##### 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, 2005
 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
    
    New York Stock ExchangeAmerican Depositary Receipts), each representing4 Common SharesPETROBRAS Preferred Shares, without par value*PETROBRAS American Depositary Shares (as evidenced by
    
    New York Stock ExchangeAmerican Depositary Receipts), each representing4 Preferred Shares
 *
    
    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 filerþ [Petrobras]
    
    Accelerated filero
    
    Non-accelerated filerþ [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



TABLE OF CONTENTS
 FORWARD-LOOKING STATEMENTS
    
    
    4CERTAIN TERMS AND CONVENTIONS
    
    
    5PRESENTATION OF FINANCIAL INFORMATION
    
    
    5Petrobras
    
    
    5PIFCo
    
    
    6PRESENTATION OF INFORMATION CONCERNING RESERVES
    
    
    6ITEM 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    7ITEM 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    7ITEM 3.
    
    KEY INFORMATION
    
    
    7Selected Financial Data
    
    
    7Exchange Rates
    
    
    13Risk Factors
    
    
    14Risks Relating to Our Operations
    
    
    14Risks Relating to PIFCo
    
    
    19Risks Relating to the Relationship between us and the Brazilian Government
    
    
    20Risks Relating to Brazil
    
    
    20ITEM 4.
    
    INFORMATION ON THE COMPANY
    
    
    25History and Development of Petrobras
    
    
    25Our Competitive Strengths
    
    
    27Overview by Business Segment
    
    
    31Exploration, Development and Production
    
    
    31Refining, Transportation and Marketing
    
    
    44Distribution
    
    
    55Natural Gas and Power
    
    
    58International
    
    
    65PIFCo
    
    
    76Organizational Structure
    
    
    80Property, Plants and Equipment
    
    
    81Regulation of the Oil and Gas Industry in Brazil
    
    
    82Health, Safety and Environmental Initiatives
    
    
    88Competition
    
    
    90Insurance
    
    
    91ITEM 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    92Managements Discussion and Analysis of Petrobras Financial Condition and Results of Operations
    
    
    92Overview
    
    
    92Sales Volumes and Prices
    
    
    93Effect of Taxes on our Income
    
    
    95Financial Income and Expense
    
    
    96Inflation and Exchange Rate Variation
    
    
    96Results of Operations
    
    
    98Business Segments
    
    
    108Managements Discussion and Analysis of PIFCos Financial Condition and Results of Operations
    
    
    110Overview
    
    
    110Purchases and Sales of Crude Oil and Oil Products
    
    
    110Results of Operations
    
    
    111Liquidity and Capital Resources
    
    
    112Critical Accounting Policies and Estimates
    
    
    121Impact of New Accounting Standards
    
    
    124Research and Development
    
    
    126Trend Information
    
    
    127ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    128Directors and Senior Management
    
    
    128Compensation
    
    
    136Indemnification of Officers and Directors
    
    
    136
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Share Ownership
    
    
    136Fiscal Council
    
    
    137Audit Committee
    
    
    137PIFCo
    
    
    138Employees and Labor Relations
    
    
    138ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    140Major Shareholders
    
    
    140Petrobras Related Party Transactions
    
    
    141PIFCo Related Party Transactions
    
    
    142ITEM 8.
    
    FINANCIAL INFORMATION
    
    
    145Petrobras Consolidated Statements and Other Financial Information
    
    
    145PIFCo Consolidated Statements and Other Financial Information
    
    
    145Legal Proceedings
    
    
    145Dividend Distribution
    
    
    150ITEM 9.
    
    THE OFFER AND LISTING
    
    
    151Petrobras
    
    
    151PIFCo
    
    
    157ITEM 10.
    
    ADDITIONAL INFORMATION
    
    
    157Memorandum and Articles of Incorporation of Petrobras
    
    
    157Restrictions on Non-Brazilian Holders
    
    
    165Transfer of Control
    
    
    165Disclosure of Shareholder Ownership
    
    
    165Memorandum and Articles of Association of PIFCo
    
    
    165Material Contracts
    
    
    169Exchange Controls
    
    
    170Taxation relating to our ADSs and common and preferred shares
    
    
    171Taxation relating to PIFCos notes
    
    
    178Documents on Display
    
    
    181PIFCo Senior Notes
    
    
    182PIFCo Global Notes
    
    
    184Sale of Future Receivables
    
    
    186ITEM 11.
    
    QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    189Petrobras
    
    
    189PIFCo
    
    
    195ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    196ITEM 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    196ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    196ITEM 15.
    
    CONTROLS AND PROCEDURES
    
    
    196ITEM 16A.
    
    AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    197ITEM 16B.
    
    CODE OF ETHICS
    
    
    197ITEM 16C.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    197Principal Accountant Fees
    
    
    197Audit and Non-Audit Fees
    
    
    197Audit Committee Approval Policies and Procedures
    
    
    198ITEM 16D.
    
    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    198ITEM 16E.
    
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    198ITEM 17.
    
    FINANCIAL STATEMENTS
    
    
    198ITEM 18.
    
    FINANCIAL STATEMENTS
    
    
    198EX-8.1: LIST OF SUBSIDIARIESEX-10.1: CONSENT LETTER OF DEGOLYER AND MACNAUGHTONEX-12.1: PETROBRAS' CERTIFICATIONSEX-12.2: PIFCO'S CERTIFICATIONSEX-13.1: PETROBRAS' CERTIFICATIONSEX-13.2: PIFCO'S CERTIFICATIONS
  3




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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.
  4




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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;
 5




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
    
    forward-looking amounts, including estimated future capital expenditures, have all
been based on our 2005-2015 Strategic Plan and 2006-2010 Business Plan and have been
projected on a constant basis and have been translated from reaisin 2006 at an
estimated average exchange rate of R$3.01 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.$45.00 per barrel for 2006, and U.S.$30.00 per barrel for 2007 and
U.S.$25.00 per barrel for 2008 and thereafter, adjusted for our quality and location
differences, unless otherwise stated; and
    
    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
  
 PRESENTATION OF INFORMATION CONCERNING RESERVES
  Agência Nacional de Petróleo
 6




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3⁄4
 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3. KEY INFORMATION
 
 Selected Financial Data
 Petrobras
  7




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BALANCE SHEET DATA
 As of December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in millions of U.S. dollars)AssetsCurrent assets:Cash and cash equivalents
    
    $
    9,871
    
    
    $
    6,856
    
    
    $
    8,344
    
    
    $
    3,301
    
    
    $
    7,360Accounts receivable, net
    
    
    6,184
    
    
    
    4,285
    
    
    
    2,905
    
    
    
    2,267
    
    
    
    2,759Inventories
    
    
    5,305
    
    
    
    4,904
    
    
    
    2,947
    
    
    
    2,540
    
    
    
    2,399Recoverable taxes
    
    
    2,087
    
    
    
    1,475
    
    
    
    917
    
    
    
    672
    
    
    
    664Advances to suppliers
    
    
    652
    
    
    
    422
    
    
    
    504
    
    
    
    794
    
    
    
    483Other current assets
    
    
    1,679
    
    
    
    1,484
    
    
    
    1,817
    
    
    
    748
    
    
    
    661Total current assets
    
    
    25,778
    
    
    
    19,426
    
    
    
    17,434
    
    
    
    10,322
    
    
    
    14,326Property, plant and equipment, net
    
    
    45,920
    
    
    
    37,020
    
    
    
    30,805
    
    
    
    18,224
    
    
    
    19,179Investments in non-consolidated companies and other investments
    
    
    1,810
    
    
    
    1,862
    
    
    
    1,173
    
    
    
    334
    
    
    
    499Other assets:Accounts receivables, net
    
    
    607
    
    
    
    411
    
    
    
    528
    
    
    
    369
    
    
    
    476Advances to suppliers
    
    
    489
    
    
    
    580
    
    
    
    416
    
    
    
    450
    
    
    
    403Petroleum and Alcohol Account-Receivable from the
Brazilian government(1)
    
    
    329
    
    
    
    282
    
    
    
    239
    
    
    
    182
    
    
    
    81Government securities
    
    
    364
    
    
    
    326
    
    
    
    283
    
    
    
    176
    
    
    
    665Unrecognized pension obligation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61
    
    
    
    187Restricted deposits for legal proceedings and guarantees
    
    
    775
    
    
    
    699
    
    
    
    543
    
    
    
    290
    
    
    
    337Recoverable taxes
    
    
    639
    
    
    
    536
    
    
    
    467
    
    
    
    156
    
    
    
    164Investments PEPSA and PELSA
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,073
    
    
    
    Goodwill
    
    
    237
    
    
    
    211
    
    
    
    183
    
    
    
    
    
    
    
    Prepaid expenses
    
    
    246
    
    
    
    271
    
    
    
    190
    
    
    
    100
    
    
    
    78Marketable securities
    
    
    129
    
    
    
    313
    
    
    
    806
    
    
    
    208
    
    
    
    212Fair value asset of gas hedge
    
    
    547
    
    
    
    635
    
    
    
    
    
    
    
    
    
    
    
    Others
    
    
    755
    
    
    
    510
    
    
    
    545
    
    
    
    209
    
    
    
    257Total other assets
    
    
    5,117
    
    
    
    4,774
    
    
    
    4,200
    
    
    
    3,274
    
    
    
    2,860Total assets
    
    $
    78,625
    
    
    $
    63,082
    
    
    $
    53,612
    
    
    $
    32,154
    
    
    $
    36,864Liabilities and Shareholders equityCurrent liabilities:Trade accounts payable
    
    $
    3,838
    
    
    $
    3,284
    
    
    $
    2,261
    
    
    $
    1,702
    
    
    $
    1,783Taxes payable
    
    
    3,423
    
    
    
    2,569
    
    
    
    2,305
    
    
    
    1,801
    
    
    
    2,145Short-term debt
    
    
    950
    
    
    
    547
    
    
    
    1,329
    
    
    
    671
    
    
    
    1,101Current portion of long-term debt
    
    
    1,428
    
    
    
    1,199
    
    
    
    1,145
    
    
    
    727
    
    
    
    940Current portion of project financings
    
    
    2,413
    
    
    
    1,313
    
    
    
    842
    
    
    
    239
    
    
    
    680Current portion of capital lease obligations
    
    
    239
    
    
    
    266
    
    
    
    378
    
    
    
    349
    
    
    
    298Dividends and interest on capital payable
    
    
    3,068
    
    
    
    1,900
    
    
    
    1,955
    
    
    
    307
    
    
    
    93Payroll and related charges
    
    
    918
    
    
    
    618
    
    
    
    581
    
    
    
    283
    
    
    
    333Advances from customers
    
    
    609
    
    
    
    290
    
    
    
    258
    
    
    
    119
    
    
    
    26Employees postretirement benefits obligations  Pension
    
    
    206
    
    
    
    166
    
    
    
    160
    
    
    
    89
    
    
    
    117Other current liabilities
    
    
    1,063
    
    
    
    1,176
    
    
    
    823
    
    
    
    976
    
    
    
    528Total current liabilities
    
    
    18,155
    
    
    
    13,328
    
    
    
    12,037
    
    
    
    7,263
    
    
    
    8,044Long-term liabilities:Long-term debt
    
    
    11,503
    
    
    
    12,145
    
    
    
    11,888
    
    
    
    6,987
    
    
    
    5,908Project financings
    
    
    3,629
    
    
    
    4,399
    
    
    
    5,066
    
    
    
    3,800
    
    
    
    3,153Employees postretirement benefits obligations  Pension
    
    
    3,627
    
    
    
    2,915
    
    
    
    1,895
    
    
    
    1,363
    
    
    
    1,971Employees postretirement benefits obligation  Health Care
    
    
    3,004
    
    
    
    2,137
    
    
    
    1,580
    
    
    
    1,060
    
    
    
    1,409Capital lease obligations
    
    
    1,015
    
    
    
    1,069
    
    
    
    1,242
    
    
    
    1,907
    
    
    
    1,930Deferred income tax
    
    
    2,159
    
    
    
    1,558
    
    
    
    1,122
    
    
    
    259
    
    
    
    717Gas-fired power liabilities
    
    
    
    
    
    
    1,095
    
    
    
    1,142
    
    
    
    
    
    
    
    Deferred Purchase Incentive
    
    
    144
    
    
    
    153
    
    
    
    
    
    
    
    
    
    
    
    Provision for abandonment of wells
    
    
    842
    
    
    
    403
    
    
    
    396
    
    
    
    
    
    
    
    Other liabilities
    
    
    556
    
    
    
    497
    
    
    
    541
    
    
    
    350
    
    
    
    406Total long-term liabilities
    
    
    26,479
    
    
    
    26,371
    
    
    
    24,872
    
    
    
    15,726
    
    
    
    15,494Minority interest
    
    
    1,074
    
    
    
    877
    
    
    
    367
    
    
    
    (136
    )
    
    
    79
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As of December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in millions of U.S. dollars)Shareholders equityShares authorized and issued:Preferred share
    
    
    4,772
    
    
    
    4,772
    
    
    
    2,973
    
    
    
    2,459
    
    
    
    1,882Common share
    
    
    6,929
    
    
    
    6,929
    
    
    
    4,289
    
    
    
    3,761
    
    
    
    2,952Capital reserve and other comprehensive income
    
    
    21,216
    
    
    
    10,805
    
    
    
    9,074
    
    
    
    3,081
    
    
    
    8,413Total Shareholders equity
    
    
    32,917
    
    
    
    22,506
    
    
    
    16,336
    
    
    
    9,301
    
    
    
    13,247Total liabilities and Shareholders equity
    
    $
    78,625
    
    
    $
    63,082
    
    
    $
    53,612
    
    
    $
    32,154
    
    
    $
    36,864
 
 (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 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. 9




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INCOME STATEMENT DATA
 For the Year Ended December 31,2005
    
    
    2004 (11)
    
    
    2003 (11)
    
    
    2002(11)
    
    
    2001(11)(in millions of U.S. dollars, except for share and per share data)Sales of products and services
    
    $
    74,065
    
    
    $
    51,954
    
    
    $
    42,690
    
    
    $
    32,987
    
    
    $
    34,145Value-added and other taxes on sales and
services
    
    
    (14,694
    )
    
    
    (10,906
    )
    
    
    (9,527
    )
    
    
    (7,739
    )
    
    
    (8,627
    )CIDE(1)
    
    
    (3,047
    )
    
    
    (2,620
    )
    
    
    (2,249
    )
    
    
    (2,636
    )
    
    
    Specific
parcel price  PPE(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (969
    )Net operating revenues
    
    $
    56,324
    
    
    
    38,428
    
    
    
    30,914
    
    
    
    22,612
    
    
    
    24,549Cost of sales(3)
    
    
    29,828
    
    
    
    21,279
    
    
    
    15,533
    
    
    
    11,506
    
    
    
    12,807Depreciation, depletion and
amortization(4)(12)
    
    
    2,926
    
    
    
    2,481
    
    
    
    1,785
    
    
    
    1,930
    
    
    
    1,729Exploration, including exploratory dry
holes(4)(5)
    
    
    1,009
    
    
    
    613
    
    
    
    512
    
    
    
    435
    
    
    
    404Selling, general and administrative expenses
    
    
    4,474
    
    
    
    2,901
    
    
    
    2,091
    
    
    
    1,741
    
    
    
    1,751Other operating expense(6)
    
    
    1,137
    
    
    
    572
    
    
    
    597
    
    
    
    222
    
    
    
    277Total costs and expenses
    
    
    39,374
    
    
    
    27,846
    
    
    
    20,518
    
    
    
    15,834
    
    
    
    16,968Financial income
    
    
    710
    
    
    
    956
    
    
    
    634
    
    
    
    1,142
    
    
    
    1,375Financial expense
    
    
    (1,189
    )
    
    
    (1,733
    )
    
    
    (1,247
    )
    
    
    (774
    )
    
    
    (808
    )Monetary and exchange variation on monetary
assets and liabilities, net
    
    
    248
    
    
    
    450
    
    
    
    509
    
    
    
    (2,068
    )
    
    
    (915
    )Employee benefit expense
    
    
    (994
    )
    
    
    (650
    )
    
    
    (595
    )
    
    
    (451
    )
    
    
    (594
    )Other non-operating income (expense), net(7)
    
    
    (1,133
    )
    
    
    (670
    )
    
    
    (924
    )
    
    
    (1,395
    )
    
    
    (1,847
    )Income before income taxes,
minority interest, extraordinary item and accounting change
    
    
    14,592
    
    
    
    8,935
    
    
    
    8,773
    
    
    
    3,232
    
    
    
    4,792Income tax (expense) benefit:Current
    
    
    (4,223
    )
    
    
    (2,114
    )
    
    
    (2,599
    )
    
    
    (1,269
    )
    
    
    (1,196
    )Deferred
    
    
    (218
    )
    
    
    (117
    )
    
    
    (64
    )
    
    
    116
    
    
    
    (193
    )Total income tax expense
    
    
    (4,441
    )
    
    
    (2,231
    )
    
    
    (2,663
    )
    
    
    (1,153
    )
    
    
    (1,389
    )Minority interests in results of
consolidated subsidiaries
    
    
    35
    
    
    
    (514
    )
    
    
    (248
    )
    
    
    232
    
    
    
    88Income before extraordinary item and effect
of change in accounting principle
    
    
    10,186
    
    
    
    6,190
    
    
    
    5,862
    
    
    
    2,311
    
    
    
    3,491Extraordinary gain net of tax
    
    
    158
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cumulative effect of change in accounting
principle, net of taxes(4)
    
    
    
    
    
    
    
    
    
    
    697
    
    
    
    
    
    
    
    Net income for the year
    
    $
    10,344
    
    
    $
    6,190
    
    
    $
    6,559
    
    
    $
    2,311
    
    
    $
    3,491Weighted average number of shares
Outstanding:(8)Common(8)
    
    
    2,536,673,672
    
    
    
    2,536,673,672
    
    
    
    2,536,673,672
    
    
    
    2,536,673,672
    
    
    
    2,536,673,672Preferred(8)
    
    
    1,849,478,028
    
    
    
    1,849,478,028
    
    
    
    1,849,478,028
    
    
    
    1,807,742,676
    
    
    
    1,807,742,676Basic and diluted earnings per share:(8)(9)Common and Preferred Shares(8)(9)
    
    $
    2.36
    
    
    $
    1.41
    
    
    $
    1.50
    
    
    $
    0.53
    
    
    $
    0.80Common and Preferred ADS(8)(9)
    
    $
    9.44
    
    
    $
    5.64
    
    
    $
    6.00
    
    
    $
    2.12
    
    
    $
    3.20Cash dividends per(8)(10):Common and Preferred shares(8)(10)
    
    $
    0.68
    
    
    $
    0.42
    
    
    $
    0.37
    
    
    $
    0.29
    
    
    $
    0.42Common and Preferred ADS(8)(10)
    
    $
    2.72
    
    
    $
    1.68
    
    
    $
    1.48
    
    
    $
    1.16
    
    
    $
    1.68
 
 (1)
    
    CIDE is a per-transaction tax due to the Brazilian government. 10




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##### Table of Contents



(2)
    
    According to specific legislation applicable to the Petroleum and Alcohol Account through
December 31, 2001, the Petroleum and Alcohol Account was realized through collection of the
Specific Parcel Price-PPE generated by the sale of the majority of basic oil products
(gasoline, diesel oil and LPG). The PPE represented the difference between the selling prices
of these products at the refinery (net of Imposto sobre Circulação de Mercadorias e Serviços
(state value-added tax), or ICMS and other charges levied on sales), fixed in reaisby the
Brazilian Government, and the corresponding realization prices for such products, which is the
basis for calculation net operating revenues. The realization prices (PR) for each oil product
were determined on the basis of a pricing formula established by the Brazilian Government
that, with a lag of approximately one month, reflected changes in oil products quotations on
the international market and the exchange rate. When the invoicing price net of ICMS and
PASEP/COFINS exceeded the realization price, the PPE collection was positive and reduced the
balance of the Petroleum and Alcohol Account. Conversely, when the invoicing value net of ICMS
and PASEP/COFINS was less than the realization price, the PPE collection was negative and
increased the balance of the Petroleum and Alcohol Account. See Item 4. Information on the
CompanyRegulation of the Oil and Gas Industry in BrazilPrice RegulationThe Petroleum and
Alcohol Account.(3)
    
    Amounts reported are net of impact of government charges and taxes of U.S.$68 million in
2001. The governmental regulations giving rise to such charges/credits and taxes were
abolished in 2002.(4)
    
    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.(5)
    
    In 2005, we reviewed and revised our 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 to estimated asset
retirement obligation were principally related to changing expectations about Brent prices,
which led the correlated fields to have longer economic lives. This review resulted in a
decrease in the related provision of U.S.$21 million with a gain recognized in net income, and
recorded in the line titled exploratory costs for oil and gas exploration. See note 2(i) to
our audited consolidated financial statements.(6)
    
    Amounts reported are net of impact of government charges and taxes of U.S.$45 million in
2001. The governmental regulations giving rise to such charges and taxes were abolished in
2002.(7)
    
    Amounts reported include financial charges in respect of the Petroleum and Alcohol Account of
U.S.$2 million in 2002 and U.S.$16 million in 2001.(8)
    
    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.(9)
    
    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).(10)
    
    Represents dividends declared in respect of the earnings of each period.(11)
    
    Certain amounts from prior years have been reclassified to conform to current year
presentation standards. These reclassifications had no impact on the Companys net income.(12)
    
    Including in 2005 an impairment charge relating to our operations in Venezuela. PIFCo
  11




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##### Table of Contents



For the Year Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in millions of U.S. dollars)Income Statement Data:Sales of crude oil and oil products and
Services:Related Parties
    
    $
    13,974.4
    
    
    $
    10,118.4
    
    
    $
    5,543.0
    
    
    $
    5,375.5
    
    
    $
    5,860.6Others
    
    
    3,161.7
    
    
    
    2,237.2
    
    
    
    1,432.5
    
    
    
    1,014.7
    
    
    
    399.9Lease income(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36.1
    
    
    
    10.7$
    17,136.1
    
    
    $
    12,355.6
    
    
    $
    6,975.5
    
    
    $
    6,426.3
    
    
    $
    6,271.2Operating Expenses:Cost of salesRelated Parties
    
    
    (7,780.3
    )
    
    
    (4,391.3
    )
    
    
    (2,851.4
    )
    
    
    (2,409.0
    )
    
    
    (1,648.1
    )Others
    
    
    (9,203.0
    )
    
    
    (7,844.7
    )
    
    
    (4,068.7
    )
    
    
    (3,962.5
    )
    
    
    (4,604.9
    )Lease expense(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24.0
    )
    
    
    (10.5
    )Selling, general and Administrative expensesRelated parties
    
    
    (158.1
    )
    
    
    (98.7
    )
    
    
    (17.1
    )
    
    
    
    
    
    
    Others
    
    
    (7.6
    )
    
    
    (1.1
    )
    
    
    (1.5
    )
    
    
    (1.2
    )
    
    
    (0.1
    )(17,149.0
    )
    
    
    (12,335.8
    )
    
    
    (6,938.7
    )
    
    
    (6,396.7
    )
    
    
    (6,263.6
    )Operating income (loss)
    
    
    (12.9
    )
    
    
    19.8
    
    
    
    36.8
    
    
    
    29.6
    
    
    
    7.6Financial income(2)Related Parties
    
    
    765.5
    
    
    
    568.6
    
    
    
    401.7
    
    
    
    201.9
    
    
    
    155.4Others
    
    
    218.5
    
    
    
    110.2
    
    
    
    41.2
    
    
    
    17.7
    
    
    
    3.4Total
    
    
    984.0
    
    
    
    678.8
    
    
    
    442.9
    
    
    
    219.6
    
    
    
    158.8Financial expense(3)Related Parties
    
    
    (409.8
    )
    
    
    (169.0
    )
    
    
    (111.9
    )
    
    
    (61.3
    )
    
    
    (67.4
    )Others
    
    
    (589.1
    )
    
    
    (592.2
    )
    
    
    (370.8
    )
    
    
    (253.4
    )
    
    
    (119.7
    )Total
    
    
    (998.9
    )
    
    
    (761.2
    )
    
    
    (482.7
    )
    
    
    (314.7
    )
    
    
    (187.1
    )Other income, netRelated Parties
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    
    
    
    
    Others
    
    
    
    
    
    
    4.0
    
    
    
    
    
    
    
    
    
    
    
    0.4Net loss
    
    $
    (27.8
    )
    
    $
    (59.1
    )
    
    $
    (3.0
    )
    
    $
    (65.5
    )
    
    $
    (20.3
    )Balance Sheet Data (end of period):Cash and cash equivalents
    
    $
    230.7
    
    
    $
    1,107.3
    
    
    
    664.2
    
    
    
    260.6
    
    
    
    48.6Trade accounts receivableRelated parties
    
    
    8,681.1
    
    
    
    7,788.1
    
    
    
    5,064.5
    
    
    
    4,837.1
    
    
    
    2,583.7Others
    
    
    212.7
    
    
    
    153.6
    
    
    
    109.4
    
    
    
    57.1
    
    
    
    44.7Notes receivableRelated parties
    
    
    3,909.3
    
    
    
    1,936.9
    
    
    
    1,726.4
    
    
    
    1,631.6
    
    
    
    283.0Export PrepaymentRelated parties
    
    
    943.9
    
    
    
    1,414.7
    
    
    
    1,479.4
    
    
    
    751.2
    
    
    
    751.2Marketable Securities
    
    
    2,248.6
    
    
    
    1,864.8
    
    
    
    615.8
    
    
    
    96.3
    
    
    
    Total assets
    
    
    16,748.9
    
    
    
    14,670.2
    
    
    
    10,196.6
    
    
    
    8,697.3
    
    
    
    4,277.8Trade accounts payableRelated parties
    
    
    950.7
    
    
    
    562.1
    
    
    
    271.0
    
    
    
    292.0
    
    
    
    288.1Other
    
    
    616.1
    
    
    
    568.1
    
    
    
    349.0
    
    
    
    281.1
    
    
    
    231.0Notes payableRelated parties
    
    
    8,080.3
    
    
    
    6,435.0
    
    
    
    2,442.8
    
    
    
    3,688.2
    
    
    
    334.6Short-term financing and current portion of
long-term debt
    
    
    891.1
    
    
    
    680.9
    
    
    
    1,076.4
    
    
    
    367.5
    
    
    
    990.4Long-term debt(4)
    
    
    5,908.4
    
    
    
    6,151.8
    
    
    
    5,825.3
    
    
    
    3,850.4
    
    
    
    2,335.0Total stockholders equity
    
    
    8.0
    
    
    
    35.7
    
    
    
    94.8
    
    
    
    43.9
    
    
    
    49.4Total liabilities and stockholders equity
    
    
    16,748.9
    
    
    
    14,670.2
    
    
    
    10,196.6
    
    
    
    8,697.3
    
    
    
    4,277.8
 
 (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 and 2005. 12




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##### Table of Contents



(2)
    
    Financial income represents primarily the imputed interest realized from PIFCos sales of
crude oil and oil products to us.(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.$601.7 million at December 31, 2002. 
 Exchange Rates
  real real
 real real real
 reais
 For the Year Ended December 31, (R$ /U.S.$)High
    
    Low
    
    Average (1)
    
    Period EndYear ended December 31,2005
    
    
    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
    
    
    
    3.5332001
    
    
    2.835
    
    
    
    1.935
    
    
    
    2.352
    
    
    
    2.320MonthNovember 2005
    
    
    2.252
    
    
    
    2.163
    
    
    
    2.211
    
    
    
    2.207December 2005
    
    
    2.374
    
    
    
    2.180
    
    
    
    2.286
    
    
    
    2.341January 2006
    
    
    2.346
    
    
    
    2.212
    
    
    
    2.273
    
    
    
    2.216February 2006
    
    
    2.222
    
    
    
    2.118
    
    
    
    2.159
    
    
    
    2.136March 2006
    
    
    2.224
    
    
    
    2.107
    
    
    
    2.148
    
    
    
    2.172April 2006
    
    
    2.172
    
    
    
    2.089
    
    
    
    2.131
    
    
    
    2.089May 2006
    
    
    2.059
    
    
    
    2.371
    
    
    
    2.170
    
    
    
    2.301June 2006 (through June 21)
    
    
    2.302
    
    
    
    2.238
    
    
    
    2.262
    
    
    
    2.238
 
 Source: Central Bank of Brazil(1)
    
    Year-end figures stated for calendar years 2005, 2004, 2003, 2002 and 2001 represent the
average of the month-end exchange rates during the relevant period. The figures provided for
the months of calendar year 2006 and 2005, as well as for the month of June up to and
including June 21, 2006, represents the average of the exchange rates at the close of trading
on each business day during such period.  13




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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.
   
    
    global and regional economic and political developments in crude oil producing
regions, particularly in the Middle East;
    
    the ability of the Organization of Petroleum Exporting Countries (OPEC) and other
crude oil producing nations to set and maintain crude oil production levels and prices;
    
    global and regional supply and demand for crude oil and oil products;
    
    competition from other energy sources;
    
    domestic and foreign government regulations;
    
    weather conditions; and
    
    global conflicts and acts of terrorism.
  Our ability to achieve our 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.
  14




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##### Table of Contents



Our crude oil and natural gas reserve estimates involve some degree of uncertainty, which could
adversely affect our ability to generate income.
  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 litigation and arbitration.
  15




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If the State of Rio de Janeiro enforces a law imposing ICMS on oil upstream activities, our results
of operations and financial condition may be adversely affected.
 Supremo Tribunal Federal
 Our participation in the domestic power market has generated losses and may not become profitable.
  
    
    Physical demand for our installed capacity, which is influenced by the current
and expected market prices of natural gas;
    
    The potential mismatch between 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 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.
  16




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##### Table of Contents



We may not be able to obtain financing for all 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.
 reais
 real real real 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 and terrorism.
  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;
 17




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##### Table of Contents




    
    the imposition of restrictions on hydrocarbon exports;
    
    the depreciation of local currencies;
    
    the nationalization of oil and gas reserves; or
    
    increases in export tax / income tax rates for crude oil and oil products.
   The recent nationalization measures taken by the Bolivian and Venezuelan governments may have an
adverse effect on our results of operations and financial condition.
    18




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##### Table of Contents



Risks Relating to PIFCo
 PIFCo may not earn enough money from its own operations to meet its debt obligations.
  
    
    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 its financing costs to us.
  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.
 reais
 PIFCo may be limited in its ability to pass on its financing costs.
  19




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##### Table of Contents



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.
  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.
  20




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##### Table of Contents




    
    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.
 Political instability may adversely affect our results of operations and the price of our
securities.
    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
 21




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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 Brazilian securities markets are smaller, more volatile and less liquid than the major U.S. and
European securities markets and therefore you may have greater difficulty selling 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.
  22




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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
  23




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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 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.
   We may not be able to pay our obligations under the standby purchase agreement in U.S. Dollars.
  24




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##### Table of Contents



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 believes 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
  25




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##### Table of Contents




    
    Exploration and Production  Our exploration and production segment encompasses
exploration, development and production activities in Brazil.
    
    Refining, Transportation and Marketing  Our refining, transportation and marketing
segment encompasses refining, logistics, transportation and the purchase of crude oil,
as well as the purchase and sale of oil products and fuel alcohol. Additionally, this
segment includes the petrochemical and fertilizers division, which includes domestic
petrochemical companies and our two domestic fertilizer plants.
    
    Distribution  Our distribution segment encompasses oil product and fuel alcohol
distribution activities conducted by our majority owned subsidiary, Petrobras
Distribuidora S.A.  BR in Brazil.
    
    Natural Gas and Power  Our natural gas and power segment encompasses the purchase,
sale and transportation of natural gas produced in or imported into Brazil.
Additionally, this segment includes our domestic electric energy commercialization
activities as well as investments in domestic natural gas transportation companies,
state owned natural gas distributors and gas-fired power plants.
    
    International  Our international segment encompasses international activities
conducted in the following countries: Argentina, Angola, Bolivia, Colombia, Ecuador,
Equatorial Guinea, Iran, Libya, Mexico, Nigeria, Paraguay, Peru, the United States,
Tanzania,Turkey, Uruguay and Venezuela), which include Exploration and Production,
Supply, Refining, Petrochemical, Fertilizers, Distribution and Gas and Energy.,
    
    Corporate  Our corporate segment includes those activities not attributable to
other segments, including corporate financial management and overhead related with
central administration.
  26




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##### Table of Contents



Recent developments relating to compliance with the Sarbanes-Oxley Act
    
 Competitive Strengths
  
    
    dominant market position in the production, refining and transportation of crude oil
and oil products in Brazil;
    
    strong reserve base;
    
    deepwater technological expertise;
    
    cost efficiencies created by large scale operations combined with vertical
integration among business segments;
    
    strong position in Brazils growing natural gas markets; and
    
    success in attracting international partners in all activities.
 Dominant market position in the production, refining and transportation of crude oil and oil
products in Brazil
  Strong reserve base
  27




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##### Table of Contents



Deepwater technological expertise
   Cost efficiencies created by large-scale operations combined with vertical integration among
business segments
  
    
    the location of over 80% 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;
    
    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 current production of 1,684 Mbpd, our refining
throughput of 1,726 Mbpd and the Brazilian market total demand for hydrocarbon products
of 1,800 Mbpd as of December 2005.
  Strong position in Brazils growing natural gas markets
  28




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##### Table of Contents




    
    increasing production of non-associated natural gas, and natural gas associated with
our domestic crude oil production, combined with the necessary investments to process
such gas from recent discoveries of non-associated gas reserves, mainly in the Santos
Basin offshore in Brazil;
    
    planned investments in expansion of the natural gas transportation network
throughout Brazil;
    
    increased 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 to improve our energy demand management.
 Success in attracting international partners in all our activities
   Strategy
  
    
    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 the
Companys business;
    
    develop and lead the domestic natural gas market and act in an integrated manner
in the gas and power market in the Southern Cone;
    
    selectively expand our activities in the domestic and Southern Cone petrochemicals market; and
    
    selectively perform in the renewable energy market.
 Consolidate and increase competitive advantages in the Brazilian and South American oil and oil
products market
  29




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##### Table of Contents




    
    Our refineries were originally designed to process light imported crude oil,
whereas our current reserves and production increasingly consist of heavier crude oil.
We are in the process of improving and adapting our refineries to better process our
domestic production of heavier crude oil.
 Selectively expand international activities in an integrated manner with the Companys business
  Develop and lead the domestic natural gas market and act in an integrated manner in the gas and
power market in the Southern Cone
  
    
    developing the natural gas industry on an integrated manner with other areas of our
Company in the production chain and consumption; and
    
    taking advantage of growing opportunities in the power industry in an integrated
manner with other natural gas market areas in which our Company already operates.
  30




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##### Table of Contents



Selectively expand our activities in the domestic and Southern Cone petrochemicals market
  Selectively perform in the renewable energy market
  
    
    bio-diesel production and H-bio;
    
    wind power generation;
    
    biomass energy; and
    
    photo voltaic.
 
 Overview by Business Segment
 
 Exploration, Development and Production
 Summary and Strategy
     31




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##### Table of Contents




    
    strengthening our expertise in deep and ultra-deep waters;
    
    focusing on profitable opportunities on-shore and in shallow water fields;
    
    implementing new practices and new technologies in areas with high exploitation
degree in order to optimize recovery factor;
    
    developing exploratory efforts in new frontiers in order to assure a sustainable
reserve/production ratio.
 Principal Domestic Oil and Gas Producing Regions
        32




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##### Table of Contents



Average
    
    
    AverageOil and
    
    
    Oil andNatural Gas
    
    
    Natural GasProduction for
    
    
    Production forthe Year
    
    
    the YearProduction Acreage as pf
    
    
    Ended
    
    
    EndedDecember 31.,2005
    
    
    December 31,
    
    
    December 31,Developed
    
    
    Undeveloped
    
    
    2005(1)(4)
    
    
    2004(1)(4)Gross(2)
    
    
    Net(2)
    
    
    Gross(2)
    
    
    Net(2)(in acres)
    
    
    
    
    
    
    (boe per day) (3)Brazil(1)OffshoreCampos Basin
    
    
    1,714,851
    
    
    
    1,681,740
    
    
    
    138,374
    
    
    
    99,580
    
    
    
    1,530,147
    
    
    
    1,311,208Other offshore
    
    
    320,979
    
    
    
    281,196
    
    
    
    329,874
    
    
    
    291,327
    
    
    
    64,510
    
    
    
    68,909Total offshore
    
    
    2,035,830
    
    
    
    1,962,936
    
    
    
    468,248
    
    
    
    390,907
    
    
    
    1,594,657
    
    
    
    1,380,117Onshore
    
    
    1,045,466
    
    
    
    1,045,466
    
    
    
    131,949
    
    
    
    131,950
    
    
    
    363,203
    
    
    
    377,603Total Brazil
    
    
    3,081,296
    
    
    
    3,008,402
    
    
    
    600,197
    
    
    
    522,857
    
    
    
    1,957,860
    
    
    
    1,757,720InternationalOnshore
    
    
    4,225,975
    
    
    
    2,584,034
    
    
    
    2,967,718
    
    
    
    1,871,834
    
    
    
    245,828
    
    
    
    247,122Offshore
    
    
    123,825
    
    
    
    36,381
    
    
    
    642,109
    
    
    
    81,778
    
    
    
    12,909
    
    
    
    15,516Total International
    
    
    4,349,800
    
    
    
    2,620,415
    
    
    
    3,609,827
    
    
    
    1,953,612
    
    
    
    258,737
    
    
    
    262,638Total
    
    
    7,431,096
    
    
    
    5,628,817
    
    
    
    4,210,024
    
    
    
    2,476,469
    
    
    
    2,216,597
    
    
    
    2,020,358
 
 (1)
    
    Over 75% of our production of natural gas is associated gas.(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. 33




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##### Table of Contents



Productive WellsOil
    
    Gas
    
    TotalGross productive wellsBrazil
    
    
    8,968
    
    
    
    468
    
    
    
    9,436International
    
    
    5,896
    
    
    
    302
    
    
    
    6,198Total
    
    
    14,864
    
    
    
    770
    
    
    
    15,634Net productive wellsBrazil
    
    
    8,954
    
    
    
    465
    
    
    
    9,419International
    
    
    4,361
    
    
    
    235
    
    
    
    4,596Total
    
    
    13,315
    
    
    
    700
    
    
    
    14,015
  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;
    
    at December 31, 2005, we were operating 37 wells at water depths in excess of 3,281
feet (1,000 meters)
    
    at December 31, 2005, we had drilled 400 wells at water depths in excess of 3,281
feet (1,000 meters), the deepest well being an exploration well in 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
5.92:1 in 2005, 4.96:1 in 2004 and 5.20:1 in 2003.
  34




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##### Table of Contents



OFFSHORE PRODUCTION BY WATER DEPTH
 Depth
    
    Percentage in 2005
    
    Percentage in 20040-400 meters (0-1,312 feet)
    
    
    18
    %
    
    
    21
    %400-1,000 meters (1,312 feet-3,281 feet)
    
    
    56
    %
    
    
    55
    %More than 1,000 meters (3,281 feet)
    
    
    26
    %
    
    
    24
    %
 Exploration Activities
              35




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##### Table of Contents



Exploration
    
    Development
    
    Production
    
    TotalEventAreas held (December 31, 2002)
    
    
    58
    
    
    
    39
    
    
    
    234
    
    
    
    331Areas redefined (July 2003) (BCAM-40)
    
    
    1
    
    
    
    0
    
    
    
    0
    
    
    
    1Areas relinquished (August 6, 2003)
    
    
    (22
    )
    
    
    0
    
    
    
    0
    
    
    
    (22
    )Areas won on Bid, Round 5
    
    
    17
    
    
    
    0
    
    
    
    0
    
    
    
    17New concession (January 29, 2003) (Guajá)
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    1New concession (August 4, 2003) (Cavalo-Marinho)
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    1Areas redefined (February 3, 2003) (Coral)
    
    
    0
    
    
    
    (1
    )
    
    
    1
    
    
    
    0Areas redefined (July 15, 2003) (Beija-Flor)
    
    
    0
    
    
    
    (1
    )
    
    
    1
    
    
    
    0Joint concession COG to CCN (1)
    
    
    0
    
    
    
    0
    
    
    
    (1
    )
    
    
    (1
    )Joint concession CDL to MP (2)
    
    
    0
    
    
    
    0
    
    
    
    (1
    )
    
    
    (1
    )Areas relinquished (BAS-104)
    
    
    0
    
    
    
    (1
    )
    
    
    0
    
    
    
    (1
    )Areas relinquished (Arraia)
    
    
    0
    
    
    
    (1
    )
    
    
    0
    
    
    
    (1
    )Joint concession CR to FBL (3)
    
    
    0
    
    
    
    (1
    )
    
    
    0
    
    
    
    (1
    )Areas relinquished (ALS-32)
    
    
    0
    
    
    
    (1
    )
    
    
    0
    
    
    
    (1
    )Areas 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
    
    
    
    374
 36




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##### Table of Contents



Exploration
    
    Development
    
    Production
    
    TotalAreas 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 million acres (as of December 31, 2005)
    
    
    31,727,205
    
    
    
    522,856
    
    
    
    3,008,401
    
    
    
    35,258,462
 
 (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 37




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##### Table of Contents




    
    drilling approximately 92 new exploratory and approximately 356 new development wells;
    
    shooting and processing two-dimensional and three-dimensional seismic surveys; and
    
    constructing onshore and offshore production and support facilities.
  EXPLORATORY AND DEVELOPMENT WELLS
 CamposPeriod
    
    Basin
    
    Other
    
    Onshore
    
    International
    
    Total2005 Net Exploratory Wells Drilled
    
    
    19
    
    
    
    14
    
    
    
    36
    
    
    
    4
    
    
    
    73Successful
    
    
    14
    
    
    
    7
    
    
    
    17
    
    
    
    4
    
    
    
    42Unsuccessful
    
    
    5
    
    
    
    7
    
    
    
    19
    
    
    
    0
    
    
    
    31Net Development Wells Drilled
    
    
    20
    
    
    
    3
    
    
    
    187
    
    
    
    207
    
    
    
    417Successful
    
    
    19
    
    
    
    3
    
    
    
    181
    
    
    
    206
    
    
    
    409Unsuccessful
    
    
    1
    
    
    
    0
    
    
    
    6
    
    
    
    1
    
    
    
    82004 Net Exploratory Wells Drilled
    
    
    21
    
    
    
    19
    
    
    
    14
    
    
    
    7
    
    
    
    61Successful
    
    
    16
    
    
    
    9
    
    
    
    4
    
    
    
    2
    
    
    
    31Unsuccessful
    
    
    5
    
    
    
    10
    
    
    
    10
    
    
    
    5
    
    
    
    30Net Development Wells Drilled
    
    
    25
    
    
    
    2
    
    
    
    208
    
    
    
    235
    
    
    
    470Successful
    
    
    24
    
    
    
    2
    
    
    
    205
    
    
    
    230
    
    
    
    461Unsuccessful
    
    
    1
    
    
    
    0
    
    
    
    3
    
    
    
    5
    
    
    
    92003 Net Exploratory Wells Drilled
    
    
    21
    
    
    
    10
    
    
    
    7
    
    
    
    4
    
    
    
    42Successful
    
    
    7
    
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    13Unsuccessful
    
    
    14
    
    
    
    8
    
    
    
    5
    
    
    
    2
    
    
    
    29Net Development Wells Drilled
    
    
    12
    
    
    
    0
    
    
    
    264
    
    
    
    26
    
    
    
    302Successful
    
    
    12
    
    
    
    0
    
    
    
    256
    
    
    
    26
    
    
    
    294Unsuccessful
    
    
    0
    
    
    
    0
    
    
    
    8
    
    
    
    0
    
    
    
    8
 38




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##### Table of Contents



DRILLING UNITS
 2005
    
    
    2004
    
    
    2003Brazil
    
    
    International
    
    
    Brazil
    
    
    International
    
    
    Brazil
    
    
    InternationalLand rigs for
onshore exploration
and development
    
    
    22
    
    
    
    19
    
    
    
    19
    
    
    
    28
    
    
    
    15
    
    
    
    10Owned
    
    
    13
    
    
    
    0
    
    
    
    13
    
    
    
    0
    
    
    
    13
    
    
    
    0Leased
    
    
    9
    
    
    
    19
    
    
    
    6
    
    
    
    28
    
    
    
    2
    
    
    
    10Semi-submersible rigs
    
    
    17
    
    
    
    1
    
    
    
    18
    
    
    
    0
    
    
    
    17
    
    
    
    0Owned
    
    
    3
    
    
    
    0
    
    
    
    4
    
    
    
    0
    
    
    
    4
    
    
    
    0Leased
    
    
    14
    
    
    
    1
    
    
    
    14
    
    
    
    0
    
    
    
    13
    
    
    
    0Drill ships
    
    
    7
    
    
    
    2
    
    
    
    7
    
    
    
    1
    
    
    
    8
    
    
    
    1Owned
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Leased
    
    
    7
    
    
    
    2
    
    
    
    7
    
    
    
    1
    
    
    
    8
    
    
    
    1Jack-up rigs
    
    
    7
    
    
    
    1
    
    
    
    6
    
    
    
    0
    
    
    
    6
    
    
    
    0Owned
    
    
    6
    
    
    
    0
    
    
    
    6
    
    
    
    0
    
    
    
    5
    
    
    
    0Leased
    
    
    1
    
    
    
    1
    
    
    
    0
    
    
    
    0
    
    
    
    1
    
    
    
    0Moduled rigs for
offshore exploration
and development
    
    
    11
    
    
    
    0
    
    
    
    11
    
    
    
    0
    
    
    
    9
    
    
    
    0Owned
    
    
    9
    
    
    
    0
    
    
    
    8
    
    
    
    0
    
    
    
    6
    
    
    
    0Leased
    
    
    2
    
    
    
    0
    
    
    
    3
    
    
    
    0
    
    
    
    3
    
    
    
    0Total
    
    
    64
    
    
    
    23
    
    
    
    61
    
    
    
    29
    
    
    
    55
    
    
    
    11
 Development Activities
   Marlim
 Roncador
 39




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##### Table of Contents



Marlim Sul (South Marlim).
  Barracuda and Caratinga.
 Albacora Leste (East Albacora)
        40




---



##### Table of Contents



Production Activities
   For the Year Ended December 31,2005
    
    
    2004
    
    
    2003(1)Crude Oil and NGL Production (in Mbpd)Brazil (2)OffshoreCampos Basin
    
    
    1,405
    
    
    
    1,204
    
    
    
    1,252Other
    
    
    36
    
    
    
    38
    
    
    
    39Total offshore
    
    
    1,441
    
    
    
    1,242
    
    
    
    1,291Onshore
    
    
    243
    
    
    
    251
    
    
    
    248Total Brazil
    
    
    1,684
    
    
    
    1,493
    
    
    
    1,540International
    
    
    163
    
    
    
    168
    
    
    
    161Total crude oil and NGL production
    
    
    1,847
    
    
    
    1,661
    
    
    
