Proportional interest of net capitalized
costs of equity companies
    
    
    
    
    
    
    224
    
    
    
    224Net capitalized costs
    
    
    33,979
    
    
    
    4,660
    
    
    
    38,639
 As of December 31, 2005Brazil
    
    International
    
    WorldwideUnproved oil and gas properties
    
    
    1,340
    
    
    
    721
    
    
    
    2,061Proved oil and gas properties
    
    
    18,734
    
    
    
    4,374
    
    
    
    23,108Support equipment
    
    
    10,755
    
    
    
    1,034
    
    
    
    11,789Gross capitalized costs
    
    
    30,829
    
    
    
    6,129
    
    
    
    36,958Depreciation and depletion
    
    
    (14,378
    )
    
    
    (2,463
    )
    
    
    (16,841
    )16,451
    
    
    
    3,666
    
    
    
    20,117Construction and installations in progress
    
    
    9,418
    
    
    
    135
    
    
    
    9,553Net capitalized costs
    
    
    25,869
    
    
    
    3,801
    
    
    
    29,670
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 (ii)
    
    Costs incurred in oil and gas property acquisition, exploration and development
activitiesCosts incurred are summarized below and include both amounts expensed and capitalized:
 Year ended December 31, 2006Brazil
    
    International
    
    WorldwideProperty acquisitionsProved
    
    
    
    
    
    
    86
    
    
    
    86Unproved
    
    
    38
    
    
    
    630
    
    
    
    668Exploration costs
    
    
    1,752
    
    
    
    430
    
    
    
    2,182Development costs
    
    
    6,022
    
    
    
    817
    
    
    
    6,8397,812
    
    
    
    1,963
    
    
    
    9,775Proportional interest of
costs incurred of equity
companies
    
    
    
    
    
    
    24
    
    
    
    247,812
    
    
    
    1,987
    
    
    
    9,799
 Year ended December 31, 2005Brazil
    
    International
    
    WorldwideProperty acquisitions
Unproved
    
    
    220
    
    
    
    126
    
    
    
    346Exploration costs
    
    
    1,741
    
    
    
    420
    
    
    
    2,161Development costs
    
    
    4,687
    
    
    
    647
    
    
    
    5,3346,648
    
    
    
    1,193
    
    
    
    7,841
 Year ended December 31, 2004Brazil
    
    International
    
    WorldwideProperty acquisitions
Unproved
    
    
    156
    
    
    
    17
    
    
    
    173Exploration costs
    
    
    1,003
    
    
    
    250
    
    
    
    1,253Development costs
    
    
    3,591
    
    
    
    404
    
    
    
    3,9954,750
    
    
    
    671
    
    
    
    5,421
 F-138




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 (iii)
    
    Results of operations for oil and gas producing activitiesThe Companys results of operations from oil and gas producing activities for the years ending
December 31, 2006, 2005 and 2004 are shown in the following table. The Company transfers
substantially all of its Brazilian crude oil and gas production to the supply segment in
Brazil. The prices calculated by the Companys model may not be indicative of the price the
Company would have realized had this production been sold in an unregulated spot market.
Additionally, the prices calculated by the Companys model may not be indicative of the future
prices to be realized by the Company after January 1, 2002, when full price deregulation began.
Gas prices used are contracted prices to third parties.Production costs are lifting costs incurred to operate and maintain productive wells and
related equipment and facilities, including such costs as operating labor, materials, supplies,
fuel consumed in operations and the costs of operating natural liquid gas plants. Production
costs also include administrative expenses and depreciation and amortization of equipment
associated with production activities.Exploration expenses include the costs of geological and geophysical activities and
non-productive exploratory wells. Depreciation and amortization expenses relate to assets
employed in exploration and development activities. In accordance with SFAS 69, income taxes
are based on statutory tax rates, reflecting allowable deductions. Interest income and expense
are excluded from the results reported in this table.
 Year ended December 31, 2006Brazil
    
    International
    
    WorldwideNet operating revenues:Sales to third parties
    
    
    3,351
    
    
    
    684
    
    
    
    4,035Intersegment (1)
    
    
    31,171
    
    
    
    1,830
    
    
    
    33,00134,522
    
    
    
    2,514
    
    
    
    37,036Production costs (2)
    
    
    (11,761
    )
    
    
    (949
    )
    
    
    (12,710
    )Exploration expenses
    
    
    (501
    )
    
    
    (434
    )
    
    
    (935
    )Depreciation, depletion, amortization
    
    
    (2,166
    )
    
    
    (309
    )
    
    
    (2,475
    )Impairment of oil and gas properties
    
    
    (20
    )
    
    
    (1
    )
    
    
    (21
    )Other operating expenses
    
    
    (22
    )
    
    
    (3
    )
    
    
    (25
    )Results before income taxes
    
    
    20,052
    
    
    
    818
    
    
    
    20,870Income tax expense
    
    
    (6,818
    )
    
    
    (279
    )
    
    
    (7,097
    )13,234
    
    
    
    539
    
    
    
    13,773Proportional interest in results of producing
activities of equity companies
    
    
    
    
    
    
    20
    
    
    
    20Results of operations (excluding corporate overhead and
interest cost)
    
    
    13,234
    
    
    
    559
    
    
    
    13,793
 F-139




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 (iii)
    
    Results of operations for oil and gas producing activities(Continued)
 Year ended December 31, 2005Brazil
    
    International
    
    WorldwideNet operating revenues:Sales to third parties
    
    
    1,874
    
    
    
    920
    
    
    
    2,794Intersegment (1)
    
    
    25,997
    
    
    
    1,476
    
    
    
    27,47327,871
    
    
    
    2,396
    
    
    
    30,267Production costs (2)
    
    
    (10,342
    )
    
    
    (665
    )
    
    
    (11,007
    )Exploration expenses
    
    
    (871
    )
    
    
    (142
    )
    
    
    (1,013
    )Depreciation, depletion, amortization
    
    
    (1,571
    )
    
    
    (360
    )
    
    
    (1,931
    )Impairment of oil and gas properties
    
    
    (11
    )
    
    
    (134
    )
    
    
    (145
    )Other operating expenses
    
    
    (29
    )
    
    
    
    
    
    
    (29
    )Results before income taxes
    
    
    15,047
    
    
    
    1,095
    
    
    
    16,142Income tax expense
    
    
    (5,116
    )
    
    
    (372
    )
    
    
    (5,488
    )Results of operations (excluding corporate overhead and
interest cost)
    
    
    9,931
    
    
    
    723
    
    
    
    10,654
 Year ended December 31, 2004Brazil
    
    International
    
    WorldwideNet operating revenues:Sales to third parties
    
    
    2,308
    
    
    
    713
    
    
    
    3,021Intersegment (1)
    
    
    16,001
    
    
    
    1,087
    
    
    
    17,08818,309
    
    
    
    1,800
    
    
    
    20,109Production costs (2)
    
    
    (6,771
    )
    
    
    (461
    )
    
    
    (7,232
    )Exploration expenses
    
    
    (418
    )
    
    
    (195
    )
    
    
    (613
    )Depreciation, depletion, amortization
    
    
    (1,322
    )
    
    
    (327
    )
    
    
    (1,649
    )Impairment of oil and gas properties
    
    
    (51
    )
    
    
    
    
    
    
    (51
    )Other operating expenses
    
    
    (41
    )
    
    
    (64
    )
    
    
    (105
    )Results before income taxes
    
    
    9,706
    
    
    
    753
    
    
    
    10,459Income tax expense
    
    
    (3,396
    )
    
    
    (278
    )
    
    
    (3,674
    )Results of operations (excluding corporate overhead and
interest cost)
    
    
    6,310
    
    
    
    475
    
    
    
    6,785
 
 (1)
    
    Does not consider US$1,216 (US$953 for 2005) related to field processing activities,
for which Petrobras has no attributable quantity of reserve. The amount, which relates
principally to dry gas volumes, is considered in Petrobras  net operating revenues of
US$35,738 (US$28,824 for 2005) for the segment of E&P Brazil (Note 23).(2)
    
    Does not consider US$1,873 (US$985 for 2005) related to field processing activities,
for which Petrobras has no attributable quantity of reserve. The amount, which relates
principally to dry gas volumes, is considered in Petrobras cost of sales of US$13,634
(US$11,327 for 2005) for the segment of E&P Brazil (Note 23). F-140




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 (iv)
    
