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Annual Report 2005

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  • 1. contents contents Profile, mission, vision 2015 and values Highlights Message from the president The conquest of self-sufficiency Conduct of the oil market Corporate strategy our businesses in brazil 22 Exploration and Production 29 Refining and Commercialization 32 Petrochemicals 35 Transportation 37 Distribution 40 Natural Gas 44 Energy I N T E R N AT I O N A L A C T I V I T I E S 54 South America 60 North America 61 Africa 62 Asia 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 TA N G I B L E A S S E TS 84 Technological Know-how Capital 87 Organizational Capital 88 Relationship Capital 91 Human Capital BUSINESS MANAGEMENT 94 Business Performance 97 Capital Markets 103 Risk Management 106 Corporate Governance 112 Corporate Information 116 Glossary, Abbreviations and Addresses
  • 2. petrobras in brazil and overseas profile p r of i l e mission To operate safely and profitably in the oil, gas and energy domestic Petrobras is a publicly listed company that and international markets in a socially ENGLAND operates on an integrated and specialized basis and environmentally responsible in the following segments of the oil, gas and manner, supplying products and T H E U N I T E D STAT ES L I BYA JA PA N services to meet the needs of its IRAN CHINA energy industry: exploration and production; customers and contributing to the M E X I CO refining, commercialization, transportation and development of Brazil and the VENEZUELA CO LO M B I A NIGERIA petrochemicals; distribution of oil products; countries in which it operates. EC UA D O R EQ UATO R I A L G U I N E A SINGAPURE PERU BOLIVIA TA N Z A N I A natural gas and energy. Founded in 1953, the A N GO L A PA R AG UAY Company today is the world’s 14th largest oil CHILE U R U G UAY company according to Petroleum Intelligence va l u e s ARGENTINA Weekly. Leader in the Brazilian hydrocarbons Focus on the Company’s main sector, Petrobras has been expanding its stakeholders: shareholders, operations to become an integrated energy customers, employees, society, government, partners, suppliers company with international operations and a and the communities in which leader in Latin America. it operates; vision5 BELÉM A spirit of entrepreneurship and REMAN SÃO LUÍS FORTALEZA an ability to meet challenges; Coari MANAUS LUBNOR Mucuripe Guamaré Dunas NATAL 2 0 1 vision 2015 Focus on obtaining excellent results; JOÃO PESSOA Campina Grande Cabedelo RECIFE Innovative and competitive spirit Suape MACEIÓ 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 Candeias with a focus on providing services ARACAJU RLAM E N E R G Y C O M PA N Y W I T H A S T R O N G DTBAS SALVADOR with a competitive edge and BRASÍLIA Sen. Canedo Jequié COCHABAMBA SANTA CRUZ DE LA SIERRA Itabuna 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 technological competence; GOIÂNIA ESPÍRITO SANTO Gualberto Villarroel Guillermo Elder Bell REGAP Norte-Capixaba 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 Excellence and leadership in Regência UBERABA VITÓRIA questions of health, safety and the REVAP W I T H I T S F O C U S O N P R O F I TA B I L I T Y REPLAN Macaé PARAGUAI REDUC preservation of the environment; RECAP RIO DE JANEIRO REPAR RPBC São Sebastião A N D S O C I A L A N D E N V I R O N M E N TA L REFINOR Paranaguá SÃO PAULO São Francisco do Sul (DTSUL) A permanent quest for business SIX CURITIBA R E S P O N S I B I L I T Y. REFAP FLORIANÓPOLIS leadership. Tramandaí Pipelines ARGENTINA Copesul PORTO ALEGRE Fertilizer Plant REFISAN URUGUAI Terminal de Refinery Rio Grande Terminal Petrobras overseas Bahía Blanca RICARDO ELIÇABE
  • 3. HIGHLIGHTS HIGHLIGHTS HIGHLIGHTS ORIGIN OF NATURAL GAS (million m3/day) (4) 42 45 Domestic gas 23 23 Bolivian gas 19 22 Operational summary | 2005 NATURAL GAS MARKET DISTRIBUTION (million m3/day) (4) 42 45 Distributors 28 31 2004 2005 Thermoelectric power plants 7 7 (1)(2) PROVED RESERVES – SPE criteria (billions of barrels of oil equivalent - boe) 14.9 14.9 Domestic consumption 7 7 Oil and condensate (billions of barrels) 12.1 12.3 (1) Natural gas (billions of boe) 2.8 2.6 ENERGY Number of thermoelectric power plants(5) 7 9 (1) AVERAGE DAILY PRODUCTION (th. boed) 2,020 2,217 Installed capacity (MW)(5) 2,194 3,203 • Oil and NGL (th. bpd) 1,661 1,847 Energy sales (GWh) 11.32 16.64 Onshore 407 396 Number of hydroelectric power plants 2 2 Offshore 1,254 1,451 Installed capacity (MW)(5) 285 285 • Natural gas (th. boed) 359 370 Transmission lines (km) 15,414 15,414 Onshore 217 213 Energy distribution (TWh/year) 13 13 Offshore 142 157 (1) FERTILIZERS (1) PRODUCING WELLS (oil and natural gas) – 12/31/2005 13,821 14,061 Number of plants 3 3 Onshore 13,156 12,803 Some 2004 data were revised due to changes in the criteria. Offshore 665 1,258 (1) Includes overseas data, corresponding to Petrobras’ stake in each partnership (2) Proved reserves are calculated according to SPE (Society of Petroleum Engineers) criteria DRILLING RIGS – 12/31/2005 50 64 (3) Includes Transpetro’ port terminals only Onshore 19 22 (4) Excludes flare off, own E&P consumption, liquefaction and reinjection Offshore 31 42 (5) Includes only assets with an equity stake equal or larger than 50% OPERATING PRODUCTION PLATFORMS – 12/31/2005 95 97 Fixed 72 73 Financial summary | 2005 Floating 23 24 PIPELINES (km) – 12/31/2005 (1) 30,039 30,343 INVESTMENTS R$ million Oil and oil products 12,553 12,857 2004 2005 Natural gas 17,486 17,486 Own Investments 21,151 22,927 Exploration & Production 12,441 13,934 TANKER FLEET – 12/31/2005 Supply 3,907 3,286 Vessels - company owned 50 50 Gas & Energy 625 1,527 - chartered 74 75 International 2,331 3,153 Tons (millions of deadweight tons - dwt) 8 8 Distribution 1,223 495 TERMINALS – 12/31/2005 Corporate Areas 624 532 Number 65 66 Special Purpose Companies (SPCs) 775 2,385 Storage capacity (million m3) (3) 9.9 10.4 Ventures under Negotiation 454 311 Project Finance 169 87 (1) REFINERIES – 12/31/2005 Total Investments 22,549 25,710 Number 16 16 Nominal installed capacity (th. bpd) 2,114 2,114 C O N S O L I DAT E D FINANCIAL I N F O R M AT I O N R$ million Average throughput processed (th. bpd) 1,847 1,861 2004 2005 % Brazil 1,728 1,758 Gross Operating Revenue 150,440 179,065 19% Overseas 119 103 Net Operating Revenue 111,128 136,605 23% Average daily production of oil products (th. bpd) 1,797 1,839 Operating Profit 29,930 39,773 33% IMPORTS (th. bpd) Financial Result (3,321) (2,843) -14% Oil 450 352 Net Income 16,887 23,725 40% Oil products 109 94 Net Income per Share (R$/share) 3.85 5.41 41% EBITDA 36,798 47,808 30% EXPORTS (th. bpd) Total Debt 55,803 48,242 -14% Oil 181 263 Net Debt 35,816 24,825 -31% Oil products 228 241 Market Value 112,458 173,584 54% COMMERCIALIZATION OF OIL PRODUCTS (th. bpd) Gross Margin 41% 44% 3% Brazil 1,637 1,655 Operating Margin 27% 29% 2% Net Margin 15% 17% 2% INTERNATIONAL SALES (th. bpd) Financial and Economic Indicators Oil, Gas and Oil Products 416 385 Brent (US$/bbl) 38.21 54.38 42% US Dollar Average Price - Sale (R$) 2.9262 2.4350 -17% US Dollar final Price - Sale (R$) 2.6544 2.3407 -12% 4 PETR OBRA S annual report 2005 PETR OBRA S annual report 2005 5
  • 4. HIGHLIGHTS HIGHLIGHTS Voting Capital – Common Shares 2005 2004 2.8% 1.9% 2.8% 1.9% Production of Oil, NGL, 4.6% 4.9% Gross Margin, Operating and Net (1) 7.5% 7.9% Condensate and Natural Gas Oil and Oil Products Spill (m3) BR GAAP Criteria (th. boed) 45% 44% 41% 39% 55.7% 55.7% 2001 1,381 258 1,639 2001 2,619 36% 27.5% 26.7% 2002 1,535 275 1,810 29% 29% 2002 197 27% 24% Federal Government 2003 1,701 335 2,036 20% 2003 276 19% 17% 17% BNDESPar 15% 2004 1,661 359 2,020 12% ADR Level 3 2004 530 FMP – FGTS Petrobras 2005 1,847 370 2,217 269 Foreign Investors (Resolution no. 2.689 C.M.N.) 2005 2001 2002 2003 2004 2005 Other individuals and legal entities Oil, NGL and Condensate 3 Spills of more than 1 barrel (0.159 m ) impacting Gross Margin Natural Gas the environment outside the installation perimeter. Operating Margin Net Margin Voting Capital - Preferred Shares 2005 2004 Debt – BR GAAP Criteria Proved Reserves of Oil, NGL, Condensate (R$ billion)(1)(3) 15.7% 15.2% and Natural Gas SPE Criteria Net Income 3.3 (billions boed) 37.1% 37.2% BR GAAP criteria 1.3 49.6 15.5% 15.8% 46.2 2001 8.5 2.1 10.6 (R$ million)(1) 44.2 40 2002 9.9 35.8 37.1 2.3 12.2 2001 9,867 31.7% 31.8% 34.7 2003 11.6 2.9 14.5 2002 8,098 24.8 BNDESPar 2004 12.1 2.8 14.9 2003 17,795 18.2 ADR Level 3 and Rule 144-A 9.7 Foreign Investors (Resolution no. 2.689 C.M.N.) 2005 12.3 2.6 14.9 16,887 2004 8.5 8.1 10.9 9.6 11.1 Other individuals and legal entities 2001 2002 2003 2004 2005 Oil, NGL and Condensate 2005 23,725 Short-Term Natural Gas Long-Term Capital Stock Funds obtained but still not used in projects 2005 2004 Net Debt Earnings/Share 2.7% 2.8% Lost Time Injury BR GAAP Criteria 7.6% 32.2% 7.8% 32.2% Market Capitalization x Net Equity Frequency Rate (LTIFR) (R$/share)(1)(2) 8.2% 8.1% (R$ billion)(1) 174 2001 2.89 2001 2.27 15.7% 15.4% 2002 1.53 2002 1.86 112 15.9% 15.7% 17.7% 18.0% 87 2003 1.23 2003 4.06 78 56 54 Federal Government 3.85 62 2004 1.04 2004 49 BNDESPar 34 29 ADR (ON Shares) 2005 0.97 2005 5.41 2001 2002 2003 2004 2005 ADR (PN Shares) 2001 2002 2003 2004 2005 Market Capitalization Net Equity FMP – FGTS Petrobras Valor de Mercado Valor Patrimonial Foreign Investors (Resolution no. 2.689 C.M.N.) Number of lost time injuries per million (1) The 2004 and 2005 fiscal years include the Specific Purpose Companies whose activities are controlled, directly or indirectly, by Petrobras Other individuals and legal entities men-hours of exposure to risk. (2) For the effects of comparison, Net Earnings per share were recalculated for the previous periods as a result of the share split approved by the Note: LTIFR covers employees and AGM of July 22, 2005. outsourced workers (3) The 2001, 2002 and 2003 fiscal years include debt contracted by the SPEs with which Petrobras structured "Project Finance" and consortia. The Commom shares - 2,536,673,672 2002, 2003, 2004 and 2005 fiscal years include leasing contracts. Preffered shares - 1,849,478,028 Total shares - 4,386,151,700 PETR OBRA S annual report 2005 7
