Relatorio Anual 2005 Ing

8/18/2019 Relatorio Anual 2005 Ing

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contents

Profile, mission, vision 2015 and values

Highlights

Message from the president

The conquest of self-sufficiency

Conduct of the oil marketCorporate strategy

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

22 Exploration and Production

29 Refining and Commercialization

32 Petrochemicals

35 Transportation

37 Distribution

40 Natural Gas

44 Energy

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

54 South America60 North America

61 Africa

62 Asia

S O C I A L A N D E N V I R O N M E N TA L R E S P O N S I B I L I T Y

66 Social Investiments

71 Human Resources

75 Health, Safety, and Environment

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

84 Technological Know-how Capital

87 Organizational Capital

88 Relationship Capital

91 Human Capital

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

94 Business Performance

97 Capital Markets

103 Risk Management

106 Corporate Governance

112 Corporate Information

116 Glossary, Abbreviations and Addresses

c o n t e n t s


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

THE UNITED STATES

MEXICO VEN EZU EL A

NIGERIA

IRAN

SINGAPURE

CHINA

ANGOLATANZANIA

BOLIVIA

PARAGUAY

URUGUAY

COLOMBIA

ENGLAND

ECUADOR

PERU

CHILE

ARGENTINA

EQUATORIAL GUINEA

JAP ANLIBYA

Coari

SANTA CRUZDE LA SIERRA

GualbertoVillarroel GuillermoElder Bell

MANAUS

COCHABAMBASen. Canedo

BRASÍLIA

Copesul

PARAGUAI

Tramanda í

Termina l deRio Grande

Bahía Blanca

São SebastiãoRIO DE JANEIRO

REDUC

REGAP

VITÓR IA

Itabuna

DTBAS

ARACAJUCandeias

Suape

DunasGuamaré

Mucuripe

SÃO LUÍS

Jequi é

BELÉM

PORTO ALEGRE

FORTALEZA

NATAL

MACEIÓ

SALVADOR

ESPÍRITO SANTONorte-Capixaba

Regência

GOIÂNIA

ARGENTINA

URUGUAI

FLORIANÓPOLISCURITIBA

SÃO PAULO Paranaguá

REFISAN

RICARDO ELIÇABE

REFAP

São Francisco do Sul (DTSUL)

RPBC

Macaé

Pipelines

Fertilizer Plant

Refinery

Terminal

Petrobras overseas

REVAPREPLAN

RECAP

REFINOR

UBERABA

RLAM

REMAN

RECIFE

LUBNOR

Cabedelo JOÃO PESSOA

Campina Grande

REPAR

SIX

profile m i s s i o nTo operate safely and profitably in

the oil, gas and energy domestic

and international markets in a s ocially

and environmentally responsible

manner, supplying products and

services to meet the needs of itscustomers and contributing to the

development of Brazil and the

countries in which it operates.

va l u e s

Focus on the Company’s main

stakeholders: shareholders,

customers, employees, society,

government, partners, suppliersand the communities in which

it operates;

A spirit of entrepreneurship and

an ability to meet challenges;

Focus on obtaining excellent results;

Innovative and competitive spirit

with a focus on providing services

with a competitive edge and

technological competence;

Excellence and leadership in

questions of health, safety and the

preservation of the environment;

A permanent quest for business

leadership.

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

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

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

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

WI TH I TS FO CU S O N P R O F IT AB I LI T Y

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

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

Petrobras is a publicly listed company that

operates on an integrated and specialized basis

in the following segments of the oil, gas and

energy industry: exploration and production;

refining, commercialization, transportation and

petrochemicals; distribution of oil products;

natural gas and energy. Founded in 1953, the

Company today is the world’s 14th largest oil

company according to Petroleum Intelligence

Weekly. Leader in the Brazilian hydrocarbons

sector, Petrobras has been expanding its

operations to become an integrated energy

company with international operations and a

leader in Latin America.