    Reserve quantities informationThe Companys estimated net proved oil and gas reserves and changes thereto for the years 2006,
2005 and 2004 are shown in the following table. Proved reserves are estimated by the Companys
reservoir engineers in accordance with the reserve definitions prescribed by the Securities and
Exchange Commission.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 reservoirs under existing economic and operating
conditions. Proved reserves do not include additional quantities recoverable beyond the term of
the concession or contract, or that may result from extensions of currently proved areas, or
from application of secondary or tertiary recovery processes not yet tested and determined to
be economic.Proved developed reserves are the quantities expected to be recovered from existing wells with
existing equipment and operating methods. Proved undeveloped reserves are those volumes which
are expected to be recovered as a result of future investments in drilling, re-equipping
existing wells and installing facilities necessary to deliver the production from these
reserves.In some cases, substantial new investments in additional wells and related facilities will be
required to recover these proved reserves. Due to the inherent uncertainties and the limited
nature of reservoir data, estimates of reserves are subject to change as additional information
becomes available.
 F-141




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 (iv)
    
    Reserve quantities information(Continued)A summary of the annual changes in the proved reserves of crude oil and natural gas follows:
 Oil (millions of barrels)
    
    Gas (billions of cubic feet)Brazil
    
    International
    
    Worldwide
    
    Brazil
    
    International
    
    WorldwideWorldwide net proved developed
and undeveloped reservesReserves at December 31, 2003
    
    
    9,051.4
    
    
    
    720.7
    (1)
    
    
    9,772.1
    
    
    
    8,111.4
    
    
    
    3,090.9
    (1)
    
    
    11,202.3Revisions of previous estimates
    
    
    (414.9
    )
    
    
    (18.8
    )
    
    
    (433.7
    )
    
    
    (262.1
    )
    
    
    276,4
    
    
    
    14.3Improved recovery
    
    
    50.2
    
    
    
    13.2
    
    
    
    63,4
    
    
    
    13.2
    
    
    
    26.8
    
    
    
    40.0Extensions and discoveries
    
    
    1,079.1
    
    
    
    47.4
    
    
    
    1,126.5
    
    
    
    569.4
    
    
    
    89.7
    
    
    
    659.1Purchase of reserves in place  PEPSA
    
    
    
    
    
    
    0.6
    
    
    
    0.6
    
    
    
    
    
    
    
    18.5
    
    
    
    18.5Production for the year
    
    
    (522.4
    )
    
    
    (61.1
    )
    
    
    (583.5
    )
    
    
    (477.6
    )
    
    
    (209.5
    )
    
    
    (687.1
    )Reserves at December 31, 2004
    
    
    9,243.4
    
    
    
    702.0
    (1)
    
    
    9,945.4
    
    
    
    7,954.3
    
    
    
    3,292.8
    (1)
    
    
    11,247.1Revisions of previous estimates
    
    
    123.0
    
    
    
    0.5
    
    
    
    123.5
    
    
    
    842.4
    
    
    
    (32.6
    )
    
    
    809.8Improved recovery
    
    
    1.1
    
    
    
    (9.4
    )
    
    
    (8.3
    )
    
    
    6.9
    
    
    
    0.2
    
    
    
    7.1Extensions and discoveries
    
    
    250.9
    
    
    
    47.8
    
    
    
    298.7
    
    
    
    990.0
    
    
    
    38.6
    
    
    
    1,028.6Production for the year
    
    
    (584.5
    )
    
    
    (58.8
    )
    
    
    (643.3
    )
    
    
    (529.8
    )
    
    
    (210.9
    )
    
    
    (740.7
    )Reserves at December 31, 2005
    
    
    9,033.9
    
    
    
    682.1
    (1)
    
    
    9,716.0
    
    
    
    9,263.8
    
    
    
    3,088.1
    (1)
    
    
    12,351.9Interest loss in Venezuela
    
    
    
    
    
    
    (240.5
    )
    
    
    (240.5
    )
    
    
    
    
    
    
    (171.2
    )
    
    
    (171.2
    )Revisions of previous estimates
    
    
    463.4
    
    
    
    (15.3
    )
    
    
    448.1
    
    
    
    322.1
    
    
    
    (459.2
    )
    
    
    (137.1
    )Improved recovery
    
    
    6.9
    
    
    
    6.7
    
    
    
    13.6
    
    
    
    7.6
    
    
    
    9.9
    
    
    
    17.5Acquisition of reserves
    
    
    0.9
    
    
    
    8.9
    
    
    
    9.8
    
    
    
    45.7
    
    
    
    16.0
    
    
    
    61.7Sale of reserves
    
    
    
    
    
    
    (4.5
    )
    
    
    (4.5
    )
    
    
    
    
    
    
    
    
    
    
    Extensions and discoveries
    
    
    112.8
    
    
    
    21.4
    
    
    
    134.2
    
    
    
    320.6
    
    
    
    65.2
    
    
    
    385.8Production for the year
    
    
    (616.0
    )
    
    
    (42.6
    )
    
    
    (658.6
    )
    
    
    (532.9
    )
    
    
    (209.8
    )
    
    
    (742.7
    )Reserves at December 31, 2006
    
    
    9,001.9
    
    
    
    416.2
    (1)
    
    
    9,418.1
    
    
    
    9,426.9
    
    
    
    2,339.0
    (1)
    
    
    11,765.9Proportional interest in net
proved developed and undeveloped
reserves of equity companies
    
    
    
    
    
    
    65.7
    
    
    
    65.7
    
    
    
    
    
    
    
    77.3
    
    
    
    77.3Net proved Developed ReservesAt January 1, 2003
    
    
    3,912.9
    
    
    
    94.7
    
    
    
    4,007.6
    
    
    
    3,892.5
    
    
    
    2,043.9
    
    
    
    5,936.4At December 31, 2003
    
    
    3,629.5
    
    
    
    404.1
    
    
    
    4,033.6
    
    
    
    4,398.1
    
    
    
    2,548.4
    
    
    
    6,946.5At December 31, 2004
    
    
    4,129.8
    
    
    
    383.1
    
    
    
    4,512.9
    
    
    
    4,427.6
    
    
    
    2,495.2
    
    
    
    6,922.8At December 31, 2005
    
    
    4.071.7
    
    
    
    365.9
    
    
    
    4,437.6
    
    
    
    4,088.8
    
    
    
    2,333.7
    
    
    
    6,422.5At December 31, 2006
    
    
    3,987.7
    
    
    
    232.9
    
    
    
    4,220.6
    
    
    
    4,115.4
    
    
    
    1,758.0
    
    
    
    5,873.4Proportional interest in proved
reserves of equity companies
    
    
    
    
    
    
    36.7
    
    
    
    36.7
    
    
    
    
    
    
    
    43.1
    
    
    
    43.1
 
 (1)
    
    Includes reserves of 134.0 million barrels of oil and 504.8 billions of cubic feet of
gas in 2006 (222.8 million barrels of oil and 550.6 billions of cubic feet of gas in 2005;
and 228.6 million barrels of oil and 445.6 billions of cubic feet of gas in 2004)
attributable to 41.38% minority interest in PEPSA, which is consolidated by Petrobras. F-142




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 (iv)
    
    Reserve quantities information(Continued)The decrease in reserves is related to revisions of previous estimates due to Bolivia
and Venezuela new nationalization measures during 2006. The new regulation in Venezuela
reduced our reserves as PDVSA became the main controller of the companies created to
operate the fields with private companies. In Bolivia, due to new government regulations,
occurred a decrease in the reserves. In Nigeria, the consortium in charge of Akpo field was
constituted by Total, Petrobras and a Nigerian private company called SAPETRO. The
agreement underwritten by these companies established that TOTAL and Petrobras carried the
investment cost of the third part and it would be compensated in the future with SAPETROs
production/reserves.Along 2006, SAPETRO sold its participation to a Chinese oil company and, as part of this
agreement, Petrobras and TOTAL were reimbursed for their past carrying investments(v)
    
    Standardized measure of discounted future net cash flows relating to proved oil and gas
quantities and changes thereinThe standardized measure of discounted future net cash flows, related to the above proved oil
and gas reserves, is calculated in accordance with the requirements of SFAS 69. Estimated
future cash inflows from production in Brazil are computed by applying year-end prices based
upon the Companys internal pricing methodology for oil and gas to year-end quantities of
estimated net proved reserves. Estimated future cash inflows from production related to the
Companys International segment are computed by applying year-end prices for oil and gas to
year-end quantities of estimated net proved reserves. Future price changes are limited to those
provided by contractual arrangements in existence at the end of each reporting year. Future
development and production costs are those estimated future expenditures necessary to develop
and produce year-end estimated proved reserves based on year-end cost indicators, assuming
continuation of year-end economic conditions. Estimated future income taxes are calculated by
applying appropriate year-end statutory tax rates. These rates reflect allowable deductions and
are applied to estimated future pre-tax net cash flows, less the tax basis of related assets.
Discounted future net cash flows are calculated using 10% midperiod discount factors. This
discounting requires a year-by-year estimate of when the future expenditures will be incurred
and when the reserves will be produced.The information provided does not represent managements estimate of Petrobras expected future
cash flows or value of proved oil and gas reserves. Estimates of proved reserve quantities
involves uncertainty and change over time as new information becomes available. Moreover,
probable and possible reserves, which may become proved in the future, are excluded from the
calculations.
 F-143