  • 5. MESSAGE FROM THE PRESIDENT MESSAGE FROM THE PRESIDENT MESSAGE FROM THE PRESIDENT MESSAGE FROM THE PRESIDENT MESSAGE FROM THE PRESIDENT 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. “ I N A S I T U AT I O N I N W H I C H A In practical terms, I should mention that we passed the benchmark of 1.8 million barrels of oil per day SCARCITY OF ENERGY (bpd) produced in Brazil, mainly due to the startup of the P-43 and P-48 platforms. We consider this a R E S O U R C E S , M A I N LY O I L , H A S BECOME MORE AND MORE milestone in the ability of Petrobras’ technical and managerial staff to overcome challenges. In 2003, these E V I D E N T, A C H I E V I N G S E L F - units were well behind in executing their projects and ran serious risks in contractual and SUFFICIENCY REPRESENTS AN operational feasibility. Nevertheless, we were able to reverse the situation and today I M P O R TA N T S T E P TO WA R D S the two rigs are operating at full production. REDUCING THE RISK AND As a result, we were able to boost annual oil production in Brazil by 13%. This growth VULNERABILITY OF BRAZIL´S TRADE BALANCE. AND placed Petrobras in the ranks of companies with the highest rise in production in the P ET R O B R AS I S P R O U D TO B E world oil industry in 2005. Even with our expanded production, we were able to M A K I N G A N I M P O R TA N T guarantee a 131% replacement rate of our oil reserves. That is, for each barrel we CO N T R I B U T I O N TOWA R D S produced, we replaced 1.31 barrels in our reserves, meaning that we continue to maintain R E A C H I N G T H I S G O A L .” long-term sustainable growth. In step with the restructuring of our exploration portfolio and the preservation of sustainable growth, during the 7th Bidding Round run by the National Petroleum, Natural Gas and Biofuel Agency (ANP), Petrobras acquired 96 new exploratory blocks, of which 42 were exclusive and 54 were in partnership, totaling the greatest number of exploratory areas in its portfolio since the Agency began running the auctions. We are now quite close to self-sufficiency in providing oil and oil products to our main market
  • 6. MESSAGE FROM THE PRESIDENT — Brazil. This target, which is symbolic for Brazilian society, will materialize in a sustainable manner in 2006, in its composition, and it already is fueling fleets of buses and trucks in large cities. Developed by as soon as the recently launched P-50 platform reaches its peak production capacity of 180,000 bpd in Petrobras, the new fuel contributes to improve air quality and is part of the Company’s commitment to the Campos Basin. In a situation in which a scarcity of energy resources, mainly oil, has become more and social and environmental responsibility. more evident, achieving self-sufficiency represents an important step towards reducing the risk and Moreover, the projects that have been approved by the current management in Brazil have a vulnerability of Brazil´s trade balance. And Petrobras is proud to be making an important contribution commitment to domestic content of at least 60%, which will strengthen local industry and generate towards reaching this goal. thousands of direct and indirect jobs. Of particular note in this regard was the approval of the order for Petrobras has sought to expand its activities with the same entrepreneurial determination and spirit. 42 tankers — the largest to be given to the naval industry in the country. The Company’s project for international expansion is based upon the same ethical and business The confidence of our shareholders and investors in the Company’s results can be principles that are leading the Brazilian market to sustainable self-sufficiency. Thus, in 2005 Petrobras measured by the performance of our shares. During the course of 2005, there was an intensified its activities in Africa, South America and United States, strengthening its international increase in the average daily financial trading volume of Petrobras’ shares. After the presence. The Company’s overseas offensive also includes the purchase of assets in Colombia, Paraguay stock split concluded in September 2005, to make shares more accessible to small and Uruguay, and the acquisition of 50% of the Passadena Refinery in the United States, an investment and medium sized investors, Petrobras’ shares became the most-traded security on of some US$ 370 million that will add value to the oil produced by the Company. the São Paulo Stock Exchange. We expanded our shareholder base and earned an Pursuing the same strategic objective of adding value to its products, Petrobras decided to build a new investment grade rating from Moody’s Investor Service for our foreign currency debt refinery in the Northeast of Brazil, in the state of Pernambuco, with scheduled investments of US$ 2.5 — four levels higher than the classification of the Brazilian sovereign risk. billion. This is the first project for a Petrobras refining facility since conclusion of the Henrique Laje Petrobras’ results in 2005 were reflected in the Company’s market capitalization, Refinery (Revap) in 1980 in the state of São Paulo. which rose 54% in 2005. Today we are the 8th most valuable company in the sector in In the energy area, Petrobras took over full control of three power plants in 2005: TermoRio (1,040 the world and the highest valued in Latin America, according to Business Week magazine MW), Eletrobolt (388 MW) and TermoCeará (220 MW) — the latter two being Merchant type plants. In In the following pages, you will find greater detail about Petrobras’ results in 2005. February 2006, we signed a memorandum of understanding for the acquisition of the Macaé Merchant They were conquests that consecrated the efforts of our employees and suppliers Plant (929 MW), thus reducing the need to make contingency payments. We took major steps to expand along with the trust of our shareholders and customers. 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 JOSÉ SERGIO GABRIELLI DE AZEVEDO growing demand for our product. President and CEO of Petrobras One of the underpinnings of our action plan has been continuous massive investment in technological development. And the results can be seen in, for example, the national record for drilling depth: a slanting well that reached 6,915 meters below the sea bottom in the Santos Basin. Our refineries have been adapted — and this is a permanent practice — to process more heavy oil and to improve the quality of our products, extracting high added value oil products. We introduced Diesel 500, with 75% less sulfur 10 PETR OBRA S annual report 2005
  • 7. self-sufficiency The conquest of self-sufficiency 2003 The largest natural gas reserve on the Brazilian continental shelf is discovered in the Santos Basin. New light oil provinces are 1996 found in Espírito Santo 1987 and Sergipe, with high 1953 1953 The giant Roncador potential for Oil production at the giant Albacora field in field in the Campos October 3 | President Getúlio the Campos Basin is initiated in 420 meters exploration and Basin is discovered. Vargas signs Law 2004 that 1966 of water depth, a world record at the time. production. establishes the monopoly of the Creation of the Another giant oil field is discovered at the federal government over the Petrobras Research Campos Basin: Marlim Sul. activities of the oil industry in the Center (Cenpes). country and authorizes the creation of Petróleo Brasileiro S. A. – Petrobras as the state 1997 company to be the executor of Oil industry activities in Brazil the monopoly. are opened up to private 1977 1985 initiative. Production exceeds the historic milestone of 1 Campos Basin The giant Marlim Oil production in Brazil | 1953 to 2005 million barrels per day. production begins field is discovered through an early system installed at in the Campos 1988 Basin. the Enchova field. The Rio Urucu field starts producing in Alto Amazonas, celebrating a long period of 1961 1968 prospecting activities in the Amazon region. Exploration of the First offshore discovery continental platform of oil: the Guaricema from Maranhão to field in Sergipe. Espírito Santo is initiated. 1986 The Technological Innovation and Advanced 1963 Development in Deep and Ultra-Deep Water Program (PROCAP) is created. Initially, the 1954 The discovery of program studies solutions for exploration and the Carmópolis Petrobras begins its production in water up to 1,000 meters deep. (SE) field opens activities, taking over Subsequently, the studies are extended to up prospects for the collection of waters 2,000-3,000 meters in depth. production outside assets of the former of Bahia. 1974 1999 National Petroleum Council (CNP). The discovery of 1962 1994 Petrobras breaks the Production is 2,700 barrels of oil per day. The company the Garoupa field off the northern coast of Rio de The first semi-submersible work offshore production record at 2005 reaches the platform totally developed by the Roncador field Janeiro marks the On December 19, Petrobras sets a production mark Petrobras technicians in the Campos beginning of the production record of 1,857,425 of 100,000 barrels (Petrobras-18) begins Basin, producing at conquest of the barrels of oil per day. Work on the of oil per day. operations in the Marlim field 1,853 meters of Campos Basin, P-50 platform, which has the of the Campos Basin). water depth. which will become 1984 capacity to produce 180,000 the largest barrels a day, is concluded. production region The giant Albacora field is Installed in the Albacora Leste in the country. discovered in the Campos Basin. field of the Campos Basin, it will Production reaches 500,000 assure sustainable oil self- barrels per day. sufficiency for the country when it hits peak production in 2006.