    1,701Crude Oil and NGL Average Sales Price (U.S. dollars per Bbl)Brazil
    
    $
    45.42
    
    
    $
    33.49
    
    
    $
    27.01International
    
    
    34.91
    
    
    
    26.51
    
    
    
    23.77Natural Gas Production (in Mmcfpd)Brazil(3)OffshoreCampos Basin
    
    
    752
    
    
    
    645
    
    
    
    657Other
    
    
    172
    
    
    
    184
    
    
    
    186Total offshore
    
    
    924
    
    
    
    829
    
    
    
    843Onshore
    
    
    719
    
    
    
    762
    
    
    
    657Total Brazil
    
    
    1,643
    
    
    
    1,590
    
    
    
    1,500International
    
    
    575
    
    
    
    564
    
    
    
    510Total natural gas production
    
    
    2,218
    
    
    
    2,154
    
    
    
    2,010Natural Gas Average Sales Price (U.S. dollars per Mcf)Brazil(4)
    
    $
    2.17
    
    
    $
    1.93
    
    
    $
    1.79International(5)
    
    
    1.64
    
    
    
    1.17
    
    
    
    1.26Aggregate Average Lifting Costs (oil and natural gas) (U.S.
dollars per boe)BrazilWith government take
    
    $
    14.65
    
    
    $
    10.72
    
    
    $
    8.62Without government take
    
    
    5.73
    
    
    
    4.28
    
    
    
    3.48International
    
    
    2.90
    
    
    
    2.60
    
    
    
    2.46
 41




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##### Table of Contents



(1)
    
    International production figures for 2003 include PEPSA and PELSA as of January 1, 2003,
although our interests were only acquired in May 2003.(2)
    
    Brazilian figures include production from shale oil reserves and natural gas liquids, which
are not included in our proved reserves figures.(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.  Reserves
  
    
    9.72 billion barrels of crude oil and NGLs; and
    
    12,351.9 billion cubic feet of natural gas.
    42




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##### Table of Contents



WORLDWIDE ESTIMATED NET PROVED RESERVES
 CombinedBrazil
    
    International
    
    GlobalNatural
    
    
    
    
    
    
    
    
    
    Natural
    
    
    
    
    
    ProvedCrude Oil
    
    Gas(1)(3)
    
    Combined(2)(3)
    
    Crude Oil
    
    Gas(1)
    
    Combined(2)
    
    Reserves(MMbbl)
    
    (Bcf)
    
    (Mmboe)
    
    (MMbbl)
    
    (Bcf)
    
    (Mmboe)
    
    (Mmboe)Net Proved Developed and
Undeveloped Reserves:Reserves as of December 31, 2003
    
    
    9,051.4
    
    
    
    8,111.4
    
    
    
    10,403.3
    
    
    
    720.7
    
    
    
    3,090.9
    
    
    
    1,235.9
    
    
    
    11,639.2Revisions of previous estimates
    
    
    (414.9
    )
    
    
    (262.1
    )
    
    
    (458.6
    )
    
    
    (18.8
    )
    
    
    276.4
    
    
    
    27.3
    
    
    
    (431.3
    )Extensions, discoveries and
improved recovery
    
    
    1,129.3
    
    
    
    582.6
    
    
    
    1,226.4
    
    
    
    60.6
    
    
    
    116.5
    
    
    
    80.0
    
    
    
    1,306.4Sales of reserves in place
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Purchase of reserves in place
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.6
    
    
    
    18.5
    
    
    
    3.7
    
    
    
    3.7Production for the year
    
    
    (522.4
    )
    
    
    (477.6
    )
    
    
    (602.0
    )
    
    
    (61.1
    )
    
    
    (209.5
    )
    
    
    (96.0
    )
    
    
    (698.0
    )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
    
    
    
    463.1Purchase of reserves in place
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0Sales of reserves in place
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0Production 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
    
    
    
    10,577.9
    
    
    
    682.1
    
    
    
    3,088.1
    
    
    
    1,196.8
    
    
    
    11,774.7Net Proved Developed Reserves:As of December 31, 2003
    
    
    3,629.5
    
    
    
    4,398.1
    
    
    
    4,362.5
    
    
    
    404.1
    
    
    
    2,548.4
    
    
    
    828.8
    
    
    
    5,191.3As 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
    
    
    
    5,508.1
 
 (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)
    
    Natural gas reserve data for 2005 presented in this table in cubic feet
have been restated using a conversion of 6000 cubic feet of natural gas
per barrel of oil equivalent, such conversion rate being consistent with
prior years volumetric statements. The FAS 69 information originally
published together with the consolidated financial statements for December 31,
2005 converted the natural gas reserves using 5613 cubic feet per
barrel of oil, such factor being related to specific gravity and calorific
content of Petrobras fields rather than the international average
standard. As Petrobras natural gas reserves and production are accounted
for in cubic meters, this change which is only for convenience
presentation of barrel of oil equivalent, has no effect on the financial
results nor on the physical natural gas reserves.  43




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##### Table of Contents



CRUDE OIL NET PROVED RESERVES BY REGION
 As of December 31,2005
    
    2004
    
    2003Proved
    
    
    
    
    
    Proved
    
    
    
    
    
    ProvedDeveloped and
    
    Proved
    
    Developed and
    
    Proved
    
    Developed and
    
    ProvedUndeveloped
    
    Developed
    
    Undeveloped
    
    Developed
    
    Undeveloped
    
    Undeveloped(MMbbl)BrazilOffshoreCampos Basin
    
    
    7,886.0
    
    
    
    3,395.9
    
    
    
    8,130.4
    
    
    
    3,422.7
    
    
    
    8,089.1
    
    
    
    2,899.6Other
    
    
    388.3
    
    
    
    101.3
    
    
    
    335.4
    
    
    
    106.1
    
    
    
    159.8
    
    
    
    111.7Total offshore
    
    
    8,274.3
    
    
    
    3,497.2
    
    
    
    8,465.8
    
    
    
    3,528.8
    
    
    
    8,248.9
    
    
    
    3,011.3Onshore
    
    
    759.6
    
    
    
    574.5
    
    
    
    777.6
    
    
    
    601.0
    
    
    
    802.5
    
    
    
    618.2Total Brazil
    
    
    9,033.9
    
    
    
    4,071.7
    
    
    
    9,243.4
    
    
    
    4,129.8
    
    
    
    9,051.4
    
    
    
    3,629.5InternationalOther South America(1)
    
    
    625.8
    
    
    
    350.8
    
    
    
    678.4
    
    
    
    367.0
    
    
    
    703.9
    
    
    
    387.6West Coast of Africa
    
    
    42.6
    
    
    
    8.6
    
    
    
    11.8
    
    
    
    11.8
    
    
    
    14.0
    
    
    
    14.0Gulf of Mexico
    
    
    13.7
    
    
    
    6.5
    
    
    
    11.8
    
    
    
    4.3
    
    
    
    2.8
    
    
    
    2.4Total international
    
    
    682.1
    
    
    
    365.9
    
    
    
    702.0
    
    
    
    383.1
    
    
    
    720.7
    
    
    
    404.1Total
    
    
    9,716.0
    
    
    
    4,437.6
    
    
    
    9,945.4
    
    
    
    4,512.9
    
    
    
    9,772.1
    
    
    
    4,033.6
 
 (1)
    
    Includes Argentina, Bolivia Colombia, Ecuador, Peru and Venezuela. NATURAL GAS NET PROVED RESERVES BY REGION:
 As of December 31,2005
    
    2004
    
    2003Proved
    
    
    
    
    
    Proved
    
    
    
    
    
    ProvedDeveloped and
    
    Proved
    
    Developed and
    
    Proved
    
    Developed and
    
    ProvedUndeveloped
    
    Developed
    
    Undeveloped
    
    Developed
    
    Undeveloped
    
    Undeveloped(Bcf)BrazilOffshoreCampos Basin
    
    
    3,836.5
    
    
    
    1,772.3
    
    
    
    4,039.3
    
    
    
    1,820.4
    
    
    
    4,096.2
    
    
    
    1,598.0Other
    
    
    2,912.1
    
    
    
    720.9
    
    
    
    1,337.5
    
    
    
    854.0
    
    
    
    1,291.2
    
    
    
    959.5Total offshore
    
    
    6,748.6
    
    
    
    2,493.2
    
    
    
    5,376.8
    
    
    
    2,674.4
    
    
    
    5,387.4
    
    
    
    2,557.5Onshore
    
    
    2,515.2
    
    
    
    1,595.6
    
    
    
    2,577.5
    
    
    
    1,753.2
    
    
    
    2,724.0
    
    
    
    1,840.6Total Brazil
    
    
    9,263.8
    
    
    
    4,088.8
    
    
    
    7,954.3
    
    
    
    4,427.6
    
    
    
    8,111.4
    
    
    
    4,398.1InternationalOther South America(1)
    
    
    2,951.7
    
    
    
    2,270.2
    
    
    
    3,162.2
    
    
    
    2,456.2
    
    
    
    3,058.2
    
    
    
    2,526.8Gulf of Mexico
    
    
    136.5
    
    
    
    63.5
    
    
    
    130.6
    
    
    
    39.0
    
    
    
    32.7
    
    
    
    21.6Total international
    
    
    3,088.1
    
    
    
    2,333.7
    
    
    
    3,292.8
    
    
    
    2,495.2
    
    
    
    3,090.9
    
    
    
    2,548.4Total
    
    
    12,351.9
    
    
    
    6,422.5
    
    
    
    11,247.1
    
    
    
    6,922.8
    
    
    
    11,202.3
    
    
    
    6,946.5
 
 (1)
    
    Includes Argentina, Bolivia, Colombia, Peru and Venezuela.  
 Refining, Transportation and Marketing
 Summary and Strategy
   44




---



##### Table of Contents



th Statistical Review of the
World
   
    
    strenghthen solution and relationship processes to the client, by understanding the
clients value chain and adjusting the services and products portfolio;
    
    expand processing, transporting and commercialization activities, using bio-energy
sources and raw material produced by us;
    
    diversify our business portfolio, focusing on synergy among assets;
    
    expand activities in the petrochemical and fertilizer industries, by seeking strategic
partnerships and promoting synergies with our other operations;
    
    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 on oil processing to promote energy and environmental
efficiency.
  Refining
 Petroleum Intelligence Weekly th
 45




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##### Table of Contents



Refinery Production and Capacity
  REFINING STATISTICS
 2005
    
    2004
    
    
    
    
    
    2003Capacity
    
    Throughput(1)
    
    Utilization(2)
    
    Capacity
    
    Throughput(1)
    
    Utilization(2)
    
    Capacity
    
    Throughput(1)
    
    Utilization(2)Refineries
    
    (Mbpd)
    
    (Mbpd)
    
    (%)
    
    (Mbpd)
    
    (Mbpd)
    
    (%)
    
    (Mbpd)
    
    (Mbpd)
    
    (%)Paulínia
    
    
    365
    
    
    
    320
    
    
    
    88
    %
    
    
    365
    
    
    
    351
    
    
    
    96
    %
    
    
    365
    
    
    
    297
    
    
    
    81
    %Landulpho Alves (9)
    
    
    332
    
    
    
    249
    
    
    
    75
    
    
    
    323
    
    
    
    237
    
    
    
    73
    
    
    
    323
    
    
    
    200
    
    
    
    62Duque de Caxias (9)
    
    
    275
    
    
    
    242
    
    
    
    88
    
    
    
    242
    
    
    
    230
    
    
    
    95
    
    
    
    242
    
    
    
    214
    
    
    
    88Henrique Lage
    
    
    251
    
    
    
    241
    
    
    
    96
    
    
    
    251
    
    
    
    236
    
    
    
    94
    
    
    
    251
    
    
    
    219
    
    
    
    87Alberto Pasqualini(3)
    
    
    189
    
    
    
    116
    
    
    
    61
    
    
    
    189
    
    
    
    103
    
    
    
    54
    
    
    
    189
    
    
    
    105
    
    
    
    56Pres. Getúlio Vargas(4)
    
    
    189
    
    
    
    186
    
    
    
    98
    
    
    
    189
    
    
    
    165
    
    
    
    87
    
    
    
    189
    
    
    
    191
    
    
    
    101Pres. Bernardes
    
    
    170
    
    
    
    157
    
    
    
    92
    
    
    
    170
    
    
    
    154
    
    
    
    91
    
    
    
    170
    
    
    
    164
    
    
    
    96Gabriel Passos
    
    
    151
    
    
    
    131
    
    
    
    87
    
    
    
    151
    
    
    
    132
    
    
    
    87
    
    
    
    151
    
    
    
    129
    
    
    
    85Manaus
    
    
    46
    
    
    
    44
    
    
    
    96
    
    
    
    46
    
    
    
    45
    
    
    
    98
    
    
    
    46
    
    
    
    44
    
    
    
    96Capuava
    
    
    53
    
    
    
    35
    
    
    
    66
    
    
    
    53
    
    
    
    46
    
    
    
    87
    
    
    
    53
    
    
    
    44
    
    
    
    83Fortaleza
    
    
    6
    
    
    
    5
    
    
    
    83
    
    
    
    6
    
    
    
    5
    
    
    
    83
    
    
    
    6
    
    
    
    5
    
    
    
    83Total Brazilian (9)
    
    
    2,027
    
    
    
    1,726
    
    
    
    85
    
    
    
    1,985
    
    
    
    1,704
    
    
    
    86
    
    
    
    1,985
    
    
    
    1,612
    
    
    
    81Gualberto Villarroel(5)
    
    
    40
    
    
    
    25
    
    
    
    63
    
    
    
    40
    
    
    
    22
    
    
    
    55
    
    
    
    40
    
    
    
    18
    
    
    
    45Ricardo Eliçabe(6)
    
    
    31
    
    
    
    26
    
    
    
    84
    
    
    
    31
    
    
    
    30
    
    
    
    98
    
    
    
    31
    
    
    
    30
    
    
    
    97Guillermo Elder Bell(5)
    
    
    20
    
    
    
    16
    
    
    
    80
    
    
    
    20
    
    
    
    16
    
    
    
    80
    
    
    
    20
    
    
    
    15
    
    
    
    75San Lorenzo (7)
    
    
    38
    
    
    
    37
    
    
    
    97
    
    
    
    38
    
    
    
    33
    
    
    
    89
    
    
    
    38
    
    
    
    33
    
    
    
    87Del Norte (8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total International
    
    
    129
    
    
    
    104
    
    
    
    81
    
    
    
    129
    
    
    
    101
    
    
    
    78
    
    
    
    129
    
    
    
    96
    
    
    
    74Total
    
    
    2,156
    
    
    
    1,830
    
    
    
    85
    %
    
    
    2,114
    
    
    
    1,805
    
    
    
    85
    %
    
    
    2,114
    
    
    
    1,708
    
    
    
    81
    %
 
 (1)
    
    Throughput does not include slop or any reprocessed feedstock.(2)
    
    Utilization was calculated based on crude oil and NGL only.(3)
    
    We do not own 100% 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. 46




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##### Table of Contents



(5)
    
    Located in Bolivia. We expect that our participation in this refinery will be reduced as a
result of the Bolivian nationalization program announced on May 1, 2006.(6)
    
    Located in Argentina.(7)
    
    Located in Argentina. We acquired this refinery through our acquisition of Petrobras Energía,
formerly Perez Companc.(8)
    
    Located in Argentina. Del Norte statistics are not included since we own just 28.5% of
that refinery.(9)
    
    Includes NGL Capacity (Mbpd): Landulpho Alves = 9, Duque de Caixas = 33.  :
 DOMESTIC PRODUCTION VOLUME OF OIL PRODUCTS
 2005
    
    %
    
    2004
    
    %
    
    2003
    
    %(Mbpd)
    
    
    
    
    
    (Mbpd)
    
    
    
    
    
    (Mbpd)ProductDiesel
    
    
    660.1
    
    
    
    38.0
    %
    
    
    657.0
    
    
    
    38.7
    %
    
    
    623.4
    
    
    
    38.0
    %Gasoline
    
    
    324.5
    
    
    
    18.7
    
    
    
    292.8
    
    
    
    17.3
    
    
    
    290.9
    
    
    
    17.8Fuel oil
    
    
    257.8
    
    
    
    14.9
    
    
    
    279.9
    
    
    
    16.5
    
    
    
    266.4
    
    
    
    16.2Naphtha and jet fuel
    
    
    218.5
    
    
    
    12.6
    
    
    
    220.2
    
    
    
    13.0
    
    
    
    219.6
    
    
    
    13.4Other
    
    
    274.3
    
    
    
    15.8
    
    
    
    245.7
    
    
    
    14.5
    
    
    
    238.6
    
    
    
    14.6Total
    
    
    1,735.2
    
    
    
    100.0
    %
    
    
    1695.6
    
    
    
    100.0
    %
    
    
    1,638.9
    
    
    
    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.
 47




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##### Table of Contents



Refinery
    
    ObjectiveAlberto Pasqualini (REFAP)
    
    Expansion and modernization of refinery,
including the installation of a coker,
residue fluid cat. craking unit, and
upgrade gasoline and diesel quality.Presidente Getúlio Vargas Refinery (REPAR)
    
    Installation of coker, expansion of
existing refinery unit and units to
upgrade the quality of diesel and
gasoline.Henrique Lage (REVAP)
    
    Installation of coker and units to upgrade
the quality of diesel and gasoline.Paulínia Refinery (REPLAN)
    
    Upgrade the quality of diesel and gasoline.Landulpho Alves (RLAM)
    
    Expansion of existing refinery unit and
units to upgrade the quality of diesel and
gasoline.Duque de Caxias Refinery (REDUC)
    
    Expansion of existing refinery,
installation of a coker and units to
upgrade the quality of diesel and
gasoline.Gabriel Passos Refinery (REGAP)
    
    Expansion of the coker and upgrade the
quality of diesel and gasoline.Presidente Bernardes Refinery (RPBC)
    
    Upgrade the quality of gasoline.Capuava Refinery (RECAP)
    
    Upgrade the quality of diesel and gasoline.
 Imports
    48




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IMPORTS OF CRUDE OIL BY REGION
 2005
    
    2004
    
    2003Volume (%)RegionAfrica
    
    
    67.5
    %
    
    
    73.4
    %
    
    
    63.7
    %Middle East
    
    
    29.4
    
    
    
    24.2
    
    
    
    30.9Central and South America/Caribbean
    
    
    3.1
    
    
    
    2.4
    
    
    
    3.1Oceania
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.9Europe
    
    
    0.0
    
    
    
    0.0
    
    
    
    1.4Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    IMPORTS OF OIL PRODUCTS
 2005
    
    2004
    
    2003Volume (Mbbl)Oil ProductLPG
    
    
    6,268
    
    
    
    11,537
    
    
    
    12,034Distillates(1)
    
    
    16,740
    
    
    
    16,879
    
    
    
    23,183Naphtha
    
    
    8,243
    
    
    
    7,231
    
    
    
    5,026Others(2)
    
    
    3,523
    
    
    
    4,487
    
    
    
    4,225Total
    
    
    34,774
    
    
    
    40,134
    
    
    
    44,468
 
 (1)
    
    Includes gasoline, diesel fuel and some intermediate fractions.(2)
    
    Includes Algerian NGLs, fuel oil, Ethanol, Methanol and others.  Exports
  49




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EXPORTS OF OIL AND OIL PRODUCTS(1)
 2005
    
    2004
    
    2003(Mbbl)Crude Oil
    
    
    96,155
    
    
    
    66,319
    
    
    
    84,899Fuel Oil (including bunker fuel)
    
    
    63,896
    
    
    
    107,104
    
    
    
    85,740Gasoline
    
    
    17,240
    
    
    
    11,510
    
    
    
    13,656Other
    
    
    9,716
    
    
    
    1,288
    
    
    
    8,250Total
    
    
    187,007
    
    
    
    186,221
    
    
    
    192,545
 
 (1)
    
    The figure includes sales made by PIFCo to unaffiliated third parties, including sales of
oil and oil products purchased internationally.  Transportation
   Pipelines and Terminals
  50




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Plano Diretor de Escoamento e
Tratamento
     52




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Programa de Integridade de Dutos)
   OWNED/BAREBOAT CHARTERED VESSELS
 Number
    
    Capacity(deadweight tonnage in thousands)Type of VesselTankers
    
    
    44
    
    
    
    2,443.4Liquefied petroleum gas tankers
    
    
    6
    
    
    
    40.2AHTS Anchor Handling Tug Supply
    
    
    1
    
    
    
    2.2FSO Floating, Storage and Offloading
    
    
    1
    
    
    
    28.9Total
    
    
    52
    
    
    
    2,514.7
  PRODUCTS AND QUANTITIES TRANSPORTED
 2005
    
    2004
    
    2003(millions of tons)ProductCrude oil
    
    
    92.38
    
    
    
    88.4
    
    
    
    96.6Oil Products
    
    
    40.42
    
    
    
    34.0
    
    
    
    28.1Fuel Alcohol
    
    
    0.04
    
    
    
    
    
    
    
    Total
    
    
    132.84
    
    
    
    122.4
    
    
    
    124.7Percentage transported by our owned/bareboat chartered fleet
    
    
    43
    %
    
    
    45.1
    %
    
    
    45.3
    %Coastal transport as a percentage of total tonnage
    
    
    67
    %
    
    
    61.1
    %
    
    
    64.2
    %
  53




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Petrochemicals
       54




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Distribution
 Summary and Strategy
   
    
    be the preferred brand of the consumer, with a multi-business retail network that
offers excellence in the quality of products and services, expanded leadership and
guaranteed expected profitability; and
    
    add value to our system, by being the leader in all consumer market segments,
launching new products, services and innovative solutions and by assuring the
preference for our brand.
 gás liquefeito de petróleo Sindicato Nacional das
Empresas Distribuidoras de Gás Liqüefeito de Petróleo
 55




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OIL PRODUCT SALES
 2005
    
    2004
    
    2003(MMbbl)ProductDiesel
    
    
    228.1
    
    
    
    224.9
    
    
    
    208.3Gasoline
    
    
    114.3
    
    
    
    104.8
    
    
    
    101.8Fuel oil
    
    
    77.2
    
    
    
    106.1
    
    
    
    98.5Naphtha and jet fuel
    
    
    79.3
    
    
    
    81.5
    
    
    
    76.6Others
    
    
    343.5
    
    
    
    129.1
    
    
    
    283.2Total
    
    
    842.4
    
    
    
    646.4
    
    
    
    768.4CustomerWholesalersDiesel
    
    
    105.5
    
    
    
    106.6
    
    
    
    100.2Gasoline
    
    
    43.0
    
    
    
    42.9
    
    
    
    41.0Others
    
    
    25.4
    
    
    
    25.6
    
    
    
    26.0Total wholesalers
    
    
    173.9
    
    
    
    175.1
    
    
    
    167.2Retail distributorsBR
    
    
    157.8
    
    
    
    145.1
    
    
    
    133.6Third parties
    
    
    510.7
    
    
    
    326.2
    
    
    
    467.6Total retail distributors
    
    
    668.5
    
    
    
    471.3
    
    
    
    601.2Total customers
    
    
    842.4
    
    
    
    646.4
    
    
    
    768.4
    56




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BR MARKET SHARE IN DISTRIBUTION
 2005
    
    2004
    
    2003Fuel oil
    
    
    64.8
    %
    
    
    64.4
    %
    
    
    65.2
    %Diesel
    
    
    31.9
    
    
    
    28.6
    
    
    
    26.1Gasoline
    
    
    25.0
    
    
    
    22.1
    
    
    
    21.1Fuel alcohol
    
    
    32.2
    
    
    
    31.2
    
    
    
    33.3Total
    
    
    33.8
    %
    
    
    31.6
    %
    
    
    30.8
    %
   De olho no Combustível
  
    
    selectively expand our service stations network, reinforcing the Petrobras image;
    
    increase the use of client fidelity programs and new technologies; and
    
    reduce operating and administrative costs and provide services, such as financial
services and controls, through investments in advanced telecommunications and data
processing technology.
    57




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COMMERCIAL AND INDUSTRIAL RETAIL SALES BY PRODUCT
 For the Year Ended December 31,2005
    
    2004
    
    2003(Mboe)Fuel oil
    
    
    22,850
    
    
    
    24,649
    
    
    
    27,729Diesel
    
    
    78,241
    
    
    
    70,521
    
    
    
    60,117Gasoline
    
    
    36,690
    
    
    
    32,147
    
    
    
    28,710Jet fuels
    
    
    15,784
    
    
    
    15,020
    
    
    
    14,343Fuel alcohol
    
    
    5,132
    
    
    
    4,147
    
    
    
    3,286Lubricants
    
    
    1,601
    
    
    
    1,460
    
    
    
    1,256Others
    
    
    24,943
    
    
    
    22,609
    
    
    
    23,198Total
    
    
    185,241
    
    
    
    170,554
    
    
    
    158,638
 
 Natural Gas and Power
 Summary and Strategy
     
    
    develop the natural gas industry in an integrated manner with other areas of the
Company, in Brazil and other South American countries;
    
    take advantage of growing opportunities in the power industry in an integrated
manner with other natural gas market sector in which our Company already operates; and
    
    develop some renewable energy alternatives and the Mecanismos de Desenvolvimento
Limpo MDL, or Clean Development Mechanisms, as well as coordinate and implement
activities related to energy efficiency to the Petrobras system and final consumers.
  58




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Natural Gas
  3⁄4
  Malha
Sudeste Malha Nordeste
        59




---



##### Table of Contents



real
    DOMESTIC SALES OF NATURAL GAS TO LOCAL DISTRIBUTION COMPANIES
 Year Ended December 31,2005
    
    2004
    
    2003(in MMscfd)Total sales annual average(i)
    
    
    1,289
    
    
    
    1,164
    
    
    
    978Annual sales growth(i)
    
    
    11
    %
    
    
    19
    %
    
    
    13.4
    %
 
 (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.  3⁄4
 Gas purchase commitments
 60




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##### Table of Contents



NATURAL GAS PURCHASE COMMITMENTS
 2006
    
    2007
    
    2008
    
    2009
    
    2010Volume Obligation (Mmcmpd)
    
    
    24
    
    
    
    24
    
    
    
    24
    
    
    
    24
    
    
    
    24Volume Obligation (Mmcfd)
    
    
    850
    
    
    
    850
    
    
    
    850
    
    
    
    850
    
    
    
    850Estimated Payments (U.S.$ million)(1)
    
    
    1,025
    
    
    
    921
    
    
    
    759
    
    
    
    654
    
    
    
    634
 
 (1)
    
    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.  Ship-or-pay commitments
 NATURAL GAS SHIP-OR-PAY COMMITMENTS
 2006
    
    2007
    
    2008
    
    2009
    
    2010Volume Commitment (Mmcmpd)(1)
    
    
    59.51
    
    
    
    59.51
    
    
    
    59.51
    
    
    
    59.51
    
    
    
    59.51Volume Commitment (Mmcfpd)(1)
    
    
    2,102
    
    
    
    2,102
    
    
    
    2,102
    
    
    
    2,102
    
    
    
    2,102Estimated Payments (U.S.$ million)(1)
    
    
    487.73
    
    
    
    490.57
    
    
    
    492.61
    
    
    
    494.70
    
    
    
    496.75
 
 (1)
    
    The figures for TBG and GTB are consolidated. Natural gas sales contracts
  61




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NATURAL GAS SALES CONTRACTS
 2006
    
    2007
    
    2008
    
    2009
    
    2010(in Mmscfd)To Local Gas Distribution
CompaniesRelated parties(i)
    
    
    585
    
    
    
    624
    
    
    
    647
    
    
    
    668
    
    
    
    686Third parties
    
    
    494
    
    
    
    534
    
    
    
    430
    
    
    
    423
    
    
    
    425To Power Generation PlantsRelated parties(i)
    
    
    27
    
    
    
    27
    
    
    
    55
    
    
    
    55
    
    
    
    55Third parties
    
    
    184
    
    
    
    184
    
    
    
    184
    
    
    
    184
    
    
    
    184Total
    
    
    1,290
    
    
    
    1,369
    
    
    
    1,316
    
    
    
    1,330
    
    
    
    1,350Estimated Contract Receipts (U.S.$ million)(ii)(iii)
    
    $
    2,023
    
    
    $
    2,111
    
    
    $
    1,923
    
    
    $
    1,916
    
    
    $
    1,985
 
 (i)
    
    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.(ii)
    
    Figures show revenues net of taxes. Estimates are based on firm contracts and do not include
internal consumption or transfers. Estimated volumes are based on take or pay agreements in
our contracts, not maximum sales.(iii)
    
    Prices may be adjusted in the future and actual amounts may vary. Pricing Portaria Portaria
 Power
     62




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
    
    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. 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
    
    2006
    
    2007
    
    2008(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
   63




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Renewable Energy Alternative
  Renewable Energy
   Sustainable Development
  Energy Efficiency
  2
 2
 64




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##### Table of Contents



International
 Summary and Strategy
     
    
    seek leadership position as an integrated energy company throughout Latin America;
    
    expand exploration and production operations, in the Gulf of Mexico and Western Africa.
    
    accelerate monetization of our natural gas reserves;
    
    expand our international opportunities to grow and diversify our portfolio of international activities;
    
    broaden the recognition and increase the value of the Petrobras brand name outside Brazil; and
    
    add value to the production of Petrobras heavy oil.
  Exploration and Production
  65




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DISTRIBUTION OF CAPITAL EXPENDITURES IN INTERNATIONAL EXPLORATION ACTIVITIES
 2005
    
    
    2004
    
    
    2003Argentina
    
    
    7.2
    %
    
    
    3.1
    %
    
    
    5.6
    %Bolivia
    
    
    4.4
    
    
    
    0.2
    
    
    
    0.7Colombia
    
    
    4.6
    
    
    
    3.5
    
    
    
    4.4Peru, Ecuador and Venezuela
    
    
    0.3
    
    
    
    2.4
    
    
    
    28.7South America
    
    
    16.5
    
    
    
    9.2
    
    
    
    39.4West Coast of Africa
    
    
    47.8
    
    
    
    52.0
    
    
    
    15.6Gulf of Mexico
    
    
    33.9
    
    
    
    36.8
    
    
    
    42.5Others
    
    
    1.8
    
    
    
    2.0
    
    
    
    2.5Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Development
   ALLOCATION OF CAPITAL EXPENDITURES IN INTERNATIONAL DEVELOPMENT ACTIVITIES
 2005
    
    
    2004
    
    
    2003Argentina
    
    
    36.2
    %
    
    
    41.9
    %
    
    
    62.2
    %Peru
    
    
    8.3
    
    
    
    10.9
    
    
    
    Ecuador
    
    
    16.7
    
    
    
    7.4
    
    
    
    Bolivia
    
    
    1.7
    
    
    
    1.5
    
    
    
    7.1Colombia
    
    
    4.6
    
    
    
    6.8
    
    
    
    14.3Venezuela
    
    
    15.9
    
    
    
    28.4
    
    
    
    South America
    
    
    83.4
    
    
    
    96.9
    
    
    
    83.8West Coast of Africa
    
    
    15.0
    
    
    
    1.4
    
    
    
    14.7Gulf of Mexico
    
    
    1.6
    
    
    
    1.7
    
    
    
    1.5Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Argentine Activities
  66




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Exchange of assets  PETROBRAS and REPSOL  YPF
      Project MEGA
  67




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Other interests of PESA
  Comisión Nacional de Defensa de la
Competencia
  Bolivian Activities
  3⁄4
 68




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##### Table of Contents



(i)
    
    Our 44.5% of the shares of Transierra S.A, the owner and operator of the
Yacuiba-Rio Grande gas pipeline (GASYRG), a pipeline in Bolivia that connects the gas
fields in the south of Bolivia to the Bolivia-Brazil pipeline. Presently the pipeline
has a capacity of 17 MMcmd, and installation of another compression unit will increase
the capacity to 23 MMcmd. Investment for this project totaled more than U.S.$375
million. We also provided all the capital for the San Marcos pipeline, which presently
transports less than 0.1 MMcmd of natural gas to the city of Puerto Suárez
(Bolivia), on the Brazilian border.(ii)
    
    Our 21% interest in a natural gas compression plant in Rio Grande, Bolivia,
which has a capacity to compress up to 34.0 MM cmd.(iii)
    
    Our 51% interest in Petrobras Bolivia RefinaciónPBR, ex-Empresa Boliviana de
Refino (EBR), with Petrobras Energia S.A.  PESA as the other partner, with 49% of the
equity. PBR owns two Bolivian refineries located in Cochabamba and Santa Cruz de la
Sierra, with production capacity of 60 thousand barrels of crude oil per day, operating
with a throughput rate of 67%. PBR wholly owns Petrobras Bolivia DistribuciónPBD,
ex-Empresa Boliviana de Distribución, or EBD, a company with a network of 104 service
stations.
 Venezuelan Activities
 3⁄4
     69




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(a)
    
    PDVSA approved a reduced amount of development investments for the
Oritupano Leona area;(b)
    
    Difficulties for the reception by PDVSA of the oil produced were
verified;(c)
    
    Partial payment in bolivares of the billings. In this regard, in
June 2005, PDVSA notified Petrobras Energía Venezuela, S.A. that it would
thereafter pay in bolivares the portion of the compensation provided in the
operation contracts currently in effect related to the domestic component of the
materials and services provided. Such decision conflicts with the provisions of
the operation contracts mentioned above, under which PDVSA is required to make
such payments in U.S. dollars. During the transition phase, and until PDVSA
performed an audit to determine the portion attributable to the domestic
component, PDVSA decided that it would pay 50% of the amounts set forth in such
contracts in U.S. dollars and the remaining 50% in bolivares. Subsequently and
based on the collections related to 2005 third quarter production, the portion of
the payment in bolivars was reduced to 25%;(d)
    
    The SENIAT (National Integrated Tax Administration Service)
performed several tax inspections on the companies that operate the 32 oil
operating contracts, and as a result of these inspections, challenged prior tax
filings. In this regard, as of December 31, 2005, we recorded a U.S.$ 18 million
loss; and(e)
    
    an increase in income tax rate from 34% to 50%.
  70




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Ecuadorian Activities
       71




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Peruvian Activities
     72




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Uruguayan Activities
     Paraguayan Activities
  Colombian Activities
     2
 73




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##### Table of Contents



African Activities
       Middle East Activities
    74




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Gulf of Mexico Activities
      Mexican Activities
  75




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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 bunker fuel and fuel oil; and
    
    Bear Insurance Company Limited, or BEAR, a company incorporated in Bermuda that
contracts insurance for us and our subsidiaries.
    76




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PETROBRAS ANNUAL BUNKER FUEL PRODUCTION
 2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Mbbl)Export
    
    
    22,948
    
    
    
    22,452
    
    
    
    21,402
    
    
    
    23,653
    
    
    
    21,438Domestic Consumption
    
    
    1,313
    
    
    
    1,061
    
    
    
    1,048
    
    
    
    1,620
    
    
    
    1,533Petrobras Fleet
    
    
    3,739
    
    
    
    3,912
    
    
    
    4,291
    
    
    
    4,596
    
    
    
    4,497Total
    
    
    28,000
    
    
    
    27,425
    
    
    
    26,741
    
    
    
    29,869
    
    
    
    27,468
     FUEL OIL EXPORT SALES
 2005
    
    2004
    
    2003
    
    2002
    
    2001Millions of U.S.$
    
    
    1,077.6
    
    
    
    1,306.1
    
    
    
    967.3
    
    
    
    697.0
    
    
    
    658.0Millions of Barrels
    
    
    25.5
    
    
    
    47.5
    
    
    
    38.4
    
    
    
    30.8
    
    
    
    31.5
 
 Organizational Structure
  80




---



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Property, Plants and Equipment
 Petrobras
  81




---



##### Table of Contents



PIFCo
  
 Regulation of the Oil and Gas Industry in Brazil
 Regulatory Framework
        82




---



##### Table of Contents







Comissão de Valores Mobiliários Securities and Exchange Commission Comisión Nacional de Valores




Price Regulation






Contribuição de Intervenção no Domínio Econômico


Programa de Integração Social Contribuição para o
Financiamento da Seguridade Social


PIS/PASEP andProduct
    
    COFINS rate
    
    CIDE(reais/m3, except LPG/metric ton)Gasoline
    
    
    R$261.60
    
    
    
    280.0Diesel
    
    
    148.00
    
    
    
    70.0Jet Fuel
    
    
    71.20
    
    
    
    LPG
    
    
    167.70
    
    
    
    







    
    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;


83



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##### Table of Contents




    
    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.
       84




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For the Year Ended December 31,2005
    
    
    2004
    
    
    2003(in millions of U.S. dollars)Opening balance
    
    $
    282
    
    
    $
    239
    
    
    $
    182Reimbursements to third parties: subsidies paid to
fuel alcohol producers
    
    
    
    
    
    
    
    
    
    
    5Reimbursements to Petrobras: transport of oil products
    
    
    
    
    
    
    1
    
    
    
    Financial income
    
    
    9
    
    
    
    4
    
    
    
    10Results of certification/audit process conducted by
the Brazilian government
    
    
    
    
    
    
    16
    
    
    
    Partial settlement
    
    
    
    
    
    
    (3
    )
    
    
    Translation gain (loss)(1)
    
    
    38
    
    
    
    25
    
    
    
    42Ending balance
    
    $
    329
    
    
    $
    282
    
    
    $
    239
 
 (1)
    
    Exchange rate translation gains (losses) are recorded as a component of cumulative
translation adjustments. real
 Exploration and Development Regulation
 85
    Table of Contents     
    
    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
 86




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##### Table of Contents



Environmental Regulations
 Conselho Nacional do Meio Ambiente
  Taxa de Controle e
Fiscalização Ambiental Confederação Nacional da Indústria
   
    
    fines;
    
    partial or total suspension of activities;
    
    obligations to fund recovery works and environmental projects;
 87




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##### Table of Contents




    
    forfeiture or restriction of tax incentives or benefits;
    
    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 2005, we
spent approximately U.S$3.519 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 2005, we spent approximately U.S$545 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;
 88




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##### Table of Contents




    
    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.
    
    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 2005, Petrobras owned 45 certificates for its operating units in Brazil and 21
for units abroad. These certificates acknowledge the compliance of our HSE management
system with ISO 14001 (environment), and BS 8800 or OHSAS 18001 (health and safety)
standards. Because some of those certificates cover more than one site, the total
number of certified sites is 172 in Brazil and 25 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;
    
    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;
    
    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;
    
    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;
    
    participated directly in discussions with the Ministry of the Environment and IBAMA
regarding issues that could affect Petrobras business;
 89




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Management
   
 Competition
    90




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Associação Brasileira das Empresas de Gás Natural
  
 Insurance
     91




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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 mainly consists of sales of oil products (such as gasoline,
diesel oil, jet fuel, fuel oil, naphtha and liquefied petroleum gas), natural gas,
petrochemical products and electricity;
    
    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 produced and refined abroad; and
    
    other sources, including services, investment income and foreign exchange gains.
  
    
    costs of sales (which is comprised 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 and 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 and foreign exchange losses.
  
    
    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 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
 92




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
    
    the amount of 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
   93




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For the Year Ended December 31,2005
    
    
    2004
    
    
    2003Net
    
    
    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.$ in
    
    
    otherwise
    
    
    
    
    
    
    (U.S.$ in
    
    
    otherwise
    
    
    
    
    
    
    (U.S.$ innoted)
    
    
    (U.S.$)(1)
    
    
    millions)
    
    
    noted)
    
    
    (U.S.$)(1)
    
    
    millions)
    
    
    noted)
    
    
    (U.S.$)(1)
    
    
    millions)Energy products:Automotive gasoline
    
    
    104,901
    
    
    $
    60.08
    
    
    $
    6,302
    
    
    
    100,712
    
    
    $
    41.58
    
    
    $
    4,188
    
    
    
    94,364
    
    
    $
    38.28
    
    
    $
    3,612Diesel
    
    
    242,831
    
    
    
    68.20
    
    
    
    16,561
    
    
    
    240,237
    
    
    
    44.64
    
    
    
    10,725
    
    
    
    219,622
    
    
    
    40.64
    
    
    
    8,925Fuel oil
    
    
    36,243
    
    
    
    40.81
    
    
    
    1,479
    
    
    
    39,654
    
    
    
    28.45
    
    
    
    1,128
    
    
    
    43,475
    
    
    
    27.92
    
    
    
    1,214Liquid petroleum gas
    
    
    77,891
    
    
    
    34.55
    
    
    
    2,691
    
    
    
    76,982
    
    
    
    28.14
    
    
    
    2,166
    
    
    
    73,575
    
    
    
    27.07
    
    
    
    1,992Total energy products
    
    
    461,866
    
    
    
    
    
    
    
    27,033
    
    
    
    457,585
    
    
    
    
    
    
    
    18,207
    
    
    
    431,036
    
    
    
    
    
    
    
    15,743Non-energy products:Petrochemical naphtha
    
    
    57,281
    
    
    
    53.49
    
    
    
    3,064
    
    
    
    57,595
    
    
    
    42.28
    
    
    
    2,435
    
    
    
    57,291
    
    
    
    32.03
    
    
    
    1,835Others
    
    
    80,953
    
    
    
    58.35
    
    
    
    4,724
    
    
    
    77,652
    
    
    
    41.96
    
    
    
    3,258
    
    
    
    73,901
    
    
    
    33.69
    
    
    
    2,490Total non-energy
products
    
    
    138,234
    
    
    
    
    
    
    
    7,788
    
    
    
    135,247
    
    
    
    
    
    
    
    5,693
    
    
    
    131,192
    
    
    
    
    
    
    
    4,325Fuel alcohol
    
    
    126
    
    
    
    23.81
    
    
    
    3
    
    
    
    455
    
    
    
    30.77
    
    
    
    14
    
    
    
    458
    
    
    
    39.30
    
    
    
    18Natural gas (BOE)
    
    
    83,090
    
    
    
    21.77
    
    
    
    1,809
    
    
    
    77,310
    
    
    
    18.61
    
    
    
    1,439
    
    
    
    64,517
    
    
    
    18.94
    
    
    
    1,222Sub-total
    
    
    683,316
    
    
    
    53.61
    
    
    
    36,633
    
    
    
    670,597
    
    
    
    37.81
    
    
    
    25,353
    
    
    
    627,203
    
    
    
    33.97
    
    
    
    21,308Distribution net sales
    
    
    201,347
    
    
    
    78.53
    
    
    
    15,811
    
    
    
    182,327
    
    
    
    57.36
    
    
    
    10,458
    
    
    
    158,635
    
    
    
    50.39
    
    
    
    7,994Intercompany net sales
    
    
    (187,268
    )
    
    
    62.22
    
    
    
    (11,651
    )
    
    
    (164,730
    )
    
    
    46.69
    
    
    
    (7,692
    )
    
    
    (143,339
    )
    
    
    44.81
    
    
    
    (6,423
    )Total domestic market
    
    
    697,395
    
    
    
    58.49
    
    
    
    40,793
    
    
    
    688,194
    
    
    
    40.86
    
    
    
    28,119
    
    
    
    642,499
    
    
    
    35.61
    
    
    
    22,879Export net sales
    
    
    187,008
    
    
    
    47.79
    
    
    
    8,938
    
    
    
    186,221
    
    
    
    31.81
    
    
    
    5,923
    
    
    
    192,545
    
    
    
    27.71
    
    
    
    5,335International net
sales and Others
    
    
    140,630
    
    
    
    43.93
    
    
    
    6,178
    
    
    
    115,304
    
    
    
    35.33
    
    
    
    4,074
    
    
    
    88,438
    
    
    
    29.89
    
    
    
    2,643Sub-Total
    
    
    327,638
    
    
    
    46.14
    
    
    
    15,116
    
    
    
    301,525
    
    
    
    33.15
    
    
    
    9,997
    
    
    
    280,983
    
    
    
    28.39
    
    
    
    7,978Services
    
    
    
    
    
    
    
    
    
    
    415
    
    
    
    
    
    
    
    
    
    
    
    312
    
    
    
    
    
    
    
    
    
    
    
    57Consolidated net sales
    
    
    1,025,033
    
    
    
    
    
    
    $
    56,324
    
    
    
    989,719
    
    
    
    
    
    
    $
    38,428
    
    
    
    923,482
    
    
    
    
    
    
    $
    30,914
 
 (1)
    
    Net average price calculated by dividing net sales by the volume for the year.   Percentage Increase in Price(increase to customers includingtaxes(CIDE / PIS / COFINS))
    
    (net increase to Petrobras)Gasoline
    
    
    16.4
    %
    
    
    10.0
    %Diesel
    
    
    14.8
    %
    
    
    12.0
    %
 Export Sales Volumes and Prices
  94




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International Volumes and Prices
  Import Purchase Volumes and Prices
   
 Effect of Taxes on our Income
 General
  
    
    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. In 2005, the tax was charged on 20 of our
fields, including Marlim, Albacora, Roncador, Leste do Urucu, Rio Urucu, Canto do Amaro,
Marimbá, Marlim Sul, Namorado, Carapeba, Pampo, Bicudo, Barracuda, Caratinga, Cherne,
Pilar, Fazenda Alegre, Miranga, Carmópolis and Bijupirá. 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 reais
at 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.
 95




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Potential Change in ICMS Legislation
     
 Financial Income and Expense
   reais
 
 Inflation and Exchange Rate Variation
 Inflation
 real real
 Exchange Rate Variation
 real real real reais
 96




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##### Table of Contents



real real
 real
 reais real reais reais reais
 reais reais
   
    
    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.$269 million net foreign exchange gain in our 2005 statement
of income, compared to a U.S.$368 million net foreign exchange gain in 2004 and a
U.S.$2,433 million net foreign exchange loss in 2003. 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 real
against 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.$3,107 million
credit directly to shareholders equity in our statement of changes in shareholders
equity for 2005, without affecting net income, to reflect the appreciation of the real
against the U.S. dollar of approximately 11.8%, as compared to a credit of U.S.$1,911
million in 2004 to reflect the appreciation of 8.1% and a charge of U.S.$2,856 million in
2003 to reflect the depreciation of 18.2%.
 reais real
  97




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real
 
 Results of Operations
 real
 2005
    
    2004
    
    2003Crude Oil and NGL Production (Mbpd)Brazil
    
    
    1,684
    
    
    
    1,493
    
    
    
    1,540International
    
    
    163
    
    
    
    168
    
    
    
    161Total Crude Oil and NGLProduction
    
    
    1,847
    
    
    
    1,661
    
    
    
    1,701Change in Crude Oil and NGL Production
    
    
    11.2
    %
    
    
    (2.4
    )%
    
    
    10.8
    %Average Sales Price for Crude (bpd in U.S.$)Brazil
    
    $
    45.42
    
    
    $
    33.49
    
    
    $
    27.01International
    
    $
    34.91
    
    
    $
    26.51
    
    
    $
    23.7Natural Gas Production (Mmcfpd)Brazil
    
    
    1,644
    
    
    
    1,590
    
    
    
    1,500International
    
    
    576
    
    
    
    564
    
    
    
    510Total Natural Gas
Production
    
    
    2,220
    
    
    
    2,154
    
    
    
    2,010Change in Natural Gas Production (sold only)
    