p r o f i l e

vision2 0 1 5

v is io n 20 1 5


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HIGHLIGHTSHIGHLIGHTS

Operational summary | 2005

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

Oil and condensate (billions of barrels) 12.1 12.3

Natural gas (billions of boe) 2.8 2.6AVERAGE DAILY PRODUCTION (th. boed)(1) 2,020 2,217• Oil and NGL (th. bpd) 1,661 1,847

Onshore 407 396Offshore 1,254 1,451

• N at ur al g as ( th . b oe d) 3 59 3 70Onshore 217 213Offshore 142 157

PRODUCING WELLS (oil and natural gas) – 12/31/2005(1) 13,821 14,061Onshore 13,156 12,803Offshore 665 1,258

D RI LL IN G R IGS – 12 /31 /20 05 50 64Onshore 19 22Offshore 31 42

OPERATING PRODUCTION PLATFORMS – 12/31/2005 95 97Fixed 72 73Floating 23 24

PIPELINES (km) – 12/31/2005 (1) 30,039 30,343Oil and o il products 12,553 12,857Natura l gas 17,486 17,486

TANKER FLEET – 12/31/2005Vessels - company owned 50 50

- chartered 74 75Tons (millions of deadweight tons - dwt) 8 8

TERMINALS – 12/31/2005Number 65 66Storage capacity (million m3) (3) 9.9 10.4

REFINERIES – 12/31/2005(1)

Number 16 16Nominal installed capacity (th. bpd) 2,114 2,114Average throughput processed (th. bpd) 1,847 1,861

Brazil 1,728 1,758Overseas 119 103

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

IMPORTS (th. bpd)Oil 450 352Oil products 109 94

EXPORTS (th. bpd)Oil 181 263Oil products 228 241

COMMERCIALIZATION OF OIL PRODUCTS (th. bpd)Brazil 1,637 1,655

INTERNATIONAL SALES (th. bpd)Oil, Gas and Oil Products 416 385

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

Domestic gas 23 23Bolivian gas 19 22

NATURAL GAS MARKET DISTRIBUTION (million m3 /day) (4) 42 45Distributors 28 31Thermoelectric power plants 7 7Domestic consumption 7 7

ENERGY(1)

Number of thermoelectric power plants(5) 7 9Installed capacity (MW)(5) 2,194 3,203Energy sales (GWh) 11.32 16.64N um be r o f h yd ro el ec tr ic p ow er p la nt s 2 2Installed capacity (MW)(5) 285 285Transmission lines (km) 15,414 15,414Energy distribution (TWh/year) 13 13

FERTILIZERS(1)

Number of plants 3 3

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

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

2004 2005 %Gross Operating Revenue 150,440 179,065 19%Net Operating Revenue 111,128 136,605 23%Operating Profit 29,930 39,773 33%Financial Result (3,321) (2,843) -14%Net Income 16,887 23,725 40%Net Income per Share (R$/share) 3.85 5.41 41%EBITDA 36,798 47,808 30%Total Debt 55,803 48,242 -14%Net Debt 35,816 24,825 -31%Market Value 112,458 173,584 54%Gross Margin 41% 44% 3%Operating Margin 27% 29% 2%Net Margin 15% 17% 2%Financial and Economic IndicatorsBrent (US$/bbl) 38.21 54.38 42%US Dollar Average Price - Sale (R$) 2.9262 2.4350 -17%US Dollar final Price - Sale (R$) 2.6544 2.3407 -12%

2004 2005Own Investments 21,151 22,927Exploration & Production 12,441 13,934Supply 3,907 3,286Gas & Energy 625 1,527International 2,331 3,153Distribution 1,223 495Corporate Areas 624 532Special Purpose Companies (SPCs) 775 2,385

Ventures under Negotiation 454 311Project Finance 169 87Total Investments 22,549 25,710

Financial summary | 2005

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

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


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Market Capital izat ion Net Equi ty

HIGHLIGHTS

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

Oil and Oil Products Spill(m 3)

Spills of more than 1 barrel (0.159 m 3) impacting

the environment outside the installation perimeter.