  • 8. Conduct of the Oil market Conduct of the Oil market Oil prices continued rising in 2005, following a trend that began in 2004. the International Energy Agency, the oil price peaks were of short duration — US$ 67.5/bbl for Brent and US$ Even with the Brent and WTI oil were, respectively, 42% and 36% more expensive than the 69.8/bbl for WTI. On the oil product market, however, the reduction by 30% of refining activity in United States slowdown in the average of the previous year. This increase in prices, compared to the rises of led to an increase in real prices only comparable to that seen in the 1970s. similar magnitude that occurred during the decade of the 1970s, has been Even with the slowdown in the growth of world demand — 1.4% in 2005 against 3.8% in 2004 — it cannot growth of world presenting a singular characteristic because it is predominantly due to market be said that the increase in the price of oil is reducing the consumption of oil products and, as a result, crude oil demand — 1.4% in fundamentals rather than geopolitical events. 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. 2005 against 3.8% in Oil Prices (US$/bbl, nominal) Nevertheless, prices remained high. Source: Bloomberg 2004 — it cannot be The growth of oil production in non-OPEC countries declined drastically in 2005, remaining practically stable, 80 said that the increase 70 according to the calculations of the International Energy Agency, compared to an increase of about 1 million bpd 60 in 2004. This decline is explained less by the fall in production in the mature regions such as the North Sea, than in the price of oil is 50 by the temporary halt in the Gulf of Mexico and — more importantly — by the strong slowdown of production in reducing the 40 Russia that went from average annual increases of 10% in each of the past five years to 2.4% in 2005. 30 consumption of oil 20 10 products and, as a 1.1.00 1.5.00 1.9.00 1.1.01 1.5.01 1.9.01 1.1.02 1.5.02 1.9.02 1.1.03 1.5.03 1.9.03 1.1.04 1.5.04 1.9.04 1.1.05 1.5.05 1.9.05 1.1.06 Private Oil Stocks in the U.S. (M bbl) OPEC Basket WTI Brent Source: US-DOE/EIA result, crude oil sales. Cesta OPEP WTI Brent 350.000 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- 330.000 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 310.000 than on production capacity. 290.000 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 270.000 2000-2004 band 2004 deal with unexpected events. Because the interruption of production was 250.000 2005 compensated for through the liberation of strategic inventories managed by 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 (after the hurricanes) weeks (semanas) Faixa 2000-2004 2004 2005 (Depois dos furações)
  • 9. Conduct of the Oil market Nevertheless, the rise in prices is not due to a shortage of oil in the market. To the contrary, analysts have been the ten member countries subject to quotas (Iraq excluded) was lower than the stipulated quantities — behavior that rather surprised by the persistent high price of a barrel of oil despite the formation of private oil inventories — a sign of than reflecting discipline demonstrated the inability to increase production: countries such as Venezuela, Iran and Indonesia abundance in the system. did not even meet their quotas. The year, thus, was notable for OPEC’s reduced surplus capacity, which inserted a high risk Because non-OPEC oil does not satisfy incremental demand, the organization began to produce more, as in 2004, premium into the price of oil. placing excess capacity into operation, which today consists primarily of heavy oil. Although more than sufficient in Another significant fact in 2005 was the official suspension of the OPEC price target (between US$ 22/bbl and volume, the quality of this additional supply was inadequate to satisfy demand due to the lack of capacity in the world’s US$ 28/bbl for its oil basket). Although the target had no longer been a benchmark for the organization since 2004, refineries to convert this oil into the medium and light oil products most required, such as diesel and gasoline. 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, As a result, marginal refiners put this means that OPEC will indirectly seek a higher level for its benchmark oils (Brent and WTI), which are lighter. Net U.S. Gulf Refining Margins (real values 2005, US$/bbl) upwards pressure on the price of The influx of speculative capital into the “paper barrels” market was also among the causes of higher oil prices Source: Purvin & Gertz lighter oils such as Brent and WTI in in 2005. The action of the derivatives funds occurred due to the low level of interest rates and the high rate of 20 order to obtain final products that monetary liquidity in the world. However, it is necessary to understand that the volatility caused by the increase in were adjusted to the demand profile. the volume of the oil futures markets was not, by itself, the cause of the rise in the prices; rather, in a context in 15 However, because the additional which the fundamentals pointed towards an increase, it was the cause of the exacerbation of this trend. supply was of a heavy type of oil, The trend of an increase in costs throughout the oil chain continued in 2005, especially for exploration and 10 processing it generated surplus production development activities. Also rising was the alarmist tone of the official energy agencies regarding the need supplies of fuel oil, widening the for greater investment in order to put into operation sufficient production and refinery capacities to accommodate the 5 difference between light and heavy growth in demand. In this situation, the government-owned companies of China and India, anxious for energy oils, as happened in 2004. That resources, further increased the competitive atmosphere of the sector and restricted the investment opportunities of 0 explains the occurrence of even the large international companies in search of acquisitions to compensate for their inability to meet their targets for higher refining margins in 2005, growth of production and replacement of reserves. -5 particularly for refiners with In conclusion, 2005 was a year when the circumstances leading to an increase in prices over the previous year became 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 conversion capacity. exacerbated, with few signs of an abatement in the conditions provoking these highs. In the sense that a higher level of IsthmusIsthmus Cracking Cracking Isthmus Coking Isthmus Coking Maya Coking Maya Coking prices is now expected over the long term as in 2004, the year of 2005 demonstrated that it was part of a period of As a result of this market situation, the historic OPEC trade-off between high prices and high production was invalidated. transition to a new reality in the OPEC-10 Oil Production and Quotas (MM bpd) By combining the two, it obtained oil export revenues of some US$ 450 billion – 50% higher than in 2004. In Iraq, the international oil market. Source: OPEC and the International Energy Agency prolonged political instability and sabotaging of the oil infrastructure frustrated attempts to increase production, which was 29.0 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 28.0 during the course of 2005 were merely cosmetic, ending the year at 28 million bpd. In September, the organization offered 27.0 the market all of its surplus capacity — without the move easing prices at all. An absolute novelty, the total production of 26.0 25.0 24.0 23.0 Jul-04 Jul-05 Jan-04 Jan-05 Mar-04 Sep-04 Mar-05 Sep-05 Nov-04 Nov-05 May-04 May-05 OPEC-10 Quota OPEC-10 Production Cota OPEP-10 Produção OPEP-10 16 PETR OBRA S annual report 2005 PETR OBRA S annual report 2005 17
  • 10. Corporate Strategy Corporate Strategy Petrobras’ Business Plan 2006-2010 maintains the aggressive growth targets established by the 2015 Strategic Production increase (th. bpd) 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. Oil + LNG Brazil Oil + LNG International Natural Gas Brazil Investment Plan (US$ Billion) Natural Gas International Business Plan Investments 2006-10 Business Area BP 2006-10 E&P 28.0 15.64 million m3/day in 2005, should reach 37 million m3/day in four years’ time. 13% Downstream 12.9 As part of the strategy to consolidate itself as an integrated energy company with an international presence, Gas & Energy 6.5 Petrobras seeks to optimize the use of renewable sources, such as biomass, biodiesel and wind and solar gener- International 7.1 ation. In 2010, the installed capacity of generation from these sources will reach 169 MW and the capacity of the 87% Distribution 0.9 thermoelectric and cogeneration power plants will be 4,857 MW. Furthermore, Petrobras should make available Corporate Areas 1.0 8.2 thousand bpd of biodiesel. Brazil Overseas Total 56.4 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 The amounts exceeded the previous plan by US$ 21.9 billion, resulting in the increase in investments for with the investment plan. Funding raised in the financial market is forecast at US$ 12.2 billion and the debt amor- Exploration and Production (+ 73%), Supply (+ 39%) and, in view of the growing demand for natural gas, in Gas tization is calculated to be US$ 14.7 billion. The policy of extending the debt maturity profile will proceed as before and Energy (+ 151%). To stimulate the development of a new center of supply, at least 65% of the amount invest- as will efforts to reduce financial leverage. Average Return on Capital Employed (ROCE) for the period should be ed in the country will be earmarked for Brazilian suppliers. Of these funds – an average of US$ 6.4 billion annually – 15%. As a result, US$ 71.1 billion will be obtained and invested. 77% will mobilize the materials, construction and assembly sectors. Petrobras will demand, directly and indirectly, the With the commitments it has assumed in the fields of social and environmental responsibility and technologi- creation of 662 thousand job positions. cal know-how, investments in Health, Safety and Environment (HSE), technology, telecommunications and In parallel with the increase in the Brazilian production of oil and natural gas, which should reach 2,200 Information Technology (IT) for the 2006-2010 period will total US$ 4.7 billion. thousand bpd in 2006, this year the country’s refineries should process 1,846 thousand bpd – a volume that points to a target of 1,869 thousand bpd in 2010. With the sustainability of self-sufficiency guaranteed, the daily Sources and use of resources processing of crude Brazilian oil, which was 1,376 thousand bpd in 2005, will rise to 1,710 thousand bpd in 2010. (US$ 71.1 billion) 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 Sources 12,2 58,9 Third-party Capital Debt Amortization hit 545 thousand boed in 2010, when the processed throughput in the Company’s refineries in other countries Use 14,7 56,4 Own Generation Investments should total 154 thousand bpd. The volume of natural gas sales in the Southern Cone (excluding Brazil), of 18 PETR OBRA S annual report 2005 PETR OBRA S annual report 2005 19