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 (v)
    
    Standardized measure of discounted future net cash flows relating to proved oil and gas
quantities and changes therein(Continued)The arbitrary valuation prescribed under SFAS 69 requires assumptions as to the timing and
amount of future development and production costs. The calculations are made as of December 31
each year and should not be relied upon as an indication of Petrobras future cash flows or the
value of its oil and gas reserves.
 Brazil
    
    International
    
    WorldwideAt December 31, 2006Future cash inflows
    
    
    477,051
    
    
    
    24,691
    
    
    
    501,742Future production costs
    
    
    (175,483
    )
    
    
    (5,726
    )
    
    
    (181,209
    )Future development costs
    
    
    (30,185
    )
    
    
    (2,679
    )
    
    
    (32,864
    )Future income tax expenses
    
    
    (93,914
    )
    
    
    (7,051
    )
    
    
    (100,965
    )Undiscounted future net cash flows
    
    
    177,469
    
    
    
    9,235
    
    
    
    186,70410 percent midyear annual discount for
timing of estimated cash flows
    
    
    (83,582
    )
    
    
    (3,566
    )
    
    
    (87,148
    )Standardized measure of discounted future net cash flows
    
    
    93,887
    
    
    
    5,669
    
    
    
    99,556Proportional interest in standardized measure of
discounted future net cash flows related to proved
reserves of equity companies
    
    
    
    
    
    
    472
    
    
    
    472At December 31, 2005Future cash inflows
    
    
    496,355
    
    
    
    36,014
    
    
    
    532,369Future production costs
    
    
    (170,638
    )
    
    
    (7,339
    )
    
    
    (177,977
    )Future development costs
    
    
    (25,934
    )
    
    
    (2,946
    )
    
    
    (28,880
    )Future income tax expenses
    
    
    (103,726
    )
    
    
    (10,929
    )
    
    
    (114,655
    )Undiscounted future net cash flows
    
    
    196,057
    
    
    
    14,800
    
    
    
    210,85710 percent midyear annual discount for
timing of estimated cash flows
    
    
    (95,580
    )
    
    
    (5,962
    )
    
    
    (101,542
    )Companys share by unconsolidated affiliates
    
    
    
    
    
    
    61
    
    
    
    61Standardized measure of discounted future net cash flows
    
    
    100,477
    
    
    
    8,899
    *
    
    
    109,376At December 31, 2004Future cash inflows
    
    
    366,045
    
    
    
    24,222
    
    
    
    390,267Future production costs
    
    
    (131,090
    )
    
    
    (4,003
    )
    
    
    (135,093
    )Future development costs
    
    
    (19,315
    )
    
    
    (2,224
    )
    
    
    (21,539
    )Future income tax expenses
    
    
    (74,758
    )
    
    
    (5,889
    )
    
    
    (80,647
    )Undiscounted future net cash flows
    
    
    140,882
    
    
    
    12,106
    
    
    
    152,98810 percent midyear annual discount for
timing of estimated cash flows
    
    
    (69,397
    )
    
    
    (5,423
    )
    
    
    (74,820
    )Companys share by unconsolidated affiliates
    
    
    
    
    
    
    121
    
    
    
    121Standardized measure of discounted future net cash flows
    
    
    71,485
    
    
    
    6,804
    *
    
    
    78,289
 
 (*)
    
    Includes US$1,338 in 2006 (US$2,379 in 2005 and U.S.$1,774 in 2004) attributable to
41.38% minority interest in PEPSA, which is consolidated by Petrobras. F-144




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 (v)
    
    Standardized measure of discounted future net cash flows relating to proved oil and gas
quantities and changes therein(Continued)The following are the principal sources of change in the standardized measure of discounted net
cash flows:
 Brazil
    
    
    International
    
    
    Worldwide2006
    
    
    2005
    
    
    2004
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2006
    
    
    2005
    
    
    2004Balance at January 1
    
    
    100,477
    
    
    
    71,485
    
    
    
    35,522
    
    
    
    8,899
    
    
    
    6,804
    
    
    
    5,297
    
    
    
    109,376
    
    
    
    78,289
    
    
    
    40,819Sales and transfers of oil and gas, net of
production costs
    
    
    (22,761
    )
    
    
    (17,529
    )
    
    
    (11,538
    )
    
    
    (1,505
    )
    
    
    (1,731
    )
    
    
    (1,339
    )
    
    
    (24,266
    )
    
    
    (19,260
    )
    
    
    (12,877
    )Development costs incurred
    
    
    6,022
    
    
    
    4,686
    
    
    
    3,591
    
    
    
    817
    
    
    
    647
    
    
    
    404
    
    
    
    6,839
    
    
    
    5,333
    
    
    
    3,995Purchases of reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101
    
    
    
    
    
    
    
    73
    
    
    
    101
    
    
    
    
    
    
    
    73Sales of reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (105
    )
    
    
    
    
    
    
    
    
    
    
    (105
    )
    
    
    
    
    
    
    Extensions, discoveries and improved less
related costs
    
    
    2,509
    
    
    
    6,599
    
    
    
    12,881
    
    
    
    494
    
    
    
    554
    
    
    
    1,015
    
    
    
    3,003
    
    
    
    7,153
    
    
    
    13,896Interest loss in Venezuela
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,305
    )
    
    
    
    
    
    
    
    
    
    
    (1,305
    )
    
    
    
    
    
    
    Revisions of previous quantity estimates
    
    
    10,373
    
    
    
    4,156
    
    
    
    (4,892
    )
    
    
    (1,825
    )
    
    
    92
    
    
    
    (58
    )
    
    
    8,548
    
    
    
    4,248
    
    
    
    (4,950
    )Net changes in prices and production costs
    
    
    (12,698
    )
    
    
    48,525
    
    
    
    51,115
    
    
    
    (976
    )
    
    
    4,981
    
    
    
    2,042
    
    
    
    (13,674
    )
    
    
    53,506
    
    
    
    53,157Changes in future development costs
    
    
    (5,274
    )
    
    
    (9,405
    )
    
    
    (292
    )
    
    
    (749
    )
    
    
    (658
    )
    
    
    (504
    )
    
    
    (6,023
    )
    
    
    (10,063
    )
    
    
    (796
    )Accretion of discount
    
    
    10,048
    
    
    
    7,148
    
    
    
    3,552
    
    
    
    1,006
    
    
    
    994
    
    
    
    739
    
    
    
    11,054
    
    
    
    8,142
    
    
    
    4,291Net change in income taxes
    
    
    5,191
    
    
    
    (15,188
    )
    
    
    (18,454
    )
    
    
    817
    
    
    
    (2,784
    )
    
    
    (865
    )
    
    
    6,008
    
    
    
    (17,972
    )
    
    
    (19,319
    )Balance at December 31
    
    
    93,887
    
    
    
    100,477
    
    
    
    71,485
    
    
    
    5,669
    
    
    
    8,899
    
    
    
    6,804
    
    
    
    99,556
    
    
    
    109,376
    
    
    
    78,289Proportional interest in standardized
measure of discounted future net cash
flows related to proved reserves of
equity companies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    472
    
    
    
    
    
    
    
    
    
    
    
    472
 F-145




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##### Table of Contents



PETROBRAS INTERNATIONAL
FINANCE COMPANY (A wholly-owned
subsidiary of PETRÓLEO BRASILEIRO
S.A.  PETROBRAS)
 Consolidated financial statements  Years ended December 31, 2006, 2005 and 2004
together with Report of Independent Registered Public Accounting Firm




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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY
AND SUBSIDIARIES
(A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 CONSOLIDATED FINANCIAL STATEMENTS
   Report of Independent Registered Public Accounting Firm
    
    
    F-146Audited Financial StatementsConsolidated Balance Sheets
    
    
    F-148Consolidated Statements of Operations
    
    
    F-150Consolidated Statements of Changes in Stockholders (Deficit)/Equity
    
    
    F-151Consolidated Statements of Cash Flows
    
    
    F-152Notes to the Financial Statements
    
    
    F-154




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##### Table of Contents



The Executive Board and Stockholder of
 Petrobras International Finance Company
    F-146




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##### Table of Contents



F-147




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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES
 (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 
 2006
    
    
    2005AssetsCurrent assetsCash and cash equivalents
    
    
    510,812
    
    
    
    230,745Marketable securities
    
    
    645,278
    
    
    
    82,923Trade accounts receivableRelated parties
    
    
    10,658,905
    
    
    
    8,681,075Other
    
    
    835,437
    
    
    
    212,703Notes receivable  related parties
    
    
    6,114,651
    
    
    
    3,329,336Inventories
    
    
    262,720
    
    
    