2001

2002

2003

2004

2005

2,619

197

276

530

269

Gross Margin, Operating and Net (1)BR GAAP Criteria

Gross MarginOperating Margin

Net Margin

Earnings/ShareBR GAAP Criteria(R$/share)(1)(2)

2001

2002

2003

2004

2005

2.27

1.86

4.06

3.85

5.41

Net IncomeBR GAAP criteria(R$ million)(1)

2001

2002

2003

2004

2005

9,867

8,098

17,795

16,887

23,725

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

Short-Term

Long-TermFunds obtained but still not used in projects

Net Debt

3

l l t i i l

56 54

2001 2002 2003 2004 2005

Market Capitalization x Net Equity (R$ billion)(1)

78

174

11287

6249

3429

2001 2002 2003 2004 2005

17%

39%36%

45%

20%

44%41%

29%

19%

12%

24%

17%

29%

15%

27%

2001 2002 2003 2004 2005

44.2

49.646.2

37.1

8.5 8.1 11.19.610.9

Debt – BR GAAP Criteria(R$ billion)(1)(3)

1.3

3.3

9.7

40

34.7

35.8

24.8

18.2

Production of Oil, NGL,Condensate and Natural Gas(th. boed)

Voting Capital - Preferred S hares

Federal GovernmentBNDESPar

ADR Level 3

FMP – FGTS PetrobrasForeign Investors (Resolution no. 2.689 C.M.N.)

Other individuals and legal entities

2001

2002

2003

2004

2005

Proved Reserves of Oil, NGL, Condensateand Natural Gas SPE Criteria(billions boed)

Oil, NGL and Condensate

Natural Gas

Oil, NGL and Condensate

Natural Gas

2001

2002

2003

2004

2005

BNDESParADR Level 3 and Ru le 144-A

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

Other individuals and legal entities

Federal Government

BNDESPar

ADR (ON Shares)ADR (PN Shares)

FMP – FGTS Petrobras

Foreign Investors (Resolution no. 2.689 C.M.N.)Other individuals and legal entities

Voting Capital – Common Shares

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

Lost Time Injury Frequency Rate (LTIFR)

2001

2002

2003

2004

2005

2.89

1.53

1.23

1.04

0.97

2.8% 1.9%

2005 2004

15.7%

37.1%

31.7%

15.5%

37.2%

15.8%

31.8%

15.2%

Capital Stock

7.6% 32.2%

15.9%

8.2%

2.7%

15.7%

17.7%

32.2%

18.0%

7.8%

15.7%

2.8%

15.4%

8.1%

2005 2004

2005 2004

8.5 10.62.1

9.9 12.22.3

11.6 14.5

12.1 14.92.8

12.3 14.92.6

1,381 258 1,639

1,535 275 1,810

1,701 335 2,036

1,661 359 2,020

1,847 370 2,217

Commom shares - 2,536,673,672

Preffered shares - 1,849,478,028Total shares - 4,386,151,700

2.8% 1.9%4.6%

7.5%

27.5%

4.9%7.9%

55.7%26.7%

55.7%

HIGHLIGHTS

2.9


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MESSAGE FROM THE PRESIDENT

MESSAGE FROM THE PRESIDENTMESSAGE FROM THE PRESIDENT

“ I N A S I T U AT I O N I N W H I C H AS C A R C I T Y O F E N E R G Y

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

E V I D E N T , A C H I E V I N G S E L F -S U F F I C I E N C Y R E P R E S E N T S A N

I M P O R TA N T S T E P T O WA R D SR E D U C I N G T H E R I S K A N D

V U L N E R A B I L I T Y O F B R A Z I L ´ ST R A D E B A L A N C E . A N D

P E T R O B R A S I S P R O U D T O B EM A K I N G A N I M P O R TA N T

C O N T R I B U T I O N T O WA R D SR E A C H I N G T H I S G O A L . ”

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

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

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

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

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

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

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

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

strategic vision of the future.

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

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

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

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

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

the two rigs are operating at full production.