  • 11. OUR BUSINESSES our businesses 2 0 0 5 W A 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 T O 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 P A N Y P R O D U C E D 1 , 6 8 4 T H O U S A N D B A R R E L S P E R D A Y O F O I L ( B P D ) , L I Q U E F I E D N A T 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 L – 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 N O F N AT U R A L G A S , T H E C O M PA N Y S E T A P R O D U C T I O N R E C O R D O F 2 , 2 1 7 T H O U S A N D BARRELS OF OIL EQU IVALENT P E R DAY ( B O E D ) . 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 AT O R AT 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 D U E T O 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 1 1 R E F I N E R I E S W E R E A B L E T O I N C R E A S E T H E A M O U N T O F D O M E S T I C O I L P R O C E S S E D F R O M 1 , 2 9 2 T H O U S A N D B P D TO 1 , 3 76 T H O U S A N D B P D — A J U M P F R O M 76 % TO 8 0 % . W I T H R E G A R D TO T H E D I S T R I B U T I O N O F O I L P R O D U C T S , T H E P E T R O B R A S D I S T R I B U I D O R A S U B S I D I A R Y H A D G R O S S R E V E N U E S 2 5 % H I G H E R T H A N I N 2 0 0 4 . S A L E S I N T H E N AT U R A L G A S S E G M E N T R O S E 9 . 5 % . PETROBRAS CONTINUED THE RESUMPTION OF PETROCHEMICAL ACTIVITIES, SEEKING SELECTIVE E X PA N S I O N IN BRAZIL AND SOUTHERN CONE COUNTRIES. THE 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. OUR BUSINESSES 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 E x p l or at i o n a n d p r od u c t i o n 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, INCREASE IN OIL PRODUCTION DURING 2005 PLACED 34% higher than during 2004, due to the 17% appreciation of the Brazilian real against the U.S. dollar, the increase THE COUNTRY ON THE DOORSTEP OF SELF-SUFFICIENCY 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. Evolution of the Production of Oil, LNG, Condensate and Natural Gas (thousands of boed) 2000 1,270 221 1,491 2001 1,336 232 1,568 The growth of domestic oil production in 2005 left the country close to self-sufficiency, boosting the Company’s 2002 1,500 252 1,752 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 2003 1,540 250 1,790 12.8% rise over the 1,493 thousand bpd produced in 2004. 2004 1,493 265 1,758 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 2005 1,684 274 1,958 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, Oil, LNG and Condensate TARGET 2,300 560 2,860 2010 Natural Gas 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. 1 - Nosso Negocios (1º parte) Average production in 2005 increased significantly, remaining close to the established target of 1,700 bpd. The Production of Oil, Condensate and LNG in Brazil Production of Non–Liquefied Natural Gas in Brazil cause of the difference was the postponement until 2006 of the startup of the P-50 (180 thousand bpd) in the Distribution by Water Depth Distribution by Water Depth Albacora Leste field in the Campos Basin. 5.1% 3.0% 18.2% A number of production records were set. On December 19, Petrobras produced 1,857,425 barrels – 23 14.4% 43.8% thousand more than the previous record established on June 23. Besides the exceptional performance of the 15.2% 65.3% Campos Basin platforms, the Mature Fields Recovery Enhancement Program (RECAGE), which seeks to minimize 35.0% 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 0 - 300 m >1,500 m 0 - 300 m >1,500 m of domestic gas, in step with the Company’s strategy to strengthen the segment and consolidate its leadership in 300 - 1,500 m ONSHORE 300 - 1,500 m ONSHORE the distribution and commercialization of the product. Production: 1,684 thousand bpd Produção de óleo Produção de Gás Total Production: 43,532 thousand m3/day 22 PETR OBRA S annual report 2005 PETR OBRA S annual report 2005 23
  • 13. OUR BUSINESSES E x p lor at io n a n d p r od u c t io n THE CONQUEST OF SELF-SUFFICIENCY Discoveries In 2006, Petrobras should reach annual average production of 1,910 thousand bpd, surpassing Brazilian In 2005, Petrobras declared the commercial viability of eight new oil and gas fields. The gigantic Papa-Terra field in demand, which is estimated at between 1,850 and 1,900 thousand bpd. An initial step in the 2006-2010 the south of the Campos Basin, with a recoverable volume estimated at between 700 million and 1 billion barrels business plan, which calls for investments of US$ 28 million in exploration and production, sustainable of equivalent oil (boe), deserves mention; Petrobras is the operator of the field with a 62.5% stake and is self-sufficiency will be obtained through the coming on stream of the P-50 and three other platforms in associated with Chevron-Texaco in the project. Also noteworthy was the new accumulation discovered in the Marlim the Campos Basin — the P-34 (60 thousand bpd) in the Jubarte field, Phase I; SSP 300 (20 thousand Leste field of the Campos Basin that, because it is located in geologically deeper layers, opens a new exploration bpd) in the Piranema field; and an FPSO (100 thousand bpd) for the Golfinho field’s Module I. frontier in the region. The increase in the amounts produced is in line with the strategy for exploration and production Other offshore highlights included the Uruguá and Tambaú fields in the Santos Basin, totaling more than 270 in Brazil. Carried out with operational excellence and social and environmental responsibility, million boe in recoverable volumes of light oil and natural gas, and the Canapu field in the Espírito Santo Basin. In Petrobras has sought to strengthen its activities in deep and ultra-deep water and to take advantage onshore basins, discoveries were made and commercial viability declarations issued for the following fields: Acauã, of profitable opportunities in shallow water and onshore areas. At the same time in which it invested in the Potiguar Basin; Anambé, in the Sergipe-Alagoas Basin; Jandaia, in the Recôncavo Baiano Basin; and Inhambu, in optimizing mature fields, the Company launched itself into the exploration of new frontiers in order in the Espírito Santo Basin. Moreover, Petrobras has a 35% stake in the Abalone, Ostra, Nautilus and Argonauta to guarantee a sustainable ratio between production and reserves. fields in the north of the Campos Basin, which were declared commercially viable in 2005 by Shell, which is the Besides the oil production projects, in 2006 the Company will initiate gas activities in the Manati field in operator of the concession. Exploration Success Rate Bahia, with production of 6 million m3/day and the first phase of the Peroá-Cangoá field, with production The new discoveries are in line with the targets capacity of 2.5 million m3/day. The construction of the P-52 and P-54 platforms (180 thousand bpd each) contained in the Strategic Plan to increase domestic 2000 20% continues to proceed within a timetable that calls for the start up of their operations in 2007 in the Roncador production of oil and natural gas to 2,860 thousand field of the Campos Basin. Two other projects are currently being executed: the P-51 and the P-53 (180 boe/day by 2010. Guaranteeing the sustainability of 2001 24% thousand bpd each), scheduled to begin operations in 2008 in Marlim Sul and Marlim Leste, respectively. production with replacement of reserves, these For 2009, Petrobras foresees the start up of production of the Frade project in the Campos Basin, with results obtained through exploration demonstrate 2002 23% capacity for 100 thousand bpd. And in 2010, in the same region, the platforms that are scheduled to begin that Petrobras’ decision to focus on deep and ultra- 2003 33% operating include the P-55, for the Roncador deep offshore areas, to conduct research in new project’s Module III; the P-57, for Phase II of frontiers, to resume efforts onshore and to optimize 2004 50% the Jubarte field; and another for the Albacora mature fields was correct. Supplemental project. Also slated for startup 2005 55% that year is the FPSO 3, for the production of light oil in the Golfinho field. The targets contained in the Petrobras Strategic Plan require that, by 2010, 15 large oil and four natural gas production projects enter into operation and that the reserve/production ratio is 16 to 18 years in 2010. The volumes of oil and gas to be incorporated will come from current proved and possible reserves, those still in an exploratory evaluation stage and from new discoveries. 24 PETR OBRA S annual report 2005 PETR OBRA S annual report 2005 25