    
    3.1
    %
    
    
    7.2
    %
    
    
    21.8
    %Average Sales Price for Natural Gas (Mcf in U.S.$)Brazil
    
    
    2.17
    
    
    
    1.93
    
    
    
    1.79International
    
    
    1.64
    
    
    
    1.17
    
    
    
    1.26Year End Exchange Rate
    
    
    2.34
    
    
    
    2.65
    
    
    
    2.89Appreciation (Depreciation) during the year
    
    
    11.8
    %
    
    
    8.1
    %
    
    
    18.2
    %Inflation Rate (IGP-DI)
    
    
    1.2
    %
    
    
    12.1
    %
    
    
    7.7
    %
 Results of Operations for the year ended December 31, 2005(2005) compared to the year ended
December 31, 2004 (2004).
    98




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Revenues
    
    
    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
    
    CIDE, the per-transaction tax due to the Brazilian government, 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 Real against 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 to international
oil prices) consumption of chemical products to clear out and eliminate toxic gases 
principally at Marlim; and (2) higher personnel expenses primarily related to:
overtime payments as set forth in our collective bargaining agreement; an increase in
our workforce; and a revision in the actuarial calculations relating to future health
care and pension benefits;
    
    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
 99




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
    
    the 16.8% increase in the value of the Real against the U.S. dollar in 2005, as
compared to 2004.
 Depreciation, depletion and amortization
  
    
    increased property, plant and equipment expenditures, and increased crude oil and
natural gas production; and
    
    the 16.8% increase in the value of the Real against the U.S. dollar in 2005, as
compared to 2004.
 Exploration, including exploratory dry holes
  
    
    the increase of U.S.$196 million due to a revision in the estimated expenses for
dismantling oil and gas producing areas and future well abandonment that affected the
exploration costs and was related to new commercial areas, increased estimates of cost
to abandon and changes in asset retirement obligations estimates provided by operators
in joint ventures;
    
    an increase of U.S.$98 million in geological and geophysical expenses;
    
    an increase of U.S.$16 million in dry holes expenses; and
    
    the 16.8% increase in the value of the Real against the U.S. dollar in 2005, as compared to 2004.
 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 Real against the U.S. dollar in 2005, as
compared to 2004.
  100




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
    
    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 Real against the U.S. dollar in 2005,
as compared to 2004.
 Research and development expenses
  Other operating expenses
   
    
    a U.S.$304 million expense for idle capacity from gas-fired power plants;
    
    a U.S.$153 million loss related to our investments in certain gas-fired power plants
resulting from our contractual obligations to cover losses;
    
    a U.S.$64 million expense for unscheduled stoppages of plants and equipment; and
    
    a U.S.$61 million increase in contractual losses from compliance with our ship or
pay commitments with respect to our investments in the OCP pipeline in Ecuador.
  
    
    a U.S.$110 million expense for idle capacity from gas-fired power plants;
    
    a U.S.$85 million expense for unscheduled stoppages of plant and equipment; and
    
    a U.S.$64 million increase in contractual losses from compliance with our ship or
pay commitments with respect to our investments in the OCP pipeline in Ecuador.
 Equity in results of non-consolidated companies
  101




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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 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
  Employee benefit expense for non-active participants
  Other taxes
  102




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Other expenses, net
   
    
    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 11(c) to our consolidated financial statements for the year
ended December 31, 2005; and
    
    a U.S.$139 million expense for legal liability and contingencies related to pending lawsuits.
  
    
    a U.S.$262 million expense for institutional relations and cultural projects;
    
    an U.S.$87 million expense for legal liability and contingencies related to pending
lawsuits. See Note 21 to our consolidated financial statements for the year ended
December 31, 2005; and
    
    a U.S.$46 million provision for tax assessments received from the Instituto Nacional
de Seguridade Social (National Social Security Institute, or INSS). See Note 21 to our
consolidated financial statements for the year ended December 31, 2005.
 Income tax (expense) benefit
   Extraordinary gain, net of taxes
  Results of Operations for the year ended December 31, 2004 (2004) compared to the year ended
December 31, 2003 (2003).
   103




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Revenues
    
    
    Value-added (ICMS) and other taxes on sales of products and services and social
security contributions. These taxes increased 14.5% to U.S.$10,906 million for 2004, as
compared to U.S.$9,527 million for 2003, primarily due to the increase in prices and
sales volume of our products and services; and
    
    CIDE, the per-transaction tax due to the Brazilian government, which increased 16.5% to
U.S.$2,620 million for 2004, as compared to U.S.$2,249 million for 2003. This increase
was primarily attributable to the increase in sales volume of our products and services
and to the 4.8% increase in the value of the Real against the U.S. dollar in 2004, as
compared to 2003.
 Cost of sales
  
    
    a U.S.$2,037 million increase in the cost of imports due to higher prices and a greater
volume of imports;
    
    a U.S.$775 million increase in costs associated with a 6.6% increase in our domestic
sales volumes;
    
    a U.S.$644 million increase in costs of certain gas-fired power plants, whose financial
statements we have been consolidating line by line since January 1, 2004, as a result of
the adoption of FIN 46;
    
    a U.S.$556 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.$495 million increase in taxes and charges paid to the Brazilian government
totaling U.S.$3,576 million for 2004, as compared to U.S.$3,081 million for 2003,
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.$1,883 million for 2004, as compared to U.S.$1,625 million for 2003, as a result of
higher international oil prices;
    
    a U.S.$354 million increase in costs associated with the full consolidation of PEPSA and PELSA; and
    
    the 4.8% increase in the value of the Real against the U.S. dollar in 2004, as compared to 2003.
 Depreciation, depletion and amortization
  
    
    an increase of approximately U.S.$331 million resulting from higher depreciation
principally associated with the Dourado, Roncador, Marlim Sul and Jubarte Fields as a
result of increased property, plant and equipment (PP&E) expenditures;
 104




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
    
    an increase of approximately U.S.$156 million resulting from the full consolidation of
PEPSA and PELSA; and
    
    the 4.8% increase in the value of the Real against the U.S. dollar in 2004, as compared
to 2003.
 Exploration, including exploratory dry holes
  
    
    an increase of U.S.$165 million in dry holes expenses, including U.S.$72 million
associated with the write-off of signature bonuses in Angola;
    
    an increase of U.S.$56 million in geological and geophysical expenses;
    
    an increase of approximately U.S.$29 million resulting from the full consolidation of
PEPSA and PELSA; and
    
    the 4.8% increase in the value of the Real against the U.S. dollar in 2004, as compared
to 2003.
  Impairment of oil and gas properties
  Selling, general and administrative expenses
   
    
    an increase of U.S.$368 million in expenses mainly associated with the transportation
costs of oil products. A portion of these expenses were previously classified as cost of
sales in 2003;
    
    an increase of approximately U.S.$33 million in selling expenses resulting from the
full consolidation of PEPSA and PELSA;
    
    an increase of approximately U.S.$33 million in selling expenses resulting from the
charge for doubtful accounts; and
    
    the 4.8% increase in the value of the Real against the U.S. dollar in 2004, as compared
to 2003.
  
    
    the 4.8% increase in the value of the Real against the U.S. dollar in 2004, as compared
to 2003;
    
    an increase of approximately U.S.$110 million in expenses related to technical
consulting services in connection with our increased outsourcing of selected non-core
general activities;
 105




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
    
    an increase of approximately U.S.$45 million resulting from the full consolidation of
PEPSA and PELSA; and
    
    an increase of approximately U.S.$72 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.
 Research and development expenses
  Other operating expenses
   
    
    a U.S.$110 million expense for idle capacity from gas-fired power plants;
    
    a U.S.$85 million expense for unscheduled stoppages of plant and equipment; and
    
    a U.S.$64 million increase in contractual losses from compliance with our ship or pay
commitments with respect to our investments in the OCP pipeline in Ecuador.
  
    
    a U.S.$173 million expense for unscheduled stoppages of plant and equipment;
    
    a U.S.$97 million provision for expected losses on the sale of property, plant and
equipment related to offshore production; and
    
    a U.S.$56 million increase in losses associated with our ship or pay commitments
related to the OCP pipeline in Ecuador.
 106




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Equity in results of non-consolidated companies
  Financial income
   Financial expense
  Monetary and exchange variation on monetary assets and liabilities, net
  Employee benefit expense
  Other taxes
  
    
    an increase of U.S.$37 million in the CPMF, a tax payable in connection with certain
financial transactions;
    
    an increase of U.S.$22 million in taxes related to our international activities;
    
    an increase of U.S.$18 million in the PASEP/COFINS taxes on financial income, due to an
increase in the COFINS tax rate from 3.0% to 7.6% beginning February 1, 2004; and
    
    the 4.8% increase in the value of the Real against the U.S. dollar in 2004, as compared
to 2003.
 107




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Other expenses, net
   
    
    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.$46 million provision for tax assessments received from the Instituto Nacional de
Seguridade Social (National Social Security Institute, or INSS). See Item 8. Financial
Information  Legal Proceedings and Note 21 to our audited consolidated financial
statements for the year ended December 31, 2004.
  
    
    a U.S.$198 million expense for institutional relations and cultural projects;
    
    a U.S.$183 million loss related to our investments in certain gas-fired power plants
resulting from our contractual obligations to cover losses when decreased demand for
power and electricity resulted in lower prices;
    
    a U.S.$130 million expense for legal liability and contingencies related to pending
lawsuits. See Note 21 to our audited consolidated financial statements for the year ended
December 31, 2004;
    
    a U.S.$114 million expense for a lower of cost or market adjustment with respect to
turbines we expected to use in connection with our gas-fired power projects, but which we
did not use for such projects; and
    
    a U.S.$55 million provision for tax assessments received from the INSS.
 Income tax (expense) benefit
   Cumulative effect of change in accounting principle
  
 Business Segments
  108




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##### Table of Contents



SELECTED FINANCIAL DATA BY SEGMENT
 For the Year Ended December 31,2005
    
    
    2004
    
    
    2003(In millions of U.S. dollars)Exploration, Development and Production
(Exploration and Production Segment)Net revenues to third parties (1)(3)
    
    $
    1,874
    
    
    $
    2,487
    
    
    $
    2,369Intersegment net revenues
    
    
    26,950
    
    
    
    16,384
    
    
    
    13,329Total net operating revenues (3)
    
    
    28,824
    
    
    
    18,871
    
    
    
    15,698Depreciation, depletion and amortization
    
    
    (1,571
    )
    
    
    (1,322
    )
    
    
    (955
    )Net income
    
    
    9,542
    
    
    
    5,961
    
    
    
    5,504Capital expenditures
    
    
    6,127
    
    
    
    4,574
    
    
    
    3,658Property, plant and equipment, net
    
    
    25,869
    
    
    
    20,458
    
    
    
    16,742Refining, Transportation and Marketing (Supply Segment)Net revenues to third parties (1)(2)(3)
    
    $
    33,229
    
    
    $
    20,981
    
    
    $
    17,405Intersegment net revenues
    
    
    12,286
    
    
    
    7,786
    
    
    
    6,585Total net operating revenues (2)(3)
    
    
    45,515
    
    
    
    28,767
    
    
    
    23,990Depreciation, depletion and amortization
    
    
    (644
    )
    
    
    (548
    )
    
    
    (397
    )Net income (2)
    
    
    2,422
    
    
    
    854
    
    
    
    1,743Capital expenditures
    
    
    1,749
    
    
    
    1,367
    
    
    
    1,451Property, plant and equipment, net
    
    
    8,085
    
    
    
    6,333
    
    
    
    4,980Distribution (Distribution Segment)Net revenues to third parties (1)
    
    $
    15,642
    
    
    $
    10,328
    
    
    $
    7,876Intersegment net revenues
    
    
    225
    
    
    
    159
    
    
    
    138Total net operating revenues
    
    
    15,867
    
    
    
    10,487
    
    
    
    8,014Depreciation, depletion and amortization
    
    
    (100
    )
    
    
    (59
    )
    
    
    (29
    )Net income
    
    
    318
    
    
    
    200
    
    
    
    138Capital expenditures
    
    
    207
    
    
    
    47
    
    
    
    106Property, plant and equipment, net
    
    
    1,236
    
    
    
    1,011
    
    
    
    442Natural Gas and Power (Gas and Energy Segment)Net revenues to third parties (1)
    
    $
    1,932
    
    
    $
    1,547
    
    
    $
    1,234Intersegment net revenues
    
    
    1,232
    
    
    
    474
    
    
    
    245Total net operating revenues
    
    
    3,164
    
    
    
    2,021
    
    
    
    1,479Depreciation, depletion and amortization
    
    
    (105
    )
    
    
    (100
    )
    
    
    (87
    )Net income (loss)
    
    
    (473
    )
    
    
    154
    
    
    
    (196
    )Capital expenditures
    
    
    694
    
    
    
    782
    
    
    
    694Property, plant and equipment, net
    
    
    5,326
    
    
    
    4,506
    
    
    
    4,174International (International Segment)Net revenues to third parties (1) (2)
    
    $
    3,647
    
    
    $
    3,085
    
    
    $
    2,030Intersegment net revenues
    
    
    881
    
    
    
    519
    
    
    
    129Total net operating revenues (2)
    
    
    4,528
    
    
    
    3,604
    
    
    
    2,159Depreciation, depletion and amortization
    
    
    (461
    )
    
    
    (423
    )
    
    
    (288
    )Net income (2)
    
    
    308
    
    
    
    243
    
    
    
    96Capital expenditures
    
    
    1,175
    
    
    
    727
    
    
    
    480Property, plant and equipment, net
    
    
    4,655
    
    
    
    4,160
    
    
    
    4,181
 
 (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)
    
    Net operating revenues and the cost of sales with respect to 2003 were reclassified from the
International segment to the Supply segment in relation to certain offshore operations. There
was no significant impact on the results reported for these segments. 109




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(3)
    
    In 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.
 
 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 its financing costs to us.
  
    
    sales of crude oil and oil products to us;
    
    limited sales of crude oil and oil products to affiliates and third parties; and
    
    financial income derived from 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
  110




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Results of Operations
 Results of operations for the year ended December 31, 2005 compared to the year ended December
31, 2004.
 Net Loss
  Sales of Crude Oil and Oil Products and Services
  Cost of Sales
  Selling, General and Administrative Expenses
  Financial Income
  Financial Expense
  Results of operations for the year ended December 31, 2004 (2004) compared to the year ended
December 31, 2003 (2003).
 111




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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
  112




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Financing Strategy
  Government Regulation
 Plano de Dispêndio Global
   Sources of Funds
        113




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##### Table of Contents



Long-Term Debt
 Banco Nacional de Desenvolvimento Econômico e Social
  Notes
    
    Principal Amount10.00% Notes due 2006
    
    U.S.$
    
    250 million6.625% 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 6.75% Senior Trust Certificates due 2010(3)
    
    U.S.$
    
    95 millionPIFCos Floating Rate Senior Trust Certificates due 2010(3)
    
    U.S.$
    
    55 millionPIFCos 9.750% Notes due 2011(2)
    
    U.S.$
    
    600 millionPIFCos 6.60% Senior Trust Certificates due 2011(3)
    
    U.S.$
    
    300 millionPIFCos Floating Rate Senior Trust Certificates due 2013(3)
    
    U.S.$
    
    300 millionPIFCos 4.750% Senior Exchangeable Notes due 2007(4)
    
    U.S.$
    
    338 millionPIFCos Global Step-up Notes due 2008(5)
    
    U.S.$
    
    400 millionPIFCos 9.125% Global Notes due 2013(6)
    
    U.S.$
    
    750 millionPIFCos 8.375% Global Notes due 2018(6)
    
    U.S.$
    
    750 millionPIFCos 3.748% Senior Trust Certificates due 2013(3)
    
    U.S.$
    
    200 millionPIFCos 6.436% Senior Trust Certificates due 2015(3)
    
    U.S.$
    
    550 million9.375% Notes due 2013(7)
    
    U.S.$
    
    100 millionPIFCos 7.75% Global Notes due 2014(2)
    
    U.S.$
    
    600 million
 
 (1)
    
    Euro; U.S.$1.1825 = EUR 1.00 at December 31, 2005.(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)
    
    Issued by PIFCo in connection with a financing program supported by future sales of bunker
fuel and fuel oil.(4)
    
    Issued by PIFCo on October 17, 2002 in connection with Petrobras acquisition of Perez
Companc S.A.(5)
    
    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.(6)
    
    Issued by PIFCo for general corporate purposes, with support from us through a standby
purchase agreement.(7)
    
    Issued by PEPSA on October 31, 2003 to cancel existing liabilities. 114




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Project Finance
     U.S.$ million2007
    
    
    1,0812008
    
    
    7432009
    
    
    6742010
    
    
    5002011
    
    
    862012 and thereafter
    
    
    545Total
    
    
    3,629
 PIFCo
 Overview
   Sources of Funds
   115




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##### Table of Contents




    
    U.S.$1,550 million in three series of long-term Senior Notes due between 2007 and 2011.
    
    U.S.$329.9 million 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
 116




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##### Table of Contents



Participaciones  PEPSA). In exchange, it 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.$400 million in Global Step-up Notes due April 2008. The notes will bear interest
from March 31, 2003 at a rate of 9.00% per annum until April 1, 2006 and at a rate of
12.375% per annum thereafter, with interest payable semiannually. On April 1, 2006, the
noteholders will have the right to exercise a put option and require us to repurchase the
notes, in whole or in part, at par value. PIFCo used the proceeds from this issuance
principally to repay trade-related debt and inter-company loans. It has subsequently
repurchased U.S.$210.9 million of these Notes.
    
    U.S.$2,115.3 million in Global Notes, of which U.S.$500 million were issued on July
2, 2003 and are due July 2013. The notes will bear interest at the rate of 9.125% per
annum, payable semiannually. 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 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 annum, payable semiannually. 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 annum, 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.
    
    U.S.$679.4 million (U.S.$410.6 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.$300
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.
    117




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CURRENT AND LONG-TERM DEBT
 December 31, 2005
    
    
    December 31, 2004(in millions of U.S. dollars)Current
    
    
    Long-term
    
    
    Current
    
    
    Long-termFinancing institutions
    
    
    U.S.$493.6
    
    
    
    U.S.$1,194.7
    
    
    
    U.S.$535.8
    
    
    
    U.S.$631.8Senior notes
    
    
    53.5
    
    
    
    1,550.0
    
    
    
    53.5
    
    
    
    1,550.0Global Step-up Notes
    
    
    9.0
    
    
    
    400.0
    
    
    
    9.0
    
    
    
    400.0Global Notes
    
    
    26.3
    
    
    
    2,115.3
    
    
    
    26.3
    
    
    
    2,124.2Sale of rights to future receivables
    
    
    567.4
    
    
    
    679.4
    
    
    
    153.7
    
    
    
    1,561.9Senior exchangeable notes
    
    
    3.7
    
    
    
    329.9
    
    
    
    3.8
    
    
    
    329.9Assets related to export prepayment
to be offset against sales of
rights to future receivables
    
    
    (150.0
    )
    
    
    (150.0
    )
    
    
    
    
    
    
    (300.0
    )Repurchased securities
    
    
    (4.7
    )
    
    
    (210.9
    )
    
    
    (3.2
    )
    
    
    (146.0
    )U.S.$998.8
    
    
    
    U.S.$5,908.4
    
    
    
    U.S.$778.9
    
    
    
    U.S.$6,151.8
 Extinguished securities
  Off Balance Sheet Arrangements
  Uses of Funds
    118




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##### Table of Contents



For the Year EndedDecember 31,2005
    
    
    2004
    
    
    2003(in millions of U.S. dollars)Exploration and Production
    
    $
    6,127
    
    
    $
    4,574
    
    
    $
    3,658Supply
    
    
    1,749
    
    
    
    1,367
    
    
    
    1,451Distribution
    
    
    207
    
    
    
    47
    
    
    
    106Gas and Energy
    
    
    694
    
    
    
    782
    
    
    
    694InternationalExploration and Production
    
    
    1,067
    
    
    
    666
    
    
    
    428Supply
    
    
    79
    
    
    
    43
    
    
    
    18Distribution
    
    
    16
    
    
    
    12
    
    
    
    33Gas and Energy
    
    
    13
    
    
    
    6
    
    
    
    1Corporate
    
    
    413
    
    
    
    221
    
    
    
    162Total
    
    $
    10,365
    
    
    $
    7,718
    
    
    $
    6,551
       reais
 119




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##### Table of Contents



Contractual obligations
    Payments due by period(in millions of U.S. dollars)Less than
    
    1-3
    
    3-5
    
    More thanTotal
    
    1 year
    
    years
    
    years
    
    5 yearsContractual Obligations:Balance Sheet Items:Long-Term Debt Obligations
    
    
    13,881
    
    
    
    2,378
    
    
    
    3,556
    
    
    
    2,253
    
    
    
    5,694Pension Fund Obligations(1)
    
    
    14,422
    
    
    
    722
    
    
    
    1,638
    
    
    
    1,956
    
    
    
    10,106Project Finance Obligations
    
    
    6,042
    
    
    
    2,413
    
    
    
    1,824
    
    
    
    1,174
    
    
    
    631Capital (Finance) Lease Obligations
    
    
    1,254
    
    
    
    239
    
    
    
    443
    
    
    
    399
    
    
    
    173Total Balance Sheet Items
    
    
    35,599
    
    
    
    5,752
    
    
    
    7,461
    
    
    
    5,782
    
    
    
    16,604Other Long-Term Contractual Obligations:Natural Gas Ship-or-Pay Commitments
    
    
    6,933
    
    
    
    488
    
    
    
    983
    
    
    
    991
    
    
    
    4,471Contract Service Obligations
    
    
    7,343
    
    
    
    3,124
    
    
    
    3,264
    
    
    
    640
    
    
    
    315Natural Gas Supply Agreements
    
    
    7,275
    
    
    
    769
    
    
    
    1,260
    
    
    
    966
    
    
    
    4,280Operating Lease Obligations
    
    
    5,917
    
    
    
    1,712
    
    
    
    2,688
    
    
    
    1,162
    
    
    
    355Purchase Obligations
    
    
    1,546
    
    
    
    765
    
    
    
    715
    
    
    
    66
    
    
    
    International Purchase Obligations
    
    
    2,999
    
    
    
    421
    
    
    
    616
    
    
    
    554
    
    
    
    1,408Total Other Long-Term Contractual Obligations
    
    
    32,013
    
    
    
    7,279
    
    
    
    9,526
    
    
    
    4,379
    
    
    
    10,829Total
    
    
    67,612
    
    
    
    13,031
    
    
    
    16,987
    
    
    
    10,161
    
    
    
    27,433
 
 (1)
    
    There are pension plan assets in the amount of U.S.$9,413 million that guarantee the
pension plan obligations. These assets are presented as a reduction to the net actuarial
liabilities. See Note 18 to our audited consolidated financial statements for the year ended
December 31, 2005.    Payments due by period(in millions of U.S. dollars)less than
    
    1-3
    
    3-5
    
    more thanTotal
    
    1 year
    
    years
    
    years
    
    5 yearsContractual ObligationsLong-term debt
    
    
    6,460.0
    
    
    
    551.6
    
    
    
    2,094.8
    
    
    
    535.5
    
    
    
    3,278.1Notes Payable  Long term
    
    
    3,734.1
    
    
    
    
    
    
    
    
    
    
    
    3,734.1Purchase obligations  Long term
    
    
    3,041.1
    
    
    
    473.4
    
    
    
    946.7
    
    
    
    893.5
    
    
    
    727.5Total
    
    
    13,235.2
    
    
    
    1,025.0
    
    
    
    3,041.5
    
    
    
    5,163.1
    
    
    
    4,005.6
 Risk Management Activities
  120




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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
  121




---



##### Table of Contents



Impact of Oil and Gas Reserves and Prices on Testing for Impairment
    Pension and Other Post-Retirement Benefits
     122




---



##### Table of Contents



Litigation, Tax Assessments and Other Contingencies
  Asset Retirement Obligations and Environmental Remediation
   123




---



##### Table of Contents



Derivative transactions
   
 Impact of New Accounting Standards
         124




---



##### Table of Contents



125




---



##### Table of Contents



Research and Development
       126




---



##### 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;
    
    conflicts in the Middle East; and
    
    speculation in the oil futures market.
  Oil products prices
  127




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##### Table of Contents



Refining
    
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
 Directors and Senior Management
 Directors of Petrobras
    128




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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 2007
    
    Casa Civil  Praça dos Três
Poderes  Palácio do Planalto  4o
andar Salas 57 e 58  Cep
70.150-900  Brasília  DFSilas Rondeau Cavalcanti
Silva (1)
    
    Dec. 15, 1952
    
    Member
    
    March 2007
    
    Esplanada dos Ministérios  Bloco
U  8o andar  Sala 809  Cep
70.065-900 Brasília  DFGuido Mantega (1)
    
    Apr. 7, 1949
    
    Member
    
    March 2007
    
    Esplanada dos Ministérios, Bloco P
- 5o andar  Ministério
da Fazenda  Cep 70.048-900 -
Brasília  DFJ.S. Gabrielli de Azevedo (1)
    
    Oct. 3, 1949
    
    Member
    
    March 2007
    
    Avenida República do Chile, no 65
23o andar Centro  20031-912
Rio de Janeiro  RJGleuber Vieira (1)
    
    Dec. 08, 1933
    
    Member
    
    March 2007
    
    Rua Álvaro Moreira, 129,
Condomínio Jardim Marapendi
22630-160, Barra da Tijuca  RJArthur Antonio Sendas (1)
    
    Jun. 16, 1935
    
    Member
    
    March 2007
    
    Rodovia Presidente Dutra, 4.674
25565-350 , São João de Meriti  RJRoger Agnelli (1)
    
    May 3, 1959
    
    Member
    
    March 2007
    
    Rua Graça Aranha, 26  18o andar 
Rio de Janeiro  RJ  CEP 
20.030-900Fabio Colletti Barbosa (2)
    
    Oct. 3, 1954
    
    Member
    
    March 2007
    
    Av. Paulista, 1374, 3o andar,
Cerqueira César 01310-916, São
Paulo  SPJorge Gerdau Johannpeter (3)
    
    Dec. 8, 1936
    
    Member
    
    March 2007
    
    Av. Farrapos, 1811
90220-005, Porto Alegre  RS
 
 (1)
    
    Appointed by the controlling shareholder.(2)
    
    Appointed by the minority common shareholders.(3)
    
    Appointed by the minority preferred shareholders. Dilma Vana Rousseff  Fundação de Economia e Estatística do Estado do Rio Grande do Sul
 Silas Rondeau Cavalcante Silva 
 129




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##### Table of Contents



Guido
Mantega
 J.S. Gabrielli de Azevedo 
 Gleuber Vieira  Departamento de Ensino e Pesquisa
 Arthur
Antonio Sendas  Grupo Sendas
 Roger Agnelli
 130




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##### Table of Contents



Fabio Colletti Barbosa  Federação Brasileira das Associações de Bancos Editora Abril Conselho de Desenvolvimento
Econômico e Social do Governo Federal
 Jorge Gerdau Johannpeter  th
 Directors of PIFCo
   131




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##### Table of Contents



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.
 Executive Officers of Petrobras
  132




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##### Table of Contents



EXECUTIVE OFFICERS OF PETROBRAS
 Name
    
    Date of Birth
    
    Position
    
    Current TermJ. S. 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
 Guilherme de Oliveira Estrella. Instituto Brasileiro de
Petróleo e Gás
 133




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##### Table of Contents



Instituto Brasileiro de Petróleo e Gás
 Paulo Roberto Costa
 Ildo Luis Sauer
 Nestor Cuñat Cerveró Programa de Termelétricas Presidência da
Comercializadora Brasileira de Energía Emergencial
 Executive Officers of PIFCo
   134




---



##### Table of Contents



EXECUTIVE OFFICERS OF PIFCo
 Year ofName
    
    Date of Birth
    
    Position
    
    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
    
    2000Isabela Cesário de Faria Alvim
    
    July 11, 1961
    
    Secretary
    
    2004
 Daniel
Lima de Oliveira
 Guilherme Pontes Galvão França.
 Sérvio Túlio da Rosa Tinoco.
 Mariângela Monteiro Tizatto.
 Nilton Antônio de Almeida Maia.
 Gerson Luiz Gonçalves.
 135




---



##### Table of Contents



Isabela Cesário de Faria Alvim
 
 Compensation
 Petrobras
    PIFCo
  
 Indemnification of Officers and Directors
  
 Share Ownership
 Petrobras
  136




---



##### 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
  137




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##### Table of Contents



Other Advisory Committees
 Comitê de Remuneração e Sucessão Comitê de Meio Ambiente
 
 PIFCo
  
 Employees and Labor Relations
 Petrobras
     138




---



##### Table of Contents



139




---



##### Table of Contents



PIFCo
  
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
 Major Shareholders
 Petrobras
    140




---



##### Table of Contents



Common
    
    
    
    
    
    PreferredShareholder
    
    Shares
    
    %
    
    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
    
    
    1.812.625
    
    
    
    0.1
    
    
    
    778.908
    
    
    
    0.1
    
    
    
    2.591.533
    
    
    
    0.1All directors and executive officers as a Group (15 persons)
    
    
    9,907
    
    
    
    
    
    
    
    26,928
    
    
    
    
    
    
    
    36,835
    
    
    
    Others
    
    
    1.074.346.748
    
    
    
    42.3
    
    
    
    1.561.648.525
    
    
    
    84.4
    
    
    
    2.635.995.273
    
    
    
    60.1Total
    
    
    2,536,673,672
    
    
    
    100
    %
    
    
    1,849,478,028
    
    
    
    100
    %
    
    
    4,386,151,700
    
    
    
    100
    %
  PIFCo
  
 Petrobras Related Party Transactions
 Board of Directors
    Brazilian Government and PETROS
  141




---



##### Table of Contents



PIFCo Related Party Transactions
   142




---



##### Table of Contents



December 31, 2005
    
    December 31, 2004Assets
    
    Liabilities
    
    Assets
    
    Liabilities(in millions of U.S. dollars)AssetsCurrentAccounts receivable
    
    
    8,681.1
    
    
    
    
    
    
    
    7,788.1
    
    
    
    Notes receivable(1)
    
    
    3,329.3
    
    
    
    
    
    
    
    1,598.5
    
    
    
    Marketable Securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exports Prepayment
    
    
    414.5
    
    
    
    
    
    
    
    152.9
    
    
    
    Others
    
    
    1.5
    
    
    
    
    
    
    
    
    
    
    
    Other non currentMarketable securities
    
    
    2,165.7
    
    
    
    
    
    
    
    1,814.9
    
    
    
    Notes receivable
    
    
    580.0
    
    
    
    
    
    
    
    338.4
    
    
    
    Exports prepayment
    
    
    529.4
    
    
    
    
    
    
    
    1,261.8
    
    
    
    LiabilitiesCurrentTrade accounts Payable
    
    
    
    
    
    
    950.7
    
    
    
    
    
    
    
    562.1Notes payable(1)
    
    
    
    
    
    
    4,346.1
    
    
    
    
    
    
    
    2,881.5Unearned income
    
    
    
    
    
    
    176.5
    
    
    
    
    
    
    
    131.3Long-term liabilitiesNotes payable (1)
    
    
    
    
    
    
    3,734.1
    
    
    
    
    
    
    
    3,553.5Total
    
    
    15,701.5
    
    
    
    9,207.4
    
    
    
    12,954.6
    
    
    
    7,128.4Current
    
    
    12,426.4
    
    
    
    5,473.3
    
    
    
    9,539.5
    
    
    
    3,574.9Long-term
    
    
    3,275.1
    
    
    
    3,734.1
    
    
    
    3,415.1
    
    
    
    3,553.5
 
 (1)
    
    PIFCos notes receivable from and payable to Petrobras bear interest at LIBOR plus 3.0% per
year. 143




---



##### Table of Contents



Year ended December 31,2005
    
    2004
    
    2003(in millions of U.S. dollars)Income
    
    Expense
    
    Income
    
    Expense
    
    Income
    
    ExpenseSales of crude oil and oil
products and servicesPETROBRAS
    
    
    7,025.7
    
    
    
    
    
    
    
    6,374.3
    
    
    
    
    
    
    
    3,618.8
    
    
    
    REFAP S.A.
    
    
    1,405.1
    
    
    
    
    
    
    
    972.1
    
    
    
    
    
    
    
    794.3
    
    
    
    Petrobras America, Inc.PAI
    
    
    5,487.9
    
    
    
    
    
    
    
    2,734.5
    
    
    
    
    
    
    
    1,109.9
    
    
    
    BR Distribuidora
    
    
    1.8
    
    
    
    
    
    
    
    3.5
    
    
    
    
    
    
    
    4.3
    
    
    
    EG3 S.A.
    
    
    
    
    
    
    
    
    
    
    12.9
    
    
    
    
    
    
    
    10.0
    
    
    
    PESA
    
    
    49.5
    
    
    
    
    
    
    
    21.1
    
    
    
    
    
    
    
    5.8
    
    
    
    Petrobras Bolívia
    
    
    4.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cost of salesPETROBRAS
    
    
    
    
    
    
    (5,931.6
    )
    
    
    
    
    
    
    (3,236.7
    )
    
    
    
    
    
    
    (1,670.0
    )Petrobras America, Inc.PAI
    
    
    
    
    
    
    (459.4
    )
    
    
    
    
    
    
    (375.3
    )
    
    
    
    
    
    
    (767.9
    )Braspetro
Oil Services CompanyBRASOIL
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (74.7
    )
    
    
    
    
    
    
    (87.6
    )Companhia MEGA S.A.
    
    
    
    
    
    
    (367.5
    )
    
    
    
    
    
    
    (299.4
    )
    
    
    
    
    
    
    (235.9
    )Eg3 S.A.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60.4
    )
    
    
    
    
    
    
    (74.5
    )PESA
    
    
    
    
    
    
    (187.8
    )
    
    
    
    
    
    
    (72.1
    )
    
    
    
    
    
    
    PIB.B.V.
    
    
    
    
    
    
    (152.0
    )
    
    
    
    
    
    
    (158.3
    )
    
    
    
    
    
    
    PEBIS
    
    
    
    
    
    
    (164.3
    )
    
    
    
    
    
    
    (110.3
    )
    
    
    
    
    
    
    REFAP
    
    
    
    
    
    
    (109.9
    )
    
    
    
    
    
    
    (4.1
    )
    
    
    
    
    
    
    Ecuadortlc S.A.
    
    
    
    
    
    
    (211.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Petrobras Colômbia
    
    
    
    
    
    
    (196.0
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Others
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15.5
    )Selling, general and
administrative expensePETROBRAS
    
    
    
    
    
    
    (158.0
    )
    
    
    
    
    
    
    (97.0
    )
    
    
    
    
    
    
    (17.1
    )Others
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    (1.7
    )
    
    
    
    
    
    
    Financial incomePETROBRAS
    
    
    580.9
    
    
    
    
    
    
    
    466.1
    
    
    
    
    
    
    
    313.7
    
    
    
    REFAP S.A.
    
    
    24.2
    
    
    
    
    
    
    
    16.8
    
    
    
    
    
    
    
    8.8
    
    
    
    Braspetro Oil
CompanyBOC
    
    
    15.6
    
    
    
    
    
    
    
    11.0
    
    
    
    
    
    
    
    14.4
    
    
    
    Braspetro
Oil Services CompanyBRASOIL
    
    
    11.5
    
    
    
    
    
    
    
    15.4
    
    
    
    
    
    
    
    9.4
    
    
    
    PIB.B.V.
    
    
    82.8
    
    
    
    
    
    
    
    56.7
    
    
    
    
    
    
    
    51.5
    
    
    
    Marlim
    
    
    
    
    
    
    
    
    
    
    1.8
    
    
    
    
    
    
    
    3.3
    
    
    
    Others
    
    
    50.5
    
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    0.6
    
    
    
    Financial expensePETROBRAS
    
    
    
    
    
    
    (409.5
    )
    
    
    
    
    
    
    (168.4
    )
    
    
    
    
    
    
    (111.0
    )Others
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    (0.6
    )
    
    
    
    
    
    
    (0.9
    )Other Income and ExpensePNBV
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    Total
    
    
    14,739.9
    
    
    
    (8,348.2
    )
    
    
    10,687.0
    
    
    
    (4,659.5
    )
    
    
    5,944.8
    
    
    
    (2,980.4
    )
 144




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##### Table of Contents



ITEM 8. FINANCIAL INFORMATION
 
 Petrobras Consolidated Statements and Other Financial Information
  
 PIFCo Consolidated Statements and Other Financial Information
  
 Legal Proceedings
 Petrobras
  PROVISIONS BY TYPE OF CLAIM(1)
 As of December 31,2005
    
    2004(in millions of U.S.dollars)Labor claims
    
    
    7
    
    
    
    26Tax claims
    
    
    87
    
    
    
    73Civil claims
    
    
    79
    
    
    
    123Commercial claims and other contingencies
    
    
    62
    
    
    
    35Total
    
    
    235
    
    
    
    257
 
 (1)
    
    Excludes provisions for contractual contingencies and tax assessments by the INSS.   Civil claims
 Programa Nacional de Desestatização
 145




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##### Table of Contents



ação popular
    146




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##### Table of Contents



Labor Claims
    Delegacia da Receita Federal
 147




---



##### Table of Contents



Delegacia da Receita Federal
   Environmental Claims
   Superior Tribunal de Justiça
   148




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##### Table of Contents




    
    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. 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; 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. We await a final decision on the merits.
   
    
    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$3,700 million 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;
and
    
    the Federal Police of 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.
   149




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##### Table of Contents



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 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 as in R$1 million because our
exploration license in Campos Basin had allegedly expired. We are contesting this fine
through administrative proceedings.
    
    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, which decision would be subject to further appeals.
    União dos
Defensores da Terra
 PIFCo
  
 Dividend Distribution
 Petrobras
  For the Year Ended December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(in millions of U.S. dollars)Dividends paid to shareholders
    
    
    2.104
    
    
    
    1.785
    
    
    
    941
    
    
    
    999
    
    
    
    1.702Dividends paid to minority interests
    
    
    6
    
    
    
    24
    
    
    
    2
    
    
    
    19
    
    
    
    232.110
    
    
    
    1.809
    
    
    
    943
    
    
    
    1.018
    
    
    
    1.725
  150




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##### Table of Contents



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)
   Price Information
  reais
 151




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##### Table of Contents



COMMON SHARES TRADED ON BOVESPAU.S. dollars
    
    Average Number ofreaisper Common Share
    
    per Common Share
    
    Common SharesHigh
    
    Low
    
    High
    
    Low
    
    Traded per Day2001
    
    
    17.54
    
    
    
    11.88
    
    
    
    7.44
    
    
    
    4.57
    
    
    
    1,511,6362002
    
    
    15.78
    
    
    
    9.47
    
    
    
    6.73
    
    
    
    2.45
    
    
    
    1,630,5642003
    
    
    21.13
    
    
    
    11.50
    
    
    
    7.26
    
    
    
    3.22
    
    
    
    1,290,2362004
    
    
    26.93
    
    
    
    19.14
    
    
    
    10.09
    
    
    
    5.99
    
    
    
    1,330,1922005
    
    
    41.80
    
    
    
    25.40
    
    
    
    18.37
    
    
    
    9.39
    
    
    
    973,1312004:First Quarter
    
    
    24.30
    
    
    
    21.25
    
    
    
    8.50
    
    
    
    7.24
    
    
    
    1,205,632Second Quarter
    
    
    25.33
    
    
    
    19.14
    
    
    
    8.77
    
    
    
    5.99
    
    
    
    1,587,788Third Quarter
    
    
    26.00
    
    
    
    20.50
    
    
    
    9.08
    
    
    
    6.66
    
    
    
    1,369,444Fourth Quarter
    
    
    26.93
    
    
    
    24.63
    
    
    
    10.09
    
    
    
    8.61
    
    
    
    1,153,7922005: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
    
    
    
    1,092,1952005:November
    
    
    38.14
    
    
    
    33.77
    
    
    
    17.04
    
    
    
    15.53
    
    
    
    804,980December
    
    
    41.30
    
    
    
    38.55
    
    
    
    18.37
    
    
    
    16.83
    
    
    
    590,9432006:January
    
    
    51.69
    
    
    
    42.30
    
    
    
    23.34
    
    
    
    18.09
    
    
    
    1,078,319February
    
    
    51.30
    
    
    
    44.77
    
    
    
    23.14
    
    
    
    20.80
    
    
    
    1,213,922March
    
    
    49.39
    
    
    
    45.00
    
    
    
    23.34
    
    
    
    20.68
    
    
    
    1,009,600April
    
    
    51.78
    
    
    
    47.22
    
    
    
    24.48
    
    
    
    22.07
    
    
    
    937,050May
    
    
    55.40
    
    
    
    48.80
    
    
    
    26.85
    
    
    
    20.64
    
    
    
    1,433,145
 152




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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 Day2001
    
    
    15.53
    
    
    
    11.24
    
    
    
    7.28
    
    
    
    4.48
    
    
    
    4,315,4002002
    
    
    15.08
    
    
    
    8.79
    
    
    
    6.43
    
    
    
    2.27
    
    
    
    4,269,4802003
    
    
    19.37
    
    
    
    10.40
    
    
    
    6.67
    
    
    
    2.90
    
    
    
    4,584,2042004
    
    
    24.47
    
    
    
    16.80
    
    
    
    9.17
    
    
    
    5.26
    
    
    
    4,825,4762005
    
    
    37.21
    
    
    
    22.74
    
    
    
    16.50
    
    
    
    8.37
    
    
    
    4,578,8772004:First Quarter
    
    
    22.05
    
    
    
    19.45
    
    
    
    7.74
    
    
    
    6.64
    
    
    
    5,264,380Second Quarter
    
    
    22.13
    
    
    
    16.80
    
    
    
    7.66
    
    
    
    5.26
    
    
    
    5,293,356Third Quarter
    
    
    23.46
    
    
    
    18.50
    
    
    
    8.21
    
    
    
    6.01
    
    
    
    4,297,276Fourth Quarter
    
    
    24.47
    
    
    
    22.40
    
    
    
    9.17
    
    
    
    7.93
    
    
    
    4,458,0082005: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
    
    
    
    6,257,0822005November
    
    
    34.55
    
    
    
    30.85
    
    
    
    15.53
    
    
    
    14.07
    
    
    
    4,961,148December
    
    
    37.21
    
    
    
    35.00
    
    
    
    16.50
    
    
    
    15.24
    
    
    
    3,698,1102006:January
    
    
    47.00
    
    
    
    38.09
    
    
    
    21.22
    
    
    
    16.29
    
    
    
    5,375,848February
    
    
    46.75
    
    
    
    40.80
    
    
    
    21.11
    
    
    
    18.94
    
    
    
    7,258,169March
    
    
    45.50
    
    
    
    40.90
    
    
    
    21.50
    
    
    
    18.75
    
    
    
    6,278,227April
    
    
    46.69
    
    
    
    43.29
    
    
    
    22.13
    
    
    
    20.26
    
    
    
    5,604,167May
    
    
    48.15
    
    
    
    42.50
    
    
    
    23.33
    
    
    
    17.96
    
    
    
    7,473,100
   153




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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 representingOne Common Share
    
    One Common Share
    
    One CommonHigh
    
    Low
    
    High
    
    Low
    
    Share Traded per Day2001
    
    
    69.46
    
    
    
    47.58
    
    
    
    30.06
    
    
    
    18.14
    
    
    
    838,9392002
    
    
    63.58
    
    
    
    36.91
    
    
    
    27.30
    
    
    
    9.55
    
    
    
    1,223,5092003
    
    
    84.77
    
    
    
    46.21
    
    
    
    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
    
    
    
    1,754,3012004:First Quarter
    
    
    98.74
    
    
    
    85.82
    
    
    
    34.11
    
    
    
    29.28
    
    
    
    1,546,458Second Quarter
    
    
    101.45
    
    
    
    77.77
    
    
    
    35.14
    
    
    
    24.35
    
    
    
    1,641,156Third Quarter
    
    
    103.48
    
    
    
    81.99
    
    
    
    36.05
    
    
    
    26.86
    
    
    
    1,106,792Fourth Quarter
    
    
    107.74
    
    
    
    98.05
    
    
    
    40.37
    
    
    
    34.43
    
    
    
    1,205,8972005: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
    
    
    
    2,267,7052005:November
    
    
    151.94
    
    
    
    134.74
    
    
    
    67.79
    
    
    
    62.06
    
    
    
    1,896,714December
    
    
    166.45
    
    
    
    155.80
    
    
    
    73.40
    
    
    
    67.16
    
    
    
    1,426,2002006:January
    
    
    209.26
    
    
    
    173.71
    
    
    
    94.50
    
    
    
    74.72
    
    
    
    2,247,450February
    
    
    203.72
    
    
    
    179.02
    
    
    
    91.65
    
    
    
    83.11
    
    
    
    2,300,853March
    
    
    196.45
    
    
    
    180.85
    
    
    
    92.83
    
    
    
    82.69
    
    
    
    2,257,935April
    
    
    211.15
    
    
    
    188.51
    
    
    
    99.53
    
    
    
    88.44
    
    
    
    2,252,600May
    
    
    220.63
    
    
    
    191.98
    
    
    
    106.92
    
    
    
    82.39
    
    
    
    3,591,950
 154




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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 representingOne Preferred Share
    
    One Preferred Share
    
    One Preferred ShareHigh
    
    Low
    
    High
    
    Low
    
    Traded per Day2001
    
    
    62.05
    
    
    
    44.76
    
    
    
    29.38
    
    
    
    17.70
    
    
    
    533,8832002
    
    
    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
    
    
    
    1,184,7892004:First Quarter
    
    
    88.26
    
    
    
    78.53
    
    
    
    30.99
    
    
    
    26.76
    
    
    
    797,526Second Quarter
    
    
    88.31
    
    
    
    66.59
    
    
    
    30.59
    
    
    
    20.85
    
    
    
    925,295Third Quarter
    
    
    92.92
    
    
    
    73.43
    
    
    
    32.37
    
    
    
    24.11
    
    
    
    693,322Fourth Quarter
    
    
    97.94
    
    
    
    89.27
    
    
    
    36.70
    
    
    
    31.67
    
    
    
    859,1412005: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
    
    
    
    1,317,1772005:November
    
    
    138.69
    
    
    
    122.74
    
    
    
    61.88
    
    
    
    56.09
    
    
    
    1,149,305December
    
    
    150.34
    
    
    
    141.65
    
    
    
    66.20
    
    
    
    60.61
    
    
    
    796,5242006:January
    
    
    190.88
    
    
    
    157.93
    
    
    
    86.20
    
    
    
    67.75
    
    
    
    1,305,980February
    
    
    184.82
    
    
    
    162.61
    
    
    
    83.85
    
    
    
    75.49
    
    
    
    1,267,253March
    
    
    181.93
    
    
    
    164.50
    
    
    
    85.97
    
    
    
    74.98
    
    
    
    1,368,157April
    
    
    190.55
    
    
    
    172.89
    
    
    
    89.82
    
    
    
    81.02
    
    
    
    1,267,942May
    
    
    193.04
    
    
    
    167.47
    
    
    
    93.55
    
    
    
    71.67
    
    
    
    1,842,509
 Markets
   Companhia Brasileira de Liquidação e Custódia
 Sistema de Negociação Assistida por
Computador
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companhia aberta companhia fechada
 156




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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
   157




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
    
    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 Corporation Law defines realized net profits as the amount of net profits
that exceeds 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
  158




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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.
     Shareholders Meetings
  Diário Oficial da União Jornal do Commercio Gazeta Mercantil Valor Econômico
  159




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Voting Rights
   
    
    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;
 160




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
    
    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;
    
    merger into another company or consolidation with another company, subject to the
conditions set forth in the Brazilian Corporation Law;
    
    participation in a group of companies subject to the conditions set forth in the
Brazilian Corporation 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 Corporation 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.
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Preemptive Rights
    Redemption and Rights of Withdrawal
  162




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
    
    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 Corporation Law; or
    
    to participate in a centralized group of companies as defined under the Brazilian
Corporation 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 Corporation Law;
    
    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 Corporation Law, subject to, the conditions set forth in the Brazilian
Corporation Law.
 incorporação de ações
  Other Shareholders Rights
  
    
    the right to participate in the distribution of profits;
 163




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
    
    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 Corporation 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
Corporation Law.
 Liquidation
  Conversion Rights
  Liability of Our Shareholders for Further Capital Calls
  Form and Transfer
   Dispute Resolution
 Câmara de Arbitragem do Mercado
  164




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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
    
 Transfer of Control
  
 Disclosure of Shareholder Ownership
  
 Memorandum and Articles of Association of PIFCo
 Register
  165




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Objects and Purposes
   Directors
    Rights and Obligations of Shareholders
         166




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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.
 There are no general limitations on the rights to own shares specified by the articles.
 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.
   