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

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

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

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

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

long-term sustainable growth.

In step with the restructuring of our exploration portfolio and the

preservation of sustainable growth, during the 7th Bidding Roundrun by the National Petroleum, Natural Gas and Biofuel Agency

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

42 were exclusive and 54 were in partnership, totaling the

greatest number of exploratory areas in its portfolio since

the Agency began running the auctions.

We are now quite close to self-sufficiency in

providing oil and oil products to our main market

MESSAGE FROM THE PRESIDENT

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


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MESSAGE FROM THE

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

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

social and environmental responsibility.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

along with the trust of our shareholders and customers.

JOSÉ SERGIO GABRIELLI DE AZEVEDOPresident and CEO of Petrobras

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

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

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

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

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

towards reaching this goal.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

growing demand for our product.

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

development. And the results can be seen in, for example, the national record for drilling depth: a slantingwell that reached 6,915 meters below the sea bottom in the Santos Basin. Our refineries have been

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

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

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

PRESIDENT


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

potential forexploration andproduction.

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

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

First offshore discoveryof oil: the Guaricemafield in Sergipe.

Exploration of thecontinental platformfrom Maranhão toEspírito Santo isinitiated.

Creation of thePetrobras ResearchCenter (Cenpes).

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

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

The giant Roncadorfield in the CamposBasin is discovered.

Campos Basinproduction beginsthrough an earlysystem installed atthe Enchova field.

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

The giant Marlimfield is discoveredin the CamposBasin.

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

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

The discovery of the Carmópolis(SE) field opensup prospects forproduction outside

of Bahia.

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

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

1974

2003

19961987

1988

1985

1986

19991994

1963

1961

1966

1968

1977

1953

1962

1984

The company reaches theproduction mark of 100,000 barrelsof oil per day.

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

1997

O i l p r o

d u c

t i o n

i n

B r a z

i l | 1

9 5 3 t o 2 0 0 5

self-sufficiency The co

nquest of self-sufficiency

1954Petrobras begins itsactivities, taking overthe collection of assets of the formerNational PetroleumCouncil (CNP).Production is 2,700barrels of oil per day. 2005

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


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Conduct of the Oil market

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

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

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

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

presenting a singular characteristic because it is predominantly due to market

fundamentals rather than geopolitical events.

Strong price swings during the year also demonstrated the nervousness of

the market in the face of any changes in the perception of the market funda-mentals, a symptom of the exhaustion of capacity in the oil chain. In particu-

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

than on production capacity.

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

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

deal with unexpected events. Because the interruption of production was

compensated for through the liberation of strategic inventories managed by

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

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

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

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

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

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

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

Nevertheless, prices remained high.

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

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

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

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

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

Even with the

slowdown in the

growth of world

demand — 1.4% in

2005 against 3.8% in

2004 — it cannot be

said that the increase

in the price of oil is

reducing the

consumption of oil

products and, as a

result, crude oil sales.

250.000

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 4 9 5 2

270.000

290.000

310.000

330.000

350.000

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

10

20

30

40

50

60

70

80

1.1.061.9.051.5.051.1.051.9.041.5.041.1.041.9.031.5.031.1.031.9.021.5.021.1.021.9.011.5.011.1.011.9.001.5.001.1.00

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

OPEC Basket WTI Brent

2000-2004 b and

2004

2005(after the hurricanes)

weeks

Conduct of the Oil market


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Conduct of the


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

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

abundance in the system.

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

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

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

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

As a result, marginal refiners put

upwards pressure on the price of

lighter oils such as Brent and WTI in

order to obtain final products that

were adjusted to the demand profile.

However, because the additional

supply was of a heavy type of oil,

processing it generated surplus

supplies of fuel oil, widening the

difference between light and heavy

oils, as happened in 2004. That

explains the occurrence of even

higher refining margins in 2005,

particularly for refiners with

conversion capacity.