  • 14. OUR BUSINESSES E x p lor at io n a n d p r od u c t io n During the year, 292 wells were to be high risk. It is a basin with many recorded natural gas seeps and the objective is to verify the existing natural drilled and concluded, of which 251 gas potential. were onshore and 41 in the ocean. The 15 offshore contract blocks acquired are located in frontier exploration areas with excellent potential. The For exploration, 69 wells were drilled first areas, in deep waters in the Potiguar Basin, offer prospects of large discoveries despite a high exploration risk. — 36 onshore and 33 offshore. The In the high-potential blocks, the areas in the Espírito Santo and Santos Basins have already shown a vocation for exploration success rate hit 55%, discoveries of non-associated gas. The deep-water blocks have been favorable for oil discoveries, in the Campos because 38 of the 69 wells that Basin, and both associated and non-associated natural gas in the Espírito Santo and Santos Basins. reached their geological objectives were considered to be oil or gas discovery or production wells. BLOCKS IN ONSHORE BASINS Mature coastal Inland Potiguar 10 Solimões 1 Sergipe-Alagoas 5 São Francisco 1 New Concessions Recôncavo 2 - - Espírito Santo 5 - - 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. OFFSHORE BASINS With the new concessions Petrobras is seeking to guarantee the levels of production of oil and gas called for in Exploratory frontiers (deep water) High potential (deep water) the 2015 Strategic Plan. The portfolio now contains 134 blocks totaling 151.5 thousand km2. Added to the 27 areas Potiguar 2 Espírito Santo 2 2 2 with discovery evaluation plans (9.1 thousand km ) in operation, the total exploration area is 160.7 thousand km . - - Campos 3 Previously, the company had 94 blocks (111.7 thousand km2) and 31 areas with discovery evaluation plans (9.5 - - Santos 4 2 2 thousand km ), for a total exploration area of 121.2 thousand km . Exploratory frontiers (shallow water) High potential (shallow water) The bonuses that Petrobras and its partners offered during the Seventh Bidding Round totaled R$ - - Espírito Santo 2 726,322,700.00, with the Company’s portion being R$ 503,527,350.00. Based upon an ANP decision, similar to - - Santos 2 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 26 PETR OBRA S annual report 2005 PETR OBRA S annual report 2005 27
  • 15. Proved reserves Petrobras’ proved reserves of oil, condensate and natural gas in Brazil reached 13.2 billion boe, using ANP/SPE OUR BUSINESSES R E F I N I N G A N D C O M M E R C I A L I Z AT I O N R E F I N E R I ES AR E ADAPTE D TO P RO C ESS M O R E criteria, posting an increase of 1.6% over 2004. During the year, 882 million boe of reserves were incorporated while DOMESTIC OIL AND SALES ARE ON THE RISE OVERSEAS the volume produced was 673 million boe. With this, the Proved Reserve Replacement Index (IRR) rose to 131.1%. For each barrel produced, 1.31 was replaced in the reserves. The reserve/production ratio (R/P) was 19.7 years. New fields that were discovered in the past few years and had commercial viability declared recently (580 million boe) contributed to the increase in the volume of the proved reserves as did new accumulations discovered in fields that already are in production (300 million boe). The incorporation of existing fields resulted in the transformation of probable and possible reserves into proved reserves, thanks to development continuity. They also stemmed from reservoir management practices that sought to enhance oil recovery. Evolution of Proved Reserves of Oil, NGL, Condensate and Natural Gas – SPE criteria (billion boe) 2000 8.29 1.36 9.65 The growth in the production of oil products in the country, the increase in the volume of domestic oil processed 2001 8.32 1.35 9.67 and the sharp increase in overseas sales were highlights of the refining and commercialization activities during 2005, which are part of the Downstream area. 2002 9.56 1.45 11.01 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 2003 10.6 1.99 12.59 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 2004 11.05 1.97 13.02 diesel and gasoline products, the Company proceeded with the installation of hydrotreatment units (HDTs), which Oil, LNG and Condensate are a part of the portfolio of projects and will require an investment of US$ 3.2 billion. 2005 11.36 1.87 13.23 Natural Gas 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 Evolution of Proved Reserves in Brazil (Billion boe- SPE Criteria) 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 2004 13.02 to adapt the industrial plants in the requirements of heavy oil processing. With the startup Volume produced in 2005: of the retarded coking units (RCUs) and diesel HDTs, the Company optimized use of 0.6 7 billion boe domestic oil for manufacturing oil byproducts. Remainder of proved reserves 2004 2005 12.35 0.58 0.3 13.23 Incorporation of New Discoveries Incorporation in Existing Fields in 2004 28 PETR OBRA S annual report 2005
  • 16. OUR BUSINESSES R E F I N I N G A N D C O M M E R C I A L I Z AT IO N The performance of the refineries was a consequence of the high level of operating reliability and the integrated Commercialization 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 Petrobras took advantage of new business opportunities to increase the commercialization of oil and oil products the factors that led to the increase in the processed throughput. in overseas markets in 2005. In line with the increase in production during the year and prospects for self- The production of oil products in Brazil in 2005 was 1,735 thousand bpd. In 2005, the average refining unit sufficiency, the strengthening of relations with international buyers of Brazilian heavy oil was a determining factor cost was US$ 1.90/bbl, 38% higher than the previous year. This result stems from the appreciation of the Brazilian for the boost in exports, which hit 504 thousand bpd — an amount that was 23% more than in 2004. real against the U.S. dollar; a greater number of scheduled maintenance industrial shutdowns compared to 2004; The increase in the commercialization of oil abroad was the result of the adoption of a more aggressive sales higher operating costs due to the startup of new facilities; and an increase in the cost of outsourcing contracts. strategy, also motivated by the increase in the international price of the product. At the same time that the The Alberto Pasqualini Refinery (Refap) was included in the program to optimize domestic oil production with Company sought to consolidate already developed markets, it won over new customers. The United States were the installation of an RCU and a residues catalytic cracking unit (RCCU) that were part of the program to expand the largest customer, absorbing 39% of foreign sales, followed by customers in Asia (18%), Europe (18%), the the facility. Their operations will begin in 2006. The RCU at the Duque de Caxias Refinery (Reduc) also was initiated, Caribbean (13%) and South America (12%). scheduled to come on stream in 2007. The basic projects for two other RCUs, at the Henrique Lage (Revap) and In the domestic market, the commercialization of oil products by Petrobras averaged 1,655 thousand bpd, an Presidente Getúlio Vargas (Repar) refineries, were concluded. increase of 1.1%. The maintenance of sales near 2004 levels was caused by factors such as the increase in the As part of a program to improve the quality of diesel, the new HDT at Refap was placed into operation at the use of natural gas replacing gasoline and fuel oil, and the expansion of the dual-fuel automobile fleet through end of the year, adding its production to the second of its type installed at the Paulínia Refinery (Replan) and the incentives for the use of alcohol. Also contributing was the decline in the growth of demand for diesel because of new HDTs at Reduc, Presidente Getúlio Vargas (Repar) and the Gabriel Passos Refinery (Regap). This set of units a smaller agricultural harvest. 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. DIESEL S500 According to the strategy of offering quality products with low environmental impact, Petrobras initiated the sale of low sulfur Diesel S500 fuel. The product is sold in the metropolitan areas of São Paulo, Rio de Janeiro and Belo Horizonte, in the São José dos Campos (SP) region and the Vale do Aço (MG). The supply of Podium gasoline, which has high performance and less sulfur content, also was expanded thanks to the startup of production of the fuel at Reduc, in addition to the production that already was taking place at the Presidente Bernardes–Cubatão Refinery (RPBC). PETR OBRA S annual report 2005 31