    195,935Export prepayments  related parties
    
    
    67,785
    
    
    
    414,505Restricted deposits for guarantees and other
    
    
    145,732
    
    
    
    94,70019,241,320
    
    
    
    13,241,922Property and equipment
    
    
    700
    
    
    
    384Other assetsMarketable securities
    
    
    1,151,588
    
    
    
    2,165,718Notes receivable  related parties
    
    
    239,709
    
    
    
    579,960Export prepayment  related parties
    
    
    464,380
    
    
    
    529,420Restricted deposits for guarantees and prepaid expenses
    
    
    223,618
    
    
    
    231,5442,079,295
    
    
    
    3,506,642Total assets
    
    
    21,321,315
    
    
    
    16,748,948
  F-148




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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES
 (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 2006
    
    
    2005Liabilities and stockholders (deficit)/equityCurrent liabilitiesTrade accounts payableRelated parties
    
    
    1,142,848
    
    
    
    950,732Other
    
    
    1,121,986
    
    
    
    616,076Notes payable  related parties
    
    
    5,386,759
    
    
    
    4,346,139Short-term financing
    
    
    148,447
    
    
    
    339,503Current portion of long-term debt
    
    
    1,057,438
    
    
    
    551,628Accrued interest
    
    
    97,865
    
    
    
    107,710Unearned income  related parties
    
    
    248,688
    
    
    
    176,481Other current liabilities
    
    
    60,199
    
    
    
    10,1699,264,230
    
    
    
    7,098,438Long-term liabilitiesLong-term debt
    
    
    4,640,134
    
    
    
    5,908,416Notes payable  related parties
    
    
    7,441,701
    
    
    
    3,734,11212,081,835
    
    
    
    9,642,528Stockholders (deficit)/equityShares authorized and issuedCommon stock  2006  300,050,000 shares and
2005 - 50,000 shares par value US$1
    
    
    300,050
    
    
    
    50Additional paid in capital
    
    
    53,926
    
    
    
    173,926Accumulated deficit
    
    
    (376,519
    )
    
    
    (165,994
    )Other comprehensive incomeLoss on cash flow hedge
    
    
    (2,207
    )
    
    
    (24,750
    )
    
    
    7,982Total liabilities and stockholders (deficit)/equity
    
    
    21,321,315
    
    
    
    16,748,948
  F-149




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PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 
 Years ended December 31,2006
    
    
    2005
    
    
    2004Sales of crude oil, oil products and servicesRelated parties
    
    
    14,236,511
    
    
    
    13,974,381
    
    
    
    10,118,356Other
    
    
    7,833,263
    
    
    
    3,161,764
    
    
    
    2,237,21622,069,774
    
    
    
    17,136,145
    
    
    
    12,355,572Operating expenses:Cost of salesRelated parties
    
    
    (8,121,994
    )
    
    
    (7,780,293
    )
    
    
    (4,391,285
    )Other
    
    
    (13,778,560
    )
    
    
    (9,203,008
    )
    
    
    (7,844,699
    )Selling, general and administrative expensesRelated parties
    
    
    (189,667
    )
    
    
    (158,075
    )
    
    
    (98,700
    )Other
    
    
    (17,678
    )
    
    
    (7,647
    )
    
    
    (1,129
    )(22,107,899
    )
    
    
    (17,149,023
    )
    
    
    (12,335,813
    )Operating income (loss)
    
    
    (38,125
    )
    
    
    (12,878
    )
    
    
    19,759Financial incomeRelated parties
    
    
    999,204
    
    
    
    765,507
    
    
    
    568,566Other
    
    
    285,994
    
    
    
    218,479
    
    
    
    110,2331,285,198
    
    
    
    983,986
    
    
    
    678,799Financial expenseRelated parties
    
    
    (722,434
    )
    
    
    (409,822
    )
    
    
    (169,039
    )Other
    
    
    (735,332
    )
    
    
    (589,088
    )
    
    
    (592,207
    )(1,457,766
    )
    
    
    (998,910
    )
    
    
    (761,246
    )Other income, netRelated parties
    
    
    
    
    
    
    
    
    
    
    (525
    )Other
    
    
    168
    
    
    
    46
    
    
    
    4,110168
    
    
    
    46
    
    
    
    3,585Loss for the year
    
    
    (210,525
    )
    
    
    (27,756
    )
    
    
    (59,103
    )
  F-150




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PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 
 Years ended December 31,2006
    
    
    2005
    
    
    2004Common stockBalance at January 1
    
    
    50
    
    
    
    50
    
    
    
    50Capital increase
    
    
    300,000
    
    
    
    
    
    
    
    Balance at end of year
    
    
    300,050
    
    
    
    50
    
    
    
    50Additional paid in capitalBalance at January 1
    
    
    173,926
    
    
    
    173,926
    
    
    
    173,926Transfer to capital
    
    
    (120,000
    )
    
    
    
    
    
    
    Balance at end of year
    
    
    53,926
    
    
    
    173,926
    
    
    
    173,926Accumulated deficitBalance at January 1
    
    
    (165,994
    )
    
    
    (138,238
    )
    
    
    (79,135
    )Loss for the year
    
    
    (210,525
    )
    
    
    (27,756
    )
    
    
    (59,103
    )Balance at end of year
    
    
    (376,519
    )
    
    
    (165,994
    )
    
    
    (138,238
    )Other comprehensive incomeLoss on cash flow hedgeBalance at January 1
    
    
    
    
    
    
    
    
    
    
    Change in the year
    
    
    (2,207
    )
    
    
    
    
    
    
    Balance at end of year
    
    
    (2,207
    )
    
    
    
    
    
    
    Total stockholders (deficit)/equity
    
    
    (24,750
    )
    
    
    7,982
    
    
    
    35,738
  F-151




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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY
AND SUBSIDIARIES
(A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 
 Years ended December 31,2006
    
    
    2005
    
    
    2004Cash flows from operating activitiesLoss for the year
    
    
    (210,525
    )
    
    
    (27,756
    )
    
    
    (59,103
    )Adjustments to reconcile net (loss) to net cash
used in operationsDepreciation, amortization of prepaid expenses and debt amortization
    
    
    20,725
    
    
    
    10,150
    
    
    
    5,198Decrease (increase) in assetsTrade accounts receivableRelated parties
    
    
    (1,977,830
    )
    
    
    (893,006
    )
    
    
    (2,723,597
    )Other
    
    
    (622,734
    )
    
    
    (59,079
    )
    
    
    (44,209
    )Export prepayments  related parties
    
    
    411,760
    
    
    
    470,754
    
    
    
    64,652Other assets
    
    
    (242,283
    )
    
    
    (221,863
    )
    
    
    (232,637
    )Increase (decrease) in liabilitiesTrade accounts payableRelated parties
    
    
    192,116
    
    
    
    388,593
    
    
    
    291,189Other
    
    
    505,910
    
    
    
    48,999
    
    
    
    218,048Other liabilities
    
    
    (44,551
    )
    
    
    277,318
    
    
    
    158,501Net cash used in operating activities
    
    
    (1,967,412
    )
    
    
    (5,890
    )
    
    
    (2,321,958
    )Cash flows from investing activitiesMarketable securities, net
    
    
    451,775
    
    
    
    (383,826
    )
    
    
    (1,248,984
    )Issuance of notes receivable  related parties
    
    
    (8,858,270
    )
    
    
    (5,114,060
    )
    
    
    (2,042,177
    )Collection of principal on notes receivable  related parties
    
    
    6,515,911
    
    
    
    3,226,935
    
    
    
    1,885,407Property and equipment
    
    
    (460
    )
    
    
    (19
    )
    
    
    (488
    )Net cash used in investing activities
    
    
    (1,891,044
    )
    
    
    (2,270,970
    )
    
    
    (1,406,242
    )Cash flows from financing activitiesShort-term financing, net issuance and repayments
    
    
    (191,056
    )
    
    
    (116,654
    )
    
    
    (396,233
    )Proceeds from issuance of long-term debt
    
    
    982,280
    
    
    
    695,000
    
    
    
    1,106,887Principal payments of long-term debt
    
    
    (1,731,726
    )
    
    
    (602,410
    )
    
    
    (465,208
    )Proceeds from short-term loans  related parties
    
    
    15,695,993
    
    
    
    8,757,712
    
    
    
    6,618,032Principal payments of short-term loans  related parties
    
    
    (17,964,891
    )
    
    
    (7,333,327
    )
    
    
    (6,245,614
    )Proceeds from long-term loans  related parties
    
    
    7,347,923
    
    
    
    
    
    
    
    3,553,452Net cash provided by financing activities
    
    
    4,138,523
    
    
    
    1,400,321
    
    
    
    4,171,316Increase (decrease) in cash and cash equivalents
    
    
    280,067
    
    
    
    (876,539
    )
    
    
    443,116Cash and cash equivalents at beginning of year
    
    
    230,745
    
    
    
    1,107,284
    
    
    
    664,168Cash and cash equivalents at end of year
    
    
    510,812
    
    
    
    230,745
    
    
    
    1,107,284
  F-152




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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 Years ended December 31,2006
    
    2005
    
    2004Supplemental disclosures of cash flow information:Cash paid during the year forInterest
    
    
    1,371,169
    
    
    
    727,739
    
    
    
    583,769Income taxes
    
    
    113
    
    
    
    120
    
    
    
    157Non-cash investing and financing transactionsIncrease of capital through conversion of loan payable
    
    
    180,000Cancellation of Senior Exchangeable Notes issued in
exchange for PETROBRAS loans (Note 8)
    
    
    
    
    
    
    
    
    
    
    8,476
  F-153




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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES
 (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 
 1.
    