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

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

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

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

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

during the course of 2005 were merely cosmetic, ending the year a t 28 million bpd. In September, the organization offeredthe market all of its surplus capacity — without the move easing prices at all. An absolute novelty, the total production of

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

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

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

premium into the price of oil.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

growth of production and replacement of reserves.

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

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

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

transition to a new reality in the

international oil market.

-5

0

5

10

15

20

200520042003200220012000199919981997199619951994199319921991199019891988198719861985

i i i

Net U.S. Gulf Refining Margins(real values 2005, US$/bbl)

Source: Purvin & Gertz

Oil market

23.0

24.0

25.0

26.0

27.0

28.0

29.0

N o v - 0 5

S e p - 0

5

J u l - 0 5

M a y - 0

5

M a r - 0

5

J a n - 0

5

N o v - 0 4

S e p - 0

4

J u l - 0 4

M a y - 0

4

M a r - 0

4

J a n - 0

4

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

Isthmus Cracking Isthmus Coking Maya Coking

OPEC-10 Quota OPEC-10 Production



10/63


Corporate Strategy Corporate Strategy

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

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

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

ies from 80% to 91%, thus consolidating the sustainability of self-sufficiency in this market.Approved by the Board of Directors in August, the Business Plan calls for investments of US$ 56.4 billion – an

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

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

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

invested abroad.

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

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

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

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

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

creation of 662 thousand job positions.

In parallel with the increase in the Brazilian production of oil and natural gas, which should reach 2,200thousand bpd in 2006, this year the country’s refineries should process 1,846 thousand bpd – a volume that

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

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

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

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

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

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

Investment Plan (US$ Billion)

Business Area BP 2006-10

E&P 28.0

Downstream 12.9

Gas & Energy 6.5

International 7.1

Distribution 0.9

Corporate Areas 1.0

Total 56.4

87%

13%

Brazil

Overseas

15.64 million m 3 /day in 2005, should reach 37 million m 3 /day in four years’ time.

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

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

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

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

8.2 thousand bpd of biodiesel.

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

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

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

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

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

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

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

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

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

Third-party Capital

Own Generation

Debt Amortization

Investments

Oil + LNG Brazil

Oil + LNG InternationalNatural Gas Brazil

Natural Gas International

(US$ 71.1 billion)

14,7 56,4

12,2Sources

Use

58,9

Production increase (th. bpd)

Sources and use of resources

BusinessPlan Investments 2006-10



11/63

our businessesOUR BUSINESSES

C A R L O S L E O N A M

, L U B R I C A N T S A N D

P A R A F F I N

P L A N T O P E R A T O R A T R E D U C

, 2 1 Y E A R S W I T H

P E T R O B R A S

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

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

1 2 . 8 % M O R E T H A N D U R I N G 2 0 0 4 . A D D I N G T H E I N T E R N AT I O N A L P R O D U C T I O N A N D N AT I O N A L P R O D U C T I O

O F N AT U R A L G A S , T H E C O M PA N Y S E T A P R O D U C T I O N R E C O R D O F 2 , 2 1 7 T H O U S A N D B A R R E L S O F O I

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

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

I N C R E A S E T H E A M O U N T O F D O M E S T I C O I L P R O C E S S E D F R O M 1 , 2 9 2 T H O U S A N D B P D TO 1 , 3 7 6 T H O U S A N D

B P D — A J U M P F R O M 7 6 % TO 8 0 % .

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

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

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

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

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

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


12/63

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

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

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

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

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

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

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

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

OUR BUSINESSES

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

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

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

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

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

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

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

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

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

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

treating 150 thousand bpd of crude oil, into operation.

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

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

Albacora Leste field in the Campos Basin.

A number of production records were set. On December 19, Petrobras produced 1,857,425 barrels – 23thousand more than the previous record established on June 23. Besides the exceptional performance of the

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

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

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

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

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

the distribution and commercialization of the product.