    
    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.
  167




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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;
    
    sub-divide 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
  Accounts
  Amendment of the Articles
  Transfer out of Jurisdiction
  168




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Material Contracts
 Petrobras
      
    
    signature bonuses;
    
    royalties;
    
    special participation charge; and
    
    rentals for the occupation or retention of areas.
    PIFCo
  169




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Exchange Controls
 Petrobras
      
    
    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.
  reais
  170




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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 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
   171




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172




---



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reais
  173




---



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reais reais reais reais
         174




---



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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
 175




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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
 176




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reais
        177




---



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
    
    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.
    
 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
    178




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Brazil Taxation
  PROSPECTIVE 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
  179




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PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX CONSEQUENCES OF
INVESTING IN THE NOTES, INCLUDING THE EFFECTS OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
  de minimis
  
 180




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Documents on Display
    181




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PIFCo Senior Notes
  Indentures
  
    
    pay all amounts owed by it under the indenture and the notes when such amounts are
due, and perform each of its other obligations under the various transaction documents
entered into by it in connection with the issuance of the notes;
    
    comply with all applicable laws and maintain all necessary governmental approvals;
    
    pay all uncontested taxes;
    
    preserve its existence and maintain our properties;
    
    maintain adequate insurance;
    
    maintain its books and records in accordance with U.S. GAAP;
    
    maintain an office or agency in New York for the purpose of service of process;
    
    ensure that the notes continue to be its senior obligations;
    
    use proceeds from the issuance of the notes for specified purposes, namely the
purchase of oil imports and the repayment of short-term indebtedness;
    
    give notice to the trustee of any default or event of default under the indenture or
certain currency control events in Brazil;
    
    provide certain financial statements to the trustee;
    
    take actions to maintain the trustees or the noteholders rights under the relevant
transaction documents;
    
    maintain the required coverage amount;
    
    provide certain information to noteholders required by Rule 144A; and
    
    replace the trustee upon any resignation or removal thereof.
  
    
    undertake certain mergers, consolidations or similar transactions;
    
    create certain liens on its assets or pledge its assets; and
 182




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
    
    enter into certain transactions with its affiliates.
   
    
    failure to pay principal when due;
    
    failure to pay interest within 30 days of any interest payment date;
    
    inaccuracy of any representation or warranty made by PIFCo or us in any transaction
document or in certain specified other certificates when made;
    
    breach of a covenant or agreement in the indenture, the standby purchase agreement
and other relevant transaction documents by PIFCo or us;
    
    acceleration of or failure to make a payment on PIFCos indebtedness or our
indebtedness or the indebtedness of one of our material subsidiaries that equals or
exceeds a specified threshold;
    
    a final judgment against PIFCo, us or a material subsidiary of ours that equals or
exceeds a specified threshold;
    
    certain events of bankruptcy, liquidation or insolvency of PIFCo, us or any material
subsidiary of ours;
    
    certain events relating to the unenforceability of the relevant transaction
documents against PIFCo or us;
    
    the cancellation, termination (other than as permitted in the indenture) or
unenforceability of the letter of credit unless an equivalent letter of credit is
promptly provided or an equivalent amount in U.S. dollars is promptly deposited in the
reserve account;
    
    we cease to own at least 51% of PIFCos outstanding voting shares; and
    
    we or PIFCo shall fail to comply with our obligations with respect to the required coverage amount.
 Standby Purchase Agreements
  
    
    the amount of any interest or other amounts not paid by PIFCo in accordance with the
terms of the notes and the indenture;
    
    the entire principal amount of the notes in the event PIFCo fails to do so at their
expected maturity or earlier upon any redemption or acceleration of the PIFCo Senior
Notes prior to the expected maturity date or, if extended, on the final maturity date;
and
    
    except where certain events have occurred which limit our ability to convert and
transfer reaisand U.S. dollars, interest on all of the foregoing amounts at a default
rate, for payments beyond the date that PIFCo was required to make payment under the
indenture in respect of the full principal amount of the Senior Notes.
 183




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pari passu
 Letters of Credit/Political Risk Insurance
   
 PIFCo Global Notes
    Indenture
   
    
    pay all amounts owed by PIFCo under the indenture and the notes when such amounts are due;
 184




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
    
    perform all other obligations under the indenture;
    
    comply with all applicable laws;
    
    maintain all necessary governmental approvals;
    
    pay all uncontested taxes;
    
    preserve its existence;
    
    maintain its properties;
    
    maintain adequate insurance;
    
    maintain its books and records in accordance with U.S. GAAP;
    
    maintain an office or agent in New York for the purpose of service of process and
maintain a paying agent located in the United States;
    
    ensure that the notes continue to be its senior obligations;
    
    use proceeds from the issuance of the notes for specified purposes, namely the
purchase of oil imports and the repayment of short-term indebtedness
    
    give notice to the trustee of any default or event of default under the indenture;
    
    provide certain financial statements to the trustee;
    
    take actions to maintain the trustees or the noteholders rights under the relevant
transaction documents; and
    
    replace the trustee upon any resignation or removal thereof.
  
    
    undertake certain mergers, consolidations or similar transactions;
    
    create certain liens on PIFCos assets or pledge PIFCos assets; and
    
    enter into certain transactions with PIFCos affiliates.
   
    
    failure to pay principal within three calendar days of its due date;
    
    failure to pay interest within 30 days of any interest payment date;
    
    specified representations or warranties made by us in the standby purchase agreement
not being true when made;
 185




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##### Table of Contents




    
    breach of a covenant or agreement in the indenture or the standby purchase agreement
by PIFCo or us, if not remedied within 60 calendar days;
    
    acceleration of or failure to make a payment on PIFCos indebtedness or our
indebtedness or the indebtedness of a material subsidiary of ours that equals or
exceeds U.S.$100 million;
    
    a final judgment against PIFCo, us or a material subsidiary of ours that equals or
exceeds U.S.$100 million;
    
    certain events of bankruptcy, liquidation or insolvency of PIFCo, us or any material
subsidiary of ours;
    
    certain events relating to the unenforceability of the notes, the indenture or the
standby purchase agreement against PIFCo or us; and
    
    we cease to own at least 51% of PIFCos outstanding voting shares.
 Standby Purchase Agreement
  
    
    the amount of any interest or other amounts not paid by PIFCo in accordance with the
terms of the notes and the indenture;
    
    the entire principal amount of the notes in the event PIFCo fails to do so at their
expected maturity or earlier upon any redemption or acceleration of the notes prior to
the expected maturity date;
    
    the entire principal amount of the notes in the event that a holder of a note
requires PIFCo to repurchase such note in accordance with the terms of the indenture;
and
    
    interest on all of the foregoing amounts at the rate of 1% above the note rate (the
default rate), for payments beyond the date that PIFCo was required to make such
payments under the indenture.
 pari passu
  
 Sale of Future Receivables
   186




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The Prepayment Agreement
  The Master Export Contract
  
    
    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:
      187




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Sales Agreements
  
    
    Offtake Contracts with Citibank, N.A, as Offtaker, pursuant to which PFL agreed to
deliver and sell, and Citibank N.A. agreed to accept and purchase, during each
quarterly delivery period, Eligible Products with a value equal to at least 1.1 times
the amounts scheduled to be paid in respect of the Series 2001 and 2003 Senior Trust
Certificates on the payment date immediately following the end of such quarterly
delivery period.
    
    A Product Sale Agreement with PAI, which may purchase Eligible Products from time to
time from PFL and sell them to buyers primarily in the United States and its
territories; and
    
    Sales to other purchasers of Eligible Products in the open market.
 The Receivables Purchase Agreement
  188




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
    
    Certain receivables to be generated by the sale of Eligible Products to the
Offtaker, following an agreed schedule under the Offtake Contracts.
    
    Certain additional receivables to be generated by the sale of Eligible Products to
other buyers following an agreed schedule; and
    
    If applicable, certain receivables in each quarterly period equal to any taxes
incurred on payments in respect of outstanding Senior Trust Certificates, together with
certain other amounts.
 The Insurance and Reimbursement Agreements
   
 ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
 
 Petrobras
 General
  reais
 reais
 Risk Management
   189




---



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Commodity Price Risk
       190




---



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force majeure
     191




---



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PetrobarsQuantity
    
    
    
    
    
    +10%(1.000.00
    
    Fair Value(1)
    
    SensitivityDerivative maturing 2006-2019
    
    0m3/day)
    
    (U.S.$ millions)
    
    (U.S.$ millions)Gas price Collar
    
    
    11.5
    
    
    
    547
    
    
    
    58
 
 (1)
    
    Fair value represents an estimate of gain or loss that would be realized if contracts were
settled at the balance sheet date.   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 2005
    
    bbl)
    
    millions)
    
    (1,000 bbl)
    
    millions)
    
    (1,000 bbl)
    
    millions)
    
    (1,000 bbl)
    
    millions
    
    millions)OptionsBuy contracts
    
    
    0
    
    
    
    0,000
    
    
    
    0
    
    
    
    0,000
    
    
    
    0
    
    
    
    0,000
    
    
    
    0
    
    
    
    0,000
    
    
    
    0,000Sell contracts
    
    
    0
    
    
    
    
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0FuturesBuy contracts
    
    
    0
    
    
    
    0,000
    
    
    
    197
    
    
    
    -0,144
    
    
    
    0
    
    
    
    0,000
    
    
    
    197
    
    
    
    -0,144
    
    
    
    -0,018Sell contracts
    
    
    0
    
    
    
    
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0SwapsReceive
variable/ pay
fixed
    
    
    6,888
    
    
    
    -0,655
    
    
    
    0
    
    
    
    0,000
    
    
    
    138
    
    
    
    0,150
    
    
    
    7,026
    
    
    
    -0,505
    
    
    
    -0,135Receive fixed/
pay variable
    
    
    8,149
    
    
    
    
    
    
    
    0
    
    
    
    
    
    
    
    138
    
    
    
    
    
    
    
    8,287Options maturing
2006-2007(2)Sell contracts
    
    
    26,000
    
    
    
    -0,0006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    -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
  192




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reais reais Taxa de Juros de Longo Prazo
  real real
  Total Debt Portfolio2005
    
    2004Realdenominated
    
    
    9.6
    %
    
    
    11.3
    %o/w fixed rate
    
    
    0.0
    
    
    
    0.0o/w floating rate
    
    
    9.6
    
    
    
    11.3Dollar denominated
    
    
    87.3
    
    
    
    84.5o/w fixed rate
    
    
    44.7
    
    
    
    41.2o/w floating rate (includes short-term debt)
    
    
    42.6
    
    
    
    43.3Other currencies (primarily Yen)
    
    
    3.1
    
    
    
    4.2o/w fixed rate
    
    
    2.8
    
    
    
    3.8o/w floating rate
    
    
    0.3
    
    
    
    0.4Total
    
    
    100.0
    %
    
    
    100.0
    %
 Total Debt Portfolio2005
    
    2004Floating Rate DebtRealdenominated
    
    
    9.6
    %
    
    
    11.3
    %Foreign Currency Denominated
    
    
    42.9
    
    
    
    43.7Fixed Rated Debt
    
    
    
    
    
    
    0.0Realdenominated
    
    
    0.0
    
    
    
    45.0Foreign Currency Denominated
    
    
    47.5
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 Total Debt Portfolio2005
    
    2004U.S. dollars
    
    
    87.32
    %
    
    
    84.52
    %Euro
    
    
    0.86
    
    
    
    1.56Japanese Yen
    
    
    2.20
    
    
    
    2.64Brazilian reais
    
    
    9.62
    
    
    
    11.28Total
    
    
    100.0
    %
    
    
    100.00
    %
 193




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Certificado de Depósito Interbancário
 Fair Valueas ofDecember 31,2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011-2022
    
    Total
    
    2005Debt in EURO:Fixed rate debt
    
    
    2.4
    
    
    
    165.5
    
    
    
    0.8
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    168.9
    
    
    
    172.3Average interest
rate
    
    
    7.6
    %
    
    
    6.8
    %
    
    
    7.6
    %
    
    
    7.6
    %
    
    
    
    
    
    
    Variable rate debt
    
    
    8.4
    
    
    
    5.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13.8
    
    
    
    14.0Average interest
rate
    
    
    8.0
    %
    
    
    7.6
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Debt in Japanese Yen:Fixed rate debt
    
    
    74.8
    
    
    
    67.2
    
    
    
    98.1
    
    
    
    54.3
    
    
    
    32.2
    
    
    
    95.9
    
    
    
    422.6
    
    
    
    425.7Average interest
rate
    
    
    8.2
    %
    
    
    6.8
    %
    
    
    6.5
    %
    
    
    6.3
    %
    
    
    8.2
    %
    
    
    5.7
    %Variable rate debt
    
    
    1.8
    
    
    
    1.9
    
    
    
    1.9
    
    
    
    10.0
    
    
    
    18.6
    
    
    
    9.5
    
    
    
    43.7
    
    
    
    50.1Average interest
rate
    
    
    9.6
    %
    
    
    9.6
    %
    
    
    9.6
    %
    
    
    9.6
    %
    
    
    9.6
    %
    
    
    9.6
    %Debt in U.S. dollars:Fixed rate debt
    
    
    1,556.5
    
    
    
    1,611.7
    
    
    
    1,231.0
    
    
    
    556.6
    
    
    
    617.1
    
    
    
    3,897.5
    
    
    
    9,470.5
    
    
    
    10,390.1Average interest
rate
    
    
    9.8
    %
    
    
    8.8
    %
    
    
    10.4
    %
    
    
    8.8
    %
    
    
    9.8
    %
    
    
    8.8
    %Variable rate debt
    
    
    3,091.6
    
    
    
    1,287.4
    
    
    
    975.7
    
    
    
    947.4
    
    
    
    930.1
    
    
    
    1,806.5
    
    
    
    9,020.6
    
    
    
    9,514.0Average interest
rate
    
    
    8.7
    %
    
    
    8.2
    %
    
    
    8.2
    %
    
    
    8.4
    %
    
    
    8.7
    %
    
    
    7.9
    %Debt in Brazilian reais:Variable rate debt
    
    
    293.9
    
    
    
    204.1
    
    
    
    206.3
    
    
    
    126.5
    
    
    
    526.7
    
    
    
    678.9
    
    
    
    2,036.4
    
    
    
    2,200.2Average interest
rate
    
    
    16.5
    %
    
    
    16.4
    %
    
    
    16.3
    %
    
    
    16.1
    %
    
    
    16.5
    %
    
    
    16.3
    %Debt in Argentine Pesos:Fixed rate debt
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.5
    
    
    
    0.5Average interest
rate
    
    
    16.4
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total debt obligations
    
    
    5,030.0
    
    
    
    3,343.2
    
    
    
    2,495.8
    
    
    
    1,695.1
    
    
    
    2,124.7
    
    
    
    6,488.3
    
    
    
    21,177.0
    
    
    
    22,766.9
  194




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##### Table of Contents



Notional amount of debt (U.S.$ in millions)
    
    
    159.1Contractual rates(EUR/USD)Interest paymentsFloor
    
    
    0.94Ceiling
    
    
    1.18Final principal paymentsFloor
    
    
    1.0725Ceiling
    
    
    1.1800Fair value as of December 31, 2005 (U.S.$ in millions)Put Option
    
    
    (1.4
    )Call Option
    
    
    11.8Expiration date
    
    
    2007
 
 PIFCo
     195




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CALENDAR YEAR OF EXPECTED MATURITY DATE FOR DEBT
(in thousands of U.S. dollars, except for percentages)
 December 31, 2005
 Fair ValueDebt Obligations
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012-2018
    
    Total
    
    Dec 31, 2005Debt in U.S.Dollars:Fixed rate debt
    
    
    903,938
    
    
    
    707,872
    
    
    
    67,718
    
    
    
    58,738
    
    
    
    659,808
    
    
    
    2,315,592
    
    
    
    4,713,666
    
    
    
    5,304,531Average interest rate
    
    
    7.68
    %
    
    
    9.09
    %
    
    
    8.12
    %
    
    
    8.13
    %
    
    
    9.19
    %
    
    
    8.30
    %Variable rate debt
    
    
    153,500
    
    
    
    329,500
    
    
    
    149,500
    
    
    
    259,500
    
    
    
    20,500
    
    
    
    282,250
    
    
    
    1,194,750
    
    
    
    1,203,745Average interest rate
    
    
    5.42
    %
    
    
    5.34
    %
    
    
    6.16
    %
    
    
    6.19
    %
    
    
    6.61
    %
    
    
    6.74
    %Total debt
obligations
    
    
    1,057,438
    
    
    
    1,037,372
    
    
    
    217,218
    
    
    
    318,238
    
    
    
    680,308
    
    
    
    2,597,842
    
    
    
    5,908,416
    
    
    
    6,508,276
 December 31,
    
    December 31,Total Debt Portfolio
    
    2005
    
    2004U.S. Dollars:Fixed rate debt
    
    
    79.8
    %
    
    
    84.5
    %Floating rate debt
    
    
    20.2
    %
    
    
    15.5
    %Total debt portfolio
    
    
    100.0
    %
    
    
    100.0
    %
 80
 
 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
  196




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##### Table of Contents



significant deficiency significant deficiency significant deficiency significant deficiency
 
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
  
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 Principal Accountant Fees
 
 Audit and Non-Audit Fees
 Petrobras
  Year ended December 31,2005
    
    2004(in thousand of reais)Audit fees
    
    
    10,876
    
    
    
    14,999Audit-related fees
    
    
    2,973
    
    
    
    2,320Tax fees
    
    
    584
    
    
    
    423All other fees
    
    
    468
    
    
    
    357Total fees
    
    
    14,901
    
    
    
    18,099
  197




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##### Table of Contents



PIFCo
 The following table sets forth the fees billed to PIFCo by its independent auditors Ernst & Young
Auditores Independentes S/S, during the fiscal years ended December 31, 2004 and 2005:
 Year ended December 31,2005
    
    2004(in thousand of reais)Audit fees
    
    
    157.7
    
    
    
    126Audit-related fees
    
    
    
    
    
    
    3Total fees
    
    
    157.7
    
    
    
    129
  
 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
  198




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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)).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)).
 199




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##### Table of Contents



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
    
    
    Indenture, dated as of May 9, 2001, between Petrobras
International Finance Company and The Bank of New York, as
Trustee, relating to the 9 ?% 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 ?% 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 ?% 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
 200




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##### Table of Contents



No.
    
    Descriptionthe 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
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)).2.21
    
    
    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
 201




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##### Table of Contents



No.
    
    Descriptionas 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)).2.33
    
    
    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
 202




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##### Table of Contents



No.
    
    DescriptionExchange
Commission on June 30, 2005 (File No. 333-14168)).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 between 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.
 203




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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.
 204




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ABBREVIATIONS
 Bbl
    
    BarrelBcf
    
    Billion cubic feetBoe
    
    Barrels of oil equivalentBpd
    
    Barrels per dayCf
    
    Cubic feetKm
    
    KilometerKm2
    
    Square kilometersMbbl
    
    Thousand barrelsMboe
    
    Thousand barrels of oil equivalentMmbtu
    
    Million British thermal unitsMbpd
    
    Thousand barrels per dayMcf
    
    Thousand cubic feetMMbbl
    
    Million barrelsMMboe
    
    Million barrels of oil equivalentMMcf
    
    Million cubic feetMMcmd
    
    Million cubic meters per dayMMcfpd
    
    Million cubic feet per dayMMscfd
    
    Million standard cubic feet per daym3
    
    Cubic meters
 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 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
 205




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##### Table of Contents



SIGNATURES
  Petróleo Brasileiro S.A.  PETROBRASBy:
    /s/ J. S. GABRIELLI DE AZEVEDOName:
    J. S. Gabrielli de AzevedoTitle:
    Chief Executive OfficerBy:
    /s/ ALMIR GUILHERME BARBASSAName:
    Almir Guilherme BarbassaTitle:
    Chief Financial Officer 206




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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 207




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##### Table of Contents








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##### Table of Contents



Consolidated Financial Statements
 Petróleo Brasileiro S.A.  PETROBRAS and subsidiaries
 December 31, 2005, 2004 and 2003,
together with Report of Independent
Registered Public Accounting Firm




---



##### 



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-122.
    
    Summary of significant accounting policies
    
    F-133.
    
    Accounting changes
    
    F-304.
    
    Income taxes
    
    F-355.
    
    Cash and cash equivalents
    
    F-396.
    
    Marketable securities
    
    F-407.
    
    Accounts receivable, net
    
    F-418.
    
    Inventories
    
    F-429.
    
    Recoverable taxes
    
    F-4310.
    
    Property, plant and equipment, net
    
    F-4411.
    
    Investments in non-consolidated companies and other investments
    
    F-4912.
    
    Petroleum and alcohol account  receivable from Federal Government
    
    F-5213.
    
    Financings
    
    F-5314.
    
    Financial income (expenses)
    
    F-6115.
    
    Project financings
    
    F-6116.
    
    Capital lease obligations
    
    F-6717.
    
    Thermoelectric plant obligations
    
    F-6818.
    
    Employees postretirement benefits and other benefits
    
    F-7119.
    
    Shareholders equity
    
    F-8520.
    
    Domestic and international acquisitions
    
    F-9221.
    
    Commitments and contingencies
    
    F-10022.
    
    Derivative instruments, hedging and risk management activities
    
    F-11223.
    
    Natural gas derivative contract
    
    F-11624.
    
    Financial instruments
    
    F-11825.
    
    Segment information
    
    F-11926.
    
    Related party transactions
    
    F-13227.
    
    Accounting for suspended exploratory wells
    
    F-13428.
    
    Subsequent event
    
    F-137Supplementary Information on Oil and Gas Exploration and Production
    
    F-138




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 PETRÓLEO BRASILEIRO S.A.  PETROBRAS
 1.
    
    We have audited the accompanying consolidated balance sheets of PETRÓLEO BRASILEIRO S.A -
PETROBRAS and its subsidiaries as of December 31, 2005 and 2004, and the related consolidated
statements of income, changes in shareholders equity and cash flows, for each of the three
years in the period ended December 31, 2005. These financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits.2.
    
    We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Companys internal control over
financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.3.
    
    In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of PETRÓLEO BRASILEIRO S.A.  PETROBRAS and its
subsidiaries as of December 31, 2005 and 2004, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended December 31,
2005, in conformity with U.S. generally accepted accounting principles.
 F-1




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##### Table of Contents



4.
    
    As discussed in Note 3, the Company made the following accounting changes: Effective December
31, 2004 the Company adopted a new actuarial methodology respective to the calculation of the
Accumulated Benefit Obligation under FAS 87; Effective January 1, 2003, the Company adopted
SFAS No. 143  Accounting for Asset Retirement Obligation (SFAS 143). Additionally, at
December 31, 2003 the Company adopted FIN 46 Consolidation of Variable Interest Entities.
 
 
 
 F-2




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 As of December 31,2005
    
    2004AssetsCurrent assetsCash and cash equivalents (Note 5)
    
    
    9,871
    
    
    
    6,856Marketable securities (Note 6)
    
    
    456
    
    
    
    388Accounts receivable, net (Note 7)
    
    
    6,184
    
    
    
    4,285Inventories (Note 8)
    
    
    5,305
    
    
    
    4,904Deferred income tax (Note 4)
    
    
    473
    
    
    
    325Recoverable taxes (Note 9)
    
    
    2,087
    
    
    
    1,475Advances to suppliers
    
    
    652
    
    
    
    422Other current assets
    
    
    750
    
    
    
    77125,778
    
    
    
    19,426Property, plant and equipment, net (Note 10)
    
    
    45,920
    
    
    
    37,020Investments in non-consolidated companies and other investments (Note 11)
    
    
    1,810
    
    
    
    1,862Other assetsAccounts receivable, net (Note 7)
    
    
    607
    
    
    
    411Advances to suppliers
    
    
    489
    
    
    
    580Petroleum and alcohol account  receivable
from Federal Government (Note 12)
    
    
    329
    
    
    
    282Government securities
    
    
    364
    
    
    
    326Marketable securities (Note 6)
    
    
    129
    
    
    
    313Restricted deposits for legal proceedings and guarantees (Note 21 (a))
    
    
    775
    
    
    
    699Recoverable taxes (Note 9)
    
    
    639
    
    
    
    536Goodwill (Note 20)
    
    
    237
    
    
    
    211Prepaid expenses
    
    
    246
    
    
    
    271Fair value asset of gas hedge (Note 23)
    
    
    547
    
    
    
    635Other assets
    
    
    755
    
    
    
    5105,117
    
    
    
    4,774Total assets
    
    
    78,625
    
    
    
    63,082
 F-3




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 As of December 31,2005
    
    2004Liabilities and shareholders equityCurrent liabilitiesTrade accounts payable
    
    
    3,838
    
    
    
    3,284Income tax
    
    
    211
    
    
    
    271Taxes payable, other than income taxes
    
    
    3,212
    
    
    
    2,298Short-term debt (Note 13)
    
    
    950
    
    
    
    547Current portion of long-term debt (Note 13)
    
    
    1,428
    
    
    
    1,199Current portion of project financings (Note 15)
    
    
    2,413
    
    
    
    1,313Current portion of capital lease obligations (Note 16)
    
    
    239
    
    
    
    266Accrued interest
    
    
    221
    
    
    
    204Dividends and interest on capital payable (Note 19)
    
    
    3,068
    
    
    
    1,900Contingencies (Note 21)
    
    
    72
    
    
    
    131Payroll and related charges
    
    
    918
    
    
    
    618Advances from customers
    
    
    609
    
    
    
    290Employees postretirement benefits obligation  pension (Note 18)
    
    
    206
    
    
    
    166Other payables and accruals
    
    
    770
    
    
    
    84118,155
    
    
    
    13,328Long-term liabilitiesLong-term debt (Note 13)
    
    
    11,503
    
    
    
    12,145Project financings (Note 15)
    
    
    3,629
    
    
    
    4,399Employees postretirement benefits obligation  pension (Note 18)
    
    
    3,627
    
    
    
    2,915Employees postretirement benefits obligation  health care (Note 18)
    
    
    3,004
    
    
    
    2,137Capital lease obligations (Note 16)
    
    
    1,015
    
    
    
    1,069Deferred income tax (Note 4)
    
    
    2,159
    
    
    
    1,558Provision for abandonment (Note 3 (a))
    
    
    842
    
    
    
    403Thermoelectric liabilities (Note 3 (b))
    
    
    
    
    
    
    1,095Contingencies (Note 21)
    
    
    238
    
    
    
    233Deferred purchase incentive (Note 23)
    
    
    144
    
    
    
    153Other liabilities
    
    
    318
    
    
    
    26426,479
    
    
    
    26,371Minority interest
    
    
    1,074
    
    
    
    877Shareholders equityShares authorized and issued (Note 19)Preferred share - 2005 and 2004  1,849,478,028 shares
    
    
    4,772
    
    
    
    4,772Common share - 2005 and 2004  2,536,673,672 shares
    
    
    6,929
    
    
    
    6,929Capital reserve (Note 19)
    
    
    159
    
    
    
    134Retained earningsAppropriated (Note 19)
    
    
    20,095
    
    
    
    11,526Unappropriated
    
    
    11,968
    
    
    
    13,199Accumulated other comprehensive incomeCumulative translation adjustments
    
    
    (9,432
    )
    
    
    (12,539
    )Amounts not recognized as net periodic pension cost, net of tax (Note 18)
    
    
    (1,930
    )
    
    
    (1,975
    )Unrealized gains on available for sale securities, net of tax
    
    
    356
    
    
    
    46032,917
    
    
    
    22,506Total liabilities and shareholders equity
    
    
    78,625
    
    
    
    63,082
 F-4




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 Year ended December 31,2005
    
    2004
    
    2003Sales of products and services
    
    
    74,065
    
    
    
    51,954
    
    
    
    42,690Less:Value-added and other taxes on sales and services
    
    
    (14,694
    )
    
    
    (10,906
    )
    
    
    (9,527
    )Contribution of intervention in the economic domain
charge  CIDE
    
    
    (3,047
    )
    
    
    (2,620
    )
    
    
    (2,249
    )Net operating revenues
    
    
    56,324
    
    
    
    38,428
    
    
    
    30,914Cost of sales
    
    
    29,828
    
    
    
    21,279
    
    
    
    15,533Depreciation, depletion and amortization
    
    
    2,926
    
    
    
    2,481
    
    
    
    1,785Exploration, including exploratory dry holes
    
    
    1,009
    
    
    
    613
    
    
    
    512Selling, general and administrative expenses
    
    
    4,474
    
    
    
    2,901
    
    
    
    2,091Impairment (Note 10 (d))
    
    
    156
    
    
    
    65
    
    
    
    70Research and development expenses
    
    
    399
    
    
    
    248
    
    
    
    201Other operating expenses
    
    
    582
    
    
    
    259
    
    
    
    326Total costs and expenses
    
    
    39,374
    
    
    
    27,846
    
    
    
    20,518Equity in results of non-consolidated companies (Note 11)
    
    
    139
    
    
    
    172
    
    
    
    141Financial income (Note 14)
    
    
    710
    
    
    
    956
    
    
    
    634Financial expenses (Note 14)
    
    
    (1,189
    )
    
    
    (1,733
    )
    
    
    (1,247
    )Monetary and exchange variation on monetary assets and
liabilities, net (Note 14)
    
    
    248
    
    
    
    450
    
    
    
    509Employee benefit expense for non-active participants (Note 18)
    
    
    (994
    )
    
    
    (650
    )
    
    
    (595
    )Other taxes
    
    
    (373
    )
    
    
    (440
    )
    
    
    (333
    )Other expenses, net
    
    
    (899
    )
    
    
    (402
    )
    
    
    (732
    )(2,358
    )
    
    
    (1,647
    )
    
    
    (1,623
    )Income before income taxes, minority interest, extraordinary
item and accounting change
    
    
    14,592
    
    
    
    8,935
    
    
    
    8,773
 F-5




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 Year ended December 31,2005
    
    2004
    
    2003Income tax expense (Note 4)Current
    
    
    (4,223
    )
    
    
    (2,114
    )
    
    
    (2,599
    )Deferred
    
    
    (218
    )
    
    
    (117
    )
    
    
    (64
    )(4,441
    )
    
    
    (2,231
    )
    
    
    (2,663
    )Minority interest in results of consolidated subsidiaries
    
    
    35
    
    
    
    (514
    )
    
    
    (248
    )Income before extraordinary item and effect of change in
accounting principle
    
    
    10,186
    
    
    
    6,190
    
    
    
    5,862Extraordinary gain net of tax (Note 11 (c))
    
    
    158
    
    
    
    
    
    
    
    Cumulative effect of change in accounting principle, net of
taxes (Note 3 (a))
    
    
    
    
    
    
    
    
    
    
    697Net income for the year
    
    
    10,344
    
    
    
    6,190
    
    
    
    6,559Net income applicable to each class of sharesCommon
    
    
    5,982
    
    
    
    3,580
    
    
    
    3,797Preferred
    
    
    4,362
    
    
    
    2,610
    
    
    
    2,762Net income for the year
    
    
    10,344
    
    
    
    6,190
    
    
    
    6,559Basic and diluted earnings per share (Note 19 (c))
Common and preferredBefore effect of extraordinary item and change in
accounting principle
    
    
    2.32
    
    
    
    1.41
    *
    
    
    1.34
    *After effect of extraordinary item and change in
accounting principle
    
    
    2.36
    
    
    
    1.41
    *
    
    
    1.50
    *Basic and diluted earnings per ADSBefore effect of extraordinary item and change in
accounting principle
    
    
    9.28
    
    
    
    5.64
    *
    
    
    5.36
    *After effect of extraordinary item and change in
accounting principle
    
    
    9.44
    
    
    
    5.64
    *
    
    
    6.00
    *Weighted average number of shares outstandingCommon
    
    
    2,536,673,672
    
    
    
    2,536,673,672
    *
    
    
    2,536,673,672
    *Preferred
    
    
    1,849,478,028
    
    
    
    1,849,478,028
    *
    
    
    1,849,478,028
    *
 
 *
    
    Restated for the effect of the 4-1 stock split on September 1, 2005 (See Note 19). F-6




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 Year ended December 31,2005
    
    2004
    
    2003Cash flows from operating activitiesNet income for the year
    
    
    10,344
    
    
    
    6,190
    
    
    
    6,559Adjustments to reconcile net income to net cash provided by
operating activitiesDepreciation, depletion and amortization
    
    
    2,926
    
    
    
    2,481
    
    
    
    1,785Dry hole costs
    
    
    597
    
    
    
    520
    
    
    
    207Loss on property, plant and equipment
    
    
    292
    
    
    
    231
    
    
    
    119Minority interest in results of consolidated subsidiaries
    
    
    (35
    )
    
    
    514
    
    
    
    248Amortization of deferred purchase incentive
    
    
    (8
    )
    
    
    (16
    )
    
    
    Deferred income taxes
    
    
    218
    
    
    
    117
    
    
    
    64Foreign exchange and monetary loss (gain)
    
    
    140
    
    
    
    23
    
    
    
    (138
    )Accretion expense  asset retirement obligation
    
    
    51
    
    
    
    33
    
    
    
    43Impairment of oil and gas properties
    
    
    156
    
    
    
    65
    
    
    
    70Provision for uncollectible accounts
    
    
    118
    
    
    
    164
    
    
    
    36Cumulative effect of change in accounting principle, net of
taxes
    
    
    
    
    
    
    
    
    
    
    (697
    )Equity in the results of non-consolidated companies
    
    
    (139
    )
    
    
    (172
    )
    
    
    (141
    )Financial income on gas hedge operations
    
    
    170
    
    
    
    (466
    )
    
    
    Others
    
    
    
    
    
    
    39
    
    
    
    21Decrease (increase) in assetsAccounts receivable
    
    
    (1,510
    )
    
    
    (1,027
    )
    
    
    (488
    )Petroleum and alcohol account
    
    
    (9
    )
    
    
    (20
    )
    
    
    (15
    )Interest receivable on government securities
    
    
    3
    
    
    
    (38
    )
    
    
    (157
    )Inventories
    
    
    38
    
    
    
    (1,527
    )
    
    
    244Advances to suppliers
    
    
    (167
    )
    
    
    3
    
    
    
    562Prepaid expenses
    
    
    38
    
    
    
    (70
    )
    
    
    96Recoverable taxes
    
    
    (540
    )
    
    
    (578
    )
    
    
    (365
    )Others
    
    
    82
    
    
    
    173
    
    
    
    90Increase (decrease) in liabilitiesTrade accounts payable
    
    
    275
    
    
    
    838
    
    
    
    (156
    )Payroll and related charges
    
    
    215
    
    
    
    (20
    )
    
    
    222Taxes payable, other than income taxes
    
    
    566
    
    
    
    (65
    )
    
    
    35Income taxes payable
    
    
    (56
    )
    
    
    120
    
    
    
    25Employees postretirement benefits obligation  pension
    
    
    647
    
    
    
    353
    
    
    
    268Employees postretirement benefits obligation  health care
    
    
    557
    
    
    
    380
    
    
    
    267Accrued interest
    
    
    8
    
    
    
    18
    
    
    
    62Contingencies
    
    
    (65
    )
    
    
    81
    
    
    
    (78
    )Abandonment
    
    
    325
    
    
    
    (171
    )
    
    
    (29
    )Other liabilities
    
    
    (122
    )
    
    
    (18
    )
    
    
    (190
    )Net cash provided by operating activities
    
    
    15,115
    
    
    
    8,155
    
    
    
    8,569
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 Year ended December 31,2005
    
    2004
    
    2003Cash flows from investing activitiesAdditions to property, plant and equipment
    
    
    (10,365
    )
    
    
    (7,718
    )
    
    
    (6,551
    )Investment in non-consolidated companies
    
    
    (71
    )
    
    
    (142
    )
    
    
    (73
    )Investment in marketable securities
    
    
    169
    
    
    
    678
    
    
    
    (1,266
    )Acquisition of Liquigás Distribuidora S.A.
    
    
    
    
    
    
    (511
    )
    
    
    Dividends received from non-consolidated companies
    
    
    60
    
    
    
    53
    
    
    
    13Restricted deposits for legal proceedings
    
    
    
    
    
    
    (103
    )
    
    
    (188
    )Effect on cash from merger with PEPSA
    
    
    
    
    
    
    
    
    
    
    231Effect on cash of FIN 46 adoption
    
    
    
    
    
    
    
    
    
    
    1,049Net cash used in investing activities
    
    
    (10,207
    )
    
    
    (7,743
    )
    
    
    (6,785
    )Cash flows from financing activitiesShort-term debt, net issuances and repayments
    
    
    (1,058
    )
    
    
    (680
    )
    
    
    321Proceeds from issuance and draw-down of long-term debt
    
    
    1,697
    
    
    
    1,457
    
    
    
    4,629Principal payments of long-term debt
    
    
    (1,120
    )
    
    
    (1,160
    )
    
    
    (1,315
    )Proceeds from project financings
    
    
    1,492
    
    
    
    971
    
    
    
    1,132Payments of project financings
    
    
    (1,392
    )
    
    
    (652
    )
    
    
    (1,340
    )Payment of capital lease obligations
    
    
    (134
    )
    
    
    (331
    )
    
    
    (108
    )Dividends paid to shareholders
    
    
    (2,104
    )
    
    
    (1,785
    )
    
    
    (941
    )Dividends paid to minority interests
    
    
    (6
    )
    
    
    (24
    )
    
    
    (2
    )Net cash provided by (used) in financing activities
    
    
    (2,625
    )
    
    
    (2,204
    )
    
    
    2,376Increase (decrease) in cash and cash equivalents
    
    
    2,283
    
    
    
    (1,792
    )
    
    
    4,160Effect of exchange rate changes on cash and cash equivalents
    
    
    732
    
    
    
    304
    
    
    
    883Cash and cash equivalents at beginning of year
    
    
    6,856
    
    
    
    8,344
    
    
    
    3,301Cash and cash equivalents at end of year
    
    
    9,871
    
    
    
    6,856
    
    
    
    8,344
 Year ended December 31,2005
    
    2004
    
    2003Supplemental cash flow information:Cash paid during the year forInterest, net of amount capitalized
    
    
    1,083
    
    
    
    995
    
    
    
    622Income taxes
    
    
    3,843
    
    
    
    2,054
    
    
    
    2,384Withholding income tax on financial investments
    
    
    29
    
    
    
    69
    
    
    
    47Non-cash investing and financing transactions during the yearConsolidation of merchant type thermoelectrics
    
    
    
    
    
    
    
    
    
    
    1,142Exchange of BR shares for PETROBRAS preferred shares
    
    
    
    
    
    
    
    
    
    
    130Recognition of asset retirement obligation  SFAS 143
    
    
    356
    
    
    
    158
    
    
    
    114Consummation of gas hedge asset with deferred purchase incentive
liability
    
    
    
    
    
    
    169
    
    
    
    
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 Year ended December 31,2005
    
    2004
    
    2003Preferred sharesBalance at January 1,
    
    
    4,772
    
    
    
    2,973
    
    
    
    2,459Capital increase from issue of preferred shares
    
    
    
    
    
    
    
    
    
    
    130Capital increase from undistributed earnings reserve
    
    
    
    
    
    
    1,799
    
    
    
    384Balance at December 31,
    
    
    4,772
    
    
    
    4,772
    
    
    
    2,973Common sharesBalance at January 1,
    
    
    6,929
    
    
    
    4,289
    
    
    
    3,761Capital increase from undistributed earnings reserve
    
    
    
    
    
    
    2,640
    
    
    
    528Balance at December 31,
    
    
    6,929
    
    
    
    6,929
    
    
    
    4,289Capital reserve  fiscal incentiveBalance at January 1,
    
    
    134
    
    
    
    118
    
    
    
    89Transfer from unappropriated retained earnings
    
    
    25
    
    
    
    16
    
    
    
    29Balance at December 31,
    
    
    159
    
    
    
    134
    
    
    
    118Accumulated other comprehensive incomeCumulative translation adjustmentsBalance at January 1,
    
    
    (12,539
    )
    
    
    (14,450
    )
    
    
    (17,306
    )Change in the year
    
    
    3,107
    
    
    
    1,911
    
    
    
    2,856Balance at December 31,
    
    
    (9,432
    )
    
    
    (12,539
    )
    
    
    (14,450
    )Amounts not recognized as net periodic pension costBalance at January 1,
    
    
    (1,975
    )
    
    
    (1,588
    )
    
    
    (1,361
    )Decrease (increase) in additional minimum liability
    
    
    68
    
    
    
    (586
    )
    
    
    (344
    )Tax effect on above
    
    
    (23
    )
    
    
    199
    
    
    
    117Balance at December 31,
    
    
    (1,930
    )
    
    
    (1,975
    )
    
    
    (1,588
    )
 F-9




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 Year ended December 31,2005
    
    2004
    
    2003Unrecognized gains (losses) on securitiesBalance at January 1,
    
    
    460
    
    
    
    157
    
    
    
    (11
    )Unrealized gains (losses)
    
    
    (158
    )
    
    
    459
    
    
    
    254Tax effect on above
    
    
    54
    
    
    
    (156
    )
    
    
    (86
    )Balance at December 31,
    
    
    356
    
    
    
    460
    
    
    
    157Appropriated retained earningsLegal reserveBalance at January 1,
    
    
    1,520
    
    
    
    1,089
    
    
    
    643Transfer from unappropriated
retained earnings, net of gain or
loss on translation
    
    
    705
    
    
    
    431
    
    
    
    446Balance at December 31,
    
    
    2,225
    
    
    
    1,520
    
    
    
    1,089Undistributed earnings reserveBalance at January 1,
    
    
    9,688
    
    
    
    9,372
    
    
    
    4,778Capital increase
    
    
    
    
    
    
    (4,439
    )
    
    
    (912
    )Transfer from unappropriated
retained earnings, net of gain or
loss on translation
    
    
    7,751
    
    
    
    4,755
    
    
    
    5,506Balance at December 31,
    
    
    17,439
    
    
    
    9,688
    
    
    
    9,372
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 Year ended December 31,2005
    
    2004
    
    2003Statutory reserveBalance at January 1,
    
    
    318
    
    
    
    235
    
    
    
    164Transfer from unappropriated retained earnings, net of
gain or loss on translation
    
    
    113
    
    
    
    83
    
    
    
    71Balance at December 31,
    
    
    431
    
    
    
    318
    
    
    
    235Total appropriated retained earnings
    
    
    20,095
    
    
    
    11,526
    
    
    
    10,696Unappropriated retained earningsBalance at January 1,
    
    
    13,199
    
    
    
    14,141
    
    
    
    16,085Net income for the year
    
    
    10,344
    
    
    
    6,190
    
    
    
    6,559Dividends reclasification (Note 19 b)
    
    
    
    
    
    
    
    
    
    
    (816
    )Dividends (per share: 2005  US$0.68 to common and
preferred shares; 2004 - US$0.42 to common and preferred
shares; 2003 - US$0.37 to common and preferred shares)
    
    
    (2,982
    )
    
    
    (1,847
    )
    
    
    (1,635
    )Appropriation to fiscal incentive reserve
    
    
    (24
    )
    
    
    (16
    )
    
    
    (29
    )Appropriation to reserves
    
    
    (8,569
    )
    
    
    (5,269
    )
    
    
    (6,023
    )Balance at December 31,
    
    
    11,968
    
    
    
    13,199
    
    
    
    14,141Total shareholders equity
    
    
    32,917
    
    
    
    22,506
    
    
    
    16,336Comprehensive income (loss) is comprised as follows:Net income for the year
    
    
    10,344
    
    
    
    6,190
    
    
    
    6,559Cumulative translation adjustments
    
    
    3,107
    
    
    
    1,911
    
    
    
    2,856Amounts not recognized as net periodic pension cost
    
    
    45
    
    
    
    (387
    )
    
    
    (227
    )Unrealized gain (loss) on available-for-sale securities
    
    
    (104
    )
    
    
    303
    
    
    
    168Total comprehensive income
    
    
    13,392
    
    
    
    8,017
    
    
    
    9,356
 F-11




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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 derivatives, 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-12




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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.
 (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).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.
 F-13




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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 Company has translated all assets and liabilities into U.S. dollars at the current
exchange rate (R$ 2.3407 and R$ 2.6544 to US$ 1.00 at December 31, 2005 and 2004,
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/(loss) in the amount of US$ 3,107 in 2005 (2004  US$ 1,911
and 2003  US$ 2,856) 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 (Note 3(b)).
Intercompany accounts and transactions are eliminated.
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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
    
    PetrochemicalPetrobras Distribuidora S.A.  BR
    
    DistributionBRASPETRO Oil Services Company  BRASOIL
    
    International operationsBRASPETRO Oil Company  BOC
    
    International operationsPIB BV  Petrobras International  BRASPETRO (1)
    
    International operationsPetrobras Comercializadora de Energia Ltda.  PCEL (2)
    
    EnergyPetrobras Negócios Eletrônicos S.A.
    
    CorporatePetrobras Gás S.A.  GASPETRO
    
    Gas transportationPetrobras International Finance Company  PIFCo
    
    FinancingPetrobras Transporte S.A.  TRANSPETRO
    
    TransportationDownstream Participações S.A.
    
    Refining and distributionPetrobras Netherlands BV
    
    Exploration and ProductionUTE Nova Piratininga Ltda.
    
    EnergyFAFEN Energia S.A.
    
    Energy5283 Participações S.A.
    
    CorporateBaixada Santista Energia Ltda.
    