    The Company and its OperationsPetrobras International Finance Company  PIFCo was incorporated in the Cayman Islands on
September 24, 1997 and operates as a wholly-owned subsidiary of PETROBRAS.The primary objective of Petrobras International Finance Company and its subsidiaries
(collectively, PIFCo or the Company) is to purchase crude oil and oil products from third
parties and sell them at a premium to PETROBRAS on a deferred payment basis. Accordingly,
intercompany activities and transactions, and therefore the Companys financial position and
results of operations, are affected by decisions made by PETROBRAS. Additionally, to a more
limited extent, the Company sells oil and oil products to third parties. PIFCo also engages in
international capital market borrowings as a part of the PETROBRAS financial and operating
strategy.The following is a brief description of each of the Companys wholly-owned subsidiaries:PETROBRAS FINANCE LIMITEDPETROBRAS FINANCE LIMITED (PFL), based in the Cayman Islands, in connection with the Companys
structured finance export prepayment program, whereby PFL purchases fuel oil from PETROBRAS and
sells this product in the international market, including sales to designated customers, in
order to generate receivables to cover the sale of future receivables debt. Until June 1, 2006,
PFL also purchased bunker fuel from PETROBRAS. Certain sales were through subsidiaries of
PETROBRAS.PETROBRAS EUROPE LIMITEDPETROBRAS EUROPE LIMITED (PEL), based in the United Kingdom, consolidates PETROBRAS European
trade and finance activities. These activities consist of advising on and negotiating the terms
and conditions for crude oil and oil products supplied to PIFCo and PETROBRAS, as well as
marketing Brazilian crude oil and other derivative products exported to the geographic areas in
which the Company operates. PEL plays an advisory role in connection with these activities and
undertakes no commercial or financial risk.
 F-154




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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES
 (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 1.
    
    The Company and its Operations (Continued)BEAR INSURANCE COMPANY LIMITEDBEAR INSURANCE COMPANY LIMITED (BEAR), based in Bermuda, contracts insurance for PETROBRAS and
its subsidiaries.PETROBRAS SINGAPORE PRIVATE LIMITED (PSPL)In April 2006, PIFCo incorporated a new wholly-owned subsidiary: PETROBRAS SINGAPORE PRIVATE
LIMITED (PSPL), a company incorporated in Singapore to trade crude oil and oil products in
connection with the trading activities in Asia. This company initiated its operations in July,
2006.2.
    
    Basis of Financial Statement PresentationThe consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (US GAAP). The preparation of
these financial statements requires the use of estimates and assumptions that affect the
assets, liabilities, revenues and expenses reported in the financial statements, as well as
amounts included in the notes thereto.
 (a)
    
    Foreign currency translationThe Companys functional currency is the US dollar. All monetary assets and liabilities
denominated in a currency other than the US dollar are remeasured into the US dollar using
the current exchange rates. The effect of variations in the foreign currencies is recorded
in the statement of operations as financial expense or income.(b)
    
    Cash and cash equivalentsCash equivalents consist of highly liquid investments that are readily convertible into
cash and have an original maturity of three months or less at their date of acquisition.
 F-155




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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES
 (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 2.
    
    Basis of Financial Statement Presentation (Continued)
 (c)
    
    Marketable securitiesMarketable securities are accounted for under SFAS No. 115  Accounting for Certain
Investments in Debt and Equity Securities (SFAS 115) and have been classified by the
Company as available for sale or trading based upon intended strategies with respect to
such securities. The marketable securities classified as trading are short-term in nature
as the investments are expected to be liquidated, sold, or used for current cash
requirements. The marketable securities classified as available for sale are long-term in
nature as the investments are not expected to be sold or otherwise liquidated in the next
twelve months.Trading securities are marked to market through current period earnings, available for
sale securities are marked to market through other comprehensive income, and held to
maturity securities are recorded at historical cost. There are no transfers between
categories of investments.(d)
    
    InventoriesInventories are stated at the lower of weighted average cost or market value.(e)
    
    Restricted Deposit and GuaranteesRestricted Deposit and guarantees represent amounts placed in escrow as required by
contractual commitments of the Company. Deposits are made in cash and recorded at funded
amount.(f)
    
    Prepaid expensesPrepaid expenses are exclusively comprised of deferred financing costs associated with the
Companys debt issuance and are being amortized over the terms of the related debt. The
unamortized balance of deferred financing costs was US$ 55,192 and US$ 66,025 as of
December 31, 2006 and 2005, respectively.(g)
    
    Current and long-term liabilitiesThese are stated at known or estimated amounts including, when applicable, accrued
interest.
 F-156




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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES
 (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 2.
    
    Basis of Financial Statement Presentation (Continued)
 (h)
    
    Unearned incomeUnearned income represents the unearned premium charged by the Company to PETROBRAS and
ALBERTO PASQUALINI  REFAP S.A. (REFAP) to compensate for its financing costs. The premium
is billed to PETROBRAS and REFAP at the same time the related product is sold, and is
deferred and recognized into earnings as a component of financial income on a
straight-line basis over the collection period, which ranges from 120 to 330 days, in
order to match the premium billed with the Companys financial expense.(i)
    
    Revenues, costs, income and expensesFor all third party and related party transactions, revenues are recognized in accordance
with the U.S. SECs Staff Accounting Bulletion 104  Revenue Recognition. Crude oil and
oil products revenues are recognized on an accrual basis when persuasive evidence of an
arrangement exists in the form of a valid contract, delivery has occurred or title has
transferred, the price is fixed or determinable and collectability is reasonably assured.
Costs are recognized when incurred. Income and expenses include financial interest and
charges, at official rates or indexes, relating to current and non-current assets and
liabilities and, when applicable, the effects arising from the adjustment of assets to
market or realizable value.The principle commercial transactions of the Company consist of:Imports  the company buys from suppliers outside Brazil (mainly from third-parties) and
sells to PETROBRAS and its Brazilian subsidiaries.Exports  the Company buys from PETROBRAS and sells to customers outside Brazil.Off-shore  the Company buys and sells mainly outside of Brazil, in transactions with
third-parties and related parties.
 F-157




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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES
 (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 2.
    
    Basis of Financial Statement Presentation (Continued)
 (j)
    
    Financial instrumentsAll of the Companys derivative instruments are recorded in the consolidated balance sheet
at their fair value. For exchange-traded contracts, fair value is based on quoted market
prices. For non-exchange traded contracts, fair value is based on dealer quotes, pricing
models or quoted prices for instruments with similar characteristics. The transaction
price is used as the initial fair value of the contracts.PIFCo designates at inception whether the derivative contact will be considered hedging or
non-hedging for SFAS 133 accounting purposes. Non-hedging derivatives that are considered
economic hedges, but not designated in a hedging relationship for accounting purposes, are
recorded as other current assets or liabilities, with changes in fair value recorded as
financial income or financial expense.For SFAS 133 hedges, PIFCo formally documents at inception all relationships; identifying
the hedging instrument and hedged item, as well as its risk management objectives and
strategies for undertaking the hedge. The Company assesses at the hedges inception and
for each reporting date thereafter whether the derivative used in the hedging transaction
is expected to be and has been highly effective.As of December 31, 2006, PIFCo has designated one hedging relationship for accounting
purposes as a cash flow hedge in order to manage foreign currency exchange rate risk.
Changes in the fair value of the derivative hedging instrument are recorded in Accumulated
OCI. Any hedge ineffectiveness, as well as the excluded component of the derivative from
the effectiveness assessments, are recorded directly in earnings (note 8(iv)).PIFCo had written put options in the past that allows the holder of the options to sell a
floating number of heavy fuel oil volumes at a minimum price of US$14/barrel. Such option
had served as an economic hedge on related future sales of receivables under the
structured finance export prepayment program; the intent of which was to ensure that
physical barrels delivered under the project finance agreement generate sufficient cash
proceeds to repay related financial obligations. Given the low strike price relative to
the market the fair value of these options is immaterial at December 31, 2006.
 F-158




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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES
 (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 2.
    