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

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

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


0 - 300 m300 - 1,500 m

Production: 1,684 thousand bpd

>1,500 mONSHORE

Production of Oil, Condensate and LNG in BrazilDistribution by Water Depth

Production of Non–Liquefied Natural Gas in BrazilDistribution by Water Depth

0 - 300 m300 - 1,500 m

>1,500 mONSHORE

Total Production: 43,532 thousand m3 /day

Evolution of the Production of Oil, LNG, Condensate and Natural Gas(thousands of boed)

Oil, LNG and CondensateNatural Gas

1,270 1,491

1,336

1,500

1,540

1,493

1,684

2,300

221

232

252

250

265

274

560

1,568

1,752

1,790

1,758

1,958

2,860

2000

2001

2002

2003

2004

2005

TARGET2010

18.2%

35.0%

3.0%

43.8%14.4%

15.2%

5.1%

65.3%


13/63

OUR BUSINESSES

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

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

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

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

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

the Campos Basin — the P-34 (60 thousand bpd) in the Jubarte field, Phase I; SSP 300 (20 thousandbpd) in the Piranema field; and an FPSO (100 thousand bpd) for the Golfinho field’s Module I.

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

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

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

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

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

to guarantee a sustainable ratio between production and reserves.

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

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

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

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

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

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

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

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

operating include the P-55, for the Roncador

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

the Jubarte field; and another for the Albacora

Supplemental project. Also slated for startup

that year is the FPSO 3, for the production of

light oil in the Golfinho field.

The targets contained in the Petrobras

Strategic Plan require that, by 2010, 15 large oil andfour natural gas production projects enter into operation

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

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

from current proved and possible reserves, those still in an

exploratory evaluation stage and from new discoveries.

Discoveries

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

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

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

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

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

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

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

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

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

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

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

operator of the concession.

The new discoveries are in line with the targets

contained in the Strategic Plan to increase domestic

production of oil and natural gas to 2,860 thousand

boe/day by 2010. Guaranteeing the sustainability of

production with replacement of reserves, these

results obtained through exploration demonstrate

that Petrobras’ decision to focus on deep and ultra-

deep offshore areas, to conduct research in new

frontiers, to resume efforts onshore and to optimize

mature fields was correct.

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

Exploration Success Rate

20%

24%

23%

33%

50%

55%

2000

2001

2002

2003

2004

2005



14/63

OUR BUSINESSES

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

gas potential.

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

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

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

discoveries of non-associated gas. The deep-water blocks have been favorable for oil discoveries, in the CamposBasin, and both associated and non-associated natural gas in the Espírito Santo and Santos Basins.

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

During the year, 292 wells were

drilled and concluded, of which 251

were onshore and 41 in the ocean.

For exploration, 69 wells were drilled

— 36 onshore and 33 offshore. The

exploration success rate hit 55%,because 38 of the 69 wells that

reached their geological objectives

were considered to be oil or gas

discovery or production wells.

New Concessions

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

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

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

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

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

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

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

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

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

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

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

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

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

and the Company is an associate.Furthermore, of the 39 of the contract blocks, 24 are located in onshore sedimentary basins and 15 are in

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

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

slow the decline in production in these areas.

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

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

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

BLOCKS IN ONSHORE BASINS

Mature coastal Inland

Potiguar 10 Solimões 1

Sergipe-Alagoas 5 São Francisco 1

Recôncavo 2 - -

Espírito Santo 5 - -

OFFSHORE BASINS

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

Potiguar 2 Espírito Santo 2

- - Campos 3

- - Santos 4

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

- - Espírito Santo 2

- - Santos 2



15/63

OUR BUSINESSES

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

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

2005, which are part of the Downstream area.

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

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

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

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

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

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

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

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

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

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

throughput in the refineries went from 76% to 80%, increasing the refining margin.The processing of domestic oil increased without impacting the production of medium

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

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

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

domestic oil for manufacturing oil byproducts.