    EnergySFE  Sociedade Fluminense de Energia Ltda.  Eletrobolt (6)
    
    EnergyTERMORIO S.A. (3)
    
    EnergyMPX Termoceará Ltda. (6)
    
    EnergyTERMOR Participações S.A. (7)
    
    EnergyIbiritermo S.A. (3)
    
    EnergyTERMOBAHIA Ltda. (3)
    
    EnergyAlbacora Japan Petroleum Limited Company (4)
    
    Exploration and ProductionBarracuda e Caratinga Holding Company B.V. (4)
    
    Exploration and ProductionCayman Cabiunas Investments Co. Ltda. (4)
    
    Exploration and ProductionCia. De Desenvolvimento e Modernização de Plantas Industriais -
CDMPI (4)
    
    Exploration and ProductionCharter Development  CDC (9)
    
    Exploration and ProductionCompanhia Locadora de Equipamentos Petrolíferos S.A.  CLEP (4) (5)
    
    Exploration and ProductionCodajás Coari Participações Ltda.
    
    TransportationCompanhia de Recuperação Secundária S.A. (4)
    
    Exploration and ProductionEVM Leasing Co. (4)
    
    Exploration and ProductionGasene Participações Ltda.
    
    TransportationConsórcio Macaé Merchant (6)
    
    EnergyManaus Geração Termelétrica Participações Ltda.
    
    EnergyCompanhia Petrolífera Marlim (4)
    
    Exploration and ProductionNovaMarlim Petróleo S.A. (4)
    
    Exploration and ProductionNova Transportadora do Nordeste S.A.(4)
    
    TransportationNova Transportadora do Sudeste S.A.(4)
    
    TransportationPDET Off-shore S.A. (4)
    
    Exploration and ProductionFundo de Investimento Imobiliário  FII (8)
    
    CorporateBlade Securities Limited.
    
    Corporate
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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 and Petrolera Entre Lomas
S.A.  PELSA.(2)
    
    Former Petrobras Energia Ltda.(3)
    
    Consolidated according to FIN 46, commencing December 31, 2003. Formerly
were accounted for as capital leases pursuant to SFAS 13. See also Note 3(b).(4)
    
    Consolidated according to FIN 46, commencing December 31, 2003. Formerly
were special purpose entities formed in connection with project financings
transactions. See also Note 3(b) and Note 15.(5)
    
    Former Langstrand Holdings S.A.(6)
    
    Consolidated according to FIN 46, commencing December 31, 2003. Formerly
were not consolidated in PETROBRAS financial statements, see also Note 3(b).(7)
    
    Disposed of in December of 2004 with immaterial impact to the consolidated
financial statements.(8)
    
    Consolidated according to FIN 46, commencing at fund inception in 2004. See
also Note 15 for discussion of this exclusive fund.(9)
    
    Consolidated according to FIN 46. Company is a new SPE formed in 2005 to
support project finance.
 (c)
    
    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 date of
acquisition.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 2.
    
    Summary of significant accounting policies(Continued)
 (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 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.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.(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.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 2.
    
    Summary of significant accounting policies(Continued)
 (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.(h)
    
    Government and marketable securitiesThe Company holds National Treasury Bonds Series B (NTN-B) issued by the Federal
Government which are accounted for as available-for-sale securities in accordance with
SFAS 115.(i)
    
    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 results of operations in the period incurred, and the
costs relating to exploratory dry wells on unproven reserve properties are charged to
the results of operations when determined as dry or uneconomical.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 2.
    
    Summary of significant accounting policies(Continued)
 (i)
    
    Property, plant and equipment(Continued)
 The 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 international industry 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 can begin 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.
    
    Development costsCosts of development wells including dry holes, platforms, well equipment and attendant
production facilities are capitalized.
    
    Production costsCosts incurred with producing wells are expensed as incurred.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 2.
    
    Summary of significant accounting policies(Continued)
 (i)
    
    Property, plant and equipment(Continued)
 
    
    Abandonment costsEffective January 1, 2003, the Company adopted SFAS No. 143  Accounting for Asset
Retirement Obligations (SFAS 143) for abandonment costs (see Note 3(a) for
information related to the new accounting policy for abandonment costs commencing from
January 1, 2003).In 2004 and in 2005, the Company made 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. In 2005, the changes to estimated asset retirement obligation
were 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. In 2004, the changes to estimated asset retirement obligation were
principally related to changing expectations about Brent prices, changes in production
curve, oil prices estimated by the Company and the probability of those prices to
occur, which led the correlated fields to have longer economic lives. This review resulted in
a US$ 21 increase in the related provision (US$ 196 in 2004) with a loss recognized in
net income, and recorded in the line titled Exploration, including exploratory dry
holes.
    
    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 reserves produced. Leased production platforms 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 are recorded using the
unit-of-production method applied on a field by field basis as a ratio of proved
developed reserves produced.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 2.
    
    Summary of significant accounting policies(Continued)
 (i)
    
    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
    
    10-25 yearsPipelines
    
    30 years
 
    
    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.
    
    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 of the related assets. Interest is capitalized at the Companys weighted
average cost of borrowings.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 2.
    
    Summary of significant accounting policies(Continued)
 (j)
    
    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.(k)
    
    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.(l)
    
    Employees postretirement 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). Disclosures related to the plan are
according to FASB Statement No. 132-R, Employers Disclosures about Pensions and Other
Postretirement Benefits (SFAS No. 132-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
  Postretirement Benefits Other Than Pensions (SFAS 106).
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 2.
    
    Summary of significant accounting policies(Continued)
 (l)
    
    Employees postretirement benefits(Continued)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.PEPSA sponsors a defined contribution plan, the funding of which is recognized in
accordance with the accrual method of accounting. PEPSAs defined contribution plan is
presently suspended. PEPSA also sponsors a defined benefit plan in which the employees
benefit is based on the last computable salary in the years of service of the employee.
For purposes of determining the estimated cost of benefit pension plans granted to
employees, the Company has used actuarial calculation methods, making estimates with
respect to the applicable demographic and financial variables.(m)
    
    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.(n)
    
    Accounting for the effect of Federal Government regulationAs provided in the Petroleum Law, the fuel market in Brazil was totally liberalized as of
January 1, 2002 permitting other companies to produce and sell on the domestic market and,
also, import and export oil products. Additionally, as from January 1, 2002, PETROBRAS is
no longer required to charge the prices established by the Federal Government on the sale
of oil products, and the realization price is no longer established by a formula adjusted
to the international market.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 2.
    
    Summary of significant accounting policies(Continued)
 (n)
    
    Accounting for the effect of Federal Government regulation(Continued)Considering the liberation of the market and current legislation, as from January 1, 2002,
the Petroleum and Alcohol Account will no longer be used to reimburse expenses related to
the supply of oil products and fuel alcohol to PETROBRAS and third parties. The movements
in the account for periods after 2002 relate only to (i) payments and adjustments mandated
by the Agência Nacional do Petróleo  ANP (ANP) with no impact on the income statement
and (ii) adjustments resulting from the audit of the account by the ANP.The impact of Federal Government regulation on the Companys balance sheet and operating
structure has been recorded in the Petroleum and Alcohol Account as of, and for the years
ended, December 31, 2005 and 2004 (see Note 12).The Contribuição de Intervenção no Domínio Econômico (Contribution of Intervention in the
Economic Domain Charge  CIDE) on the importation and sale of fuels was established by Law
No. 10,336 dated December 19, 2001.The CIDE is a per-transaction payment to the Brazilian Government required to be made 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.(o)
    
    Compensated absencesThe liability for future compensation of employees for vacations is accrued as earned.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 2.
    
    Summary of significant accounting policies(Continued)
 (p)
    
    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.(q)
    
    Research and development costsResearch and development costs are charged to expense when incurred.(r)
    
    Accounting for derivatives and hedging activitiesThe Company applies SFAS No. 133  Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), as amended by SFAS No. 138  Accounting for Certain Derivative
Instruments and Certain Hedging Activities (SFAS 138). SFAS 133 requires that all
derivative instruments be recorded in the balance sheet of the Company as either an asset
or a liability measured at fair value. SFAS 133 requires that changes in the derivatives
fair value be recognized in earnings/losses unless specific hedge accounting criteria is
met. For derivatives accounted for as hedges, fair value adjustments are recorded to
earnings/losses or accumulated other comprehensive income, a component of shareholders
equity, depending upon the type of hedge and the degree of hedge effectiveness.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 2.
    
    Summary of significant accounting policies(Continued)
 (r)
    
    Accounting for derivatives and hedging activities(Continued)The Company uses derivative financial instruments to mitigate the risk of unfavorable
price movements on crude oil purchases. These instruments are marked-to-market on a
current basis and associated gains and losses are recognized currently in the financial
income/expense line items.The Company may also use derivative financial instruments to mitigate the risk of
unfavorable exchange-rate movements affecting its foreign currency-denominated
indebtedness. Gains and losses from changes in the fair value of these contracts are
recognized as financial income or financial expense.PEPSA also uses derivative instruments such as swaps, options, futures, and other
instruments, principally to mitigate the impact of changes in crude oil prices, exchange
rates and interest rates. PEPSAs crude oil derivative instruments and interest rate swap
instruments are designed to mitigate specific exposures and thus qualify as cash flow
hedges under SFAS 133.As cash flow hedges, the gains and losses associated with the derivative instruments are
deferred and recorded in accumulated other comprehensive income until the underlying hedge
transaction impacts earnings, with the exception of any ineffective portions. Derivative
instruments not qualifying for hedge accounting are marked-to-market through earning on a
current basis. At December 31, 2005, PEPSA had no commodity or interest rate derivatives
to be accounted for under FAS 133.(s)
    
    Recently issued accounting pronouncementsFASB has recently issued, (i) SFAS No. 151, Inventory Costs, an amendment of ARB No 43,
Chapter 4, Inventory Pricing, (SFAS 151) in November of 2004. ii) FASB Statement No.
123R, Share-Based Payment (SFAS 123R)in December of 2004 (iii) FASB Interpretation No
47, Accounting for Conditional Asset Retirement Obligations, in March of 2005, (iv) FSP
19-1, Accounting for Suspended Well Costs in April 2005, (v) SFAS No. 154, Accounting
Charges and Error corrections in May 2005, (vi) EITF No. 04-13, Accounting for Purchases
and Sales of Inventory with the Same Counterparty. in September 2005 (vii) SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments in February 2006.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 2.
    
    Summary of significant accounting policies(Continued)
 (s)
    
    Recently issued accounting pronouncements(Continued)FASB has recently issued (i) SFAS No. 151, Inventory Costs, an amendment of ARB No 43,
Chapter 4, Inventory Pricing, (SFAS 151) in November of 2004. SFAS 151 will be
effective for the Company on January 1, 2006. The standard amends the guidance in
Accounting Research Bulletin (ARB) No. 43, Chapter 4, Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling costs and
spoilage. In addition, the standard requires that allocation of fixed production overheads
to the costs of conversion be based on the normal capacity of the production facilities.
The Company does not expect the adoption of this standard to have a material impact on the
Companys financial statements.In December 2004, the Financial Accounting Standards Board (FASB) issued a revised
Statement of Financial Accounting Standards SFAS No. 123R that requires compensation costs
relating to share-based payments be recognized in the Companys financial statements.
Petrobras Energia S.A.-PEPSA, member of PETROBRAS System currently accounts for those
payments under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. When adopted, SFAS No. 123R
is expected to have a minimal impact on the Companys results of operations, financial
position and liquidity.FIN 47 clarifies the term conditional asset retirement obligation as used SFAS 143 in
order to avoid diversity in accounting practice with respect to the effect of
uncertainties about the timing and (or) method of settlement that are conditional on a
future event, when recognizing the fair value of a liability for an asset retirement
obligation. FIN 47 also clarifies when an entity would have sufficient information to
reasonably estimate the fair value of an asset retirement obligation. The adoption of FIN
47 did not have a material effect on the Companys financial position or results from
operations at December 31, 2005.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 2.
    
    Summary of significant accounting policies(Continued)
 (s)
    
    Recently issued accounting pronouncements(Continued)The FASB has also adopted on April 4, 2005, the FASB Staff Position (FSP SFAS 19-1) that
amends SFAS 19 to permit the continued capitalization of exploratory well costs beyond one
year if (a) the well found a sufficient quantity of reserves that justify its completion
as a producing well and (b) the entity is making sufficient progress assessing the
reserves and the viability of the project. The guidance in FSP SFAS 19-1 was applied
prospectively from the third quarter of 2005. The Company did not have a material effect
on its financial position or results from operations from adoption of FSP SFAS 19-1 (see
Note 27).SFAS No. 154, Accounting Charges and Error corrections requires retrospective
application to prior periods financial statements of changes in accounting principle,
unless it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. When it is impracticable to determine the period specific
effects of an accounting change on one or more individual prior periods presented, this
Statement requires that the new accounting principle be applied to the balances of assets
and liabilities as of the beginning of the earliest period for which retrospective
application is practicable and that a corresponding adjustment be made to the opening
balance of retained earnings (or other appropriate components of equity or net assets in
the statement of financial position) for that period rather than being reported in an
income statement. When it is impracticable to determine the cumulative effect of applying
a change in accounting principle to all prior periods, this Statement requires that the
new accounting principle be applied as if it were adopted prospectively from the earliest date
practicable. This Statement shall be effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005.FSP FAS 115-1 and FAS 124-1, The Meaning of Other Than Temporary Impairment and its
Application to Certain Investments was issued in November 2005. FSP FAS 115-1 replaces
the impairment evaluation guidance of EITF issue No. 03-1 with reference to the existing
other than temporary impairment guidance, but EITF 03-1 disclosure requirements are
maintained. The guidance is to be applied to reporting periods beginning after December
15, 2005. The Company does not expect adoption to have a material impact.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 2.
    
    Summary of significant accounting policies(Continued)
 (s)
    
    Recently issued accounting pronouncements(Continued)At its September 2005 meeting, the Emerging Issues Task Force (EITF) reached a consensus
on Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same
Counterparty. This issue addresses the question of when it is appropriate to measure
purchases and sales of inventory at fair value and record them in cost of sales and
revenues and when they should be recorded as exchanges measured at the book value of the
item sold. The EITF concluded that purchases and sales of inventory with the same
counterparty that are entered into in contemplation of one another should be combined and
recorded as exchanges measured at the book value of the item sold. PETROBRAS reviewed its
buy and sell contracts and has estimated that, if those contracts were required to be
reported net, sales of products and services, net operating revenues and cost of sales
would be reduced by U$ 60 for 2005 with no impact on net income.SFAS No. 155, Accounting for Certain Hybrid Financial Instruments allows certain
financial instruments that have embedded derivatives to be accounted for as a whole
(eliminating the need to bifurcate the derivative from its host) if the holder elects to
account for the whole instrument on a fair value basis. This Statement is effective for
all financial instruments acquired or issued after the beginning of an entitys first
fiscal year that begins after September 15, 2006. The Company does not expect that the adoption of SFAS 155 will have a material effect on the
Companys financial position or results from operations.(t)
    
    ReclassificationsCertain prior year amounts have been reclassified to conform to current year presentation
standards. These reclassifications had no impact on the Companys net income.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 3.
    
    Accounting changes
 (a)
    
    SFAS No. 143  Accounting for asset retirement obligationsAs of January 1, 2003, PETROBRAS adopted SFAS No. 143  Accounting for Asset Retirement
Obligations (SFAS 143). The primary impact of SFAS 143 is to change the method of
accruing for upstream site restoration costs.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.The cumulative adjustment for the change in accounting principle reported in the first
quarter of 2003 was an after-tax income of US$ 697 (net of US$ 359 deferred income tax
effects). The effect of this accounting change on the balance sheet, was a US$ 1,056
reduction to the abandonment provision, and a US$ 359 increase in deferred income tax liabilities, see Note 4. Additionally, the change in accounting principle resulted in a
US$ 16 increase to property, plant and equipment at original asset acquisition date, with
accumulated depreciation through January 1, 2003 of US$ 9 on proved developed properties.
Further, on January 1, 2003, PETROBRAS established an abandonment liability with respect
to proved undeveloped reserves in the amount of US$ 44.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 3.
    
    Accounting changes(Continued)
 (a)
    
    SFAS No. 143  Accounting for asset retirement obligations(Continued)This adjustment is due to the difference in the method of accruing site restoration costs
under SFAS 143 compared with the method required by SFAS 19. Under SFAS 19, site
restoration costs are accrued on a unit-of-production basis of accounting as the oil and
gas are produced. The SFAS 19 method matches the accruals with the revenues generated from
production and results in most of the costs being accrued in early field life, when
production is at the highest level. Because SFAS 143 requires accretion of the liability
as a result of the passage of time using an effective interest method of allocation, a
significant portion of costs will be accrued towards the end of field life when production
is at the lowest level. The cumulative income adjustment described above results from
reversing the higher liability accumulated under SFAS 19 in order to adjust it to the
lower present value amount resulting from transition to SFAS 143.This amount being reversed in transition, which was previously charged to operating
earnings under SFAS 19, will again be charged to earnings under SFAS 143 in future years.Measurement of assets 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.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 3.
    
    Accounting changes(Continued)
 (a)
    
    SFAS No. 143  Accounting for asset retirement obligations(Continued)A summary of the annual changes in the abandonment provision is presented as follows:
 Assets
    
    LiabilitiesBalance as of December 31, 2002
    
    
    
    
    
    
    1,166Reversion of provision
    
    
    
    
    
    
    (1,056
    )Assets related to proved developed property
    
    
    16
    
    
    
    Accumulated depreciation
    
    
    (9
    )
    
    
    Assets related to proved undeveloped property
    
    
    44
    
    
    
    44Balance as of January 1, 2003
    
    
    51
    
    
    
    154PEPSA acquisition
    
    
    11
    
    
    
    28Depreciation and impairment
    
    
    (29
    )
    
    
    Accretion expenses
    
    
    
    
    
    
    43Liabilities incurred
    
    
    114
    
    
    
    114Liabilities settled
    
    
    
    
    
    
    (14
    )Cumulative translation adjustment
    
    
    15
    
    
    
    71Balance as of December 31, 2003
    
    
    162
    
    
    
    396Depreciation and impairment
    
    
    (13
    )
    
    
    Accretion expenses
    
    
    
    
    
    
    33Liabilities incurred
    
    
    158
    
    
    
    158Liabilities settled
    
    
    
    
    
    
    (14
    )Revision of provision (Note 2 (i))
    
    
    (43
    )
    
    
    (196
    )Cumulative translation adjustment
    
    
    18
    
    
    
    26Balance as of December 31, 2004
    
    
    282
    
    
    
    403Depreciation and impairment
    
    
    (40
    )
    
    
    Accretion expenses
    
    
    
    
    
    
    46Liabilities incurred
    
    
    356
    
    
    
    356Liabilities settled
    
    
    
    
    
    
    (4
    )Revision of provision
    
    
    (32
    )
    
    
    (21
    )Cumulative translation adjustment
    
    
    47
    
    
    
    62Balance as of December 31, 2005
    
    
    613
    
    
    
    842
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 3.
    
    Accounting changes(Continued)
 (b)
    
    Interpretation No. 46 (FIN 46)  consolidation of variable interest entitiesThe Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46) -
Consolidation of Variable Interest Entities in January of 2003. FIN 46 provides guidance
on when certain entities should be consolidated or the interests in those entities
disclosed by enterprises that do not control them through a majority voting interest.
Under FIN 46, entities are required to be consolidated by an enterprise that has a
controlling financial interest in such entities when equity investors of that enterprise
do not have significant capital risk, the obligation to absorb the majority of expected
losses, or the right to receive the majority of expected returns from such entities.
Entities identified with these characteristics are called variable interest entities and
the interest that enterprises have in these entities are called variable interests. These
interests may derive from certain guarantees, leases, loans or other arrangements that
result in risks and rewards to the enterprise with the controlling financing interest in
such entities, irrespective of such enterprises voting interest in such entities.The interpretation requires that if a business enterprise has a controlling financial
interest in a variable entity, the assets, liabilities and results of the activities of
the variable interest entity must be included in the consolidated financial statements
with those of the business enterprise. This interpretation was applied immediately to
variable interest entities created after January 31, 2003. For variable interests in
special purpose entities created before February 1, 2003, FIN 46 was adopted at December
31, 2003. For variable interest in operating entities, FIN 46 was required to be adopted
in the first quarter of 2004.The Company adopted FIN 46 in its December 31, 2003 annual financial statements. Such
adoption resulted in the consolidation of a number of special purpose entities related to
project financings arrangements in which the Company has an interest, and which were
deemed to be variable interest entities for which the Company was the primary beneficiary.
These entities are detailed above in Note 2 (b). Prior to adoption of FIN 46, a
significant portion of the Companys share of commitments and debt obligations, as well as
fixed asset contributions, were already included in the consolidated financial statements
as the project financings transactions qualified as capital leases.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 3.
    
    Accounting changes(Continued)
 (b)
    
    Interpretation No. 46 (FIN 46)  consolidation of variable interest entities
(Continued)Thus, adoption of FIN 46 related to the special purpose companies formed in connection
with project financings arrangements did not have a significant impact on the Companys
financial condition. While PETROBRAS does not have specific assets set aside and
established as collateral for these special purpose entities, the Company does have
certain contractual obligations relating to the debt of the special purpose entities.Three thermoelectric plants were also consolidated at December 31, 2003 as a result of the
adoption of FIN 46. However, as these thermoelectric plants had previously been accounted
for as capital leases, their consolidation did not have a material impact on the Companys
financial condition.Furthermore, PETROBRAS has determined that it is the primary beneficiary of three
additional plants for which it has certain contractual obligations to bear energy market
risk.During 2005 PETROBRAS acquired 100% interest of two of those thermoelectric plants:
Eletrobolt and Termoceará Ltda. and on February 02, 2006 PETROBRAS signed a Memorandum of Understanding containing
conditions for the acquisition of 100% interest of Macaé Merchant. See Note 17. As of
December 31, 2005 those thermoelectric financial statements are consolidated on a line by
line basis with debt obligations related to thermoelectrics being presented together with
long-term debt. At December 31, 2004, the thermoelectric obligation represents the debt of
the consolidated thermoelectric with the third-party lender.PETROBRAS has also indentified an exclusive investment fund which requires consolidation.
See Note 6.The Company has determined that it has no variable interests in operating entities and
thus has not consolidated additional entities as variable interests in 2005 and 2004.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 3.
    
    Accounting changes(Continued)
  (c)
    
    Change in actuarial methodologyOn December 31, 2004 the Company adopted a new actuarial methodology regarding the
calculation of Accumulated Benefit Obligation (ABO), by excluding the effects of long term
inflation. In the past, the Company had applied a terminal methodology in the calculation
of its ABO, an approach permitted under EITF 88-1, but at December 31, 2004 elected a
change in methodology to a going concern calculation of the ABO, a more preferable
application of principle per EITF 88-1.The change in accounting principle application did not effect net income, and while the
ABO increased from 2003 to 2004, the change in methodology resulted in a reduction of the
ABO in the approximate amount of US$ 1,142 over that which would have been calculated
under the former methodology and effected both the liability balance and amount not
recognized in the shareholders equity. There was no income statement impact of this change
in accounting principle.
 
 4.
    
    Income taxesIncome taxes in Brazil comprise federal income tax and social contribution, which is an
additional federal income tax. The statutorily enacted tax rates have been 25% and 9%,
respectively for the years ended December 31, 2005, 2004 and 2003.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 4.
    
    Income taxes(Continued)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 31,2005
    
    2004
    
    2003Income before income taxes, minority interest,
extraordinary item and accounting change
    
    
    14,592
    
    
    
    8,935
    
    
    
    8,773Tax expense at statutory rates
    
    
    (4,961
    )
    
    
    (3,038
    )
    
    
    (2,983
    )Adjustments to derive effective tax rate:Non-deductible postretirement health-benefits
    
    
    (244
    )
    
    
    (157
    )
    
    
    (107
    )Change in valuation allowance
    
    
    76
    
    
    
    159
    
    
    
    150Tax benefit on interest on shareholders equity
    
    
    791
    
    
    
    650
    
    
    
    364Others
    
    
    (103
    )
    
    
    155
    
    
    
    (87
    )Income tax expense per consolidated statement of income
    
    
    (4,441
    )
    
    
    (2,231
    )
    
    
    (2,663
    )
   F-36




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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 4.
    
    Income taxes(Continued)PEPSA also has tax credits amounting to US$ 443 as of December 31, 2005 (US$ 488 in 2004),
which could be offset against future taxable income and, for which a valuation allowance is
recognized in the consolidated financial statements for December 31, 2005 and 2004. As of
December 31, 2005, PEPSA has booked a US$ 352 allowance for tax loss carryforwards (US$ 431 in
2004) because, as of such dates, it is not possible to guarantee that future taxable income
will be sufficient to absorb net temporary differences and accumulated tax loss carryforwards.
These tax losses carryforward have been generated mainly due to operating losses occurred
during the Argentinean crisis on 2001 and 2002 and the valuation allowance recognized is
related to uncertainties regarding the recovery of the Argentinean economy and its impact on
the financial instruments transacted by PESA.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, 2005 and 2004, the PEPSAs Management partially reversed the tax loss
carryforward allowance booked in prior years recognizing a gain of US$ 63 and US$ 90,
respectively. PEPSAs Management will continue analyzing the feasibility of recovering the tax
loss carryforwards for which the allowance was recognized.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 4.
    
    Income taxes(Continued)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 31,2005
    
    2004Current assetsInventories
    
    
    (12
    )
    
    
    8Lease obligations
    
    
    58
    
    
    
    68Provision for profit sharing
    
    
    131
    
    
    
    91Provision for losses with energy
    
    
    13
    
    
    
    35Provision for INSS
    
    
    19
    
    
    
    32PETROS
    
    
    86
    
    
    
    40Other temporary differences
    
    
    187
    
    
    
    59482
    
    
    
    333Current liabilitiesOther temporary differences
    
    
    (9
    )
    
    
    (8
    )(9
    )
    
    
    (8
    )Net current deferred tax assets
    
    
    473
    
    
    
    325Non-current assetsEmployees postretirement benefits, net of unrecognized pension obligation
    
    
    1,291
    
    
    
    1,079Interest on shareholders equity
    
    
    159
    
    
    
    140Deferred assets
    
    
    124
    
    
    
    113Tax loss carryforwards
    
    
    592
    
    
    
    713Investments
    
    
    102
    
    
    
    31Lease obligations
    
    
    61
    
    
    
    217Inventory revaluation
    
    
    37
    
    
    
    42Derivatives
    
    
    60
    
    
    
    39Allowance for doubtful accounts
    
    
    47
    
    
    
    61Provision for contingencies
    
    
    28
    
    
    
    52Project financings
    
    
    64
    
    
    
    85Provision for notification from INSS
    
    
    10
    
    
    
    14Other temporary differences, not significant individually
    
    
    100
    
    
    
    200Valuation allowance
    
    
    (524
    )
    
    
    (596
    )2,151
    
    
    
    2,190Non-current liabilitiesCapitalized exploration and development costs
    
    
    2,995
    
    
    
    2,217Property, plant and equipment
    
    
    584
    
    
    
    958Hedge
    
    
    199
    
    
    
    178Investments
    
    
    81
    
    
    
    72Tax effect on unrealized loss on investments available-for-sale
    
    
    168
    
    
    
    224Other temporary differences, not significant individually
    
    
    283
    
    
    
    994,310
    
    
    
    3,748Net long-term deferred tax liabilities
    
    
    (2,159
    )
    
    
    (1,558
    )
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 4.
    
    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 do not expire and are
available for offset against future taxable income, limited to 30% of taxable income in any
individual year for Brazilian companies. PEPSA tax loss carryfoward principally expire in years
beyond 2008, 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, 2005, 2004 and
2003:
 Year ended December 31,2005
    
    2004
    
    2003Balance at January 1,
    
    
    (596
    )
    
    
    (749
    )
    
    
    (261
    )Reductions (additions)
    
    
    76
    
    
    
    159
    
    
    
    150Acquisition of PEPSA
    
    
    
    
    
    
    
    
    
    
    (590
    )Cumulative translation adjustments
    
    
    (4
    )
    
    
    (6
    )
    
    
    (48
    )Balance at December 31,
    
    
    (524
    )
    
    
    (596
    )
    
    
    (749
    )
 
 5.
    
    Cash and cash equivalents
 As of December 31,2005
    
    2004Cash
    
    
    1,539
    
    
    
    605Investments  Brazilian reais
    
    
    6,280
    
    
    
    3,242Investments  U.S. dollars
    
    
    2,052
    
    
    
    3,0099,871
    
    
    
    6,856
  F-39




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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 6.
    
    Marketable securities
 As of December 31,2005
    
    2004Marketable security classification:Available for sale
    
    
    163
    
    
    
    318Trading
    
    
    361
    
    
    
    332Held-to-maturity
    
    
    61
    
    
    
    51585
    
    
    
    701Less: Current portion of marketable securities
    
    
    (456
    )
    
    
    (388
    )Long-term portion of marketable securities
    
    
    129
    
    
    
    313
  F-40




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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 7.
    
    Accounts receivable, netAccounts receivable, net consisted of the following:
 As of December 31,2005
    
    2004TradeThird parties
    
    
    7,514
    
    
    
    5,047Related parties (Note 26)
    
    
    340
    
    
    
    5537,854
    
    
    
    5,600Less: Allowance for uncollectible accounts
    
    
    (1,063
    )
    
    
    (904
    )6,791
    
    
    
    4,696Less: Long-term accounts receivable, net
    
    
    (607
    )
    
    
    (411
    )Current accounts receivable, net
    
    
    6,184
    
    
    
    4,285
 As of December 31,2005
    
    2004
    
    2003Allowance for uncollectible accountsBalance at January 1,
    
    
    (904
    )
    
    
    (780
    )
    
    
    (701
    )Additions
    
    
    (118
    )
    
    
    (164
    )
    
    
    (36
    )Write-offs
    
    
    10
    
    
    
    66
    
    
    
    Cumulative translation adjustments
    
    
    (51
    )
    
    
    (26
    )
    
    
    (43
    )Balance at December 31,
    
    
    (1,063
    )
    
    
    (904
    )
    
    
    (780
    )Allowance on short-term receivables
    
    
    (196
    )
    
    
    (150
    )
    
    
    (106
    )Allowance on long-term receivables
    
    
    (867
    )
    
    
    (754
    )
    
    
    (674
    )
 F-41




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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 7.
    
    Accounts receivable, net(Continued)At December 31, 2005 and 2004, long-term receivables include US$ 599 and US$ 590 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 opinions from the legal advisers of BRASOIL, these payments can be reimbursed, since
they represent a right of BRASOIL with respect to the contractors, for which reason judicial
action was filed with international courts to seek financial reimbursement. However, as a
result of the uncertainties with regards to the probability of receiving all the amounts
disbursed, the Company recorded a provision for uncollectible accounts for all credits that are
not backed by collateral. The balances of this provision amounted US$ 527 and US$ 518 as of
December 31, 2005 and 2004, respectively.
 
 8.
    
    Inventories
 As of December 31,2005
    
    2004ProductsOil products
    
    
    2,020
    
    
    
    1,728Fuel alcohol
    
    
    66
    
    
    
    722,086
    
    
    
    1,800Raw materials, mainly crude oil
    
    
    2,266
    
    
    
    2,286Materials and supplies
    
    
    811
    
    
    
    697Others
    
    
    142
    
    
    
    1215,305
    
    
    
    4,904
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 9.
    
    Recoverable taxesRecoverable taxes consisted of the following:
 As of December 31,2005
    
    2004Local:Domestic value-added tax (ICMS)
    
    
    1,830
    
    
    
    1,272Income tax and social contribution
    
    
    275
    
    
    
    325PASEP/COFINS (1)
    
    
    157
    
    
    
    148Foreign value-added tax (IVA)
    
    
    123
    
    
    
    126Other recoverable taxes
    
    
    341
    
    
    
    1402,726
    
    
    
    2,011Less: Long-term recoverable taxes
    
    
    (639
    )
    
    
    (536
    )Current recoverable taxes
    
    
    2,087
    
    
    
    1,475
 
 (1)
    
    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-43




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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 10.
    
    Property, plant and equipment, net
 (a)
    
    Composition of balanceProperty, plant and equipment, at cost, are summarized as follows:
 As of December 31,2005
    
    2004Accumulated
    
    
    
    
    
    
    
    
    
    AccumulatedCost
    
    depreciation
    
    Net
    
    Cost
    
    depreciation
    
    NetBuildings and improvements
    
    
    1,696
    
    
    
    (755
    )
    
    
    941
    
    
    
    1,258
    
    
    
    (614
    )
    
    
    644Oil and gas assets
    
    
    34,530
    
    
    
    (15,646
    )
    
    
    18,884
    
    
    
    29,396
    
    
    
    (13,102
    )
    
    
    16,294Equipment and other assets
    
    
    15,329
    
    
    
    (8,845
    )
    
    
    6,484
    
    
    
    12,286
    
    
    
    (6,183
    )
    
    
    6,103Capital lease  platforms and vessels
    
    
    2,651
    
    
    
    (1,233
    )
    
    
    1,418
    
    
    
    2,605
    
    
    
    (1,087
    )
    
    
    1,518Rights and concessions
    
    
    1,492
    
    
    
    (210
    )
    
    
    1,282
    
    
    
    1,033
    
    
    
    (134
    )
    
    
    899Land
    
    
    226
    
    
    
    
    
    
    
    226
    
    
    
    201
    
    
    
    
    
    
    
    201Materials
    
    
    820
    
    
    
    
    
    
    
    820
    
    
    
    548
    
    
    
    
    
    
    
    548Expansion projects -Construction and installations in progress:Exploration and production
    
    
    9,553
    
    
    
    
    
    
    
    9,553
    
    
    
    6,136
    
    
    
    
    
    
    
    6,136Supply
    
    
    4,546
    
    
    
    
    
    
    
    4,546
    
    
    
    3,107
    
    
    
    
    
    
    
    3,107Gas and energy
    
    
    1,356
    
    
    
    
    
    
    
    1,356
    
    
    
    1,407
    
    
    
    
    
    
    
    1,407Distribution
    
    
    185
    
    
    
    
    
    
    
    185
    
    
    
    118
    
    
    
    
    
    
    
    118Corporate
    
    
    225
    
    
    
    
    
    
    
    225
    
    
    
    45
    
    
    
    
    
    
    
    4572,609
    
    
    
    (26,689
    )
    
    
    45,920
    
    
    
    58,140
    
    
    
    (21,120
    )
    
    
    37,020
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 10.
    
    Property, plant and equipment, net(Continued)
 (a)
    
    Composition of balanceDuring 2005, the Company capitalized US$ 612 of interest cost (2004  US$ 267; 2003  US$
184). See Note 14.The property, plant and equipment account at December 31, 2005 and 2004, respectively,
includes US$ 243 and US$ 347 of assets under construction that are intended to be sold or
transferred into structured financing deals. These assets include natural gas pipelines
and other oil and gas projects at 2005 and 2004. Additionally, the property, plant and
equipment account at December 31, 2005 and 2004, respectively, includes US$ 571 and US$
844 of assets under agreements with investors.(b)
    
    New Hydrocarbons Law of BoliviaThe New Hydrocarbons Law No. 3058, effective May 19, 2005 in Bolivia, revoked the former
Hydrocarbons Law No. 1689, dated April 30, 1996.The new law establishes, among other matters, 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.
On June 30, 2005, the first payment of the new tax (IDH) was made. Up to December 31,
2005, the Company recognized US$ 64 referring to this tax.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 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 national territory.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 10.
    
    Property, plant and equipment, net(Continued)
 (b)
    
    New Hydrocarbons Law of Bolivia(Continued)Up to December 31, 2005, the Bolivian government had not yet presented the new contract
models mentioned in the Law (operation, shared production and association). The impact for
the Company, from substitution of the current shared risk contracts will be analyzed after
the models proposed and the regulations therein are known.(c)
    
    Review of operating agreements in VenezuelaIn April 2005, the Ministry of Energy and Petroleum of Venezuela (MEP) requested the
company Petróleos de Venezuela S.A. (PDVSA) to review the thirty-two operating agreements
entered into by PDVSA branches with oil companies from 1992 to 1997, among which the
contracts entered into with Petrobras Energia Venezuela S.A., PESA subsidiary, which
regulate exploitation of the areas of Oritupano Leona, La Concepción, Acema and Mata.Under the new rules, all the necessary measures to adapt the current mixed capital
operating agreements shall be adopted, for the Venezuelan Government, through PDVSA, to
have participation in excess of 50%. In relation to these agreements, MEP sent instructions to PDVSA for the amount of payments to parties to the
agreements not to be in 2005 in excess of 66.67 % of the amount in US dollars of oil
delivered under the ruling operating agreements. See (d) below.In June 2005, PDVSA communicated to PETROBRAS Energia Venezuela S.A. that the remuneration
provided for by the operating agreements would be made in bolivares, corresponding to the
Venezuelan component of materials and services. This changes the terms of these
agreements, under which payments by PDVSA previously were agreed to be made in US dollars.
Until PDVSA conducts an audit to determine the portion corresponding to Venezuelan
component, it was defined that PDVSA will pay 50% of the amounts stipulated in the
contracts in US dollars and 50% in bolivares. The application of the new rules and the
requirement to pay the financial commitments of PETROBRAS Energia Venezuela abroad
required foreign capital remittances. As from collection corresponding to 2005 third
quarter production, the percentage of payment in bolivares was reduced to 25%.
 F-46




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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 10.
    
    Property, plant and equipment, net(Continued)
 (c)
    
    Review of operating agreements in Venezuela(Continued)The Integrated Tax Administration Service of Venezuela (SENIAT) carried out a series of
tax inspections at the companies participating in the 32 oil operating agreements and as a
result of these procedures adjustments were made, which resulted in loss of US$ 18 to
PETROBRAS; additionally, the income tax rate was increased from 34% to 50%.On September 29, 2005, PETROBRAS Energia Venezuela S.A. entered into temporary agreements
with PDVSA, under which it commits to negotiate the terms and conditions of the conversion
of the operating agreements in the areas of Oritupano Leona, La Concepción, Acema and Mata
and further acknowledges application of the limit of 66.67% calculated on the amount paid
to the parties to agreements in 2005. Acknowledgement of said limit corresponded to a
reduction in revenue from sales by approximately US$ 43 in 2005.(d)
    
    ImpairmentFor the years ended December 31, 2005, 2004 and 2003, the Company recorded impairment
charges of US$ 156, US$ 65 and US$ 70, respectively. 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), mentioned
above. 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.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 10.
    
    Property, plant and equipment, net(Continued)
 (d)
    
    Impairment(Continued)During 2003, US$ 65 of the impairment charge was related to producing properties in
Brazil, principle amounts were related to the Companys Fazenda Belem on-shore field (US$
15) in Rio Grande do Norte, and the Lamarão on-shore field (US$ 4) in Bahia. These charges
were recorded based upon the Companys annual assessment of the fields using pricing and
other assumptions consistent with those used in the Companys overall strategic plan.(e)
    
    Return of exploration areas to the ANPDuring 2005, PETROBRAS returned to the National Agency of Petroleum, Natural Gas and
Biofuels  ANP the rights associated with:
 
    
    Exploratory concession ES-T-400.
    
    Areas for Well Discovery Assessments:1-BRSA-18-ESS / completing total return for Block BC-600.1-BRSA-213-RJS / completing total return for Block BC-100.
 (f)
    
    Return of fields operated by PETROBRAS in the production phase to ANPDuring 2005, PETROBRAS returned to the National Agency of Petroleum, Natural Gas and
Biofuels  ANP the rights associated with the fields Ilha da Caçumba and Norte de Pescada.(g)
    
    7th bidding for exploratory blocks of ANPIn October 2005, PETROBRAS acquired 96 (ninety-six) new exploratory blocks out of the 251
(two hundred and fifty one) blocks included in the 7th bidding process conducted by the
National Agency of Petroleum, Natural Gas and Biofuels  ANP.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 10.
    
    Property, plant and equipment, net(Continued)
 (g)
    
    7th bidding for exploratory blocks of ANP(Continued)PETROBRAS acquired 42 (forty-two) blocks with exclusive rights and another 54 (fifty-four)
blocks in consortium with other companies; PETROBRAS serves as operator of 28
(twenty-eight) of these blocks.The costs incurred by PETROBRAS in subscription bonus totaled US$ 215. The new concession
agreements were signed on January 12, 2006.
 
 11.
    
    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 products transportation businesses.
 InvestmentsTotal ownership
    
    2005
    
    2004Equity method
    
    
    20 % - 50
    % (1)
    
    
    974
    
    
    
    834Investments available-for-sale
    
    
    8% - 17
    %
    
    
    647
    
    
    
    792Investments at cost
    
    
    
    
    
    
    189
    
    
    
    236Total
    
    
    
    
    
    
    1,810
    
    
    
    1,862
 
 (1)
    
    As described further in this Note, certain thermoelectrics with ownership of 10% to
50% are also accounted for as equity investments due to particularities of significant
influence.  F-49




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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 11.
    
    Investments in non-consolidated companies and other investments(Continued)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, 2005 and 2004 includes US$ 179 and US$ 119
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$ 139 for the year ended December 31,
2005 (2004  US$ 172; 2003  US$ 141).
 (a)
    
    Acquisition of interest of GASMIGOn August 25, 2004, PETROBRAS, through its subsidiary PETROBRAS GÁS S.A.  GASPETRO,
agreed to the acquisition of 40% interest of the capital of Companhia de Gás de Minas
Gerais  GASMIG, according to the Association Agreement with Companhia Energética de Minas
Gerais  CEMIG, dated August 11, 2004, in order to promote natural gas consumption in the Minas Gerais State. The acquisition was approved by the
Minas Gerais State Legislature through Law No. 15.404, dated December 3, 2004. The
operation was concluded on December 15, 2004 by GASPETRO and its subsidiary TSS
Participações S.A., for US$ 58. The acquisition of GASMIG was recorded using the equity
method of accounting.(b)
    
    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 are 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 is not
restructuring the 2004 Financial Statements for effects of the additional share interest
purchase. The acquisition of CEG RIO was recorded using the equity method of accounting.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 11.
    
    Investments in non-consolidated companies and other investments(Continued)
 (c)
    
    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 Albacora
Leste field.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 equipments and US$ 158 recorded as extraordinary gain, net of US$ 82 of income
tax.The final value, including monetary restatement, due by PETROBRAS to Repsol YPF, related
to 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.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 12.
    
    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, 2005 and 2004:
 Year ended December 31,2005
    
    2004Opening balance
    
    
    282
    
    
    
    239Reimbursements to PETROBRAS
    
    
    
    
    
    
    1Financial income (Note 26)
    
    
    9
    
    
    
    4Result of audit conducted by the Federal Government
    
    
    
    
    
    
    16Partial settlement
    
    
    
    
    
    
    (3
    )Translation gain
    
    
    38
    
    
    
    25Ending balance
    
    
    329
    
    
    
    282
 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.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.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 13.
    
    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 31,2005
    
    2004Import  oil and equipment
    
    
    340
    
    
    
    456Working capital
    
    
    610
    
    
    
    91950
    
    
    
    547
 The weighted average annual interest rates on outstanding short-term borrowings were
4.09% and 4.43% at December 31, 2005 and 2004, respectively.(b)
    
    Long-term debt
 
    
    Composition
 As of December 31,2005
    
    2004Foreign currencyNotes
    
    
    5,871
    
    
    
    6,440Financial institutions
    
    
    3,215
    
    
    
    3,217Sale of future receivables
    
    
    1,241
    
    
    
    1,707Suppliers credits
    
    
    1,349
    
    
    
    726Senior exchangeable notes
    
    
    330
    
    
    
    330Assets related to export program to be offset against
sales of future receivables (1)
    
    
    (300
    )
    
    
    (300
    )Repurchased securities (2)
    
    
    (356
    )
    
    
    (291
    )11,350
    
    
    
    11,829Local currencyDebentures
    
    
    935
    
    
    
    814National Economic and Social Development
Bank  BNDES (state-owned company, see Note 26)
    
    
    298
    
    
    
    343Debentures- BNDES (state-owned company, see Note 26)
    
    
    291
    
    
    
    274Others
    
    
    57
    
    
    
    841,581
    
    
    
    1,515Total
    
    
    12,931
    
    
    
    13,344Current portion of long-term debt
    
    
    (1,428
    )
    
    
    (1,199
    )11,503
    
    
    
    12,145
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 13.
    
    Financings(Continued)
 (b)
    
    Long-term debt(Continued)
 (1)
    
    In May 2004, PFL and the PF Export Trust executed an amendment to the Trust
Agreement allowing the Junior Trust Certificates that amounted to US$ 300 as of
December 31, 2005 and 2004, 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 these financial
statements.(2)
    
    At December 31, 2005 and 2004, 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, in
the total amount of US$ 2,078 (US$ 2,013 in 2004). 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$ 356 (US$ 291 in 2004), and project financings, of US$ 1,722 (US$ 1,722 in 2004),
respectively. See also Note 15. Gains and losses on extinguishment are recognized as
incurred. Subsequent reissuances of notes at amounts greater or lower than par are
recorded as premium or discounts and are amortized over the life of the notes. During
2005 PETROBRAS recognized net losses on extinguishment of debt of US$ 17 (US$ 137 in
2004). As December 31, 2005, the Company had an outstanding balance of net premiums
on reissuance of US$ 56 (US$ 78 in 2004).
    
    Composition of foreign currency denominated debt by currency
 As of December 31,2005
    
    2004CurrenciesUnited States dollars
    
    
    10,679
    
    
    
    10,949Japanese Yen
    
    
    409
    
    
    
    553Euro
    
    
    262
    
    
    
    326Others
    
    
    
    
    
    
    111,350
    
    
    
    11,829
 
    
    Maturities of the principal of long-term debtThe long-term portion at December 31, 2005 becomes due in the following years:
 2007
    
    
    2,0392008
    
    
    1,5172009
    
    
    8052010
    
    
    1,4482011
    
    
    1,0662012 and thereafter
    
    
    4,62811,503
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 13.
    
    Financings(Continued)
 (b)
    
    Long-term debt(Continued)As of December 31, 2005 and 2004, US$ 1,588 and US$ 1,904, respectively, was related to
PEPSAs debt. Of this amount US$ 406 (US$ 368 in 2004) was recorded as current portion of
long term debt and US$ 1,182 (US$ 1,536 in 2004) as long term debt).
 
    
    Composition of long-term debt by annual interest rateInterest rates on long-term debt were as follows:
 As of December 31,2005
    
    2004Foreign currency6% or less
    
    
    3,686
    
    
    
    4,769Over 6% to 8%
    
    
    2,603
    
    
    
    2,178Over 8% to 10%
    
    
    4,491
    
    
    
    4,552Over 10% to 15%
    
    
    570
    
    
    
    33011,350
    
    
    
    11,829Local currency6% or less
    
    
    85
    
    
    
    393Over 6% to 8%
    
    
    266
    
    
    
    Over 8% to 10%
    
    
    264
    
    
    
    248Over 10% to 15%
    
    
    966
    
    
    
    8741,581
    
    
    
    1,51512,931
    
    
    
    13,344
  F-55




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 13.
    