    Basis of Financial Statement Presentation (Continued)
 (k)
    
    Income taxesThe Company accounts for income taxes using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year and deferred
tax liabilities and assets representing the future tax consequences of events that have
been recognized in the Companys financial statements or tax return. The measurement of
current and deferred tax liabilities and assets is based on the provisions of the tax laws
in the countries in which the Company and its subsidiaries operate (the United Kingdom,
Bermuda, Singapore and the Cayman Islands in 2006 and the United Kingdom, Bermuda and the
Cayman Islands in 2005 and 2004). Deferred tax assets are reduced by the amount of any tax
benefits when, based on the available evidence, such benefit may not be realized. The
Cayman Islands and Bermuda have no corporate tax requirements, therefore the Company has
no tax provision from these locations and no significant operations in the United Kingdom
or Singapore.
 3.
    
    Cash and Cash Equivalents
 2006
    
    
    2005Cash and banks
    
    
    461
    
    
    
    6,242Time deposits and short-term investment
    
    
    510,351
    
    
    
    224,503510,812
    
    
    
    230,745
 F-159




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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY
AND SUBSIDIARIES
 (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 4.
    
    Marketable Securities
 Interest
    
    TotalSecurity
    
    Maturity
    
    rate
    
    2006(*)
    
    2005(*)Available for Sale (***)
    
    CLEP  (**)
    
    
    2014
    
    
    
    8
    %
    
    
    975,840
    
    
    
    1,888,498Available for Sale (***)
    
    MARLIM (**)
    
    
    2008
    
    
    
    12.25
    %
    
    
    295,588
    
    
    
    277,220Available for Sale (***)
    
    GASENE (**)
    
    
    2007
    
    
    
    5.67
    %
    
    
    212,184
    
    
    
    Held to Maturity
    
    PDET (**)
    
    
    2007
    
    
    
    5.74
    %
    
    
    207,721
    
    
    
    Held to Maturity
    
    MEXILHÃO (**)
    
    
    2007
    
    
    
    5.68
    %
    
    
    87,589
    
    
    
    Trading
    
    Various third parties
    
    
    
    
    
    
    
    
    
    
    17,944
    
    
    
    57,734Available for Sale (***)
    
    Various third parties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,1891,796,866
    
    
    
    2,248,641Less: Current balances
    
    
    
    
    
    
    
    
    
    
    
    
    (645,278
    )
    
    
    (82,923
    )1,151,588
    
    
    
    2,165,718
 
 (*)
    
    The balances include interest and principal.(**)
    
    Securities held by the fund respective to the consolidated special purposes
companies, established to support PETROBRAS infrastructure projects, are not US exchange
traded securities.(***)
    
    Changes in fair value related to the securities classified as available for sale in
accordance with FAS 115 are diminimus and were included in the Statement of Operations as
financial income or expense. Marketable securities are comprised of amounts the Company has invested in the exclusive
portfolio of an investment fund, operated exclusively for PIFCo, which holds certain PIFCo and
PETROBRAS group securities among its other investments which are classified as held to
maturity, trading or available for sale under SFAS 115 based on managements intent. The
trading securities are presented as current assets, as they are expected to be used in the near
term for cash funding requirements; available for sale securities are presented as other
long-term assets, as they are not expected to be sold or liquidated in the next twelve months.At December 31, 2005, PIFCo had amounts invested in an exclusive portfolio of an investment
fund that held its own debt securities in the total amount of US$ 215,638. This amount was
recognized as an extinguishment of debt and offset against the balance of financing classified
under current and non-current liabilities. There were no repurchased securities of PIFCo debt
at December 31, 2006.
 F-160




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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES
 (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 5.
    
    Related Parties
 PETROBRAS
    
    DOWNSTREAM
    
    BRASPETROPETRÓLEO
    
    INTERNATIONAL
    
    PARTICIPAÇÕES
    
    OIL SERVICES -
    
    
    
    
    
    PETROBRASBRASILEIRO
    
    BRASPETRO B.V. -
    
    S.A.
    
    BRASOIL
    
    
    
    
    
    NETHERLANDS B.V.S.A. -
    
    PIB.B.V. and its
    
    and its
    
    and its
    
    
    
    
    
    and itsPETROBRAS
    
    subsidiaries
    
    subsidiaries
    
    subsidiaries
    
    CLEP
    
    subsidiaries
    
    TERMOBAHIA (iv)
    
    MARLIM
    
    Other
    
    2006
    
    2005Current assetsMarketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119,840
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    507,495
    
    
    
    627,335
    
    
    
    Accounts receivable, principally for sales (i)
    
    
    10,246,875
    
    
    
    160,033
    
    
    
    251,997
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,658,905
    
    
    
    8,681,075Notes receivable
    
    
    
    
    
    
    3,721,683
    
    
    
    
    
    
    
    31,496
    
    
    
    
    
    
    
    2,360,912
    
    
    
    560
    
    
    
    
    
    
    
    
    
    
    
    6,114,651
    
    
    
    3,329,336Export prepayment
    
    
    67,785
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,785
    
    
    
    414,505Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,453
    
    
    
    
    
    
    
    
    
    
    
    1,453
    
    
    
    1,453Other assetsMarketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    856,000
    
    
    
    
    
    
    
    
    
    
    
    295,588
    
    
    
    
    
    
    
    1,151,588
    
    
    
    2,165,718Notes receivable
    
    
    
    
    
    
    198,935
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,774
    
    
    
    
    
    
    
    
    
    
    
    239,709
    
    
    
    579,960Export prepayment
    
    
    464,380
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    464,380
    
    
    
    529,420Current liabilitiesTrade accounts payable
    
    
    969,299
    
    
    
    156,498
    
    
    
    17,051
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,142,848
    
    
    
    950,732Notes payable
    
    
    5,386,759
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,386,759
    
    
    
    4,346,139Unearned income
    
    
    247,160
    
    
    
    
    
    
    
    1,528
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    248,688
    
    
    
    176,481Long-term liabilitiesNotes payable (ii)
    
    
    7,441,701
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,441,701
    
    
    
    3,734,1122004Statement of operationsSales of crude oil and oil products and
services
    
    
    9,729,919
    
    
    
    3,022,525
    
    
    
    1,484,067
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,236,511
    
    
    
    13,974,381
    
    
    
    10,118,356Purchases (iii)
    
    
    (6,044,308
    )
    
    
    (1,871,579
    )
    
    
    (206,107
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,121,994
    )
    
    
    (7,780,293
    )
    
    
    (4,391,285
    )Selling, general and administrative expenses
    
    
    (176,368
    )
    
    
    (13,299
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (189,667
    )
    
    
    (158,075
    )
    
    
    (98,700
    )Financial income
    
    
    623,767
    
    
    
    162,470
    
    
    
    28,268
    
    
    
    2,253
    
    
    
    
    
    
    
    174,454
    
    
    
    3,080
    
    
    
    
    
    
    
    4,912
    
    
    
    999,204
    
    
    
    765,507
    
    
    
    568,566Financial expense
    
    
    (722,434
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (722,434
    )
    
    
    (409,822
    )
    
    
    (169,039
    )Other expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (525
    )
 Commercial operations between PIFCo and its subsidiaries and affiliated companies are carried out
under normal market conditions and at commercial prices, except for the sales of oil and oil
products to PETROBRAS, which have an extended settlement period consistent with PIFCos formation
as a financing entity, and include finance charges accrued during the extended payment period.Certain affiliates of PIFCo and PFL, which are subsidiaries of Petrobras, serve as agents in
connection with export sales to certain customers under the export prepayment program. Those
transactions have been classified as related party transactions for purposes of these financial
statements.The transactions were realized to support the financial and operational strategy of the Companys
Parent Company, PETRÓLEO BRASILEIRO S.A.  PETROBRAS.
 (i)
    
    Accounts receivable from related parties relate principally to crude oil sales made by the
Company to PETROBRAS, with extended payment terms of up to 330 days. Extended payment terms for
accounts receivable from related parties were up to 270 days in 2004.(ii)
    
    Long-Term Liabilities  Notes payable relate to loans executed between the Company and
PETROBRAS due in 2021, with annual interest rates ranging from 8.3% to 8.6%.(iii)
    
    Purchases from related parties are presented in the cost of sales section of the
statement of operations.(iv)
    
    On December 28, 2005, in order to lend support to Petrobras in its transactions related
to the Termobahia power plant, PIFCo entered into a series of agreements with Blade
Securities Ltd , a special purpose company holding 49% of the equity shares of Termobahia
(consolidated by Petrobras). Under the agreements, PIFCo paid to Blade US$ 1,453, and in
return, Blade transfers to PIFCo the right of any dividends to be received from Termobahia
and the rights to the shares of Termobahia either for PIFCo or a Petrobras subsidiary.
Additionally, PIFCo paid to Blade US$ 38,185, and in return, Blade transfers to PIFCo any
amounts received from Termobahia related to the subordinated loan recorded as notes
receivable, which has an interest rate of 8% p.a. and an expiry date of 2023, and the right
to the loans receivable for PIFCo or a Petrobras subsidiary. Petrobras has the intention of
finding a strategic partner within one year time frame to purchase the Termobahia equity
interest and related loan.
 F-161




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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES
 (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 6.
    