R E F I N I N G A N D C O M M E R C I A L I Z ATI O N

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

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

Proved reserves

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

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

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

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

New fields that were discovered in the past few years and had commercial viability declared recently (580million boe) contributed to the increase in the volume of the proved reserves as did new accumulations discovered

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

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

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

Evolution of Proved Reserves of Oil, NGL, Condensate and Natural Gas – SPE criteria(billion boe)

Oil, LNG and CondensateNatural Gas

8.29 9.65

8.32

9.56

10.6

11.05

11.36

1.36

1.35

1.45

1.99

1.97

1.87

9.67

11.01

12.59

13.02

13.23

2000

2001

2002

2003

2004

2005

Evolution of Proved Reserves in Brazil

(Billion boe- SPE Criteria)

Remainder of proved reserves 2004Incorporation of New DiscoveriesIncorporation in Existing Fields in 2004

13.02

12.35 0.58 0.3

2004

2005 13.23

Volume produced in 2005:0.6 7 billion boe



16/63

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

According to the strategy of offering quality products with low environmental impact, Petrobras initiatedthe sale of low sulfur Diesel S500 fuel. The product is sold in the metropolitan areas of São Paulo, Rio de

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

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

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

the Presidente Bernardes–Cubatão Refinery (RPBC).

D I E S E L S 5 0 0

Commercialization

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

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

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

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

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

strategy, also motivated by the increase in the international price of the product. At the same time that theCompany sought to consolidate already developed markets, it won over new customers. The United States were

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

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

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

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

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

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

a smaller agricultural harvest.

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

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

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

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

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

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

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

higher operating costs due to the startup of new facilities; and an increase in the cost of outsourcing contracts.The Alberto Pasqualini Refinery (Refap) was included in the program to optimize domestic oil production with

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

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

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

Presidente Getúlio Vargas (Repar) refineries, were concluded.

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

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

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

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

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

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

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

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



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OUR BUSINESSES


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

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

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

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

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

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

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

with new manufacturing companies to be incorporated.Petroquisa also initiated studies for the building of a purified terephthalic acid

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

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

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

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

petrochemical refinery.

Located in Duque de

Caxias, Riopol initiated

operations in

November, using

ethane and propane

extracted from Campos

Basin natural gas as

raw material.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

polymer supplied by REPLAN and REVAP. The project is scheduled for conclusion at the beginning of 2008, at aninvestment estimated at US$ 240 million.

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

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

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

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

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

P e t r o c h e m i c a l s

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

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

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

Braskem S.A. Basic, intermediate

and final petrochemicals 10.0 8.4

Cia . Pe troquímica do Sul – Copesul Bas ic pet rochemical s 15.6 15.6

Petroquímica União S.A Basic petrochemicals 17.5 17.4

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

D et en Q uí mi ca S .A . L in ea r a lk yl ben ze ne 28. 6 27. 7

Fábrica Carioca de Catalisadores S.A. Catalyzers 50.0 50.0

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

Pet roqu ímica Tr iunfo S .A. Low densi ty polye thylene 70.5 85.0

Petroquisa’s Participation in Operating Companies | De cember/2005


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OUR BUSINESSES

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

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

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

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

competitive advantages.

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

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

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

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

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

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

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

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

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

advantage of business opportunities that emerge in the field of renewable products, such as alcohol and biodiesel.The orders for the tankers, financed by the BNDES through funds made available by the Merchant Marine Fund,

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

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

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

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

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

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

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

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

view of the fact that a major portion of the demand from Brazilian agribusiness — a sectorthat represents 30% of the GDP — is supplied via imports. In 2005, the sales of ammonia

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

previous year.

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

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

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

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

tons during the year.

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

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

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

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

R$ 26.3 million was invested to increase ammonia production by

50 thousand tons annually and to boost urea production by 68

thousand tons a year.

Petrobras is finalizing studies for construction of a

nitrogenous fertilizer plant in the Center-West Region of the

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

come on stream in 2010. Using natural gas imported from

Bolivia, the plant will have the capacity for annual production

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


Tr a n s p o r t a t i o n

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

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


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OUR BUSINESSES

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

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

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

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

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

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

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

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

of fuel sales.

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

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

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

public authorities.