  • 17. OUR BUSINESSES In order to build an integrated Acrylic Complex in Minas Gerais for production of Located in Duque de 160 thousand tons/year of crude acrylic acid and some byproducts, including Caxias, Riopol initiated Petrochemicals acrylate, Petrobras concluded the first stage of a technical-economic and environmental study of the project, which is budgeted at an estimated US$ 500 operations in I N V E S T M E N TS I N N E W P R O J E C TS S H O W S T H AT P E T R O B R A S million and is scheduled for startup in 2009. A pioneer effort in Latin America, the November, using HAS R ETU R N E D TO TH E S EG M E NT WITH F U LL F O RC E 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, ethane and propane with new manufacturing companies to be incorporated. extracted from Campos Petroquisa also initiated studies for the building of a purified terephthalic acid Basin natural gas as (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 raw material. 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. Petrobras participates in the petrochemical sector through its Petrobras Química S.A. (Petroquisa) subsidiary, which Petroquisa’s Participation in Operating Companies | December/2005 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. Company Product Voting capital (%) Total capital (%) The following petrochemical projects were noteworthy in 2005: Rio Polímeros, Paulínia Petrochemical (PPSA), Braskem S.A. Basic, intermediate Petrochemical Refinery, the Acrylic Acid Complex and the PTA Project. and final petrochemicals 10.0 8.4 Located in Duque de Caxias (Rio de Janeiro), Rio Polímeros S.A. (Riopol) initiated operations in November, Cia. Petroquímica do Sul – Copesul Basic petrochemicals 15.6 15.6 using ethane and propane extracted from natural gas from the Campos Basin as its raw material. Riopol has the Petroquímica União S.A Basic petrochemicals 17.5 17.4 capacity to produce 540 thousand tons of polyethylene and 75,000 tons of propane per year. Petroquisa owns Metanol do Nordeste – Metanor S.A. Methanol 49.5 34.3 16.7% of the shares, together with Suzano (33.3%), Unipar (33.3%) and BNDESPar (16.7%). In 2005, Deten Química S.A. Linear alkylbenzene 28.6 27.7 Petroquisa invested R$ 57 million in the project, totaling R$ 245 million of investments since its beginning. Fábrica Carioca de Catalisadores S.A. Catalyzers 50.0 50.0 In compliance with the strategy to expand its presence in the market, Petroquímica Paulínia S.A (PPSA) was Petrocoque S.A. Indústria e Comércio Calcinated petroleum coke 35.0 35.0 constituted on September 16, with ownership stakes belonging to Petroquisa (40%) and Braskem (60%). This Petroquímica Triunfo S.A. Low density polyethylene 70.5 85.0 company will be responsible for building an industrial plant with additional polypropylene production capacity of 300,000 tons/year, located near REPLAN in the municipality of Paulínia (SP), based upon a propane-grade polymer supplied by REPLAN and REVAP. The project is scheduled for conclusion at the beginning of 2008, at an investment estimated at US$ 240 million. The 2015 Strategic Plan highlighted installation of a Rio de Janeiro Petrochemical Refinery. Developed in partnership with the Ultra Group, it will have the capacity to process 150 thousand bpd of heavy domestic oil. Besides producing ethane, propane, para-xylene, benzene, LPG and diesel, this facility will produce a number of second-generation petrochemicals, such as polyethylene, polypropylene, ethylengycol and purified terephthalic acid. The refinery, with total investments of some US$ 6 billion, is scheduled to begin operating in 2011. 32 PETR OBRA S annual report 2005 PETR OBRA S annual report 2005 33
  • 18. OUR BUSINESSES T r a n s p ortat i o n T R A N S P E T R O ’ S F L E E T E X PA N S I O N A N D M O D E R N I Z AT I O N FERTILIZERS FOR BRAZILIAN AGROBUSINESS P RO G R AM CALLS F O R 42 N EW VESS E LS BY 2010 Petrobras’ strategy is to increase its participation in the fertilizer segment, mainly nitrogenates, in view of the fact that a major portion of the demand from Brazilian agribusiness — a sector that represents 30% of the GDP — is supplied via imports. In 2005, the sales of ammonia and urea generated net revenues of US$ 330 million for Petrobras, rising 8% over the previous year. The nitrogenous fertilizer plants sold 205,000 tons of ammonia on the domestic market, the fourth consecutive year in which sales increased. Another noteworthy point regarding ammonia was the record production of Fafen/SE (400 thousand tons). In the segments of urea used as fertilizer, Petrobras remained the leader of the domestic market, with sales of 708 thousand tons during the year. Seeking improvements in urea logistics and quality, Petrobras initiated construction of a Petrobras is active in the field of the transportation and storage of oil, oil products and gas through its wholly owned warehouse at the Sergipe plant with capacity for storing 30 thousand tons and a granulation unit to Transpetro subsidiary. Responsible for the operation of 50 oil tanker ships, 44 terminals and 9,839 km of pipelines, process 600 tons/day of the product. These investments totaled R$ 53.8 million, with the conclusion the company provides services to the Petrobras System as a way of adding value to its products. It plays a strategic of the projects scheduled for the first half of 2006. At the nitrogenous fertilizer plant in Bahia, role because its integrated logistical solutions and operating flexibility give the Petrobras System a series of R$ 26.3 million was invested to increase ammonia production by competitive advantages. 50 thousand tons annually and to boost urea production by 68 Transpetro is the largest shipping company in South America, owning a fleet with a capacity of 2,480,000 thousand tons a year. deadweight tons (DWT). Of the vessels operated by the company, 46 belong to Transpetro and Petrobras while Petrobras is finalizing studies for construction of a four are chartered on a bareboat basis from third parties. The fleet also includes a Floating Storage and Offloading nitrogenous fertilizer plant in the Center-West Region of the unit (FSO) and an AHTS-type offshore support boat. country, for an estimated investment of US$ 780 million, to As part of the strategy to increase its services to Petrobras, Transpetro has implemented the first phase of its come on stream in 2010. Using natural gas imported from Fleet Modernization and Expansion Program — involving an investment of US$ 1.2 billion. The company initiated a Bolivia, the plant will have the capacity for annual production tender process construction of 26 Suezmax, Aframax, Panamax, product and LPG ships by 2010. of 760 thousand tons of ammonia and 1 million tons of urea. 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. PETR OBRA S annual report 2005 35
  • 19. OUR BUSINESSES 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 Distribution managerial conditions of the ships according to international regulations. P ETRO B R AS D I STR I B U I D O R A I N C R EAS ES ITS MAR K ET The volume of product spills from its ships totaled only 25 liters, compared to 102 liters in 2004. This reduction 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 E S 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 In the field of fuel distribution, Petrobras operates through its Petrobras Distribuidora (BR) subsidiary, which has the network was responsible for the movement of nearly 640 million m3 of oil, oil products and alcohol, largest network of service stations in the country. Of the 6,933 BR service stations spread through all regions of the 3 and of 33 million m of gas per day. At its waterway terminals, the monthly average was nation, 763 are owned by the company while the other 6,170 belong to franchisees of the Petrobras flag brand. 382 ships in operation. The company also managed the supply of bunker to ships Being the preferred brand of consumers and adding value to the Petrobras System are the strategic objectives all along the Brazilian coastline, supplying some 350 of the company, which is the market leader of the segment. In 2005, net revenues for products and services totaled thousand m3 of this fuel per month. R$ 46.3 billion – an increase of 25.1% over the previous year, stemming from a greater volume of sales. In the natural gas segment, Transpetro operates the Petrobras’ share of the distribution market reached 33.8% - 2.2 percentage points higher than recorded Malhas Project that, by 2012, will boost the supply of the in 2004. The increase of its presence in the segment was a consequence of the 8.6% growth in the volume 3 product to 14 million m /day in the Southeast. In 2005, yet of fuel sales. another phase of the Cabiúnas Project was concluded, Petrobras also is the leader of the Vehicular Natural Gas (VNG) market, with a 25.1% share of sales during increasing the natural gas processing capacity of the Campos 2005, thanks to the supply of the product through a network of 295 BR outlets. Its leadership position of the gas Basin to 14.9 million m3/day. market also encompasses the supply of direct consumers — large industrial clients, trucking fleets, airlines and For the 2006-2010 period, in line with the Petrobras Business public authorities. Plan and the transportation requirements created by self- The strategy for expanding business in the commercialization area has been the guiding factor for the increase sufficiency, Transpetro has forecast an increase in capacity of the in investments in new markets, such as that for liquefied petroleum gas (LPG) and green petroleum coke (GPC). Southeast and South pipelines and the construction of an oil products After the acquisition in 2004 of Agip do Brasil, which had its official name changed to Liquigás Distribuidora S.A., terminal in Fortaleza. Petrobras reached 21.83% market share of the LPG market in 2005. The company has been investing in the creation of a “corridor” for Petrobras Distribuidora invested R$ 459.7 million in 2005. The funds were applied on a priority basis to expand exporting alcohol from the São Paulo countryside and for an increase in and modernize its service stations, to support industrial and commercial customers, on Health, Safety and the gas processing capacity at Cabiúnas. This project will raise supply of Environment (HSE) programs and in logistics and operations. 3 the product to 20 million m /day, satisfying the requirements of industrial In the automotive segment, the strategy continues to be to get closer to the resellers and end consumers. The companies located in the Rio de Janeiro Gas and Chemical Complex. objective is to offer speedy and qualified service in order to increase market presence and profitability. Petrobras . PETR OBRA S annual report 2005 37