    Financings(Continued)
 (b)
    
    Long-term debt(Continued)
 
    
    Structured finance of exportsRespective to the Senior and Junior Notes issued pursuant to the structured finance
program, PETROBRAS and Petrobras Finance Ltd.  PFL have certain contracts (Master
Export Contract and Prepayment Agreement) between themselves and 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.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 13.
    
    Financings(Continued)
 (b)
    
    Long-term debt(Continued)PETROBRAS prepaid an amount of US$ 330, which allowed PETROBRAS FINANCE LTD.  PFL to
settle an equal amount on September 1, 2005 related to the Senior Trust Certificates
series A2 and C with floating rates, issued by PF Export, maturing on 2010 and 2013,
respectively.On March 1, 2006 PETROBRAS will prepay US$ 334 to PETROBRAS FINANCE LTD.  PFL respective
to the export prepayments and accordingly, US$ 295 were reclassified from long-term to
current liabilities.Subsequent, PETROBRAS FINANCE LTD.  PFL will pay 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.
 
    
    GASENE Project, Urucu-Coari-Manaus gas pipeline project and Urucu-Coari liquefied
petroleum gas line Project.On 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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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 13.
    
    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 December17, 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 plataforms 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 aditional 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 plataforms P-51 and P-52. The agreement states a
floating interest rate of Libor plus 1.4%.The platform is being built in accordance with an engineering, procurement and
construction agreement entered into with the Fels Setal/Technip consortium, an
agreement for the construction and assembly of gas compression modules, entered into
with Nuovo Pignone, and an agreement for the construction and assembly of
turbo-generators, entered into with Rolls Royce, totaling approximately US$ 810.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 13.
    
    Financings(Continued)
 (b)
    
    Long-term debt(Continued)
 
    
    Financing for P-51 and P-52 platforms (Continued)P-51 will be one of PETROBRAS platforms having the largest processing capacity in the
Marlim Sul field, located in the Campos Basin, expected to commence operations in 2008.
 (c)
    
    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 (vessels).At December 31, 2005 and 2004, 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 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.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 13.
    
    Financings(Continued)
 (c)
    
    Guarantees and covenants(Continued)The Federal Government guarantees TBGs Multilateral Credit Agency debt, which had an
outstanding balance of US$ 402 and US$ 437 at December 31, 2005 and 2004, 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.(d)
    
    Lines of creditAt December 31, 2005 and 2004, the Company had fully utilized all available lines of
credit for the purchase of imports. Outstanding lines of credit at December 31, 2005 and
2004 were US$ 1,688 and US$ 1,167, respectively. Lines of credit are included in
short-term debt and long-term debt.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 
 14.
    
    Financial income (expenses)Financial expenses, financial income and monetary and exchange variation on monetary assets
and liabilities, net, allocated to income for the years ended at December 31, 2005, 2004 and
2003 are shown as follows:
 Year ended December 31,2005
    
    2004
    
    2003Financial expensesLoans and financings
    
    
    (1,135
    )
    
    
    (1,055
    )
    
    
    (808
    )Capitalized interest
    
    
    612
    
    
    
    267
    
    
    
    184Leasing
    
    
    (98
    )
    
    
    (94
    )
    
    
    (117
    )Project financings
    
    
    (334
    )
    
    
    (316
    )
    
    
    (291
    )Losses on derivative instruments
    
    
    (103
    )
    
    
    (233
    )
    
    
    (80
    )Repurchased securities losses
    
    
    (17
    )
    
    
    (137
    )
    
    
    Other
    
    
    (114
    )
    
    
    (165
    )
    
    
    (135
    )(1,189
    )
    
    
    (1,733
    )
    
    
    (1,247
    )Financial incomeInvestments
    
    
    337
    
    
    
    199
    
    
    
    243Advances to suppliers
    
    
    33
    
    
    
    32
    
    
    
    36Government securities
    
    
    90
    
    
    
    42
    
    
    
    24Gain on fair value hedge
    
    
    93
    
    
    
    553
    
    
    
    Other
    
    
    157
    
    
    
    130
    
    
    
    331710
    
    
    
    956
    
    
    
    634Monetary and exchange variationMonetary and exchange variation on monetary assets
    
    
    150
    
    
    
    250
    
    
    
    (269
    )Monetary and exchange variation on monetary liabilities
    
    
    98
    
    
    
    200
    
    
    
    778248
    
    
    
    450
    
    
    
    509(231
    )
    
    
    (327
    )
    
    
    (104
    )
 
 15.
    
    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 fincance projects are consolidated
based on FIN 46, and the project financing obligation represents the debt of the consolidated
SPEs with the third-party lender.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 15.
    
    Project financings(Continued)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, 2005 and 2004:
 As of December 31,2005
    
    2004Barracuda/Caratinga
    
    
    2,435
    
    
    
    2,534Companhia Locadora de Equipamentos Petrolíferos  CLEP (1)
    
    
    1,700
    
    
    
    1,700Cabiúnas
    
    
    799
    
    
    
    1,045Nova Transportadora do Sudeste  NTS (2)
    
    
    461
    
    
    
    260Espadarte/Voador/Marimbá (EVM)
    
    
    399
    
    
    
    516Nova Transportadora do Nordeste  NTN (2)
    
    
    385
    
    
    
    141NovaMarlim
    
    
    286
    
    
    
    386PDET Offshore S.A.
    
    
    188
    
    
    
    111Cia Petrolífera Marlim
    
    
    139
    
    
    
    593Albacora
    
    
    55
    
    
    
    81Pargo, Carapeba, Garoupa and Cherne (PCGC)
    
    
    35
    
    
    
    67Charter Development  CDC (3)
    
    
    346
    
    
    
    Codajás (4)
    
    
    215
    
    
    
    Transportadora Gasene
    
    
    236
    
    
    
    Fundo de Investimemento Imobiliário  FII (5)
    
    
    85
    
    
    
    Repurchased securities (6)
    
    
    (1,722
    )
    
    
    (1,722
    )6,042
    
    
    
    5,712Current portion of project financings
    
    
    (2,413
    )
    
    
    (1,313
    )3,629
    
    
    
    4,399
 
 (1)
    
    Former Langstrand Holdings S.A.(2)
    
    Nova Transportadora do Sudeste  NTS and Nova Transportadora do Nordeste  NTN take
part in the consortium responsible for Malhas Project.(3)
    
    Charter Development  CDC is responsible for Marlim Leste (P-53 project).(4)
    
    Codajás consolidates Transportadora Urucu  Manaus S.A. which is responsible for the
Amazonia Project.(5)
    
    Investment Fund for Fixed Assets  FII is responsible for Certified Receipts of
Acceptance of Fixed Assets  CRI Macaé Project.(6)
    
    At December 31, 2005 and 2004, 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 6.  F-62




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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 15.
    
    Project financings(Continued)At December 31, 2005, the long-term portion of project financings becomes due in the
following years:
 2007
    
    
    1,0812008
    
    
    7432009
    
    
    6742010
    
    
    5002011
    
    
    862012 and thereafter
    
    
    5453,629
  PDET Offshore S.A.
    
    
    722Charter Development  CDC
    
    
    451Codajás
    
    
    128Nova Transportadora do Nordeste  NTN
    
    
    123Transportadora Gasene
    
    
    108Nova Transportadora do Sudeste  NTS
    
    
    961,628
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 15.
    
    Project financings(Continued)
 InvestmentProject
    
    Purpose
    
    Main guarantees
    
    amountBarracuda/ 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.
    
    Pledge of certain
oil volumes and
payment by BRASOIL
if BCLC does not
meet its
obligations towards
the lenders.
    
    US$ 3,100CLEP
    
    PETROBRAS will sell
assets related to
oil production
located in the
Campos Basin, which
will be supplied by
Companhia Locadora
de Equipamentos
Petrolíferos  CLEP
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$ 910
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 15.
    
    Project financings(Continued)
 InvestmentProject
    
    Purpose
    
    Main guarantees
    
    amountMarlim
    
    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$ 1,500Albacora
    
    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)
    
    In order 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,
USA. 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, including a
6-month
contingency.Cost Overrun: Any
increase in P-53
construction costs
will represent
an
increase in
charter
amounts
payable by
PETROBRAS.
    
    US$ 1,030Development of two
projects in the Gas
and Energy area:Amazônia (Codajás)
    
    construction of a
gas pipe with
length of 395 km,
between Coari and
Manaus, under the
responsibility of
Transportadora
Urucu  Manaus S.A.
and construction of
a thermoelectric
plant, in Manaus,
with capacity of
715 MW through
Companhia de
Geração
Termelétrica
Manauara S.A.
    
    Being negotiated
    
    US$ 1,300
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 15.
    
    Project financings(Continued)
 InvestmentProject
    
    Purpose
    
    Main guarantees
    
    amountGASENE
    
    TRANSPORTADORA
GASENE S.A. will
own the Southeast-
Northeast gas
pipeline, which
aims at
interconnecting the
Southeastern and
Northeastern gas
pipeline networks,
thus forming the
Brazilian Natural
Gas Transportation
Network (Rede
Brasileira de
Transporte de Gás
Natural  RBTGN).
    
    To be defined.
    
    US$ 2,000.Certificate of Real
Estate Receivables
- CRI Macaé (FII)
    
    This project aims
at constructing
four administrative
buildings in Macaé
(RJ) through the
issuance of a
Certificate of Real
Estate Receivables
by Rio Bravo
Securitizadora S/A,
secured by leasing
credit rights to
PETROBRAS.
    
    Corporate guarantee
provided by
PETROBRAS
    
    US$ 85
 PDET Offshore  project financing commitment
  Blade Securities Limited
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 15.
    
    Project financings(Continued)Blade Securities Limited(Continued)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 the rights to any amounts received from
TERMOBAHIA related to the subordinated loan, which has an interest rate of 8% p.a. (amended
from an original rate of 18.79% under agreements signed between and among the parties) and an
expiry date of 2023, and the right to the loan receivable for PIFCo or a PETROBRAS subsidiary.
See also Note 20 (h).As a result of the trasaction series, Petrobras has recognized a US$4 gain on debt
extinguishment 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 aquisition accounting to the
purchase of the 49% TERMOBAHIA interest.
 
 16.
    
    Capital lease obligationsThe Company leased certain offshore platforms and vessels, which are accounted for as capital
leases. At December 31, 2005, assets under capital leases had a net book value of US$ 1,419
(US$ 1,518 at December 31, 2004).The following is a schedule by year of the future minimum lease payments at December 31, 2005:
 2006
    
    
    3052007
    
    
    2832008
    
    
    2992009
    
    
    2742010
    
    
    2242011
    
    
    1092012 and thereafter
    
    
    98Estimated future lease payments
    
    
    1,592Less amount representing interest at 6.2% to 12.0% annual
    
    
    (338
    )Present value of minimum lease payments
    
    
    1,254Less current portion of capital lease obligations
    
    
    (239
    )Long-term portion of capital lease obligations
    
    
    1,015
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 17.
    
    Thermoelectric plant obligationsAs a result of adoption of FIN 46 at December 31, 2003, the Company consolidates six
thermoelectric plants. Previously, three of these thermoelectric plants were accounted for as
capital leases, and therefore, their consolidation did not have a material impact on the
Companys financial condition. For the other three thermoelectric plants, the Company was
deemed the primary beneficiary because of contractual obligations concerning third-party
interests, with amounts equal to the contingent payments required under the contracts
recognized to the extent the related payments are deemed probable and can be estimated in
accordance with the provisions of SFAS 5.The balance of thermoelectric obligation at December 31, 2004 was US$ 1,095 and the
thermoelectric obligation represented the debt of the consolidated thermoelectric with the
third party lender. Pursuant to the acquisitions dicussed below, at December 31, 2005 the
thermoelectric financial statements are consolidated on a line by line basis and related
obligations are presented together with debt.
 (a)
    
    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 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.(b)
    
    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
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
 
 
 17.
    
    Thermoelectric plant obligations(Continued)
 (c)
    
    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 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.(d)
    
    Macaé merchantIn 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 in the amount of US$ 181 related to unpaid contingency the
amounts, while awaiting final decision of the Arbitration proceedings.On February 01, 2006 PETROBRAS signed a Memorandum of Understanding  MOU containing
conditions for the acquisition of 100% interest of Macaé Merchant and began a due
diligence process in order to conclude the acquisition.In the event the process of due diligence, the detailing and negotiation of the
acquisition process take place to the satisfaction of the parties, the final contracts
will be executed with a price of US$ 358 for the debt assumption and transfer of the
shares.The final terms of the contracts will need to be submitted for the approval of the Board
of Directors of PETROBRAS and El Paso.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 17.
    
    Thermoelectric plant obligations(Continued)
 (e)
    
    First auction of energy capacityOn December 16, 2005 the Brazilian Agency for Electric Energy Affairs (Agência Nacional
de Energia Elétrica  ANEEL) organized a public sale of electricity capacity derived from
new enterprises, with the objective of supplying the National System of Energy (Sistema
Interligado Nacional  SIN) under the Regulated Environment of Contraction (Ambiente de
Contratação Regulada  ACR).Such regulated contraction must be formalized through bilateral contracts named Energy
Contracts under the Regulated Environment (Contrato de Comercialização de Energia no
Ambiente Regulado  CCEAR) and signed between the producer and all the purchasing
distribution companies.The CCEAR predicts that the producers revenue will be composed of both fixed and
variable parcels, which must be paid monthly by the purchaser. The fixed parcel
comprehends a charge to provide for the recovery of the cost of the plant and related
financing. The variable parcel will be obtained by the product of the variable cost
stated in the CCEAR times the difference between the energy produced and the amount related to the fixed parcel.In this first auction of energy from new enterprises, PETROBRAS sold 1.391 MW of capacity
that will be produced by its thermoelectric plants: Eletrobolt, MPX Termoceará Ltda.,
TERMORIO S. A., Três Lagoas and Cubatão. The future revenues are calculated for sales of
available capacity from the Companys power plants generating fixed revenue for a term of
15 years in current values of US$ 85/year beginning from 2008 with the sale of 352 MW, of
an additional US$ 90/year beginning from 2009 with the sale of a further 469 MW and an
additional US$ 119/year beginning from 2010 with the sale of 570 MW. Additionally
PETROBRAS will receive reimbursement for variable costs of operation, as per established
parameters and the actual dispatch of the power plants.The contracts for the energy auction bid results as announced in December 2005 have not
yet been signed. As of and for the year ended December 31, 2005, there is no effect to
financial position or results of operations for these energy auction contracts.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 
 18.
    
    Employees postretirement benefits and other benefits
 (a)
    
    Employees postretirement benefits balancesThe balances related to Employees Postretirement Benefits are represented as follows:
 As of December 31,2005
    
    2004Health
    
    
    
    
    
    HealthPension
    
    care
    
    Pension
    
    carebenefits
    
    benefits
    
    benefits
    
    benefitsCurrent liabilities
    
    
    206
    
    
    
    
    
    
    
    166
    
    
    
    Long-term liabilities
    
    
    3,627
    
    
    
    3,004
    
    
    
    2,915
    
    
    
    2,137Employees postretirement benefits obligations
    
    
    3,833
    
    
    
    3,004
    
    
    
    3,081
    
    
    
    2,137Accumulated other comprehensive income
    
    
    2,941
    
    
    
    
    
    
    
    2,994
    
    
    
    Tax effect
    
    
    (1,011
    )
    
    
    
    
    
    
    (1,019
    )
    
    
    Net balance recorded in shareholders equity
    
    
    1,930
    
    
    
    
    
    
    
    1,975
    
    
    
    
 (b)
    
    Pension plan  Fundação Petrobras de Seguridade Social  PETROSThe Fundação Petrobras de Seguridade Social (PETROS) and the current benefits plan (the
PETROS Plan)The 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.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 18.
    
    Employees postretirement benefits and other benefits(Continued)
 (b)
    
    Pension plan  Fundação Petrobras de Seguridade Social  PETROS(Continued)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 2005 year, contributions paid totaled US$ 570
(US$ 435 in 2004), and was deducted from the balance of the provision for benefit
obligation established at December 31, 2005. In the 2005 and 2004 financial years, these
contributions were included in the cost of operations.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 accumulated benefit obligation less the fair value of plan assets is recognized as an
increase or decrease in the additional minimum liability and respectively recorded to
amounts not recognized as net periodic 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, 2005, 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 2005 and 2004
financial years, was 1.00. The Companys best estimate of contributions expected to be
paid in 2006 respective to the pension plan approximates US$ 162, with total pension
benefit payments in 2006 expected to be US$ 722.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 18.
    
    Employees postretirement benefits and other benefits(Continued)
 (b)
    
    Pension plan  Fundação Petrobras de Seguridade Social  PETROS(Continued)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.Plan assetsPlan assets are invested primarily in government securities, investment funds, equity
instruments and properties.The table below describes the types of plan assets:
 As of December 31,2005
    
    2004Government securities
    
    
    45
    %
    
    
    49
    %Investments funds
    
    
    26
    %
    
    
    22
    %Equity instruments
    
    
    18
    %
    
    
    17
    %Other
    
    
    11
    %
    
    
    12
    %100
    %
    
    
    100
    %
  As of December 31,2005
    
    2004PETROBRAS common shares
    
    
    178
    
    
    
    85PETROBRAS preferred shares
    
    
    343
    
    
    
    144Government controlled companies
    
    
    14
    
    
    
    28Government securities
    
    
    3,899
    
    
    
    3,270Securities of other related parties
    
    
    183
    
    
    
    1974,617
    
    
    
    3,724
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 18.
    
    Employees postretirement benefits and other benefits(Continued)
 (b)
    
    Pension plan  Fundação Petrobras de Seguridade Social  PETROS(Continued)Plan assets (Continued)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 15).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, 2005 was comprised of 71%
securities, 45% of which were held-to-maturity government securities that earn interest at
6% annually plus the IPCA (Consumer Price Index) variation and 26% 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 intends to change its investment strategy for the 2006-2008 years to reflect the
evolution of and opportunities expected in the Brazilian economy for 2006 and beyond.
PETROS will continue to maintain plan assets in various sectors, but percentages by asset
type are expected to differ depending on yields achievable in the market while minimizing
risk exposure.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. Thus, the percentage of assets allocated in this investment will remain
the same over the short term.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 18.
    
    Employees postretirement benefits and other benefits(Continued)
 (b)
    
    Pension plan  Fundação Petrobras de Seguridade Social  PETROS(Continued)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 injuction 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.The impact of joining the new plan and the cost of the benefits stipulated in the new plan
will be valued according to the standards established in SFAS 87 and will only be computed
and recognized in the accounts when the litigation has been resolved.Pursuant to closure of the PETROS Plan, PETROBRAS 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.In 2003, PETROBRAS 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. There have been no formal decisions
by the committee as of December 31, 2005.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 18.
    
    Employees postretirement benefits and other benefits(Continued)
 (b)
    
    Pension plan  Fundação Petrobras de Seguridade Social  PETROS(Continued)New benefits plan (Continued)PETROBRAS made internal studies to develop proposals with FUP and petroleum union with
Conttimaf and representatives of Sitramico, in order to evaluate alternatives for a new
model for the Companys supplementary pension plan. The Company held meeting with these
etitles to consider questions relative to the Petros Plan and when the proposal for a new
plan will be completed. One of the principal objectives of the negotiations was to define
a solution to the technical deficit of the Petros Plan and also to solve the problems of
structural and diagnostic issues raised in the FUP and union studies, always complying
limites imposed by laws of Brazil.PETROBRAS, in its policy of transparency hopes to arrive at an understanding with all
unions as brieffy as possible, to find and implement the structural solutions and sustain
relative questions of the model intended to be complete.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.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 18.
    
    Employees postretirement benefits and other benefits(Continued)
 (c)
    
    PETROBRAS ENERGIA  PEPSA (including PESA)Defined contribution planIn November 2005, the Board of Directors of PETROBRAS ENERGIA, a PETROBRAS subsidiary in
Argentina, approved the implementation of a defined contribution plan, which all of the
Companys employees may elect to join. This implementation will be supported by several
financial channels and a trust, for the investments of PETROBRAS ENERGIA, and by mutual
investment funds or investments in a Pension Fund Manager (AFJP), for the employees
option. Through this plan, PETROBRAS ENERGIA contributes to a trust the amounts equivalent
to the contributions made by the employees participating in the plan to the mutual
investment fund or AFJP, based on the contribution plan defined for each salary level.
Participating employees may make voluntary contributions in excess of those established in
the contribution plan, but these will not be considered for purposes of calculating the
amounts to be contributed by PETROBRAS ENERGIA. Upon joining the plan, the employees may
elect to make contributions retroactively to January 1, 2004 or to the date they joined PETROBRAS ENERGIA, whichever is closest.In addition to the above mentioned defined contribution plan the Company maintains a
policy of benefits for all employees which is granted after certain service requirements
are achieved and is equal to one month of salary for each year of service to the company,
in accordance with a decreasing pay scale in accordance with the years of service of the
employee and is intended to do complement the employees pension.PESA, a PETROBRAS subsidiary in Argentina, contributes to a defined contribution private
pension plan applicable to all company employees whose salaries exceed a certain level.
Based on this plan, PESA made additional contributions for amounts equivalent to those
made by employees who exceeded the amounts required by law, which were inputted to results
for the periods in which such contributions were made.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 18.
    
    Employees postretirement benefits and other benefits(Continued)
 (c)
    
    PETROBRAS ENERGIA  PEPSA (including PESA) (Continued)Defined contribution plan (Continued)Due to important changes in the Argentine macroeconomic scenario as from the end of 2001
and to the uncertainties on the economic unfolding in Argentina, PESA temporarily
suspended this benefit as from January 2002. The benefit will be resumed as a provisional
savings method is found for such purpose.Defined benefit pension planAll employees joining PEPSA prior to May 31, 1995 that have participated in the defined
contribution plan without interruption and that have worked for a required number of years
are entitled to be participants in the defined benefit pension plan. The benefit is based
on the last salary amount paid to the employees that participate in the plan, considering
years of service.The defined benefit pension plan is of a supplemental nature, with the benefit received by
the employee corresponding to an amount defined in conformity with the plans provisions,
after deducting the benefits payable in accordance with the contribution plan and the
government-sponsored pension system, such that the aggregate amount of benefits granted to
each employee under the three plans is equivalent to that defined in the plan. As from
retirement, the employees are entitled to a fixed monthly payment.The plan requires contributions to a fund, payable exclusively by PEPSA and without any
contribution by the employees, who must contribute to the social security system based on
their total salary. The funds assets have been transferred to a trust and invested mainly
in bonds, notes, mutual investment funds and fixed term deposits. The Bank of New York is
the trustee and Watson Wyatt is the managing agent. PEPSA determines the liability
relating to this plan using actuarial calculation methods.In conformity with PEPSAs by- laws, the Company contributes to the fund based on amounts
proposed by the Board of Directors to the Sharehoders Meeting limited to a maximum
equivalent to 1.5% of net income for each year.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 18.
    
    Employees postretirement benefits and other benefits(Continued)
 (d)
    
    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.The actuarial gains and losses arising from the differences between the actuarial
assumptions and the costs effectively incurred are respectively included or excluded when
defining the net actuarial liability. These gains and losses are amortized over the average remaining service period of the active employees.For measurement purposes, a 12.5% 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 6.0% from 2006 to 2035.Assumed health care cost trend rates have a significant effect on the amounts reported for
the postretirement 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
    
    
    109
    
    
    
    (88
    )Effect on postretirement benefit
obligation
    
    
    792
    
    
    
    (644
    )
 F-79




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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 18.
    
    Employees postretirement benefits and other benefits(Continued)
 (d)
    
    Health care benefits  Assistência Multidisciplinar de Saúde (AMS)(Continued)LIQUIGÁS DISTRIBUIDORA S.A.On August 9, 2004, the Company acquired Liquigás Distribuidora S.A. (see Note 20).
Liquigás maintains a health care benefit plan, which offers defined benefits and covers
LPG employees. At December 31, 2005, Liquigás recorded liabilities in connection with
future post-retirement health care benefit costs, in the amount of US$ 16 (US$ 12 in
2004). The 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,
according to SFAS 106 and SFAS 132 Employers Disclosures about Pensions and Other
Postretirement Benefits an amendment of FASB Statements No. 87, 88, and 106 (SFAS 132).
 F-80




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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 18.
    
    Employees postretirement benefits and other benefits(Continued)
 (e)
    
    Funded status of the plansThe funded status of the plans at December 31, 2005 and 2004, 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 31,2005
    
    2004Health
    
    
    
    
    
    HealthPension
    
    Care
    
    Pension
    
    carebenefits
    
    benefits
    
    benefits
    
    benefitsChange in benefit obligation:Benefit obligation at beginning of year
    
    
    11,509
    
    
    
    4,025
    
    
    
    7,768
    
    
    
    3,073Service cost
    
    
    146
    
    
    
    74
    
    
    
    134
    
    
    
    45Interest cost
    
    
    1,381
    
    
    
    489
    
    
    
    866
    
    
    
    343Actuarial loss (gain)
    
    
    363
    
    
    
    (28
    )
    
    
    2,205
    
    
    
    320Benefits paid
    
    
    (570
    )
    
    
    (141
    )
    
    
    (435
    )
    
    
    (103
    )Others
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    12Gain on translation
    
    
    1,595
    
    
    
    555
    
    
    
    971
    
    
    
    335Benefit obligation at end of year (1)
    
    
    14,422
    
    
    
    4,974
    
    
    
    11,509
    
    
    
    4,025Change in plan assets:Fair value of plan assets at beginning of year
    
    
    7,104
    
    
    
    
    
    
    
    5,591
    
    
    
    Actual return on plan assets
    
    
    1,609
    
    
    
    
    
    
    
    1,136
    
    
    
    Company contributions
    
    
    155
    
    
    
    141
    
    
    
    118
    
    
    
    103Employee contributions
    
    
    112
    
    
    
    
    
    
    
    105
    
    
    
    Benefits paid
    
    
    (570
    )
    
    
    (141
    )
    
    
    (435
    )
    
    
    (103
    )Others
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    Gain on translation
    
    
    1,005
    
    
    
    
    
    
    
    589
    
    
    
    Fair value of plan assets at end of year
    
    
    9,413
    
    
    
    
    
    
    
    7,104
    
    
    
    Reconciliation:Funded status
    
    
    (5,009
    )
    
    
    (4,974
    )
    
    
    (4,405
    )
    
    
    (4,025
    )Unrecognized actuarial loss
    
    
    4,117
    
    
    
    1,970
    
    
    
    4,318
    
    
    
    1,888Net amount recognized
    
    
    (892
    )
    
    
    (3,004
    )
    
    
    (87
    )
    
    
    (2,137
    )Amounts recognized in the balance sheet consist of:Employees postretirement benefits
    
    
    (3,833
    )
    
    
    (3,004
    )
    
    
    (3,081
    )
    
    
    (2,137
    )Accumulated other comprehensive income
    
    
    2,941
    
    
    
    
    
    
    
    2,994
    
    
    
    Net amount recognized
    
    
    (892
    )
    
    
    (3,004
    )
    
    
    (87
    )
    
    
    (2,137
    )
 
 (1)
    
    Projected benefit obligation, measured at December 31, 2005 and 2004. 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. F-81




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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 18.
    
    Employees postretirement benefits and other benefits(Continued)
 (e)
    
    Funded status of the plans(Continued)Net periodic benefit cost includes the following components:
 As of December 31,2005
    
    2004Health
    
    
    
    
    
    HealthPension
    
    Care
    
    Pension
    
    Carebenefits
    
    benefits
    
    benefits
    
    benefitsService cost-benefits earned during the year
    
    
    146
    
    
    
    74
    
    
    
    134
    
    
    
    45Interest cost on projected benefit obligation
    
    
    1,381
    
    
    
    489
    
    
    
    866
    
    
    
    343Expected return on plan assets
    
    
    (887
    )
    
    
    
    
    
    
    (672
    )
    
    
    Gain on translation
    
    
    56
    
    
    
    22
    
    
    
    101
    
    
    
    39Recognized actuarial loss
    
    
    376
    
    
    
    141
    
    
    
    256
    
    
    
    911,072
    
    
    
    726
    
    
    
    685
    
    
    
    518Employee contributions
    
    
    (112
    )
    
    
    
    
    
    
    (105
    )
    
    
    Net periodic benefit cost
    
    
    960
    
    
    
    726
    
    
    
    580
    
    
    
    518
  2005
    
    2004Pension benefits
    
    Health care benefits
    
    Pension benefits
    
    Health care benefitsDiscount rates
    
    Inflation: 5% + 6%
    
    Inflation: 5% + 6%
    
    Inflation: 5% + 6%
    
    Inflation: 5% + 6%Rates of increase in
compensation levels
    
    Inflation: 5% + 2.08%
    
    Inflation: 5% +
2.08%
    
    Inflation: 5% +
2.11%
    
    Inflation: 5% +
2.11%Expected long-term rate of
return on assets
    
    Inflation: 5% + 6.19
    
    Not applicable
    
    Inflation: 5% + 6%
    
    Not applicableMortality table
    
    AT 2000
    
    AT 2000
    
    AT 2000
    
    AT 2000
  F-82




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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 18.
    
    Employees postretirement benefits and other benefits(Continued)
 (e)
    
    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. Although SFAS 87 offers limited
guidance, the Company considers it appropriate to use actuarial assumptions which include
an estimate of long-term inflation; i.e. nominal rates.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.
 F-83




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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 18.
    
    Employees postretirement benefits and other benefits(Continued)
 (f)
    
    Change in accounting principle related to methodology applicationAs discussed in Note 3(c), on December 31, 2004 the Company adopted a new actuarial
methodology regarding the calculation of Accumulated Benefit Obligation.The Accumulated Benefit Obligation at December 31, 2005 and 2004, respectively, is US$
13,246 and US$ 10,186.(g)
    
    Cash contributions and benefit paymentsIn 2005, the Company contributed US$ 155 to its pension plans. In 2006, the Company
expects contributions to be approximately US$ 162. 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.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 benefits2006
    
    
    722
    
    
    
    1682007
    
    
    785
    
    
    
    1922008
    
    
    854
    
    
    
    2202009
    
    
    932
    
    
    
    2522010
    
    
    1,024
    
    
    
    288Subsequent five years
    
    
    6,872
    
    
    
    2,115
 F-84




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 19.
    
    Shareholders equity
 (a)
    
    CapitalThe Companys subscribed and fully paid-in capital at December 31, 2005 and 2004 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.The Extraordinary General Meeting held on July 22, 2005 decided split of each company
share into four, resulting in 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; such amendment to the Companys By
Laws is effective from September 1, 2005.The relation between 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.At an Extraordinary General Meeting to be held together with the General Ordinary Meeting,
on April 3, 2006, the Board of Directors of PETROBRAS will propose to the shareholders of
PETROBRAS an increase in the Companys capital to US$ 20,612 (R$ 48,248) through the
capitalization of revenue reserves accrued during previous financial years, in the amount
of US$ 6,414 (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.Current Brazilian law requires that the Federal Government retain ownership of 50% plus
one share of the Companys voting shares.
 F-85




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 19.
    
    Shareholders equity(Continued)
 (a)
    
    Capital(Continued)On January 29, 2003, the Board of Directors of the Company, approved the issuance of
9,866,828 preferred shares of the Company in connection with the public offer by the
Company to acquire publicly traded shares of Petrobras Distribuidora  BR, at an issue
price of US$ 12.38 (R$ 45.08) per share, under the terms of the capital increase approved
during the meeting of the Board of Directors of the Company held on November 7, 2002. As a
result, the capital of the Company increased by US$ 122. This minority interest
acquisition, accounted for as a purchase business combination under SFAS No. 141 
Business Combinations (SFAS 141), did not have a material impact to the financial
statements.The Extraordinary Shareholders Meeting, held jointly with the General Shareholders
Meeting on March 27, 2003, approved an increase in the Companys capital by capitalizing
revenue reserves accrued during previous years, to the amount of US$ 912, without issuing
new shares, in accordance with Art. 169, paragraph 1 of Law No. 6,404/76.On May 9, 2003, the Board of Directors of the Company approved the issue of 567,010
preferred shares of the Company in connection with the public offer by the Company to acquire publicly traded shares of Petrobras Distribuidora  BR, at an issue price of R$ 45.08 per share. As a
result, the capital of the Company increased by US$ 8.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.
 F-86




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 19.
    
    Shareholders equity(Continued)
 (a)
    
    Capital(Continued)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.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.(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$ 275 in dividends during the year ended December 31, 2005 (2004
  US$ 366  2003  US$ 212). No withholding tax is payable on distributions of dividends
made since January 1, 1996.
 F-87




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 
 19.
    
    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$ 1,835 in interest on shareholders equity during the year ended December
31, 2005 (2004  US$ 1,443  2003  US$ 731).The proposal for 2005 dividends that is being submitted by the PETROBRAS Board of
Directors for approval of the shareholders at the Ordinary General Meeting to be held on
April 03, 2006, in the amount of US$ 2,998, 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 include interest on capital approved by the Board
of Directors on June 17, 2005, in the amount of US$ 933, which was made available to
shareholders on January 5, 2006, corresponding to US$ 0.21 per common and preferred share,
and to US$ 0.84 per share before the share split of September 2005, based on the
shareholding position of June 30, 2005. The dividend proposed also includes interest on
capital approved by the Board of Directors on December 16, 2005, which will be made
available until March 31, 2006 based on the shareholding position of December 31, 2005, in
the amount of US$ 939, corresponding to US$ 0.21 per common and preferred share, and an
aditional parcel, approved by the Board of Directors on February 17, 2006, in the amount
of US$ 468, corresponding to US$ 0.11 per common and preferred share, based on the
shareholding position of December 31, 2005. These 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.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 19.
    
    Shareholders equity(Continued)
 (b)
    
    Dividends and interest on shareholders equity(Continued)The dividends and the final portion of the interest on shareholders equity will be paid on a
date to be established by the General Shareholders Meeting. These amounts will be monetarily
restated from December 31, 2005 to the initial date of payment, according to the variation in
the SELIC rate.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$ 791 (US$ 650 in 2004, and US$ 364 in 2003).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.The dividends related to the fiscal year ended December 31, 2003, approved at the General
Shareholders Meeting held March 29, 2004, in the amount of US$ 1,955, including the portion
of interest on shareholders equity, in the amount of US$ 1,139, paid to the shareholders on
February 13, 2004 and also includes the portion of interest on equity in the amount of US$
436, approved by the Board of Directors on February 13, 2004, were made available to
stockholders 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, 2005, the Company had appropriated all such
retained earnings.In addition, at December 31, 2005, the undistributed reserve in appropriated retained earnings,
amounting to US$ 17,439, 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.
 F-89




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 19.
    
    Shareholders equity(Continued)
 (c)
    
    Basic and diluted earnings per shareBasic and diluted earnings per share amounts have been calculated as follows:
 Year ended December 31,2005
    
    
    2004
    
    
    2003Income before extraordinary item and effect of
change in accounting principle
    
    
    10,186
    
    
    
    6,190
    
    
    
    5,862Extraordinary gain, net of taxes
    
    
    158
    
    
    
    
    
    
    
    Cumulative effect of change in accounting principle,
net of taxes
    
    
    
    
    
    
    
    
    
    
    697Net income for the period
    
    
    10,344
    
    
    
    6,190
    
    
    
    6,559Less priority preferred share dividends
    
    
    (426
    )
    
    
    (297
    )
    
    
    (226
    )Less common shares dividends, up to the priority
preferred
Shares dividends on a per-share basis
    
    
    (584
    )
    
    
    (407
    )
    
    
    (309
    )Remaining net income to be equally allocated to
common and preferred shares
    
    
    9,334
    
    
    
    5,486
    
    
    
    6,024Weighted average number of shares outstandingCommon/ADS
    
    
    2,536,673,672
    
    
    
    2,536,673,672
    
    
    
    2,536,673,672Preferred/ADS
    
    
    1,849,478,028
    
    
    
    1,849,478,028
    
    
    
    1,849,478,028Basic and diluted earnings per share
Common and preferred (*) (**)
    
    
    2.32
    
    
    
    1.41
    
    
    
    1.34Basic and diluted earnings per ADS (*) (**)
    
    
    9.28
    
    
    
    5.64
    
    
    
    5.36
 
 (*)
    
    Per share data is presented after extraordinary item and cumulative effect of
change in accounting principle.(**)
    
    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.
 F-90




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 19.
    
    Shareholders equity(Continued)
 (d)
    
    Capital reserves(Continued)
 
    
    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.
 (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. For the year ended December 31, 2003, the
Companys management retained US$ 4,603 of which US$ 3,773 relates to net income for
that year and US$ 830 to the remaining balance of retained earnings, to fund the
Companys capital expenditure budget for 2004. This proposal was approved at the
General Shareholders Meeting held on March 29, 2004.The proposal for appropriation of income for the year ended December 31, 2004 includes
a retention of earnings in the amount of US$ 4,396, of which US$ 4,392 relates 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 is intended
to cover partially the annual investment program established in the capital budget for
2005.
 F-91




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 19.
    
    Shareholders equity(Continued)
 (e)
    
    Appropriated retained earnings(Continued)
 
    
    Undistributed earnings reserve (Continued)The proposal of destination of net income for the year ended December 31, 2005
includes 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 proposal
is intended cover to partially meet the annual investment program established in the
2006 capital budget, ad referendum of the General Shareholders Meeting of April 3,
2006.
    
    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.
 
 20. Domestic and international acquisitions
 (a)
    
    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.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 20.
    
    Domestic and international acquisitions(Continued)
 (a)
    
    Acquisition of Liquigás Distribuidora S.A.(Continued)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.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.
 2004
    
    
    2003Pro-forma
    
    
    
    
    
    
    Pro-formaAs reported
    
    
    (unaudited)
    
    
    As reported
    
    
    (unaudited)Net operating revenues
    
    
    38,428
    
    
    
    39,529
    
    
    
    30,914
    
    
    
    32,783Cost of Sales
    
    
    (21,279
    )
    
    
    (22,222
    )
    
    
    (15,533
    )
    
    
    (17,168
    )Net income for the period
    
    
    6,190
    
    
    
    6,182
    
    
    
    6,559
    
    
    
    6,604Basic and diluted earnings
per common and preferred
share (*) (**)
    
    
    1.41
    
    
    
    1.41
    
    
    
    1.50
    
    
    
    1.51Basic and diluted earnings
per ADS (*) (**)
    
    
    5.64
    
    
    
    5.64
    
    
    
    6.00
    
    
    
    6.04
 
 (*)
    
    Considers effect of 4 for 1 stock split that occurred on September 1, 2005.(**)
    
    After effect of cumulative accounting change. F-93




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PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 20.
    
    Domestic and international acquisitions(Continued)
 (b)
    
    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.(c)
    
    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.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 20.
    
    Domestic and international acquisitions(Continued)
 (c)
    
    Acquisition of FAFEN Energia S.A.(Continued)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.(d)
    
    Acquisition of an interest in Petrobras Energia Participaciones S.A.  PEPSA  and
Petrolera Entre Lomas S.A.  PELSAOn October 17, 2002, the Company signed the Final Share Acquisition Agreement completing
the acquisition of a controlling interest PEPSA and PELSA.On May 13, 2003, the Argentine antitrust agency approved the purchase of 58.62% of the
capital stock of PEPSA and 39.67% of the capital stock of PELSA. As a result of the
purchase of a 39.67% interest in the capital stock of PELSA, together with the purchase of
58.62% of PEPSAs interest in the capital stock of PELSA, the Company has a controlling
interest in PELSA equal to 50.73% and thus has consolidated the entity.The purchase price to be paid for PEPSA and PELSA was based on an economic valuation model
of expected future earnings of those companies, which considered relevant factors,
including the potential effects of the economic situation of Argentina. The Company paid
US$ 739 in cash and US$ 338 in bonds to the Perez Companc family for the shares of PEPSA
and PELSA.The acquisition was consummated principally to expand PETROBRAS operations into
geographical markets where the Company had little activity. Through the acquisition of
PEPSA and PELSA, PETROBRAS was able to gain immediate access to the Argentine market and
brand recognition.
 F-95




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 20.
    
    Domestic and international acquisitions(Continued)
 (d)
    
    Acquisition of an interest in Petrobras Energia Participaciones S.A.  PEPSA  and
Petrolera Entre Lomas S.A.  PELSA(Continued)The acquisition of PEPSA and PELSA was recorded using the purchase method of accounting
and the financial statements of PEPSA and PELSA were included in the consolidated
PETROBRAS financial statements, beginning on May 13, 2003.The purchase price for PEPSA and PELSA 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. The goodwill of US$ 183 generated by the transaction is attributed
principally to downstream activities.PEPSA operates principally in the areas of oil field exploration and production, refining,
transport and commercialization, electricity generation, transmission and distribution,
and petrochemicals. Its activities are primarily based in Argentina, but PEPSA also
operates in Bolivia, Brazil, Ecuador, Peru and Venezuela. PELSA operates
primarily in the oil and gas exploration and production industry in Argentina.The following unaudited pro forma summary financial information presents the consolidated
results of operations as if the acquisition of PEPSA and PELSA had occurred at the
beginning of the periods presented.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 20.
    
    Domestic and international acquisitions(Continued)
 (d)
    
    Acquisition of an interest in Petrobras Energia Participaciones S.A.  PEPSA  and
Petrolera Entre Lomas S.A.  PELSA(Continued)Consolidated income statements data for the year ended December 31, 2003.
 Pro formaAs reported
    
    (unaudited)Net operating revenues
    
    
    30,914
    
    
    
    31,467Costs and expenses
    
    
    (20,518
    )
    
    
    (20,878
    )Financial expenses, net
    
    
    (104
    )
    
    
    (309
    )Others
    
    
    (1,519
    )
    
    
    (1,503
    )Income tax expense
    
    
    (2,663
    )
    
    
    (2,665
    )Minority interest
    
    
    (248
    )
    
    
    (260
    )Cumulative effect of change in accounting principles,
net of taxes
    
    
    697
    
    
    
    697Net income for the year
    
    
    6,559
    
    
    
    6,549Basic and diluted earnings per Common and Preferred
share (*) (**)
    
    
    1.50
    
    
    
    1.49Basic and diluted earnings per ADS (*) (**)
    
    
    6.00
    
    
    
    5.96
 
 (*)
    
    Considers effect of 4 for 1 stock split that occurred on September 1, 2005.(**)
    
    After effect of cumulative accounting change. (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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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 20.
    
    Domestic and international acquisitions(Continued)
 (f)
    
    Acquisition of new businesses in Colombia, Paraguay and UruguayIn 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., a natural gas distribution
concession company in Montevideo, Uruguay from GDF International. This operation is
subject to conclusion and execution of a purchase and sale agreement, to the completion of
some legal procedures, especially with regard to Gasebas minority shareholders, to the
approval from Uruguayan and the French government.In 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 the approximate amount of US$ 140. The final
transaction price will be defined when the related assets are fully transferred to
PETROBRAS in 2006. Acquisitions in these countries are subject to proper governmental
approvals.(g)
    
    Ventures in JapanThrough its subsidiary PETROBRAS International Braspetro B.V.  PIB BV, PETROBRAS created
in Japan Brazil-Japan Ethanol Co., Ltd (Nippaku Ethanol K.K. in Japanese) in order to
import and distribute ethanol produced in Brazil, developing technical and business
solutions that result in reliable long-term fuel alcohol supply to the Japanese market.Brazil-Japan Ethanol Co. Ltd will be equally owned (50%  50% share) by PETROBRAS and
Nippon Alcohol Hanbai K.K., which holds 70% of the ethanol distribution market in that
country. Corporate management will be shared by both companies, which will join efforts
and apply their distinct knowledge, technology and experience to export ethanol for fuel
use from Brazil to Japan in large volumes, with quality and safety.The new company will seek to develop technical and business solutions with a view to
introducing ethanol in the Japanese energy system in replacement for fuel fossils, in
order to reduce greenhouse gas emissions, such as carbon dioxide, thus contributing to the
successful adoption of the Kyoto protocol.
 F-98




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PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 20.
    
    Domestic and international acquisitions(Continued)
 (h)
    
    Acquisition of a 49% interest in TERMOBAHIAOn 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 and
step-acquisition business combination accounting was not applied as the transaction had
no material impact on PETROBRAS consolidated accounting records. Due to the
immateriality, proforma information has not been presented. See Note 15 discussion
regarding Blade.(i)
    
    Agreement for sale and association with Teikoku Oil Co. Ltd. in operations in EcuadorIn January 2005, PETROBRAS Energia S.A. entered into an agreement for sale and association
with Teikoku, under which, after obtaining prior approval and authorization from the
Ministry of Energy and Mines of Ecuador, it will assign 40% of the rights and obligations
under the contracts for participation in Blocks 18 and 31. It has been agreed that Teikoku
will undertake the payment for 40% of the oil transportation agreement to Oleoduto de
Crudos Pesados  OCP, as from the time production from Block 31 reaches an average of
10,000 barrels per day in a period of 30 consecutive days. During the transition period
and before the expected output is reached, Teikoku will undertake to pay 20% of the
agreement as of July 1, 2006.Teikoku will also make a one-time payment of 20%, equivalent to an additional disbursement
included in the agreement, considering the shortest of the following periods: (a) from
July 1, 2006 until Block 31 reaches the estimated output; or (b) 18 months before the
estimated output level is attained.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 20.
    
    Domestic and international acquisitions(Continued)
 (i)
    
    Agreement for sale and association with Teikoku Oil Co. Ltd. in operations in Ecuador
(Continued)For this acquisition, Teikoku will make a down payment of US$ 5 and additional
disbursement of US$ 10. Additionally, Teikoku is to make additional investments in Block
31, above and beyond its share in the joint venture, which will permit accelerated
development of the block and monetization of the reserves.The agreement will allow release of 40% of letters of credit of Petrobras Energia S.A.,
which are restricted to compliance with commercial commitments, linked to the
transportation contract with Oleodutos de Crudos Pesados  OCP.
 
 21.
    
    Commitments and contingencies
 PETROBRAS 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 210,696 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$ 2,244 (US$ 1,661 in 2004). Out of this
total, US$ 1,875 (US$ 1,311 in 2004) 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$ 369 through December 31,
2005(US$ 350 in 2004).
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 21.
    
    Commitments and contingencies(Continued)PETROBRAS has guaranteed that it will purchase specified volumes of natural gas that run
through TBG pipeline.In 1993, the Company signed a long-term contract to buy gas (The Gas Supply Agreement or
GSA) with Yacimentos 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 23.1 million cubic meters per
day during 2005.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, 2005 and 2004, the respective claims by type are
as follows:
 As of December 31,2005
    
    
    2004Labor claims
    
    
    7
    
    
    
    26Tax claims
    
    
    87
    
    
    
    73Civil claims
    
    
    79
    
    
    
    123Commercials claims and other contingencies
    
    
    62
    
    
    
    35235
    
    
    
    257Contingencies for joint liability
    
    
    75
    
    
    
    107Total
    
    
    310
    
    
    
    364Current contingencies
    
    
    (72
    )
    
    
    (131
    )Long-term contingencies
    
    
    238
    
    
    
    233
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 21.
    