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

in investments in new markets, such as that for liquefied petroleum gas (LPG) and green petroleum coke (GPC).After the acquisition in 2004 of Agip do Brasil, which had its official name changed to Liquigás Distribuidora S.A.,

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

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

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

Environment (HSE) programs and in logistics and operations.

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

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

D i s t r i b u t i o n

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

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

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

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

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

managerial conditions of the ships according to international regulations.

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

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

Pipelines and terminals

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

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

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

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

environment — whether within the company or in neighboring communities.

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

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

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

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

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

all along the Brazilian coastline, supplying some 350

thousand m3 of this fuel per month.

In the natural gas segment, Transpetro operates the

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

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

another phase of the Cabiúnas Project was concluded,

increasing the natural gas processing capacity of the Campos

Basin to 14.9 million m3 /day.

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

Plan and the transportation requirements created by self-

sufficiency, Transpetro has forecast an increase in capacity of theSoutheast and South pipelines and the construction of an oil products

terminal in Fortaleza.

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

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

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

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

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

.



20/63

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

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

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

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

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

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

AP • 22

PA • 109AM • 61

RO • 42

MT • 165

MS • 196

GO • 241

TO • 63

MA • 71

PI • 89

BA • 384

CE • 256

MG • 1.052

SP • 1.619

RJ • 391

ES • 104

SE • 60

AL • 92

PE • 197

PB • 79

RN • 100

PR • 428

SC • 276

RS • 634

RR • 36

AC • 33

BR Service Stations per State (2005)

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

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

strategies and plan courses of action.

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

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

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

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

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

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

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

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

42.1%). One of our advantages over the

competition is the ability to supply technical support

throughout the country, a factor that boosts the

level of customer loyalty.

Petrobras Distribuidora has the largest network for

the distribution of fuels and lubricants in Brazil. Thereare 51 operating installations that are strategically

located — 22 terminals and 29 bases, ensuring

excellent capillarity network for placing our products.

This network also makes it possible to integrate

transportation and inventory solutions — another

distinguishing characteristic that sets us apart from

the competition in terms of service quality.

Stake of the Fuel Distribution Companies in Brazil (%)

20012002200320042005

40,0

30,0

20,0

10,0

0,0BR Ipiranga Shell Esso Texaco Others


UnitsBR Outlets 6,933Urban 5,334Highway 1,567Maritime 32

Active Outlets 5,885

Own Outlets 763Third Party Outlets 6,170

Convenience Stores 740

VNG Outlets 295

Service Station Network


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OUR BUSINESSES


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

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

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

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

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

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

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

The Company obtained an R$ 800 million loan from the National Economic andSocial Development Bank (BNDES) for the Cabiúnas-Vitória stretch. Gasene will

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

of the state of Espírito Santo.

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

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

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

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

direction, reinforcing supply of Vitória and the Southeast Region.

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

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

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

national content. This will have a multiplying effect on employment and income, fostering the development of localsuppliers and creating an alternative supply center for the Company. Many of the projects involved are permanent

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

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

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

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

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

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

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

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

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

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

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

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

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

Two factors were responsible for maintaining the Brazilian market for this product in expansion: (i) the growthof the supply logistical infrastructure, and (ii) the growing pressure for the use of fuels that have a less aggressive

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

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

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

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

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

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

compared to 2004.

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

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

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

Transportation

The company remained committed to setting up a Basic Natural Gas

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

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

Paulo to Bolivia, thus helping expand the market.

N a t u r a l G a s

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

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

Brazil has the second-

largest VNG fleet in the

world, after only Argentina,

which is supplied through

a network of

approximately 1,500

service stations, of which

47% belong to Petrobras .


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OUR BUSINESSESN a t u r a l G a s


Petrobras owns a share of eight natural gas

pipeline transportation companies, including:

Transportadora Brasileira Gasoduto Bolívia-Brasil

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

of the Brazilian and Bolivian stretches of the

Bolivia-Brazil gas pipeline. The other six gastransportation companies in which Petrobras

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

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

de Gás S.A., Capixab

Relatorio Anual 2005 Ing

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