    Inventories
 2006
    
    
    2005Crude oil
    
    
    60,097
    
    
    
    51,701Oil products
    
    
    202,623
    
    
    
    144,234262,720
    
    
    
    195,935
 7.
    
    Restricted Deposits and GuaranteesPIFCo has restricted deposits with financial institutions that are required as a result of
contractual obligations in financing arrangements. The amount of US$ 76,389 classified in
current assets, relates to a deposit made in connection with the issuance of global notes in
the amount of US$ 500,000 (described in Note 8) and is renewed annually. The amount classified
in other assets is comprised of deposits: (i) US$ 31,585 related to issuances of senior notes
in the total amount of US$ 450,000; (ii) US$ 41,051 related to issuances of senior notes in the
total amount of US$ 600,000. The guarantees related to the financings will be maintained
through maturity of such financings (described in Note 8), and are required per the related
debt agreement; and (iii) in accordance with the Deposit, Pledge and Indemnity Agreement of
April 29, 2005, PIFCo has guaranteed the debt of Eletrobolt, a subsidiary of its parent. In
accordance with the terms of this guarantee, PIFCo has deposited US$ 95,949 in an escrow
account, such amount to be used to satisfy Eletrobolt debts in the event of default.
 F-162




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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES
 (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 8.
    
    Financing
 Current
    
    Long-term2006
    
    2005
    
    2006
    
    2005Financial institutions (i)
    
    
    329,180
    
    
    
    493,550
    
    
    
    1,041,250
    
    
    
    1,194,750Senior notes (iii)
    
    
    533,945
    
    
    
    53,525
    
    
    
    524,602
    
    
    
    1,550,000Global notes (iii) and (viii)
    
    
    32,725
    
    
    
    26,326
    
    
    
    2,181,420
    
    
    
    2,115,263Senior exchangeable notes (vii)
    
    
    333,684
    
    
    
    3,744
    
    
    
    
    
    
    
    329,940Global step-up notes (iii)
    
    
    4,165
    
    
    
    9,000
    
    
    
    134,622
    
    
    
    400,000Japanese yen bonds (iv)
    
    
    1,658
    
    
    
    
    
    
    
    293,860
    
    
    
    Sale of right to future receivables (v)
    
    
    68,393
    
    
    
    567,377
    
    
    
    614,380
    
    
    
    679,420Assets related to export prepayment to
be offset against sale of right to
future receivables (vi)
    
    
    
    
    
    
    (150,000
    )
    
    
    (150,000
    )
    
    
    (150,000
    )Repurchased securities (ii)
    
    
    
    
    
    
    (4,681
    )
    
    
    
    
    
    
    (210,957
    )1,303,750
    
    
    
    998,841
    
    
    
    4,640,134
    
    
    
    5,908,416Financing
    
    
    148,447
    
    
    
    339,503
    
    
    
    4,640,134
    
    
    
    5,908,416Current portion of long-term debt
    
    
    1,057,438
    
    
    
    551,628
    
    
    
    
    
    
    
    Accrued interest
    
    
    97,865
    
    
    
    107,710
    
    
    
    
    
    
    
    1,303,750
    
    
    
    998,841
    
    
    
    4,640,134
    
    
    
    5,908,416
 
 (i)
    
    The Companys borrowings in US dollars are derived mainly from commercial banks and
include trade lines of credit and commercial paper, which are primarily intended for the
purchase of crude oil and oil products, and with interest rates ranging from 5.14% to
9.42% at December 31, 2006. The weighted average borrowing rate for short-term debt at
December 31, 2006 and 2005 was 6.76% and 5.02%, respectively.At December 31, 2006 and 2005, the Company had fully utilized all available lines of
credit specifically designated for purchase of imported crude oil and oil products.Additionally, the Company had available standby committed facilities in the amount of US$
675,000, which are not specified as to use requirements. PIFCo has no drawn down amounts
related to these facilities and does not have a scheduled date for the drawdown.
 F-163




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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES
 (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 8.
    
    Financing (Continued)
 (ii)
    
    On December 31, 2005, the Company had amounts invested in an exclusive portfolio of
an investment fund that held its own debt securities in the total amount of US$ 215,638.
These securities were considered to be extinguished, and thus the related amounts,
together with applicable interest, which comprise the current portion at the respective
date, have been removed from the presentation of marketable securities and short and
long-term debt. Gain and losses on extinguishment are recognized as incurred. Subsequent
reissuances of notes at amounts greater or lesser than par are recorded as premiums or
discounts and are amortized over the life of the notes. As of December 31, 2006 and
December 31, 2005, the outstanding balance of net premiums on reissuances amounted to
US$ 10,273 and US$ 18,464, respectively. PIFCo incurred in expenses in the total amount of
US$ 11,738 on extinguishment of debt during 2005 and US$ 160,048 during 2006.(iii)
    
    On July 24, 2006, PIFCo concluded its debt repurchase offer (Tender) announced on
July 18, 2006. The amount of notes tendered for five series of notes listed below was US$
888,260. Including the notes previously repurchased by Petrobras and its affiliates, also
included in the tender, the total value reached US$ 1,215,661. The purpose of this
initiative was to reduce total debt outstanding and simplify the debt profile, thus
benefiting from the Companys current strong cash generation. The transaction was settled
on July 27, 2006 and all the notes tendered were canceled from this date. Upon conclusion
of the debt repurchase offer (Tender), PIFCo incurred in expenses in the total amount of
US$ 160,048.
 InterestSecurities Repurchased
    
    Rate
    
    
    Maturity
    
    
    US$Global Step-Up Notes
    
    
    12.375
    %
    
    
    2008
    
    
    
    265,378Senior Notes
    
    
    9.875
    %
    
    
    2008
    
    
    
    211,754Senior Notes
    
    
    9.750
    %
    
    
    2011
    
    
    
    313,644Global Notes
    
    
    9.125
    %
    
    
    2013
    
    
    
    251,665Global Notes
    
    
    8.375
    %
    
    
    2018
    
    
    
    173,2201,215,661
 F-164




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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY
AND SUBSIDIARIES
 (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 8.
    
    Financing (Continued)
 (iv)
    
    On September 27, 2006, the Company concluded a private placement of securities in the
Japanese capital market (Shibosai) for a total of ¥ 35 billion (US$ 297,780) due
September 2016. The issue was a private placement in Japanese market with a partial
guarantee of Japan Bank for International Cooperation (JBIC) and bears interest at the
rate of 2.15% per annum, payable semiannually. PIFCo used the proceeds principally to
finance PNBV, an affiliate, for construction of lines interconnecting the P-51, P-52 and
P-53 production platforms to the PRA-1 autonomous repumping unit.In the same date, PIFCo entered into cross currency swaps under which it swaps the
principal and interest payments on Yen denominated funding into U.S. dollars; and
designated the hedging relationship as a qualifying cash flow hedge under SFAS 133. The
hedged item is a ¥ 35 billion 10 year issued bond, with a semi-annual coupon of 2.15% p.a.
The hedging instrument is a series of cross currency swaps, whose notional amounts,
underlyings and maturities match the terms of the funding; in which U.S. dollars are paid
and Japanese Yen are received.The transaction gain or loss arising from the remeasurement of Yen denominated bonds is
offset by the reclassification relating to the remeasurement of the hedged item at spot
rates from other comprehensive income to earnings. The cross currency swap at December 31,
2006 had a fair value of US$ 8,754 due to the devaluation of the Japanese Yen when
compared to U.S. dollar since the inception of the instrument. No amounts were recognized
in earnings during the year as hedge ineffectivenesses. Accumulated other comprehensive
income were reclassified at the reporting date in order to offset the foreign currency
exchange gain or losses on the hedged item.(v)
    
    On September 1, 2005, PFL prepaid the floating rate Senior Trust Certificates
(Series A2 and C) in accordance with the applicable provisions of the governing
agreements. In order to facilitate this advance payment, Petrobras prepaid to PFL an
amount of US$ 330,290 related to the export prepayment program.On March 1, 2006, PFL prepaid the fixed rate Senior Trust Certificates (Series A1 and B) in
accordance with the applicable provisions of the governing agreements in the amount of US$ 333,860.
On prepayment the fixed rate Senior Trust
 F-165




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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY
AND SUBSIDIARIES
 (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 8.
    