    Commitments and contingencies(Continued)
 (a)
    
    Litigation(Continued)As of December 31, 2005 and 2004, in accordance with Brazilian law, the Company had
paid US$ 775 and US$ 699, 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, 2005, this amount was included in the
balance sheet as restricted deposits for legal proceedings and guarantees.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. 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
 
 21.
    
    Commitments and contingencies(Continued)
 (a)
    
    Litigation(Continued)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
 
 21.
    
    Commitments and contingencies(Continued)
 (a)
    
    Litigation(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
considers this last decision to be wrong and awaits its publication before filing an
appeal. 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.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. 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.Based on its legal counsels opinion, the Company  ́s Administration believes it is possible
that the Company will not prevail in this case, but that any possible negative judgment
would be in an amount far below the originally filed complaint. As such, the Company
assesses the risk of loss related to this case as possible.The 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
 
 21.
    
    Commitments and contingencies(Continued)
 (a)
    
    Litigation(Continued)PETROBRAS is a defendant in five 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. 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.The 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$ 383, up to December 31,
2005 some US$ 34 (US$ 28 in 2004) 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.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 21.
    
    Commitments and contingencies(Continued)
 (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.Since 2002, the Company has been conservatively accruing a provision for this contingency
which at December 31, 2005 totals US$ 75 (US$ 107 at December 31, 2004), as it considers
the chance of success in a defense filed against the INSS to be remote.PETROBRAS had disbursed during 2005 US$ 85 (US$ 137 in 2004), referring to administrative
suits filed by the INSS claiming the Companys joint liability.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 assessments  internal revenue service of Rio de JaneiroThe 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%.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 21.
    
    Commitments and contingencies(Continued)
 (c)
    
    Tax assessments  internal revenue service of Rio de Janeiro(Continued)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.PETROBRAS has defended itself against these tax assessments: i) the smaller in value has
been confirmed by the first administrative level, and the corresponding appeal has been
already filed by the Company, and waits judgment; ii) no first level decision has been
issued so far with regard to the other one, with greater value. Based on its legal
counsels advice, the Companys Administration does not expect to obtain an unfavorable
decision in this case, and thus 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.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 21.
    
    Commitments and contingencies(Continued)
 (d)
    
    Environmental matters(Continued)During 2000 the Company implemented an environmental excellence and operational safety
program  PEGASO  (Programa de Excelência em Getão Ambiental e Segurança Operacional).
The Company made expenditures of approximately US$ 3,519 from 2000 to December 31, 2005
under this program. During the years ended December 31, 2005 and 2004 the Company made
expenditures of approximately US$ 545 and US$ 594 respectively. The Company believes that
future payments related to environmental clean-up activities resulting from these
incidents, if any, will not be material.On 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.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 21.
    
    Commitments and contingencies(Continued)
 (d)
    
    Environmental matters(Continued)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.On 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. The Company cannot predict whether these
proceedings will have a material adverse effect on the financial condition, results of
operations or cash flow of the Company.On 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.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 21.
    
    Commitments and contingencies(Continued)
 (d)
    
    Environmental matters(Continued)On 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.On 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.On 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.On 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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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 21.
    
    Commitments and contingencies(Continued)
 (d)
    
    Environmental matters(Continued)On 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.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.(e)
    
    Minimum operating lease paymentsThe Company is committed to make the following minimum payments related to operating
leases as of December 31, 2005:
 2007
    
    
    1,5162008
    
    
    1,1722009
    
    
    7972010
    
    
    3652011
    
    
    1592012 and thereafter
    
    
    196Minimum operating lease payment commitments
    
    
    4,205
 The Company incurred US$ 1,417, US$ 1,247, and US$ 1,205 in rental expense on operating
leases at December 31, 2005, 2004 and 2003, respectively.
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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 21.
    
    Commitments and contingencies(Continued)
 (f)
    
    REVAP modernization projectThe REVAP modernization project aims to increase the capacity of Henrique Lage Refinery
(REVAP), so that the refinery is able to process heavy national oil, to adjust output of
diesel volumes to new locally required specifications and decrease the discharge of
pollutants. Accordingly, the special purpose company, Cia. de Desenvolvimento e
Modernização de Plantas Industriais  CDMPI, was created to construct and lease to
PETROBRAS an HDS (Hydro De-Sulfurization) unit, an HDT (Hydro Treatment) plant and related
units in that refinery. The commitment agreement was signed in 2005, with no specification
of a bridge loan.
 
 22.
    
    Derivative instruments, hedging and risk management activities
 The Company is exposed to a number of market risks arising from the normal course of business.
Such market risks principally involve the possibility that changes in interest rates, 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 developed under the direction of the Companys
executive officers.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 adverse effect on the value of a financial
instrument that results from a favorable change 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.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 22.
    
    Derivative instruments, hedging and risk management activities(Continued)In 2004, 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 an
integrated management of risk exposures and formalizing the main guidelines adopted by the
Company to handle uncertainties regarding its activities. The Risk Management Committee has
been created with a view to concentrating risk management information and discussions,
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 impair the
value of certain of the Companys obligations.During 2000, the Company entered into three zero cost foreign exchange collars to reduce
its exposure to variations between the U.S. Dollar and the Japanese Yen, and between the
U.S. Dollar and EURO relative to long-term debt denominated in foreign currencies with a
notional amount of
approximately US$ 470. The Company does not use hedge accounting for these derivative
instruments.These collars establish a ceiling and a floor for the associated exchange rates. If the
exchange rate falls below the defined floor, the counterparties will pay to the Company
the difference between the actual rate and the floor rate on the notional amount.
Conversely, if the exchange rate increases above the defined ceiling, the Company will pay
to the counterparties the difference between the actual rate and the ceiling rate on the
notional amount. The contracts expire upon the maturity date of each note.The Yen zero cost collar contracts were settled on September 8, 2003, with a cash payment
of US$ 68 and one of the Euro zero cost collars was settled on December 31, 2004, with
cash reception of US$ 18.The call and put portion of the Companys zero cost foreign exchange collars at December
31, 2005 have a fair value of US$ 12 and US$ 1, respectively (US$ 18 and US$ 3 at December
31, 2004).
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 22.
    
    Derivative instruments, hedging and risk management activities(Continued)
 (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 primarily
consist of futures contracts traded on stock exchanges and options and swaps entered into
with major financial institutions. The futures contracts provide economic hedges to
anticipated crude oil purchases and sales, generally forecast to occur within a 30 to 360
day period, and reduce the Companys exposure to volatile commodity prices.The Companys exposure on these contracts is limited to the difference between contract
value and market value on the volumes hedged. Crude oil future contracts are marked to
market and related gains and losses are recognized currently into earnings, irrespective
of when physical crude sales occur. For the years ended December 31, 2005, 2004 and 2003,
the Company consummated commodity derivative transaction activities on 26.79%, 33.06% and
40.52%, respectively, of its total import and export traded volumes.The open positions on the futures market, compared to spot market value, resulted in
recognized losses of US$ 1, US$ 2 and US$ 2 during the years ended December 31, 2005, 2004
and 2003, respectively.A long-term position was executed in January 2001 by 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 to obtain 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 puts 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 2003 the Company
realized a net gain of US$ 7. During 2005 and 2004 the Company realized no gain or loss.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 22.
    
    Derivative instruments, hedging and risk management activities(Continued)
 (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, 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 studying various forms of
derivatives to reduce exposure to interest rate fluctuations and may use these financial
instruments in the future.(d)
    
    Risk Management activity at PEPSAPEPSA also uses derivative instruments such as options, swaps and others, mainly to
mitigate the impact of changes in crude oil prices, interest rates and future exchange
rates. Such derivative instruments are designed to mitigate specific exposures, and are
assessed periodically to assure high
correlation of the derivative instrument to the risk exposure identified and to assure
that the derivative is highly effective in offsetting changes in cash flows inherent in
the covered risk. PEPSA in the past qualified for hedge accounting treatment for its crude
oil derivative instruments and its interest rate swap derivative instruments, but holds no
such instruments at December 31, 2005.As of December 31, 2005, 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, (US$ 233 in 2004) due to derivative financial
instruments that do not qualify for hedge accounting.Additionally, PEPSA until July, 2005, held an interest rate contract to manage the
volatility of the LIBOR rate implied in a Class C negotiable instrument, establishing the
respective interest rate at 7.93% annually. This contract qualified for hedge accounting
in accordance with SFAS 133 until its liquidation, which was made
with in material impact.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 
 23.
    
    Natural gas derivative contract
 In 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,
effective October 2002, with a gas producer that constituted a derivative financial instrument
under SFAS 133. This contract, the Natural Gas Price Volatility Reduction Contract (the
PVRC), with maturity in 2019, was executed with the purpose to reduce the volatility of price
under the GSA. The counterparty to the PVRC is one of the gas producers that sell to the
supplier under the GSA contract. Therefore, the PVRC refers to the same volumes of natural gas
sold by the counterparty to the supplier under the GSA, and uses the same pricing index as the
GSA contract and thus works as an economic hedge. The volume covered by the PVRC represents
approximately 43% of the anticipated volume under the GSA.The terms of the PVRC include a straight fixed for floating price swap for the period between
inception and 2004, and for the period from 2005 to 2019, a collar with PETROBRAS receiving
cash payments when the calculated price is over the established ceiling and PETROBRAS 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.The PVRC is being accounted for under SFAS 133 as a derivative instrument, since the Company
did not satisfy the documentation required for hedge accounting, and is being marked to its
calculated fair value with changes in such value recognized in income. At inception, the PVRC
had a positive value to PETROBRAS of US$ 169, which is deemed a deferred purchase incentive and
is being amortized into income on the basis of the volumes anticipated under the PVRC. The
liability was US$ 144 at December 31, 2005 (US$ 153 in 2004) and generated a gain in the amount
of US$ 6 (US$ 11 in 2004), net of deferred tax effect of US$ 3 (US$5 in 2004).
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 23.
    
    Natural gas derivative contract(Continued)As of December 31, 2005, the Company recorded a derivative asset based on the fair value
calculation in the amount of US$ 547 (US$ 635 in 2004), and a mark-to-market (or MTM) loss in
the amount of US$ 58, net of deferred tax effect of US$29 (a gain in the amount of US$ 365, net
of deferred tax effect of US$ 188 in 2004). Such MTM losses represent the decreased value of
the derivative during the year ended December 31, 2005. The MTM gains recorded in 2004
represent the increased value of the derivative from inception to December 31, 2004. The
derivative gains (losses) are recorded as a component of financial income. The effects of the
PVRC were not recognized from inception but the impact was immaterial and has been cumulatively
recognized in 2004.Considering that there are no market quotations for natural gas for such a long duration as
that of the PVRC, the fair value was calculated based on simulation using a mean reversion
model developed by PETROBRAS. The most significant model assumptions at December 31, 2005 and
2004 include starting prices of crude oil of US$ 56.91 and US$ 39.53, respectively, per barrel,
an average fuel oil basket (i.e., the price index of the GSA) of US$ 42.50 and US$ 23.58,
respectively, per barrel and a volatility of crude oil of 23% a.a. (25% a.a. in 2004). Other
parameters of the model, including the long run average of crude
oil, fuel oil spread to crude, correlations and inflation indexes were estimated based on
historical averages.A US$ 1 (one United States dollar) per barrel increase in the market price of crude under the
PVRC would result in a US$ 12 increase in the fair value of the derivative at December 31, 2005
(US$ 24 increase at December 31, 2004).As indicated above, the accounting impacts recognized are in accordance with SFAS 133, whereas
the economic impact and cash flow results of the transaction are to fix the price paid for
natural gas imports within a range and to receive or pay cash for price fluctuations under the
GSA beyond those capped amounts. Such ceiling and floor amounts in the PVRC allow the purchase
of natural gas at a price level appropriate to PETROBRAS, which then sells the gas in local
market to distributors at a price level that will allow the sustained development of the
natural gas market in Brazil.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 
 24.
    
    Financial instruments
 In the normal course of its business, the Company uses various types of financial
instruments. These instruments include recorded assets and liabilities, and also items such as
derivatives, which principally involve off-balance sheet risk.
 (a)
    
    Concentrations of credit riskSubstantial portions of the Companys assets including financial instruments are
located in Brazil and 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 equivalents, government
securities, the Petroleum and Alcohol account, trade receivables and future contracts.The Company takes several measures to reduce its credit risk to acceptable levels. All
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, 2005 and December 31, 2004, the Companys trade
receivables were primarily maintained with large distributors.(b)
    
    Fair valueFair values are derived either from quoted market prices where 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, 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.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 24.
    
    Financial instruments(Continued)
 (b)
    
    Fair value(Continued)The Companys debt including project financing obligations, resulting from FIN 46
consolidation amounted to US$ 15,132 at December 31, 2005 and US$ 16,544 at December 31,
2004 and had estimated fair values of US$ 15,239 and U$ 17,195, respectively.
 
 25.
    
    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.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 25.
    
    Segment information(Continued)
 
    
    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:
 
    
    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.
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PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 25.
    
    Segment information(Continued)The following presents the Companys assets by segment:
 As of December 31, 2005Exploration
    
    
    
    
    
    
    
    
    
    
    Internationaland
    
    
    
    
    
    
    Gas and
    
    
    (see separateproduction
    
    
    Supply
    
    
    energy
    
    
    disclosure)
    
    
    Distribution
    
    
    Corporate
    
    
    Eliminations
    
    
    TotalCurrent assets
    
    
    3,484
    
    
    
    8,835
    
    
    
    1,816
    
    
    
    2,403
    
    
    
    2,077
    
    
    
    9,958
    
    
    
    (2,795
    )
    
    
    25,778Cash and cash equivalents
    
    
    701
    
    
    
    617
    
    
    
    764
    
    
    
    588
    
    
    
    159
    
    
    
    7,042
    
    
    
    
    
    
    
    9,871Other current assets
    
    
    2,783
    
    
    
    8,218
    
    
    
    1,052
    
    
    
    1,815
    
    
    
    1,918
    
    
    
    2,916
    
    
    
    (2,795
    )
    
    
    15,907Investments in non-consolidated companies
and other investments
    
    
    9
    
    
    
    822
    
    
    
    438
    
    
    
    417
    
    
    
    20
    
    
    
    104
    
    
    
    
    
    
    
    1,810Property, plant and equipment, net
    
    
    25,869
    
    
    
    8,085
    
    
    
    5,326
    
    
    
    4,655
    
    
    
    1,236
    
    
    
    782
    
    
    
    (33
    )
    
    
    45,920Non current assets
    
    
    971
    
    
    
    396
    
    
    
    1,349
    
    
    
    453
    
    
    
    392
    
    
    
    5,151
    
    
    
    (3,595
    )
    
    
    5,117Petroleum and Alcohol account
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    329
    
    
    
    
    
    
    
    329Government securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    364
    
    
    
    
    
    
    
    364Other assets
    
    
    971
    
    
    
    396
    
    
    
    1,349
    
    
    
    453
    
    
    
    392
    
    
    
    4,458
    
    
    
    (3,595
    )
    
    
    4,424Total assets
    
    
    30,333
    
    
    
    18,138
    
    
    
    8,929
    
    
    
    7,928
    
    
    
    3,725
    
    
    
    15,995
    
    
    
    (6,423
    )
    
    
    78,625
 F-121




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 25.
    
    Segment information(Continued)
 As of December 31, 2005InternationalExplorationand
    
    
    
    
    
    
    Gas andproduction
    
    
    Supply
    
    
    energy
    
    
    Distribution
    
    
    Corporate
    
    
    Eliminations
    
    
    TotalCurrent assets
    
    
    1,623
    
    
    
    724
    
    
    
    555
    
    
    
    86
    
    
    
    597
    
    
    
    (1,182
    )
    
    
    2,403Cash and cash equivalents
    
    
    137
    
    
    
    64
    
    
    
    3
    
    
    
    14
    
    
    
    370
    
    
    
    
    
    
    
    588Other current assets
    
    
    1,486
    
    
    
    660
    
    
    
    552
    
    
    
    72
    
    
    
    227
    
    
    
    (1,182
    )
    
    
    1,815Investments in non-consolidated companies
and other investments
    
    
    141
    
    
    
    51
    
    
    
    204
    
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    417Property, plant and equipment, net
    
    
    3,801
    
    
    
    530
    
    
    
    192
    
    
    
    78
    
    
    
    59
    
    
    
    (5
    )
    
    
    4,655Non current assets
    
    
    452
    
    
    
    30
    
    
    
    54
    
    
    
    22
    
    
    
    2,206
    
    
    
    (2,311
    )
    
    
    453Other assets
    
    
    452
    
    
    
    30
    
    
    
    54
    
    
    
    22
    
    
    
    2,206
    
    
    
    (2,311
    )
    
    
    453Total assets
    
    
    6,017
    
    
    
    1,335
    
    
    
    1,005
    
    
    
    186
    
    
    
    2,883
    
    
    
    (3,498
    )
    
    
    7,928
 F-122




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 25.
    
    Segment information(Continued)
 As of December 31, 2004Exploration
    
    
    
    
    
    
    
    
    
    
    Internationaland
    
    
    
    
    
    
    Gas and
    
    
    (see separateproduction
    
    
    Supply
    
    
    energy
    
    
    disclosure)
    
    
    Distribution
    
    
    Corporate
    
    
    Eliminations
    
    
    TotalCurrent assets
    
    
    2,551
    
    
    
    7,341
    
    
    
    1,139
    
    
    
    1,940
    
    
    
    1,717
    
    
    
    6,506
    
    
    
    (1,768
    )
    
    
    19,426Cash and cash equivalents
    
    
    878
    
    
    
    496
    
    
    
    178
    
    
    
    490
    
    
    
    104
    
    
    
    4,710
    
    
    
    
    
    
    
    6,856Other current assets
    
    
    1,673
    
    
    
    6,845
    
    
    
    961
    
    
    
    1,450
    
    
    
    1,613
    
    
    
    1,796
    
    
    
    (1,768
    )
    
    
    12,570Investments in non-consolidated companies
and other investments
    
    
    8
    
    
    
    919
    
    
    
    307
    
    
    
    516
    
    
    
    25
    
    
    
    87
    
    
    
    
    
    
    
    1,862Property, plant and equipment, net
    
    
    20,458
    
    
    
    6,333
    
    
    
    4,506
    
    
    
    4,160
    
    
    
    1,011
    
    
    
    571
    
    
    
    (19
    )
    
    
    37,020Non current assets
    
    
    1,270
    
    
    
    438
    
    
    
    1,331
    
    
    
    316
    
    
    
    265
    
    
    
    6,783
    
    
    
    (5,629
    )
    
    
    4,774Petroleum and Alcohol account
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    282
    
    
    
    
    
    
    
    282Government securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    326
    
    
    
    
    
    
    
    326Other assets
    
    
    1,270
    
    
    
    438
    
    
    
    1,331
    
    
    
    316
    
    
    
    265
    
    
    
    6,175
    
    
    
    (5,629
    )
    
    
    4,166Total assets
    
    
    24,287
    
    
    
    15,031
    
    
    
    7,283
    
    
    
    6,932
    
    
    
    3,018
    
    
    
    13,947
    
    
    
    (7,416
    )
    
    
    63,082
 F-123




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 25.
    
    Segment information(Continued)
 As of December 31, 2004InternationalExplorationand
    
    
    
    
    
    
    Gas andproduction
    
    
    Supply
    
    
    energy
    
    
    Distribution
    
    
    Corporate
    
    
    Eliminations
    
    
    TotalCurrent assets
    
    
    1,112
    
    
    
    579
    
    
    
    272
    
    
    
    99
    
    
    
    638
    
    
    
    (760
    )
    
    
    1,940Cash and cash equivalents
    
    
    151
    
    
    
    45
    
    
    
    2
    
    
    
    6
    
    
    
    286
    
    
    
    
    
    
    
    490Other current assets
    
    
    961
    
    
    
    534
    
    
    
    270
    
    
    
    93
    
    
    
    352
    
    
    
    (760
    )
    
    
    1,450Investments in non-consolidated companies
and other investments
    
    
    159
    
    
    
    50
    
    
    
    239
    
    
    
    
    
    
    
    68
    
    
    
    
    
    
    
    516Property, plant and equipment, net
    
    
    3,317
    
    
    
    507
    
    
    
    199
    
    
    
    87
    
    
    
    50
    
    
    
    
    
    
    
    4,160Non current assets
    
    
    310
    
    
    
    26
    
    
    
    11
    
    
    
    11
    
    
    
    1,399
    
    
    
    (1,441
    )
    
    
    316Other assets
    
    
    310
    
    
    
    26
    
    
    
    11
    
    
    
    11
    
    
    
    1,399
    
    
    
    (1,441
    )
    
    
    316Total assets
    
    
    4,898
    
    
    
    1,162
    
    
    
    721
    
    
    
    197
    
    
    
    2,155
    
    
    
    (2,201
    )
    
    
    6,932
 F-124




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 25.
    
    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
    
    
    
    881
    
    
    
    225
    
    
    
    
    
    
    
    (41,574
    )
    
    
    Net operating revenues
    
    
    28,824
    
    
    
    45,515
    
    
    
    3,164
    
    
    
    4,528
    
    
    
    15,867
    
    
    
    
    
    
    
    (41,574
    )
    
    
    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
and impairment
    
    
    (882
    )
    
    
    
    
    
    
    
    
    
    
    (283
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,165
    )Selling, general and administrative expenses
    
    
    (357
    )
    
    
    (1,195
    )
    
    
    (612
    )
    
    
    (424
    )
    
    
    (914
    )
    
    
    (1,027
    )
    
    
    55
    
    
    
    (4,474
    )Research and development expenses
    
    
    (153
    )
    
    
    (55
    )
    
    
    (22
    )
    
    
    (2
    )
    
    
    (1
    )
    
    
    (166
    )
    
    
    
    
    
    
    (399
    )Other operating expenses
    
    
    (29
    )
    
    
    (36
    )
    
    
    (457
    )
    
    
    (60
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (582
    )Costs and expenses
    
    
    (14,319
    )
    
    
    (41,963
    )
    
    
    (3,680
    )
    
    
    (3,655
    )
    
    
    (15,372
    )
    
    
    (1,238
    )
    
    
    40,853
    
    
    
    (39,374
    )Equity in results of non-consolidated companies
    
    
    
    
    
    
    10
    
    
    
    56
    
    
    
    68
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    139Financial income (expenses), net
    
    
    (197
    )
    
    
    273
    
    
    
    (17
    )
    
    
    (354
    )
    
    
    11
    
    
    
    53
    
    
    
    
    
    
    
    (231
    )Employee benefit expense
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (992
    )
    
    
    
    
    
    
    (994
    )Other taxes
    
    
    (20
    )
    
    
    (32
    )
    
    
    (23
    )
    
    
    (51
    )
    
    
    (68
    )
    
    
    (179
    )
    
    
    
    
    
    
    (373
    )Other expenses, net
    
    
    (31
    )
    
    
    (101
    )
    
    
    (28
    )
    
    
    (37
    )
    
    
    44
    
    
    
    (746
    )
    
    
    
    
    
    
    (899
    )Income before income taxes, minority interest,
extrarodinary item and accounting change
    
    
    14,257
    
    
    
    3,700
    
    
    
    (528
    )
    
    
    499
    
    
    
    482
    
    
    
    (3,097
    )
    
    
    (721
    )
    
    
    14,592Income tax benefits (expense)
    
    
    (4,888
    )
    
    
    (1,237
    )
    
    
    114
    
    
    
    (153
    )
    
    
    (164
    )
    
    
    1,634
    
    
    
    253
    
    
    
    (4,441
    )Minority interest in results of consolidated subsidiaries
    
    
    173
    
    
    
    (41
    )
    
    
    (59
    )
    
    
    (38
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35Income before effect of change in accounting principle
    
    
    9,542
    
    
    
    2,422
    
    
    
    (473
    )
    
    
    308
    
    
    
    318
    
    
    
    (1,463
    )
    
    
    (468
    )
    
    
    10,186Extraordinary gain net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    158
    
    
    
    
    
    
    
    158Net income for the year
    
    
    9,542
    
    
    
    2,422
    
    
    
    (473
    )
    
    
    308
    
    
    
    318
    
    
    
    (1,305
    )
    
    
    (468
    )
    
    
    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. F-125




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 25.
    
    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
    
    
    
    32
    
    
    
    4
    
    
    
    
    
    
    
    (1,910
    )
    
    
    881Net operating revenues
    
    
    2,396
    
    
    
    2,358
    
    
    
    568
    
    
    
    1,094
    
    
    
    22
    
    
    
    (1,910
    )
    
    
    4,528Cost of sales
    
    
    (665
    )
    
    
    (2,151
    )
    
    
    (452
    )
    
    
    (1,019
    )
    
    
    (23
    )
    
    
    1,885
    
    
    
    (2,425
    )Depreciation, depletion and amortization
    
    
    (360
    )
    
    
    (65
    )
    
    
    (13
    )
    
    
    (11
    )
    
    
    (12
    )
    
    
    
    
    
    
    (461
    )Exploration, including exploratory dry holes
and impairment
    
    
    (277
    )
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    (283
    )Selling, general and administrative expenses
    
    
    (123
    )
    
    
    (60
    )
    
    
    (7
    )
    
    
    (69
    )
    
    
    (165
    )
    
    
    
    
    
    
    (424
    )Research and development expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )Other operating expenses
    
    
    
    
    
    
    
    
    
    
    (60
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60
    )Costs and expenses
    
    
    (1,425
    )
    
    
    (2,276
    )
    
    
    (532
    )
    
    
    (1,105
    )
    
    
    (202
    )
    
    
    1,885
    
    
    
    (3,655
    )Equity in results of non-consolidated companies
    
    
    4
    
    
    
    18
    
    
    
    2
    
    
    
    
    
    
    
    41
    
    
    
    3
    
    
    
    68Financial income (expenses), net
    
    
    (218
    )
    
    
    (4
    )
    
    
    1
    
    
    
    
    
    
    
    (129
    )
    
    
    (4
    )
    
    
    (354
    )Other taxes
    
    
    (14
    )
    
    
    (5
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (30
    )
    
    
    
    
    
    
    (51
    )Other expenses, net
    
    
    (149
    )
    
    
    9
    
    
    
    68
    
    
    
    1
    
    
    
    (14
    )
    
    
    48
    
    
    
    (37
    )Income before income taxes, minority interest,
extrarodinary item and accounting change
    
    
    594
    
    
    
    100
    
    
    
    106
    
    
    
    (11
    )
    
    
    (312
    )
    
    
    22
    
    
    
    499Income tax benefits (expense)
    
    
    (221
    )
    
    
    (31
    )
    
    
    (25
    )
    
    
    (1
    )
    
    
    125
    
    
    
    
    
    
    
    (153
    )Minority interest in results of consolidated subsidiaries
    
    
    15
    
    
    
    (20
    )
    
    
    (10
    )
    
    
    2
    
    
    
    (25
    )
    
    
    
    
    
    
    (38
    )Net income (loss) for the year
    
    
    388
    
    
    
    49
    
    
    
    71
    
    
    
    (10
    )
    
    
    (212
    )
    
    
    22
    
    
    
    308
 F-126




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 25.
    
    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
    
    
    
    159
    
    
    
    
    
    
    
    (25,322
    )
    
    
    Net operating revenues
    
    
    18,871
    
    
    
    28,767
    
    
    
    2,021
    
    
    
    3,604
    
    
    
    10,487
    
    
    
    
    
    
    
    (25,322
    )
    
    
    38,428Cost of sales
    
    
    (7,093
    )
    
    
    (25,916
    )
    
    
    (1,996
    )
    
    
    (1,870
    )
    
    
    (9,470
    )
    
    
    
    
    
    
    25,066
    
    
    
    (21,279
    )Depreciation, depletion and amortization
    
    
    (1,322
    )
    
    
    (548
    )
    
    
    (100
    )
    
    
    (423
    )
    
    
    (59
    )
    
    
    (29
    )
    
    
    
    
    
    
    (2,481
    )Exploration, including exploratory dry holes
and impairment
    
    
    (470
    )
    
    
    
    
    
    
    (13
    )
    
    
    (195
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (678
    )Selling, general and administrative expenses
    
    
    (235
    )
    
    
    (960
    )
    
    
    (178
    )
    
    
    (335
    )
    
    
    (567
    )
    
    
    (626
    )
    
    
    
    
    
    
    (2,901
    )Research and development expenses
    
    
    (109
    )
    
    
    (53
    )
    
    
    (9
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (73
    )
    
    
    
    
    
    
    (248
    )Other operating expenses
    
    
    (41
    )
    
    
    (44
    )
    
    
    (110
    )
    
    
    (64
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (259
    )Costs and expenses
    
    
    (9,270
    )
    
    
    (27,521
    )
    
    
    (2,406
    )
    
    
    (2,889
    )
    
    
    (10,098
    )
    
    
    (728
    )
    
    
    25,066
    
    
    
    (27,846
    )Equity in results of non-consolidated companies
    
    
    
    
    
    
    12
    
    
    
    68
    
    
    
    92
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    172Financial income (expenses), net
    
    
    (143
    )
    
    
    82
    
    
    
    730
    
    
    
    (417
    )
    
    
    (3
    )
    
    
    (576
    )
    
    
    
    
    
    
    (327
    )Employee benefit expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (650
    )
    
    
    
    
    
    
    (650
    )Other taxes
    
    
    (12
    )
    
    
    (25
    )
    
    
    (30
    )
    
    
    (47
    )
    
    
    (54
    )
    
    
    (272
    )
    
    
    
    
    
    
    (440
    )Other expenses, net
    
    
    (46
    )
    
    
    11
    
    
    
    (87
    )
    
    
    6
    
    
    
    (80
    )
    
    
    (206
    )
    
    
    
    
    
    
    (402
    )Income before income taxes, minority interest,
extrarodinary item and accounting change
    
    
    9,400
    
    
    
    1,326
    
    
    
    296
    
    
    
    349
    
    
    
    252
    
    
    
    (2,432
    )
    
    
    (256
    )
    
    
    8,935Income tax benefits (expense)
    
    
    (3,217
    )
    
    
    (438
    )
    
    
    (32
    )
    
    
    42
    
    
    
    (52
    )
    
    
    1,377
    
    
    
    89
    
    
    
    (2,231
    )Minority interest in results of consolidated subsidiaries
    
    
    (222
    )
    
    
    (34
    )
    
    
    (110
    )
    
    
    (148
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (514
    )Net income (loss) for the year
    
    
    5,961
    
    
    
    854
    
    
    
    154
    
    
    
    243
    
    
    
    200
    
    
    
    (1,055
    )
    
    
    (167
    )
    
    
    6,190
 F-127




---



##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS AND SUBSIDIARIES
 
 25.
    
    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
    )
    
    
    (16
    )
    
    
    1,681
    
    
    
    (1,870
    )Depreciation, depletion and amortization
    
    
    (327
    )
    
    
    (63
    )
    
    
    (12
    )
    
    
    (10
    )
    
    
    (11
    )
    
    
    
    
    
    
    (423
    )Exploration, including exploratory dry holes
and impairment
    
    
    (195
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (195
    )Selling, general and administrative expenses
    
    
    (111
    )
    
    
    (53
    )
    
    
    (11
    )
    
    
    (61
    )
    
    
    (99
    )
    
    
    
    
    
    
    (335
    )Research and development expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )Other operating expenses
    
    
    (64
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64
    )Costs and expenses
    
    
    (1,158
    )
    
    
    (1,913
    )
    
    
    (360
    )
    
    
    (1,011
    )
    
    
    (128
    )
    
    
    1,681
    
    
    
    (2,889
    )Equity in results of non-consolidated companies
    
    
    8
    
    
    
    21
    
    
    
    6
    
    
    
    
    
    
    
    56
    
    
    
    1
    
    
    
    92Financial income (expenses), net
    
    
    (303
    )
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    (108
    )
    
    
    
    
    
    
    (417
    )Other taxes
    
    
    (16
    )
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )
    
    
    (17
    )
    
    
    
    
    
    
    (47
    )Other expenses, net
    
    
    3
    
    
    
    9
    
    
    
    12
    
    
    
    (2
    )
    
    
    (16
    )
    
    
    
    
    
    
    6Income before income taxes, minority interest,
extrarodinary item and accounting change
    
    
    334
    
    
    
    264
    
    
    
    89
    
    
    
    (140
    )
    
    
    (195
    )
    
    
    (3
    )
    
    
    349Income tax benefits (expense)
    
    
    (146
    )
    
    
    (51
    )
    
    
    (18
    )
    
    
    10
    
    
    
    247
    
    
    
    
    
    
    
    42Minority interest in results of consolidated subsidiaries
    
    
    6
    
    
    
    (5
    )
    
    
    (2
    )
    
    
    (4
    )
    
    
    (143
    )
    
    
    
    
    
    
    (148
    )Net income (loss) for the year
    
    
    194
    
    
    
    208
    
    
    
    69
    
    
    
    (134
    )
    
    
    (91
    )
    
    
    (3
    )
    
    
    243
 F-128




---



##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 25.
    
    Segment information(Continued)
 Year ended December 31, 2003Exploration
    
    
    
    
    
    
    
    
    
    Internationaland
    
    
    
    
    
    Gas and
    
    (see separateproduction
    
    Supply
    
    energy
    
    disclosure)
    
    Distribution
    
    Corporate
    
    Eliminations
    
    TotalNet operating revenues to third parties
    
    
    2,369
    
    
    
    17,405
    
    
    
    1,234
    
    
    
    2,030
    
    
    
    7,876
    
    
    
    
    
    
    
    
    
    
    
    30,914Inter-segment net operating revenues
    
    
    13,329
    
    
    
    6,585
    
    
    
    245
    
    
    
    129
    
    
    
    138
    
    
    
    
    
    
    
    (20,426
    )
    
    
    Net operating revenues
    
    
    15,698
    
    
    
    23,990
    
    
    
    1,479
    
    
    
    2,159
    
    
    
    8,014
    
    
    
    
    
    
    
    (20,426
    )
    
    
    30,914Cost of sales
    
    
    (6,154
    )
    
    
    (20,210
    )
    
    
    (1,045
    )
    
    
    (1,135
    )
    
    
    (7,256
    )
    
    
    
    
    
    
    20,267
    
    
    
    (15,533
    )Depreciation, depletion and amortization
    
    
    (955
    )
    
    
    (397
    )
    
    
    (87
    )
    
    
    (288
    )
    
    
    (29
    )
    
    
    (29
    )
    
    
    
    
    
    
    (1,785
    )Exploration, including exploratory dry holes
and impairment
    
    
    (452
    )
    
    
    
    
    
    
    
    
    
    
    (130
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (582
    )Selling, general and administrative expenses
    
    
    (123
    )
    
    
    (732
    )
    
    
    (149
    )
    
    
    (208
    )
    
    
    (416
    )
    
    
    (554
    )
    
    
    91
    
    
    
    (2,091
    )Research and development expenses
    
    
    (92
    )
    
    
    (50
    )
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    (53
    )
    
    
    
    
    
    
    (201
    )Other operating expenses
    
    
    (209
    )
    
    
    (61
    )
    
    
    
    
    
    
    (56
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (326
    )Costs and expenses
    
    
    (7,985
    )
    
    
    (21,450
    )
    
    
    (1,287
    )
    
    
    (1,817
    )
    
    
    (7,701
    )
    
    
    (636
    )
    
    
    20,358
    
    
    
    (20,518
    )Equity in results of non-consolidated companies
    
    
    
    
    
    
    25
    
    
    
    56
    
    
    
    62
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    141Financial income (expenses), net
    
    
    (317
    )
    
    
    146
    
    
    
    (78
    )
    
    
    (129
    )
    
    
    (62
    )
    
    
    538
    
    
    
    (202
    )
    
    
    (104
    )Employee benefit expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (595
    )
    
    
    
    
    
    
    (595
    )Other taxes
    
    
    (9
    )
    
    
    (24
    )
    
    
    (19
    )
    
    
    (25
    )
    
    
    (48
    )
    
    
    (208
    )
    
    
    
    
    
    
    (333
    )Other expenses, net
    
    
    (15
    )
    
    
    (39
    )
    
    
    (387
    )
    
    
    1
    
    
    
    (1
    )
    
    
    (291
    )
    
    
    
    
    
    
    (732
    )Income before income taxes, minority interest,
extrarodinary item and accounting change
    
    
    7,372
    
    
    
    2,648
    
    
    
    (236
    )
    
    
    251
    
    
    
    202
    
    
    
    (1,194
    )
    
    
    (270
    )
    
    
    8,773Income tax benefits (expense)
    
    
    (2,506
    )
    
    
    (874
    )
    
    
    196
    
    
    
    (154
    )
    
    
    (63
    )
    
    
    698
    
    
    
    40
    
    
    
    (2,663
    )Minority interest in results of consolidated subsidiaries
    
    
    (59
    )
    
    
    (31
    )
    
    
    (156
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (248
    )Income before effect of change in accounting principle
    
    
    4,807
    
    
    
    1,743
    
    
    
    (196
    )
    
    
    96
    
    
    
    138
    
    
    
    (496
    )
    
    
    (230
    )
    
    
    5,862Cumulative effect of change in accounting principle,
net of taxes
    
    
    697
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    697Net income (loss) for the year
    
    
    5,504
    
    
    
    1,743
    
    
    
    (196
    )
    
    
    96
    
    
    
    138
    
    
    
    (496
    )
    
    
    (230
    )
    
    
    6,559
 Net operating revenues and Costs of sales relative to 2003 were reclassified between the
International segment and Supply segment in relation to offshore operations that were being
allocated to the international segment. There was no significant impact on the results reported
for these segments.
 F-129




---



##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 25.
    
    Segment information(Continued)
 Year ended December 31, 2003InternationalExplorationand
    
    
    
    
    
    Gas andproduction
    
    Supply
    
    energy
    
    Distribution
    
    Corporate
    
    Eliminations
    
    TotalNet operating revenues to third parties
    
    
    535
    
    
    
    730
    
    
    
    159
    
    
    
    592
    
    
    
    14
    
    
    
    
    
    
    
    2,030Inter-segment net operating revenues
    
    
    534
    
    
    
    633
    
    
    
    3
    
    
    
    29
    
    
    
    
    
    
    
    (1,070
    )
    
    
    129Net operating revenues
    
    
    1,069
    
    
    
    1,363
    
    
    
    162
    
    
    
    621
    
    
    
    14
    
    
    
    (1,070
    )
    
    
    2,159Cost of sales
    
    
    (300
    )
    
    
    (1,215
    )
    
    
    (102
    )
    
    
    (586
    )
    
    
    (14
    )
    
    
    1,082
    
    
    
    (1,135
    )Depreciation, depletion and amortization
    
    
    (223
    )
    
    
    (46
    )
    
    
    (11
    )
    
    
    (4
    )
    
    
    (4
    )
    
    
    
    
    
    
    (288
    )Exploration, including exploratory dry holes
and impairment
    
    
    (130
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (130
    )Selling, general and administrative expenses
    
    
    (59
    )
    
    
    (34
    )
    
    
    (2
    )
    
    
    (32
    )
    
    
    (81
    )
    
    
    
    
    
    
    (208
    )Other operating expenses
    
    
    (56
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56
    )Costs and expenses
    
    
    (768
    )
    
    
    (1,295
    )
    
    
    (115
    )
    
    
    (622
    )
    
    
    (99
    )
    
    
    1,082
    
    
    
    (1,817
    )Equity in results of non-consolidated companies
    
    
    2
    
    
    
    6
    
    
    
    (2
    )
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    62Financial income (expenses), net
    
    
    (100
    )
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    
    
    
    
    (129
    )Other taxes
    
    
    (3
    )
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )
    
    
    (12
    )
    
    
    
    
    
    
    (25
    )Other expenses, net
    
    
    (17
    )
    
    
    (9
    )
    
    
    7
    
    
    
    1
    
    
    
    19
    
    
    
    
    
    
    
    1Income before income taxes, minority interest,
extrarodinary item and accounting change
    
    
    183
    
    
    
    49
    
    
    
    52
    
    
    
    (5
    )
    
    
    (40
    )
    
    
    12
    
    
    
    251Income tax benefits (expense)
    
    
    (133
    )
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    (154
    )Minority interest in results of consolidated subsidiaries
    
    
    3
    
    
    
    (2
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )Net income (loss) for the year
    
    
    53
    
    
    
    45
    
    
    
    51
    
    
    
    (6
    )
    
    
    (59
    )
    
    
    12
    
    
    
    96
 F-130




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 25.
    
    Segment information(Continued)Capital expenditures incurred by segment for the years ended December 31, 2005, 2004 and 2003
are as follows:
 Year ended December 31,2005
    
    2004
    
    2003Exploration and production
    
    
    6,127
    
    
    
    4,574
    
    
    
    3,658Supply
    
    
    1,749
    
    
    
    1,367
    
    
    
    1,451Gas and energy
    
    
    694
    
    
    
    782
    
    
    
    694InternationalExploration and production
    
    
    1,067
    
    
    
    666
    
    
    
    428Supply
    
    
    79
    
    
    
    43
    
    
    
    18Distribution
    
    
    16
    
    
    
    12
    
    
    
    33Gas and energy
    
    
    13
    
    
    
    6
    
    
    
    1Distribution
    
    
    207
    
    
    
    47
    
    
    
    106Corporate
    
    
    413
    
    
    
    221
    
    
    
    16210,365
    
    
    
    7,718
    
    
    
    6,551
  Year ended December 31,2005
    
    2004
    
    2003Brazil
    
    
    57,669
    
    
    
    40,905
    
    
    
    34,025International
    
    
    16,396
    
    
    
    11,049
    
    
    
    8,66574,065
    
    
    
    51,954
    
    
    
    42,690
 The total amounts sold of products and services to the two major customers in 2005 were
US$ 6,258 and US$ 4,594 (US$ 4,269 and US$ 3,108 in 2004; and US$ 3,498 and US$ 2,688 in 2003).
 F-131




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 
 26.
    
    Related party transactionsThe Company is controlled by the Federal Government and has numerous transactions with other
state-owned companies in the ordinary course of its business.Transactions with major related parties resulted in the following balances:
 As of December 31,2005
    
    2004Assets
    
    Liabilities
    
    Assets
    
    LiabilitiesPETROS (pension fund)
    
    
    362
    
    
    
    15
    
    
    
    326
    
    
    
    9Banco do Brasil S.A.
    
    
    5,944
    
    
    
    56
    
    
    
    3,944
    
    
    
    53BNDES (Note 13 (b))
    
    
    
    
    
    
    589
    
    
    
    
    
    
    
    617Federal Government
    
    
    
    
    
    
    966
    
    
    
    264
    
    
    
    612Restricted deposits for legal
Proceedings
    
    
    637
    
    
    
    
    
    
    
    418
    
    
    
    Government securities
    
    
    269
    
    
    
    
    
    
    
    87
    
    
    
    Petroleum and Alcohol account  receivable
from Federal Government (Note 12)
    
    
    329
    
    
    
    
    
    
    
    282
    
    
    
    Others
    
    
    1,926
    
    
    
    775
    
    
    
    1,241
    
    
    
    709,467
    
    
    
    2,401
    
    
    
    6,562
    
    
    
    1,361Current
    
    
    7,458
    
    
    
    1,759
    
    
    
    4,712
    
    
    
    733Long-term
    
    
    2,009
    
    
    
    642
    
    
    
    1,850
    
    
    
    628
 F-132




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 26.
    
    Related party transactions(Continued)These balances are included in the following balance sheet classifications:
 As of December 31,2005
    
    2004Assets
    
    Liabilities
    
    Assets
    
    LiabilitiesAssetsCurrentCash and cash equivalents
    
    
    5,908
    
    
    
    
    
    
    
    3,906
    
    
    
    Accounts receivable (Note 7)
    
    
    308
    
    
    
    
    
    
    
    278
    
    
    
    Other current assets
    
    
    1,242
    
    
    
    
    
    
    
    528
    
    
    
    OtherAccounts receivable (Note 7)
    
    
    32
    
    
    
    
    
    
    
    275
    
    
    
    Government securities
    
    
    269
    
    
    
    
    
    
    
    45
    
    
    
    Petroleum and Alcohol account  receivable
from Federal Government (Note 12)
    
    
    329
    
    
    
    
    
    
    
    282
    
    
    
    Restricted deposits for legal proceedings
    
    
    637
    
    
    
    
    
    
    
    418
    
    
    
    Pension fund
    
    
    362
    
    
    
    
    
    
    
    326
    
    
    
    Other assets
    
    
    380
    
    
    
    
    
    
    
    504
    
    
    
    LiabilitiesCurrentCurrent portion of long-term debt
    
    
    
    
    
    
    70
    
    
    
    
    
    
    
    80Current liabilities
    
    
    
    
    
    
    723
    
    
    
    
    
    
    
    41Dividends and interest on capital payable
to Federal Government
    
    
    
    
    
    
    966
    
    
    
    
    
    
    
    612Long-termLong-term debt
    
    
    
    
    
    
    545
    
    
    
    
    
    
    
    555Other liabilities
    
    
    
    
    
    
    97
    
    
    
    
    
    
    
    739,467
    
    
    
    2,401
    
    
    
    6,562
    
    
    
    1,361
 F-133




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 26.
    
    Related party transactions(Continued)The principal amounts of business and financial operations carried out with related parties are
as follows:
 Year ended December 31,2005
    
    2004
    
    2003Income
    
    Expense
    
    Income
    
    Expense
    
    Income
    
    ExpenseSales of products and servicesBRASKEM S.A.
    
    
    1,488
    
    
    
    
    
    
    
    1,049
    
    
    
    
    
    
    
    754
    
    
    
    Centrais Elet. do Norte do Brasil S.A.  ELETRONORTE
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    205
    
    
    
    COPESUL S.A.
    
    
    373
    
    
    
    
    
    
    
    501
    
    
    
    
    
    
    
    545
    
    
    
    Manaus Energia S.A.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    425
    
    
    
    Petroquímica União S.A.
    
    
    885
    
    
    
    
    
    
    
    828
    
    
    
    (15
    )
    
    
    543
    
    
    
    Others
    
    
    954
    
    
    
    
    
    
    
    582
    
    
    
    
    
    
    
    729
    
    
    
    (164
    )Financial incomePetroleum and Alcohol account -
receivable from Federal Government (Note 12)
    
    
    9
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    10
    
    
    
    Government securities
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    71
    
    
    
    Others
    
    
    47
    
    
    
    
    
    
    
    (113
    )
    
    
    
    
    
    
    155
    
    
    
    Financial expenses
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    (178
    )Other expenses, net
    
    
    
    
    
    
    (262
    )
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    3,756
    
    
    
    (251
    )
    
    
    2,856
    
    
    
    (2
    )
    
    
    3,437
    
    
    
    (342
    )
 
 27.
    