  • 20. OUR BUSINESSES Distribution Stake of the Fuel Distribution Companies in Brazil (%) E X C E L L E N C E I N C U S TO 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 40,0 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 30,0 and DVD rental shops, as well as “Siga Bem”, a program aimed at professional truck drivers. 20,0 BR Service Stations per State (2005) 2001 2002 10,0 2003 2004 0,0 2005 RR • 36 AP • 22 BR Ipiranga Shell Esso Texaco Others Distribuidora maintains several contact mechanisms with resselers, including regular visits of commercial AM • 61 PA • 109 representatives and publication of a newsletter, the Jornal do Revendedor, along with regular meetings to map out MA • 71 CE • 256 RN • 100 strategies and plan courses of action. PI • 89 PB • 79 The increase in the demand for hydrated alcohol in 2005 was 15% compared to the previous year, while PE • 197 demand for gasoline rose little more than 1%. The growth of alcohol sales was driven by the leap in sales of multi- RO • 42 TO • 63 AL • 92 AC • 33 SE • 60 fuel automobiles (flex fuel). Surpassing forecasts, flex fuel vehicles reached 50% of the total of all new vehicles BA • 384 MT • 165 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 GO • 241 contained over the course of the year by a rise in the relative price of alcohol resulting from exports of the product. MG • 1.052 In the direct fuel consumer market, Petrobras Distribuidora’s share is 45%, with highlights being the company’s MS • 196 ES • 104 share of aviation products (55.7%), large consumers (44.3%), asphalt (29.5%) and retail delivery fleets (TRR – SP • 1.619 RJ • 391 42.1%). One of our advantages over the Service Station Network PR • 428 competition is the ability to supply technical support Units SC • 276 BR Outlets 6,933 throughout the country, a factor that boosts the Urban 5,334 RS • 634 level of customer loyalty. Highway 1,567 Petrobras Distribuidora has the largest network for Maritime 32 the distribution of fuels and lubricants in Brazil. There Active Outlets 5,885 are 51 operating installations that are strategically located — 22 terminals and 29 bases, ensuring Own Outlets 763 Third Party Outlets 6,170 excellent capillarity network for placing our products. This network also makes it possible to integrate Convenience Stores 740 transportation and inventory solutions — another VNG Outlets 295 distinguishing characteristic that sets us apart from the competition in terms of service quality. 38 PETR OBRA S annual report 2005 PETR OBRA S annual report 2005 39
  • 21. Brazil has the second- largest VNG fleet in the 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 world, after only Argentina, ability to take advantage of future discoveries. The construction of the Southeast- N at u r a l G a s Northeast Interconnection Gas Pipeline (Gasene) and the expansion of the pipeline which is supplied through I M P R O V E M E N T I N S U P P LY I N F R A S T R U C T U R E grid in the two regions are among the investments currently being studied. a network of AND NEW DISCOVERIES ENLARGED THE MARKET The Gasene project is comprised of three gas pipelines: The Cabiúnas–Vitória approximately 1,500 Pipeline (Gascav), the Cacimbas–Vitória Pipeline and the Cacimbas–Catu Pipeline. The Company obtained an R$ 800 million loan from the National Economic and service stations, of which Social Development Bank (BNDES) for the Cabiúnas-Vitória stretch. Gasene will 47% belong to Petrobras . 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. Natural gas sales increased 9.5% in 2005, with average sales of 36 million m3/day. Petrobras continued to follow In the Brazilian Northeast, the routes that have been decided upon will favor the interior. Budgeted at R$ 3 billion its strategy of developing the segment in an integrated manner with the Company’s other chains of production in over the course of the construction period, the project encompasses seven northeastern states. The contracts signed Brazil. During the year, the financial turnover of this business totaled more than R$ 5 billion. with Petrobras and the other partners contain clauses that ensure the use of a major portion of the funding for Two factors were responsible for maintaining the Brazilian market for this product in expansion: (i) the growth national content. This will have a multiplying effect on employment and income, fostering the development of local of the supply logistical infrastructure, and (ii) the growing pressure for the use of fuels that have a less aggressive suppliers and creating an alternative supply center for the Company. Many of the projects involved are permanent impact on the environment. In September, the country passed the milestone of 1 million automobiles converted in nature and their maintenance and operation will require creation of fixed job positions along the route of the to use VNG, according to the Brazilian Petroleum Institute (IBP), counting for this upon a network of more than pipeline. In the Northeast region, of the five pipelines that are scheduled, four are under construction, representing 1,190 VNG stations. It is the second largest VNG fleet in the world, behind only Argentina’s, which is fueled by a 50% of the physical execution of the total that is planned. network of approximately 1,500 stations, of which 47% belong to Petrobras. In the Southeast region, the construction projects, with total investments of some R$ 1.9 billion over the course 3 In order to satisfy the increase in demand, besides domestic production Petrobras imported 23 million m /day of the program, encompass the states of Rio de Janeiro, São Paulo and Minas Gerais. of natural gas, representing 98% of all Brazilian imports of the product, which was an increase of 2.5 million m3/day In Brazil’s North region, Petrobras has been investing in building the strategically important Urucu–Coari–Manaus gas compared to 2004. pipeline designed to transport nearly 5.5 million m3/day of natural gas. This gas will be consumed for the most part by Petrobras continued to be the largest investor in the segment, increasingly striving to insert the product into the thermoelectric power plants in the region that have been converted from fuel oil to gas due to the more rational economic Brazilian energy matrix. In view of the prospects for the expansion of the market, the new discoveries are making and environmental advantages of the latter. Some of the product will be earmarked for industrial companies, homes and it possible to increase the supply of Brazilian gas at competitive costs, supplemented through imports. the fleet of natural gas-fueled vehicles in Manaus and the seven municipalities located along the pipeline’s right of way. 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. PETR OBRA S annual report 2005 41
  • 22. OUR BUSINESSES N at u r a l G a s Petrobras owns a share of eight natural gas In the automotive segment, the Ottolized (converted to VNG) Gas-Fueled Bus Using Light Cylinders Project pipeline transportation companies, including: promoted the conversion of an OM 366 LA diesel engine in order to evaluate the performance of the engine Transportadora Brasileira Gasoduto Bolívia-Brasil and obtain technical, economic and environmental data based on field tests and operating in real passenger and Gás Trans-Boliviano S.A., owners, respectively, transportation conditions; of the Brazilian and Bolivian stretches of the In the residential segment, Vala Técnica de Caxias do Sul is a laboratory that makes it possible to consolidate Bolivia-Brazil gas pipeline. The other six gas the methodology of shared utility networks (gas, water, etc.) in a single trench; and also to implement new RGE transportation companies in which Petrobras projects, designed to use this methodology in the residential segment. Also in this segment, the objective of the participates are Sul-Brasileira de Gás S.A., Meio Pre-Payment System Meter is to develop a metering pre-payment system that can be used in housing projects Norte S.A., TNG Participações Ltda., Amazonense to measure natural gas consumption in residences; de Gás S.A., Capixaba de Gás S.A. and Nordeste- For the industrial segment, the project for the construction of a Natural Gas Tunnel Kiln for the Red Ceramic Sudeste de Gás S.A.. Industry seeks to design and build to serve as a demonstration plant for other red ceramic producers; In the domestic distribution market, Petrobras In the commercial segment, the proposal of a micro co-generator that uses domestic technology is to help maintained its holdings in 19 distribution develop and build a micro co-generator prototype using local technology that incorporates a gas generator, a companies, but increased its participation in the capital stock of Distribuidora de Gás Natural Canalizado CEG-Rio to free power turbine and a heat recovery unit; 37.41% after acquiring 12.41% of its shares (common and preferred) in July 2005 for R$ 39.33 million (US$ 16.54 In the alternative mode segment, the RedeGasEnergia is developing a final use program for LNG, which is million). Through this acquisition, Petrobras gained shared control of CEG-Rio an advance alternative for the natural gas market in view of the relative lack of gas pipeline transportation Petrobras continued to support projects for anticipating the supply of natural gas, either through compressed infrastructure. natural gas (CNG) as, for example, at Gaspisa, or participating in the Gemini Consortium, which will make it possible to supply the product in the form of liquefied natural gas (LNG) to Cebgás, Goiasgás and upcountry areas operated by Gasmig and Compagás. The Gemini Consortium will establish, in 2006, the first LNG plant in Brazil. Technology As part of the strategy to develop the segment, two technological enhancement initiatives in the natural gas chain of production were chosen as priority programs for investment: the RedeGasEnergia (Gas Energy Network) and the Gas Technology Center. With 90 projects on the drawing boards for expanding the use of the product, the Network involves universities research institutes, distributors, equipment manufacturers and government organizations. In partnership with the National Industry Service (SENAI), the Center promotes the use of gas and fosters the training of specialized manpower. Within the context of bringing the use of natural gas to a mass market, RedeGasEnergia’s Excellence Network undertakes cooperative and segmented efforts focused on technology and the development of the natural gas market, striving to increase the share of this fuel in the domestic energy matrix in a sustainable manner, connecting up all of the links in the chain of production. Among the 90 projects currently being contracted or alreadyunderway around Brazil, we can highlight the following: 42 PETR OBRA S annual report 2005