    Financing (Continued)
 Certificates (Series A1 and B) PFL paid premium in the total amount of US$ 13,650.On May 26, 2006, PFL has successfully completed a solicitation of consents from holders
of the Series 2003-A 6.436% Senior Trust Certificates due 2015 issued by PF Export
Receivables Master Trust. The amendments sought to eliminate exports of bunker fuel from
the transaction so that the securities have been collateralized only by receivables from
sales of fuel oil exported by Petrobras and to reduce the minimum average daily gross
exports of fuel oil for any rolling twelve-month period. PFL also obtained the consent
from the holders of Series 2003-B 3.748% due 2013. The amendments became effective on
June 1, 2006.As a result of these amendments, the premium rate of the guarantee of the Series 2003-B
was reduced from 1.8% to 1.1%.(vi)
    
    In May 2004, PFL and the PF Export Trust (the Trust) executed an amendment to the
Trust Agreement allowing the Junior Trust Certificates to be set-off against the related
Notes, rather than paid in full, after fulfillment of all obligations pursuant to the
Senior Trust Certificates. The effect of this amendment is that amounts related to the
Junior Trust Certificates have been presented net, rather than gross in these
consolidated financial statements, and thus US$ 150,000 has been reduced from the long
term debt financing respective to sales of right to future receivables.(vii)
    
    On October 06, 2006, the Company issued Global Notes of US$ 500,000 due October,
2016. The notes bear interest at the rate of 6.125% per annum, payable semiannually. The
Company used the proceeds from this issuance principally to repay trade-related debt and
inter-company loans.
 F-166




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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY
AND SUBSIDIARIES
 (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 8.
    
    Financing (Continued)
 Long-term financing  additional informationa)
    
    Long-term debt interest rates
 Payment periodDate of issuance
    
    
    Maturity
    
    
    Interest rate
    
    
    Amount
    
    
    Interest
    
    
    PrincipalSenior NotesSenior Notes
    
    May, 2001
    
    
    2008
    
    
    
    9.875
    %
    
    
    238,246
    
    
    semiannually
    
    bulletSenior Notes
    
    January, 2002
    
    
    2011
    
    
    
    9.750
    %
    
    
    286,356
    
    
    semiannually
    
    bullet524,602Sale of Right to Future
ReceivablesJunior Trust CertificatesSerie 2003-B
    
    May, 2003
    
    
    2013
    
    
    
    3.748
    %
    
    
    40,000
    
    
    quarterly
    
    bulletSerie 2003-A
    
    May, 2003
    
    
    2015
    
    
    
    6.436
    %
    
    
    110,000
    
    
    quarterly
    
    bullet150,000Assets related to export
prepayment to be offset
against sale of right to
future receivables
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (150,000
    )Senior Trust CertificatesSerie 2003-B
    
    May, 2003
    
    
    2013
    
    
    
    4.848
    %
    
    
    131,520
    
    
    quarterly
    
    quarterlySerie 2003-A
    
    May, 2003
    
    
    2015
    
    
    
    6.436
    %
    
    
    332,860
    
    
    quarterly
    
    quarterly464,380Japanese yen bonds
    
    September, 2006
    
    
    2016
    
    
    
    2.150
    %
    
    
    293,860
    
    
    semiannually
    
    bullet293,860Global Step-up Notes
    
    March, 2003
    
    
    2008
    
    
    
    12.375
    %
    
    
    134,622
    
    
    semiannually
    
    bullet134,622Global NotesGlobal Notes
    
    July, 2003
    
    
    2013
    
    
    
    9.125
    %
    
    
    504,640
    
    
    semiannually
    
    bulletGlobal Notes
    
    December, 2003
    
    
    2018
    
    
    
    8.375
    %
    
    
    576,780
    
    
    semiannually
    
    bulletGlobal Notes
    
    September, 2004
    
    
    2014
    
    
    
    7.750
    %
    
    
    600,000
    
    
    semiannually
    
    bulletGlobal Notes
    
    October, 2006
    
    
    2016
    
    
    
    6.125
    %
    
    
    500,000
    
    
    semiannually
    
    bullet2,181,420Financial Institutions
    
    from 2005
    
    up to 2017
    
    from 6.46% to 9.42%
    
    
    1,041,250
    
    
    various
    
    various1,041,2504,640,134
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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES
 (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 8.
    
    Financing (Continued)
 Long-term financing  additional informationb)
    
    Long-term debt maturity date
 December 31,20062008
    
    
    771,1982009
    
    
    217,2182010
    
    
    328,2382011
    
    
    376,6642012
    
    
    93,178Thereafter
    
    
    2,853,6384,640,134
 9.
    
    Fair ValueFair values are derived either from quoted market prices available, or, in their absence, the
present value of expected cash flows. The fair values reflect the cash that would have been
received or paid if the instruments were settled at year end. Fair values of cash and cash
equivalents, trade receivables, short-term debt and trade payables approximate their carrying
values.At December 31, 2006 the Companys long-term debt was US$ 4,640,134 (US$ 5,908,416 at December
31, 2005) and had an estimated fair value of approximately US$ 5,050,000 (US$ 6,397,000 at
December 31, 2005).The Companys long-term asset related to the export prepayment program was US$ 464,380 and US$
529,420 at December 31, 2006 and 2005, and had fair values of US$ 466,000 and US$ 523,000,
respectively.
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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES
 (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 10.
    
    Commitments and Contingencies
 (a)
    
    Commitments  PurchasesIn an effort to ensure procurement of oil products for the Companys customers, the
Company currently has several short and long-term normal purchase contracts with maturity
date up to 2017, which collectively obligate it to purchase a minimum of approximately
129,925 barrels of crude oil and oil products per day at market prices.(b)
    
    Purchase Option  PlatformsThe Company has maintained the right to exercise the call option on the existing
Subchartered Asset Option Agreement granted by PNBV and has maintained the obligation to
purchase the vessels in case the Owners exercise the Put Option, on condition of an event
of default, under the same Option Agreement, for the Platforms P-8, P-15, P-32. PIFCo also
has an obligation to purchase the platforms after the expiration of the Charter terms.In relation to Platform P-47, PIFCo has maintained the right to exercise the call option
on the existing Subchartered Asset Option Agreement granted by PNBV and has maintained the
obligation to purchase the vessel in case the Owner exercise the Put Option, on condition
of an event of default or of the expiration of the Charter.PIFCo may designate any affiliate or subsidiary to perform its obligations under this
agreement.
 11.
    
    Stockholders Equity
 Capital Increase
 In September 2006, PETROBRAS changed the designation of US$ 120,000 in advances for future
capital and US$ 180,000 in notes receivable from PIFCo into a capital increase.
 F-169




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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES
 (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 12.
    
    Subsequent EventsOn January 4, 2007, PIFCo announced an offer for the exchange of securities (Exchange Offering)
totaling up to US$ 500,000 for five series of Notes.The objective of the Exchange was offer to the investors the opportunity to substitute the five
old notes listed bellow with PIFCos new benchmark, issued on October 6, 2006 with a 6.125% per
annum coupon and maturity in 2016.The settlement of the Exchange Offer occurred on February 7, 2007 and as result, PIFCo received
and accepted a tender amount of US$ 399,053 (face value of the Notes). All the Notes received
were cancelled in the same day and as consequence, PIFCo issue US$ 399,053 of Global Notes due
2016 that bear interest at the rate of 6.125% per annun, payable semi annually. The new Notes
constitute a single fungible series with the US$ 500,000 Global Notes due 2016 issued in
October 2006. In total, there will be US$ 899,053 in outstanding bonds due 2016. PIFCo also
paid to the investors a cash amount equivalent to US$ 56,056 as a result of the Exchange. The
table below presents the result of the Exchange.
 US$Principal Outstanding
    
    Total AmountPIFCo Old Notes
    
    Interest Rate
    
    Maturity
    
    after Exchange

    TenderedGlobal Step-Up Notes
    
    
    12.375
    %
    
    
    2008
    
    
    
    126,868
    
    
    
    7,754Senior Notes
    
    
    9.875
    %
    
    
    2008
    
    
    
    224,212
    
    
    
    14,034Senior Notes
    
    
    9.750
    %
    
    
    2011
    
    
    
    235,350
    
    
    
    51,006Global Notes
    
    
    9.125
    %
    
    
    2013
    
    
    
    374,211
    
    
    
    124,124Global Notes
    
    
    7.750
    %
    
    
    2014
    
    
    
    397,865
    
    
    
    202,1351,358,506
    
    
    
    399,053
 US$Principal OutstandingPIFCo New Notes
    
    Interest Rate
    
    Maturity
    
    after Exchange
    
    Total ReopenedGlobal Notes
    
    
    6.125
    %
    
    
    2016
    
    
    
    899,053
    
    
    
    399,053899,053
    
    
    
    399,053
  F-170