    Accounting for suspended exploratory wellsThe Companys accounting for exploratory drilling costs is governed by Statement of
Financial Accounting Standards No. 19, Financial Accounting and Reporting by Oil and Gas
Producing Companies (SFAS No. 19). On April 4, 2005, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position (FSP FAS 19-1) that amended SFAS No. 19 with respect to the
deferral of exploratory drilling costs. The Company adopted FASB Staff Position FAS 19-1)
Accounting for Suspeded Wells Costs effective from January 1, 2005. There was no material
impact at adoption.
 F-134




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 27.
    
    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, 2005, the total amount of unproved oil and gas properties was US$ 2,061, and
of that amount US$ 906 (US$ 831 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 and expiring time
frames in other concession blocks have dictated the timing of the planned additional drilling.
 F-135




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 27.
    
    Accounting for Suspended exploratory wells(Continued)The following table shows the net changes in capitalized exploratory drilling costs during the
years ended December 31, 2005 and 2004:
 Unproved oil and gas properties (*)Year ended December,312005
    
    2004Beginning balance at January 1
    
    
    1,684
    
    
    
    1,903Additions to capitalized costs pending determination
of proved reserves
    
    
    1,247
    
    
    
    736Capitalized exploratory costs charged to expense
    
    
    (597
    )
    
    
    (490
    )Transfers to property, plant and equipment based
on the determination of the proved reserves
    
    
    (423
    )
    
    
    (551
    )Cumulative translation adjustment
    
    
    150
    
    
    
    86Ending balance
    
    
    2,061
    
    
    
    1,684
 
 (*)
    
    Amounts capitalized and subsequently expensed in the same period have been excluded
from the above table. The following table provides an aging of capitalized exploratory well costs based on the date
the drilling was completed and the number of projects for which exploratory well costs have
been capitalized for a period greater than one year since the completion of the drilling:
 Aging of capitalized exploratory well costsYear ended December 31,2005
    
    2004Capitalized exploratory well costs
that have been capitalized for a
period of one year or less
    
    
    1,155
    
    
    
    844Capitalized exploratory well costs
that have been capitalized for a
period greater than one year
    
    
    906
    
    
    
    840Ending balance
    
    
    2,061
    
    
    
    1,684Number of projects that have
exploratory well costs that have
been capitalized for a period
greater than one year
    
    
    42
    
    
    
    40
 F-136




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
 27
    
    Accounting for suspended exploratory wells(Continued)Of the US$ 906 for 42 projects that include wells suspended for more than one year since
the completion of drilling, approximately US$ 694 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$ 202 incurred in costs for
activities necessary to assess the reserves and their potential development.The US$ 906 of suspended well cost capitalized for a period greater than one year as of
December 31, 2005 represents 119 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
    
    wells2004
    
    
    290
    
    
    
    382003
    
    
    368
    
    
    
    382002
    
    
    151
    
    
    
    192001
    
    
    77
    
    
    
    182000
    
    
    20
    
    
    
    6906
    
    
    
    119
 
 28.
    
    Subsequent event
 Acquisition of Pasadena RefineryOn February 3, 2006, the Board of Directors of PETROBRAS approved the purchase and sale
agreement with Astra Oil NV for the acquisition of 50% of refinery Pasadena Refining System
Inc. (PRSI), former Crow Refinery, in Pasadena  Texas  USA, for approximately US$ 370. The
initial business plan provides for joint operation and commercial management of PRSI.PRSI refinerys capacity is of 100,000 bbl/d and is going through a modernization process to
meet the new environment standards established by the Environmental Protection Agency (EPA) for
gasoline.
 F-137




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##### Table of Contents



PETRÓLEO BRASILEIRO S.A.  PETROBRAS
AND SUBSIDIARIES
 
        F-138




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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, 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
 As of December 31, 2004Brazil
    
    International
    
    WorldwideUnproved oil and gas properties
    
    
    1,101
    
    
    
    583
    
    
    
    1,684Proved oil and gas properties
    
    
    14,976
    
    
    
    3,746
    
    
    
    18,722Support equipment
    
    
    10,464
    
    
    
    935
    
    
    
    11,399Gross capitalized costs
    
    
    26,541
    
    
    
    5,264
    
    
    
    31,805Depreciation and depletion
    
    
    (12,038
    )
    
    
    (2,128
    )
    
    
    (14,166
    )14,503
    
    
    
    3,136
    
    
    
    17,639Construction and installations in progress
    
    
    5,955
    
    
    
    181
    
    
    
    6,136Net capitalized costs
    
    
    20,458
    
    
    
    3,317
    
    
    
    23,775
 F-139




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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, 2005Brazil
    
    International
    
    WorldwideProperty acquisitionsUnproved
    
    
    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 acquisitionsUnproved
    
    
    156
    
    
    
    17
    
    
    
    173Exploration costs
    
    
    1,003
    
    
    
    250
    
    
    
    1,253Development costs
    
    
    3,591
    
    
    
    404
    
    
    
    3,9954,750
    
    
    
    671
    
    
    
    5,421
 Year ended December 31, 2003Brazil
    
    International
    
    WorldwideProperty acquisitionsProved
    
    
    
    
    
    
    2,255
    
    
    
    2,255Unproved
    
    
    7
    
    
    
    6
    
    
    
    13Exploration costs
    
    
    827
    
    
    
    96
    
    
    
    923Development costs
    
    
    3,025
    
    
    
    285
    
    
    
    3,3103,859
    
    
    
    2,642
    
    
    
    6,501
 F-140




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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, 2005, 2004 and 2003 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, 2005InternationalBrazil
    
    (1)
    
    WorldwideNet operating revenues:Sales to third parties
    
    
    1,874
    
    
    
    920
    
    
    
    2,794Intersegment (2)
    
    
    25,997
    
    
    
    1,476
    
    
    
    27,47327,871
    
    
    
    2,396
    
    
    
    30,267Production costs (3)
    
    
    (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
 F-141




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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, 2004InternationalBrazil
    
    (1)
    
    WorldwideNet operating revenues:Sales to third parties (2)
    
    
    2,308
    
    
    
    713
    
    
    
    3,021Intersegment (2)
    
    
    16,001
    
    
    
    1,087
    
    
    
    17,08818,309
    
    
    
    1,800
    
    
    
    20,109Production costs (3)
    
    
    (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
 Year ended December 31, 2003InternationalBrazil
    
    (1)
    
    WorldwideNet operating revenues:Sales to third parties
    
    
    2,369
    
    
    
    535
    
    
    
    2,904Intersegment
    
    
    13,329
    
    
    
    534
    
    
    
    13,86315,698
    
    
    
    1,069
    
    
    
    16,767Production costs
    
    
    (6,154
    )
    
    
    (300
    )
    
    
    (6,454
    )Exploration expenses
    
    
    (387
    )
    
    
    (130
    )
    
    
    (517
    )Depreciation, depletion, amortization
    
    
    (955
    )
    
    
    (217
    )
    
    
    (1,172
    )Impairment of oil and gas properties
    
    
    (65
    )
    
    
    (5
    )
    
    
    (70
    )Other operating expenses
    
    
    (209
    )
    
    
    (56
    )
    
    
    (265
    )Results before income taxes
    
    
    7,928
    
    
    
    361
    
    
    
    8,289Income tax expense
    
    
    (2,767
    )
    
    
    (123
    )
    
    
    (2,890
    )5,161
    
    
    
    238
    
    
    
    5,399Companys share of unconsolidated affiliates
    
    
    
    
    
    
    3
    
    
    
    3Results of operations (excluding corporate
overhead and interest cost)
    
    
    5,161
    
    
    
    241
    
    
    
    5,402
 
 (1)
    
    Includes PEPSA from June 1, 2003. PEPSA results are included for the full year 2004
and 2005, see also Note 20.(2)
    
    Does not consider US$ 953 (US$ 561 for 2004) 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$
28,824 (US$ 18,871 for 2004) for the segment of E&P Brazil (Note 25).(3)
    
    Does not consider US$ 985 (US$ 322 for 2004) 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$ 11,327
(US$ 7,093 for 2004) for the segment of E&P Brazil (Note 25). F-142




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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 2005,
2004 and 2003 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-143




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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, 2002
    
    
    8,833.2
    
    
    
    121.7
    
    
    
    8,954.9
    
    
    
    7,327.8
    
    
    
    2,145.0
    
    
    
    9,472.8Revisions of previous estimates
    
    
    (682.1
    )
    
    
    (10.8
    )
    
    
    (692.9
    )
    
    
    459.3
    
    
    
    (294.8
    )
    
    
    164.5Improved recovery
    
    
    37.6
    
    
    
    28.8
    
    
    
    66.4
    
    
    
    13.3
    
    
    
    7.2
    
    
    
    20.5Extensions and discoveries
    
    
    1,402.2
    
    
    
    26.7
    
    
    
    1,428.9
    
    
    
    765.0
    
    
    
    72.9
    
    
    
    837.9Purchase of reserves in place  PEPSA
    
    
    
    
    
    
    602.8
    
    
    
    602.8
    
    
    
    
    
    
    
    1,346.9
    
    
    
    1,346.9Sales of reserves in place
    
    
    
    
    
    
    (7.7
    )
    
    
    (7.7
    )
    
    
    
    
    
    
    (49.5
    )
    
    
    (49.5
    )Production for the year
    
    
    (539.5
    )
    
    
    (40.8
    )
    
    
    (580.3
    )
    
    
    (454.0
    )
    
    
    (136.8
    )
    
    
    (590.8
    )Reserves 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
    (2)
    
    
    (32.6
    )
    
    
    809.8
    (2)Improved recovery
    
    
    1.1
    
    
    
    (9.4
    )
    
    
    (8.3
    )
    
    
    6.9
    
    
    
    0.2
    
    
    
    7.1Extensions and discoveries
    
    
    250.9
    
    
    
    47.8
    
    
    
    298.7
    
    
    
    990.0
    (2)
    
    
    38.6
    
    
    
    1,028.6
    (2)Production for the year
    
    
    (584.5
    )
    
    
    (58.8
    )
    
    
    (643.3
    )
    
    
    (529.8)
    (2)
    
    
    (210.9
    )
    
    
    (740.7)
    (2)Reserves at December 31, 2005
    
    
    9,033.9
    
    
    
    682.1
    (1)
    
    
    9,716.0
    
    
    
    9,263.8
    (2)
    
    
    3,088.1
    (1)
    
    
    12,351.9
    (2)Net proved Developed ReservesAt January 1, 2002
    
    
    3,899.4
    
    
    
    66.6
    
    
    
    3,966.0
    
    
    
    3,946.0
    
    
    
    1,336.8
    
    
    
    5,282.8At December 31, 2002
    
    
    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)
    
    
    2,333.7
    
    
    
    6,422.5
    (2)
 
 (1)
    
    Includes reserves of 222.8 million barrels of oil and 550.6 billions of cubic feet of
gas in 2005 (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.(2)
    
    Natural gas reserve data for 2005 presented in this table in cubic feet have been
restated using a conversion of 6000 cubic feet of natural gas per barrel of oil
equivalent, such conversion rate being consistent with prior years volumetric statements.
The FAS 69 information originally published together with the consolidated financial
statements for December 31, 2005 converted the natural gas reserves using 5613 cubic feet
per barrel of oil, such factor being related to specific gravity and calorific content of
PETROBRAS fields rather than the international average standard. As PETROBRAS natural
gas reserves and production are accounted for in cubic meters, this change which is only
for convenience presentation of barrel of oil equivalent, has no effect on the financial
results nor on the physical natural gas reserves. 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 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 are
imprecise 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-145




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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, 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
    *
    
    
    78,289At December 31, 2003Future cash inflows
    
    
    216,112
    
    
    
    20,881
    
    
    
    236,993Future production costs
    
    
    (86,666
    )
    
    
    (5,212
    )
    
    
    (91,878
    )Future development costs
    
    
    (18,727
    )
    
    
    (1,799
    )
    
    
    (20,526
    )Future income tax expenses
    
    
    (38,982
    )
    
    
    (4,651
    )
    
    
    (43,633
    )Undiscounted future net cash flows
    
    
    71,737
    
    
    
    9,219
    
    
    
    80,95610 percent midyear annual discount for
timing of estimated cash flows
    
    
    (36,215
    )
    
    
    (4,013
    )
    
    
    (40,228
    )Companys share by unconsolidated affiliates
    
    
    
    
    
    
    91
    
    
    
    91Standardized measure of discounted future
net cash flows
    
    
    35,522
    
    
    
    5,297
    *
    
    
    40,819
 
 (*)
    
    Includes US$ 2,379 in 2005 (US$ 1,774 in 2004) attributable to 41.38% minority
interest in PEPSA, which is consolidated by PETROBRAS. F-146




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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
    
    Worldwide2005
    
    2004
    
    2003
    
    2005
    
    2004
    
    2003
    
    2005
    
    2004
    
    2003Balance at January 1
    
    
    71,485
    
    
    
    35,522
    
    
    
    37,208
    
    
    
    6,804
    
    
    
    5,297
    
    
    
    1,506
    
    
    
    78,289
    
    
    
    40,819
    
    
    
    38,714Sales and transfers of oil and gas, net of
production costs
    
    
    (17,529
    )
    
    
    (11,538
    )
    
    
    (9,544
    )
    
    
    (1,731
    )
    
    
    (1,339
    )
    
    
    (769
    )
    
    
    (19,260
    )
    
    
    (12,877
    )
    
    
    (10,313
    )Development costs incurred
    
    
    4,686
    
    
    
    3,591
    
    
    
    3,025
    
    
    
    647
    
    
    
    404
    
    
    
    285
    
    
    
    5,333
    
    
    
    3,995
    
    
    
    3,310Purchases of reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73
    
    
    
    3,473
    
    
    
    
    
    
    
    73
    
    
    
    3,473Sales of reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49
    )
    
    
    
    
    
    
    
    
    
    
    (49
    )Extensions, discoveries and improved less
related costs
    
    
    6,599
    
    
    
    12,881
    
    
    
    6,687
    
    
    
    554
    
    
    
    1,015
    
    
    
    518
    
    
    
    7,153
    
    
    
    13,896
    
    
    
    7,205Revisions of previous quantity estimates
    
    
    4,156
    
    
    
    (4,892
    )
    
    
    (4,766
    )
    
    
    92
    
    
    
    (58
    )
    
    
    (349
    )
    
    
    4,248
    
    
    
    (4,950
    )
    
    
    (5,115
    )Net changes in prices and production costs
    
    
    48,525
    
    
    
    51,115
    
    
    
    (1,398
    )
    
    
    4,981
    
    
    
    2,042
    
    
    
    630
    
    
    
    53,506
    
    
    
    53,157
    
    
    
    (768
    )Changes in future development costs
    
    
    (9,405
    )
    
    
    (292
    )
    
    
    1,549
    
    
    
    (658
    )
    
    
    (504
    )
    
    
    (347
    )
    
    
    (10,063
    )
    
    
    (796
    )
    
    
    1,202Accretion of discount
    
    
    7,148
    
    
    
    3,552
    
    
    
    3,721
    
    
    
    994
    
    
    
    739
    
    
    
    597
    
    
    
    8,142
    
    
    
    4,291
    
    
    
    4,318Net change in income taxes
    
    
    (15,188
    )
    
    
    (18,454
    )
    
    
    (960
    )
    
    
    (2,784
    )
    
    
    (865
    )
    
    
    (198
    )
    
    
    (17,972
    )
    
    
    (19,319
    )
    
    
    (1,158
    )Balance at December 31
    
    
    100,477
    
    
    
    71,485
    
    
    
    35,522
    
    
    
    8,899
    
    
    
    6,804
    
    
    
    5,297
    
    
    
    109,376
    
    
    
    78,289
    
    
    
    40,819
 F-147




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##### Table of Contents



CONSOLIDATED FINANCIAL STATEMENTS
 PETROBRAS INTERNATIONAL FINANCE COMPANY
 (A wholly-owned subsidiary of  PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 Years ended December 31, 2005, 2004 and  2003 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)
 FINANCIAL STATEMENTS
  Report of Independent Registered Public Accounting Firm
    
    F-148Audited Financial StatementsConsolidated Balance Sheets
    
    F-149Consolidated Statements of Operations
    
    F-151Consolidated Statements of Changes in Stockholders Equity
    
    F-152Consolidated Statements of Cash Flows
    
    F-153Notes to the Consolidated Financial Statements
    
    F-155




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    
 
   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)
 
 2005
    
    
    2004AssetsCurrent assetsCash and cash equivalents
    
    
    230,745
    
    
    
    1,107,284Marketable securities
    
    
    82,923
    
    
    
    Trade accounts receivableRelated parties
    
    
    8,681,075
    
    
    
    7,788,069Others
    
    
    212,703
    
    
    
    153,624Notes receivable  related parties
    
    
    3,329,336
    
    
    
    1,598,521Inventories
    
    
    195,935
    
    
    
    165,450Export prepayments  related parties
    
    
    414,505
    
    
    
    152,859Restricted deposits for guarantees and others
    
    
    94,700
    
    
    
    90,85513,241,922
    
    
    
    11,056,662Property and equipment
    
    
    384
    
    
    
    502Other assetsMarketable securities
    
    
    2,165,718
    
    
    
    1,864,815Notes receivable  related parties
    
    
    579,960
    
    
    
    338,416Export prepayment  related parties
    
    
    529,420
    
    
    
    1,261,820Restricted deposits for guarantees and prepaid expenses
    
    
    231,544
    
    
    
    148,3423,506,642
    
    
    
    3,613,393Total assets
    
    
    16,748,948
    
    
    
    14,670,557
  F - 149




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##### Table of Contents



PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES  (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 2005
    
    
    2004Liabilities and stockholders equityCurrent liabilitiesTrade accounts payableRelated parties
    
    
    950,732
    
    
    
    562,139Others
    
    
    616,076
    
    
    
    567,077Notes payable  related parties
    
    
    4,346,139
    
    
    
    2,881,484Short-term financing
    
    
    339,503
    
    
    
    456,156Current portion of long-term debt
    
    
    551,628
    
    
    
    224,738Accrued interest
    
    
    107,710
    
    
    
    98,021Unearned income  related parties
    
    
    176,481
    
    
    
    131,318Other current liabilities
    
    
    10,169
    
    
    
    8,6327,098,438
    
    
    
    4,929,565Long-term liabilitiesLong-term debt
    
    
    5,908,416
    
    
    
    6,151,802Notes payable  related parties
    
    
    3,734,112
    
    
    
    3,553,4529,642,528
    
    
    
    9,705,254Stockholders equityShares authorized and issued
Common stock - 2005 and 2004 - 50,000 shares,
par value US$1
    
    
    50
    
    
    
    50Additional paid in capital
    
    
    173,926
    
    
    
    173,926Accumulated deficit
    
    
    (165,994
    )
    
    
    (138,238
    )7,982
    
    
    
    35,738Total liabilities and stockholders equity
    
    
    16,748,948
    
    
    
    14,670,557
  F - 150




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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 31,2005
    
    
    2004
    
    
    2003Sales of crude oil, oil products and servicesRelated parties
    
    
    13,974,381
    
    
    
    10,118,356
    
    
    
    5,543,022Others
    
    
    3,161,764
    
    
    
    2,237,216
    
    
    
    1,432,51617,136,145
    
    
    
    12,355,572
    
    
    
    6,975,538Operating expenses:Cost of salesRelated parties
    
    
    (7,780,293
    )
    
    
    (4,391,285
    )
    
    
    (2,851,402
    )Others
    
    
    (9,203,008
    )
    
    
    (7,844,699
    )
    
    
    (4,068,775
    )Selling, general and administrative expensesRelated parties
    
    
    (158,075
    )
    
    
    (98,700
    )
    
    
    (17,091
    )Others
    
    
    (7,647
    )
    
    
    (1,129
    )
    
    
    (1,509
    )(17,149,023
    )
    
    
    (12,335,813
    )
    
    
    (6,938,777
    )Operating income (loss)
    
    
    (12,878
    )
    
    
    19,759
    
    
    
    36,761Financial incomeRelated parties
    
    
    765,507
    
    
    
    568,566
    
    
    
    401,735Others
    
    
    218,479
    
    
    
    110,233
    
    
    
    41,143Financial expenseRelated parties
    
    
    (409,822
    )
    
    
    (169,039
    )
    
    
    (111,896
    )Others
    
    
    (589,088
    )
    
    
    (592,207
    )
    
    
    (370,754
    )Other income (expense), netRelated parties
    
    
    
    
    
    
    (525
    )
    
    
    Others
    
    
    46
    
    
    
    4,110
    
    
    
    Net (loss) for the year
    
    
    (27,756
    )
    
    
    (59,103
    )
    
    
    (3,011
    )
  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 31,2005
    
    
    2004
    
    
    2003Common stock
    
    
    50
    
    
    
    50
    
    
    
    50Additional paid in capitalBalance at January 1
    
    
    173,926
    
    
    
    173,926
    
    
    
    120,000Capital contribution from PETROBRAS
related to transfer of PNBV
    
    
    
    
    
    
    
    
    
    
    53,926Balance at end of year
    
    
    173,926
    
    
    
    173,926
    
    
    
    173,926Accumulated deficitBalance at January 1
    
    
    (138,238
    )
    
    
    (79,135
    )
    
    
    (76,124
    )Net (loss) for the year
    
    
    (27,756
    )
    
    
    (59,103
    )
    
    
    (3,011
    )Balance at end of year
    
    
    (165,994
    )
    
    
    (138,238
    )
    
    
    (79,135
    )Total stockholders equity
    
    
    7,982
    
    
    
    35,738
    
    
    
    94,841
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PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES  (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 Years ended December 31,2005
    
    
    2004
    
    
    2003Cash flows from operating activitiesNet (loss) for the year
    
    
    (27,756
    )
    
    
    (59,103
    )
    
    
    (3,011
    )Adjustments to reconcile net (loss) to net cash
used in operationsDepreciation, deferred financing and debt premium
amortization
    
    
    10,150
    
    
    
    5,198
    
    
    
    8,346Decrease (increase) in assetsTrade accounts receivableRelated parties
    
    
    (893,006
    )
    
    
    (2,723,597
    )
    
    
    (410,756
    )Others
    
    
    (59,079
    )
    
    
    (44,209
    )
    
    
    (62,143
    )Export prepayments  related parties
    
    
    470,754
    
    
    
    64,652
    
    
    
    (722,000
    )Other assets
    
    
    (221,863
    )
    
    
    (232,637
    )
    
    
    (228,234
    )Increase (decrease) in liabilitiesTrade accounts payableRelated parties
    
    
    388,593
    
    
    
    291,189
    
    
    
    (3,439
    )Others
    
    
    48,999
    
    
    
    218,048
    
    
    
    82,210Other liabilities
    
    
    277,318
    
    
    
    158,501
    
    
    
    32,398Net cash used in operating activities
    
    
    (5,890
    )
    
    
    (2,321,958
    )
    
    
    (1,306,629
    )Cash flows from investing activitiesCash rendered in connection with transfer of subsidiary
to PETROBRAS
    
    
    
    
    
    
    
    
    
    
    (743
    )Cash acquired in connection with transfer of subsidiary
from BRASOIL
    
    
    
    
    
    
    
    
    
    
    2,988Marketable securities, net
    
    
    (383,826
    )
    
    
    (1,248,984
    )
    
    
    (517,859
    )Issuance of notes receivable  related parties
    
    
    (5,114,060
    )
    
    
    (2,042,177
    )
    
    
    (1,400,290
    )Collection of principal on notes receivable  related parties
    
    
    3,226,935
    
    
    
    1,885,407
    
    
    
    1,231,526Property and equipment
    
    
    (19
    )
    
    
    (488
    )
    
    
    (28
    )Net cash used in investing activities
    
    
    (2,270,970
    )
    
    
    (1,406,242
    )
    
    
    (684,406
    )Cash flows from financing activitiesShort-term financing, net issuance and repayments
    
    
    (116,654
    )
    
    
    (396,233
    )
    
    
    566,620Proceeds from issuance of long-term debt
    
    
    695,000
    
    
    
    1,106,887
    
    
    
    2,837,675Principal payments of long-term debt
    
    
    (602,410
    )
    
    
    (465,208
    )
    
    
    (268,371
    )Proceeds from short-term loans  related parties
    
    
    8,757,712
    
    
    
    6,618,032
    
    
    
    9,618,929Principal payments of short-term loans  related parties
    
    
    (7,333,327
    )
    
    
    (6,245,614
    )
    
    
    (10,375,070
    )Proceeds from long-term loans  related parties
    
    
    
    
    
    
    3,553,452
    
    
    
    Capital contribution
    
    
    
    
    
    
    
    
    
    
    14,791Net cash provided by financing activities
    
    
    1,400,321
    
    
    
    4,171,316
    
    
    
    2,394,574Increase (decrease) in cash and cash equivalents
    
    
    (876,539
    )
    
    
    443,116
    
    
    
    403,539Cash and cash equivalents at beginning of year
    
    
    1,107,284
    
    
    
    664,168
    
    
    
    260,629Cash and cash equivalents at end of year
    
    
    230,745
    
    
    
    1,107,284
    
    
    
    664,168
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PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES  (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 Years ended December 31,2005
    
    2004
    
    2003Supplemental disclosures of cash flow information:Cash paid during the year forInterest
    
    
    727,739
    
    
    
    583,769
    
    
    
    337,818Income taxes
    
    
    120
    
    
    
    157
    
    
    
    109Non-cash investing and financing transactionsBook value of net assets exchanged for inter-company loan
    
    
    
    
    
    
    
    
    
    
    6,361Capital contribution from PETROBRAS from transfer
of PNBV
    
    
    
    
    
    
    
    
    
    
    39,135Receipt of Junior Trust Certificates in exchange
of receivables
    
    
    
    
    
    
    
    
    
    
    150,000Cancellation of Senior Exchangeable Notes issued in
exchange for PETROBRAS loans (Note 8(c))
    
    
    
    
    
    
    8,476
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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 the products 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.On January 2, 2003, the Company entered into a series of transactions as part of a larger
corporate restructuring implemented by PETROBRAS. The restructuring included the transfer of
PETROBRAS NETHERLANDS B. V.  PNBV to PETROBRAS and the transfer of BEAR INSURANCE COMPANY
LIMITED  BEAR from BRASPETRO OIL SERVICES  BRASOIL to PIFCo.PNBV was transferred to PETROBRAS through an intercompany loan of US$4,658, with PNBVs
existing cash balance being US$743. BEAR was transferred to the Company in exchange for an
intercompany payable to BRASOIL of US$1,703, with BEARs existing cash balance being US$2,988.
The restructuring was undertaken in order to group each business activities more closely with
the corporate goals of the respective companies in the PETROBRAS group.In connection with the transfer of PNBV, the Company recognized US$39,135 as a capital
contribution from PETROBRAS. This amount is equal to the unamortized portion of the deferred
gain of the platform P-47 (US$37,271) and the deferred gain on other equipment (US$1,864) under
similar transaction structures, which upon transfer of PNBV to PETROBRAS was treated as a
capital transaction. This platform was acquired from BRASOIL in December 2001, for its book
value of US$142,729. On the same date, the P-47 was sold to PB-47, an independent trust, for a
market value of US$180,000. PB-47 subsequently entered into a charter agreement with PNBV,
which in turn entered into a subcharter agreement with PETROBRAS.
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PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES  (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 1.
    
    The Company and its Operations(Continued)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, was created in connection with
the Companys structured finance export prepayment program, whereby PFL purchases bunker and
fuel oil from PETROBRAS and sells these products in the international market, including sales
to designated customers, in order to generate receivables to cover the sale of right to future
receivables debt. Certain of the sales were through subsidiaries of Petrobras.In May 2003, PIFCo, upon receiving approval from the Board of Directors, contributed an
additional US$15,000 of capital, bringing PFLs total capital to US$30,000 divided into
30,000,000 quotas of US$1.00 each.PETROBRAS EUROPE LIMITEDPETROBRAS EUROPE LIMITED (PEL), based in the United Kingdom, consolidates PETROBRAS European
trade 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.BEAR INSURANCE COMPANY LIMITEDBEAR INSURANCE COMPANY LIMITED (BEAR), based in Bermuda, contracts insurance for PETROBRAS and
its subsidiaries.
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PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES  (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 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.(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.
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PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES  (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 2.
    
    Basis of Financial Statement Presentation(Continued)
 (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$66,025 and US$80,119 as of December
31, 2005 and 2004, respectively.(g)
    
    Current and long-term liabilitiesThese are stated at known or estimated amounts including, when applicable, accrued
interest.(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.
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PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES  (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 2.
    
    Basis of Financial Statement Presentation(Continued)
 (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 (mainly to
related-parties).Off-shore  the Company buys and sells mainly outside of Brazil, in transactions with
third-parties and related parties.(j)
    
    Financial instrumentsAll of the Companys derivative instruments are recorded on the balance sheet at their
fair value. The changes in the market value of derivative instruments that do not qualify for hedge accounting are recognized in the statement of operations as
financial income or expense each reporting period.PIFCo holds a purchased put option that allows the holder to sell a floating number of
heavy fuel oil volumes at a minimum floor price of US$14/barrel. Such option serves as an
economic hedge on related future sales of receivables under the structured finance export
prepayment program, the intent of which is to assure that physical barrels delivered under
the project finance agreement generate sufficient cash proceeds to repay related financial
obligations. This option has no intrinsic value and immaterial time value at December 31,
2005, and therefore does not have a material effect on the Companys results of
operations or financial position.
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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 and the Cayman Islands in 2005 an 2004 and the United Kingdom, Netherlands and the
Cayman Islands in 2003). 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. There were no significant operations in the United Kingdom
or the Netherlands that gave rise to provisions in these countries.(l)
    
    ReclassificationCertain immaterial reclassifications have been made respective to prior period financial
statements .
 3.
    
    Cash and Cash Equivalents
 2005
    
    
    2004Cash and banks
    
    
    6,242
    
    
    
    16,496Time deposits and short-term investment funds
    
    
    224,503
    
    
    
    1,090,788230,745
    
    
    
    1,107,284
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PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES  (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 4.
    
    Marketable Securities
 Interest
    
    
    TotalSecurity
    
    Maturity
    
    
    rate
    
    
    2005(*)
    
    
    2004 (*)Available for Sale (***)
    
    MEGA      (**)
    
    
    2014
    
    
    
    10.77
    %
    
    
    
    
    
    
    63,607Available for Sale (***)
    
    MARLIM (**)
    
    
    2008
    
    
    
    12.25
    %
    
    
    277,220
    
    
    
    Available for Sale (***)
    
    CLEP      (**)
    
    
    2014
    
    
    
    8
    %
    
    
    1,888,498
    
    
    
    1,751,246Available for Sale (***)
    
    Various third parties
    
    
    
    
    
    
    
    
    
    
    25,189
    
    
    
    49,962Trading
    
    Various third parties
    
    
    
    
    
    
    
    
    
    
    57,734
    
    
    
    2,248,641
    
    
    
    1,864,815Less: Current balances
    
    
    
    
    
    
    
    
    
    
    
    
    (82,923
    )
    
    
    2,165,718
    
    
    
    1,864,815
 
 (*)
    
    The balances include interest and principal.(**)
    
    PETROBRAS group company, including consolidated subsidiaries and non-consolidated
PETROBRAS affiliates, and other consolidated special purposes companies established to
support PETROBRAS infrastructure projects. Securities held by the fund respective to the
group companies are not US exchange traded securities.(***)
    
    Other comprehensive income (OCI) amounts related to the securities classified as
available for sale in accordance with FAS 115 are diminimus at December 31, 2005 and
2004, and are thus not presented in a separate statement of OCI, such amounts are included
in the Statement of operations as Financial income or expense. Marketable securities are comprised of amounts the Company has invested in the exclusive
fund, absent the Companys own securities, which are considered repurchased. The exclusive fund
is consolidated by PETROBRAS, and the equity and debt securities within the portfolio 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 and 2004, the exclusive fund held debt securities of PIFCo and PIFCo
subsidiaries in the amount of US$215,638 and US$149,227, respectively. These amounts were
recognized as an extinguishment of debt and offset against the related balances of current and
non-current liabilities.
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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
    
    
    BRASPETRO
    
    
    
    
    
    
    NETHERLANDS B.V.S.A. -
    
    
    PIB.B.V. and its
    
    
    and its
    
    
    and its
    
    
    OIL COMPANY -
    
    
    
    
    
    
    and itsPETROBRAS
    
    
    subsidiaries
    
    
    subsidiaries (iii)
    
    
    subsidiaries
    
    
    BOC
    
    
    CLEP
    
    
    subsidiaries
    
    
    TERMOBAHIA (vi)
    
    
    Others
    
    
    2005
    
    
    2004Current assetsAccounts receivable, principally for sales (i)
    
    
    7,533,133
    
    
    
    694,745
    
    
    
    453,049
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    148
    
    
    
    8,681,075
    
    
    
    7,788,069Notes receivable
    
    
    
    
    
    
    1,321,058
    
    
    
    
    
    
    
    11,958
    
    
    
    220,885
    
    
    
    
    
    
    
    1,733,751
    
    
    
    41,684
    
    
    
    
    
    
    
    3,329,336
    
    
    
    1,598,521Export prepayment
    
    
    414,505
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    414,505
    
    
    
    152,859Others
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,453
    
    
    
    
    
    
    
    1,453Other assetsMarketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,888,498
    
    
    
    
    
    
    
    
    
    
    
    277,220
    
    
    
    2,165,718
    
    
    
    1,814,853Notes receivable
    
    
    
    
    
    
    579,960
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    579,960
    
    
    
    338,416Export prepayment
    
    
    529,420
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    529,420
    
    
    
    1,261,820Current liabilitiesTrade accounts payable
    
    
    855,821
    
    
    
    57,558
    
    
    
    15,655
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,698
    
    
    
    950,732
    
    
    
    562,139Notes payable (ii)
    
    
    4,346,139
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,346,139
    
    
    
    2,881,484Unearned income
    
    
    173,536
    
    
    
    
    
    
    
    2,945
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    176,481
    
    
    
    131,318Long-term liabilitiesNotes payable (iii)
    
    
    3,734,112
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,734,112
    
    
    
    3,553,4522003Statement of operationsSales of crude oil and oil products and services
    
    
    7,025,730
    
    
    
    5,541,754
    
    
    
    1,405,056
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,841
    
    
    
    13,974,381
    
    
    
    10,118,356
    
    
    
    5,543,022Purchases (iv)
    
    
    (5,931,535
    )
    
    
    (1,371,336
    )
    
    
    (109,896
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (367,526
    )
    
    
    (7,780,293
    )
    
    
    (4,391,285
    )
    
    
    (2,851,402
    )Selling, general and administrative expenses
    
    
    (157,960
    )
    
    
    (115
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (158,075
    )
    
    
    (98,700
    )
    
    
    (17,091
    )Financial income
    
    
    580,900
    
    
    
    82,752
    
    
    
    24,202
    
    
    
    11,501
    
    
    
    15,650
    
    
    
    
    
    
    
    47,003
    
    
    
    3,499
    
    
    
    
    
    
    
    765,507
    
    
    
    568,566
    
    
    
    401,735Financial expense
    
    
    (409,496
    )
    
    
    (326
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (409,822
    )
    
    
    (169,039
    )
    
    
    (111,896
    )Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (525
    )
    (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)
    
    Notes payable to related parties principally include balances to PETROBRAS for
intercompany loans made on 180 day basis.(iii)
    
    Long-Term Liabilities  Notes payable relate to loans executed between the Company and
PETROBRAS due in 2010, with annual interest rates ranging from 4.9% to 5.8%. The transaction
extended the financing terms respective to certain short-term notes payable, creating
liquidity for the Company and such liquidity was partially used to fund purchases of
securities by the exclusive investment fund.(iv)
    
    Purchases from related parties are presented in the cost of sales section of the statement
of operations.(v)
    
    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.(vi)
    
    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.
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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
 2005
    
    
    2004ProductsCrude oil
    
    
    51,701
    
    
    
    76,252Fuel oil
    
    
    80,249
    
    
    
    48,973GLP
    
    
    45,716
    
    
    
    29,078Others
    
    
    18,269
    
    
    
    11,147195,935
    
    
    
    165,450
 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$75,672 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 (f)) and is renewed annually. The amount
classified in non-current assets is comprised of deposits: (i) US$30,306 related to issuances
of senior notes in the total amount of US$450,000, and (ii) US$39,390 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 (a)), and are required
per the related debt agreement.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 - 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
 Current
    
    
    Long-term2005
    
    
    2004
    
    
    2005
    
    
    2004Financial institutions (i)
    
    
    493,550
    
    
    
    535,845
    
    
    
    1,194,750
    
    
    
    631,800Senior notes
    
    
    53,525
    
    
    
    53,525
    
    
    
    1,550,000
    
    
    
    1,550,000Global notes
    
    
    26,326
    
    
    
    26,326
    
    
    
    2,115,263
    
    
    
    2,124,221Senior exchangeable notes
    
    
    3,744
    
    
    
    3,787
    
    
    
    329,940
    
    
    
    329,940Global step-up notes
    
    
    9,000
    
    
    
    9,000
    
    
    
    400,000
    
    
    
    400,000Sale of right to future receivables
    
    
    567,377
    
    
    
    153,680
    
    
    
    679,420
    
    
    
    1,561,820Assets related to export
prepayment to be offset against
sale of right to future
receivables (b)
    
    
    (150,000
    )
    
    
    
    
    
    
    (150,000
    )
    
    
    (300,000
    )Repurchased securities (e)
    
    
    (4,681
    )
    
    
    (3,248
    )
    
    
    (210,957
    )
    
    
    (145,979
    )998,841
    
    
    
    778,915
    
    
    
    5,908,416
    
    
    
    6,151,802Financing
    
    
    339,503
    
    
    
    456,156
    
    
    
    5,908,416
    
    
    
    6,151,802Current portion of long-term debt
    
    
    551,628
    
    
    
    224,738
    
    
    
    
    
    
    
    Accrued interest
    
    
    107,710
    
    
    
    98,021
    
    
    
    
    
    
    
    998,841
    
    
    
    778,915
    
    
    
    5,908,416
    
    
    
    6,151,802
 
 (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 3.08% to
7.87% at December 31, 2005. The weighted average borrowing rate for short-term debt at
December 31, 2005 and 2004 was 5.02% and 4.25%, respectively.At December 31, 2005 and 2004, 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 - 164




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PETROBRAS INTERNATIONAL FINANCE COMPANY AND SUBSIDIARIES  (A wholly-owned subsidiary of PETRÓLEO BRASILEIRO S.A.  PETROBRAS)
 
 8.
    
    Financing(Continued)Long-term financing  additional information
 Payment periodDate of issuance
    
    
    Maturity
    
    
    Interest rate
    
    
    Amount
    
    
    Interest
    
    
    PrincipalSenior Notes(a)Senior Notes
    
    February, 2002
    
    
    2007
    
    
    
    9.125
    %
    
    
    400,000
    
    
    semiannually
    
    bulletSenior Notes
    
    February, 2002
    
    
    2007
    
    
    
    9.125
    %
    
    
    100,000
    
    
    semiannually
    
    bulletSenior Notes
    
    May, 2001
    
    
    2008
    
    
    
    9.875
    %
    
    
    450,000
    
    
    semiannually
    
    bulletSenior Notes
    
    July, 2001
    
    
    2011
    
    
    
    9.750
    %
    
    
    600,000
    
    
    semiannually
    
    bullet1,550,000Sale of Right to Future
Receivables(b)Junior 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(b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (150,000
    )Senior Trust CertificatesSerie 2003-B
    
    May, 2003
    
    
    2013
    
    
    
    5.548
    %
    
    
    152,180
    
    
    quarterly
    
    quarterlySerie 2003-A
    
    May, 2003
    
    
    2015
    
    
    
    6.436
    %
    
    
    377,240
    
    
    quarterly
    
    quarterly529,420Senior Exchangeable
Notes(c)
    
    October, 2002
    
    
    2007
    
    
    
    4.750
    %
    
    
    329,940
    
    
    semiannually
    
    bulletGlobal Step-up Notes(d)
    
    March, 2003
    
    
    2008
    
    
    
    9.000
    %(d)
    
    
    400,000
    
    
    semiannually
    
    bulletGlobal Step-up Notes
repurchased (e)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (210,957
    )189,043Global Notes(f)Global Notes
    
    July, 2003
    
    
    2013
    
    
    
    9.125
    %
    
    
    500,000
    
    
    semiannually
    
    bulletGlobal Notes
    
    September, 2003
    
    
    2013
    
    
    
    9.125
    %
    
    
    265,263
    
    
    semiannually
    
    bulletGlobal Notes
    
    December, 2003
    
    
    2018
    
    
    
    8.375
    %
    
    
    750,000
    
    
    semiannually
    
    bulletGlobal Notes
    
    September, 2004
    
    
    2014
    
    
    
    7.750
    %
    
    
    600,000
    
    
    semiannually
    
    bullet2,115,263
 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)Long-term financing  additional information(Continued)
 (a)
    
    The three series of Senior Notes issued in 2001 and 2002 have fixed interest rates
with interest payable semi-annually. So long as any note of the issuances remains
outstanding, the Company is prohibited from creating or permitting any lien, other than a
PIFCo permitted lien as defined in the issuances prospectus, by the Company on any of
the Companys assets to secure additional indebtedness, except under certain conditions.
These issuances are general senior unsecured and unsubordinated obligations of the Company
and will rank equal in right of payment with all other unsecured and unsubordinated
obligations of the Company that are not expressly subordinated in right of payment. The
failure by the Company to make required payments of principal, interest or other amounts
will compel PETROBRAS to fulfill payment obligations.PETROBRAS entered into standby purchase agreements in support of the obligations of PIFCo
under the issuances 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. This purchase obligation exists, subject to certain
limitations, irrespective of whether any such amounts are due at maturity of the notes or
otherwise.(b)
    
    Respective to the Senior and Junior Notes issued pursuant to the structured finance
program, PETROBRAS and 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 bunker acquired from PETROBRAS.
 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 information(Continued)
 As stipulated in the contracts, PFL assigned the right to future receivables in the amount
of US$1,800,000 (1st and 2nd trenches) to PF Export, which, in turn, issued and delivered
to PFL the following securities, also in the amount of US$1,800,000:
 
    
    US$1,500,000 in Senior Trust Certificates, which were negotiated by PFL on
the international market at face value, and the amount was transferred to PETROBRAS
as prepayment for exports to be made to PFL, according to the prepayment agreement.
    
    US$300,000 in Junior Trust Certificates, which are held in the portfolio of
PFL. The Junior Trust Certificates are intended to compensate any losses PF Export
should incur on the value of exports transferred by PFL .
 The assignment of right 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.As long as any Senior Trust Certificates or amounts payable to the insurers that are
guaranteeing the payments to the holders of the Senior Trust Certificates remain
outstanding, PETROBRAS is required to export to the Company, during each quarterly
delivery period, (a) at least 80% of the total volume of heavy fuel oil exported by
PETROBRAS during such period and (b) certain oil products having an aggregate value (as
determined by the net invoice amount at which such products are actually sold by PFL)
equal to, at least, the debt service requirements of the Senior Trust Certificates
multiplied by a coverage ratio. Additionally, certain receivables, as defined in the related agreements, are to be generated by the sale
of eligible products to other buyers, to make the aggregate amount of both exports and
additional receivables equal to 1.2 times the debt service. PETROBRAS also agrees that its
average daily gross exports of heavy fuel oil for any rolling 12 month period will be
equal to at least 70,000 barrels.
 F - 167




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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 information(Continued)
 PETROBRAS will not be relieved of its obligations to deliver the oil products under the
export prepayment program in the amounts set forth for any reason, including, but not
limited to force majeure or non-payment by PFL.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 these consolidated financial
statements, and thus US$300,000 has been reduced from the short and long-term financing
respective to sale of right to future receivables.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 December 29, 2005, in accordance with applicable provisions of the governing
agreements, PFL communicated to the Trust an intention to prepay the fixed rate titles of
Senior Trust Certificates (series A1 and B) on March 1, 2006. In order to facilitate such
advance payment, PETROBRAS will prepay to PFL an amount of US$333,860 related to the
export prepayment program.As of December 31, 2005, the outstanding balance of series A1 and B of Senior Trust
Certificates are presented in the balance sheet as current portion of long-term debt, with the balance related to the export prepayments with Petrobras being presented in
the balance sheet as current assets.(c)
    
    Issued on October 17, 2002 in connection with Petrobras acquisition of Perez Companc
S.A. In March 2004, the amount was reduced from US$338,416 to US$329,940 due to an
environmental liabilities settlement agreed under the terms of an agreement with the
former owners of Perez Companc S.A.
 F - 168




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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 information(Continued)
 (d)
    
    On March 31, 2003, the Company issued Global Step-up Notes in an aggregate principal
amount of US$400,000 due April 2008. The notes will bear interest from March 31, 2003 at a
rate of 9.00% per annum until April 1, 2006 and at a rate of 12.375% per annum
thereafter, with interest payable semiannually. The Company used the proceeds from this
issuance principally to repay trade-related debt and inter-company loans.(e)
    
    At December 31, 2005 and December 31, 2004, the Company had amounts invested in an
exclusive fund that held debt securities of PIFCo in the total amount of US$210,957 and
US$145,979, respectively. These securities are 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,
2005 and 2004, the outstanding balance of net premiums on reissuances amounted to
US$18,464 and US$26,655, respectively. PIFCo recognized losses on extinguishment of debt of
US$11,738 during 2005 and of US$64,191 during 2004.(f)
    
    On July 2, 2003, the Company issued Global Notes in an aggregate principal amount of
US$500,000 due July 2013. The notes will bear interest at the rate of 9.125% per annum,
payable semiannually. In September 2003, the Company issued an additional US$250,000 in
Global Notes, which form a single fungible series with the US$500,000 Global Notes due
July 2013. The Company used the proceeds from these issuance principally to repay
trade-related debt and inter-company loans.On December 10, 2003, the Company issued Global Notes in an aggregate principal amount of
US$750,000 due December 2018. The notes will bear interest at the rate of 8.375% per
annum, payable semiannually. The Company used the proceeds from this issuance principally
to repay trade-related debt and inter-company loans.On September 15, 2004, the Company issued Global Notes in an aggregate principal amount of
US$600,000 due September 2014. The notes will bear interest
 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)
 
 8.
    
    Financing(Continued)
 at the rate of 7.75% per annum, payable semiannually. The Company used the proceeds from
this issuance principally to repay trade-related debt and inter-company loans.
 Long-term maturities
 December 31,20052007
    
    
    1,057,4382008
    
    
    1,037,3722009
    
    
    217,2182010
    
    
    318,2382011
    
    
    680,308Thereafter
    
    
    2,597,8425,908,416
 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.For 2005, long-term lines of credit had fair values immaterially different from their book
values. At December 31, 2005 the Companys long-term debt, excluding long-term lines of credit,
was US$5,908,416 (US$6,151,802 at December 31, 2004) and had an estimated fair value of approximately US$6,397,000 (US$6,576,000 at December 31, 2004).The Companys long-term asset related to the export prepayment program was US$529,420 and
US$1,261,820 at December 31, 2005 and 2004, and had fair values of US$523,000 and US$1,252,000,
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-term contracts which collectively obligate it to
purchase a minimum of approximately 185,627 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 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.
  F - 171