  • 23. OUR BUSINESSES The acquisition of the three merchant plants ended legal controversies regarding Petrobras’ main the consortium contracts signed with the plants in 2001 and 2002. The Company projects for the use of had been obliged to make contingency payments regarding taxes, fees, operating Energy costs, maintenance and investments in situations in which the companies involved renewable energy T H E C O M PA N Y A C Q U I R E D N E W T H E R M O E L E CT R I C P O W E R P L A N TS had not obtained efficient funds. The acquisitions were designed to reduce costs A N D I N V E ST E D I N T H E D E V E LO P M E N T O F R E N E WA B L E E N E R GY S O U R C E S sources are for the and to guarantee receipt of all of the energy generation revenues in compliance with Petrobras’ guidelines for its participation in the electricity sector. production of biodiesel In March 2005, Petrobras acquired all of the quotas belonging to the Cubatão and the generation of thermoelectric power plant, scheduled to start up operations in October 2007, supplying 47 MW and 415t/h of steam to the RPBC refinery. electricity through Construction of the Termoaçu Plant (RN) is continuing. Petrobras has a 46% wind power. stake in the project, which is scheduled to come on stream in 2007. This plant, budgeted at US$ 300 million, should generate 310 MW and 610 t/h of steam, which will be used to be injected into oil wells to increase the production of oil. In compliance with Petrobras’ Strategic Plan, the Company will invest US$ 1.3 billion in the Energy Sector over the 2006-2010 period. The Business Plan calls for acquisitions, the conclusion of projects and the conversion of gas- Petrobras increased its share of the thermoelectricity segment, oriented by a strategy of consolidating itself as an fueled thermoelectric plants to bi-fuel facilities as well as the development of generation from renewable sources. integrated energy company. The Company is present in the entire thermal generation chain of production, Petrobras’ own thermoelectric power plants, or those that are under its management, generated a total of optimizing the use of natural gas, ensuring the placement of oil products, operating power plants and selling energy. 3,100,632 MWh in 2005, having “generation by inflexibility” of 42% as its main ratio, thus contributing to the safety Its presence in the sector strengthens the contribution of the thermoelectric power plants in improving the reliability of the Electric System and the saving of reservoir water, especially in the Northeast. Most of this generation, of the National Interconnected System (SIN). 1,271,830 MWh, was earmarked to comply with an agreement Petrobras signed at the end of 2004 to guarantee According to the new electric sector model, energy is sold through Regulated Contracts via auctions, and Free saleable power from the northeast region thermoelectric power plants. The accumulated generation for the year Contracts through bilateral contracts between sellers and buyers. for this purpose was used to rebate 49.6% of the initial debt of 2,562,639 MWh. At the new energy auction held in December by the National Electric Energy Agency (ANEEL), Petrobras sold The conversion of thermoelectric power plants to bi-fuel (natural gas and diesel) seeks to guarantee greater 1,391 MW made available by its power plants. The final result of the auction gave the Company a fixed revenue reliability regarding the supply of fuels to the plants and, in compliance with the legal requirement that for a period of 15 years, of R$ 199,842,928.00/year (in current values) as of 2008, which will reach R$ establishes mandatory proof of the 277,927,992.00/year as of 2010. origin of fuel for 100% of the generation capacity of each thermoelectric power plant (Decree Thermoelectric power plants no. 5.163, of July 30, 2004), Petrobras decided to convert part of Petrobras took over full control of three thermoelectric power plants during 2005. TermoRio (1,040 MW) was its thermoelectric power plants to acquired for US$ 83 million from NGR, as were two merchant-type plants – the Barbosa Lima Sobrinho bi-fuel operation. The basic projects thermoelectric power plant, former Eletrobolt (386 MW), also in Rio de Janeiro, and the TermoCeará thermoelectric for the conversions have been power plant (220 MW). The former was purchased for US$ 65.1 million, with absorption of a debt of US$ 98.9 concluded and now await the million from Sociedade Fluminense de Energia; the latter was acquired for US$ 137 million, including the granting of environmental licenses. liquidation of debt obligations with financing institutions. At the beginning of 2006, Petrobras signed a The next phase will be to contract Memorandum of Understanding for the acquisition of the Macaé Merchant thermoelectric power plant. the required construction work. 44 PETR OBRA S annual report 2005 PETR OBRA S annual report 2005 45
  • 24. OUR BUSINESSES Energy Renewable energy The main projects under development for the utilization of renewable energy sources are aimed at production of biodiesel Measures were implemented at all Petrobras units to meet, in addition to the aforementioned projects, the energy and the generation of electric energy through wind power. To this end, the Strategic Plan established targets of 481 consumption and emission reduction targets that were established. For this, energy diagnosis surveys were conducted thousand m3/year of biodiesel and 169 MW of electric energy through renewable sources to be available by 2010. in all of the Company’s industrial facilities. Furthermore, each Business Unit that will operate future production platforms Investments of some US$ 335 million are foreseen over this period for the development of renewable energy businesses. will be the focus of efforts to ensure that the projects they prepare are based on the efficient use of energy. An experimental plant with capacity to produce 4,000 tons/year, to provide technological support for the In 2005, the National Program for the Rational Use of Oil Products and Natural Gas (Conpet) increased by 23% production of biodiesel, was built in Guamaré (RN); the biodiesel it produces makes use of vegetable oil deriving the size of the fleet it services, surpassing the 10% target that had been established at the beginning of the year. mainly from castor beans. The environmental counterpart of this performance meant that 920 thousand fewer tons of CO2 went into the In terms of production of electricity through wind power, Petrobras already is operating a pilot wind farm in Macau atmosphere, an effort that is allied to Petrobras’ overall commitment to social and environmental responsibility. (RN) with an installed generating potential of 1.8 MW, and it is preparing a second pilot project in Rio Grande (RS), with 4 MW capacity. The building of wind farms with larger scales of production is being negotiated with outside partners and takes into account the opportunity for the acquisition and development of projects that are structured S U STA I N A B L E DEVELOPMENT within the Alternative Electric Energy Sources Incentive Program (Proinfa) located in the Northeast region and whose production of energy already has been contracted by Eletrobrás. The objective of these projects is to increase the The Company’s activities in sustainable development businesses in the field of energy during 2005 were supply of electric energy to the Northeast, supplementing the power that is generated through natural gas. designed to evaluate projects that are eligible to receive carbon credits according to the Clean Development Also along these lines, Petrobras signed a protocol of intentions with the National Department for Drought Mechanism (CDM) defined by the Kyoto Protocol, as well as to propose commercialization policies for these Projects (DNOCS) and is studying the technical and economic feasibility of the hydroelectric potential of DNOCs certificates. Toward this end, the technical feasibility and baseline methodologies necessary to obtain the reservoirs, aimed at implementing small hydroelectric power plants approval of these products were studied. The main projects being evaluated that might qualify for CDM (PCHs) in the Northeast. credits were the following: Renewable and alternative energies; The UN-SIX agricultural schist project in São Mateus do Sul (PR); Energy efficiency The Urucu–Manaus Gas Pipeline: evaluation of its potential; The reutilization of industrial exhaust gases; Petrobras’ promotion of energy efficiency is strongly linked in the Strategic Plan, 2015 vision, Closed cycles in thermoelectric power plants; in which social and environmental responsibility is highlighted. To this end, the In-house Energy Reduction of leakages in natural gas transportation compression stations. Conservation Program was involved in the development, coordination and implementation of Of particular note is the proactive participation of Petrobras in its support, through an agreement, of the activities related to energy efficiency, fostering a relative reduction of the burning of fossil fuels and, Brazilian Climate Change Forum, that is seeking the development of a Brazilian policy regarding climate change. consequently, CO2 emissions, the one of the main greenhouse gases.
  • 25. international activities international activities I N 2 0 0 5 , P E T R O B R A S B A S E D I T S I N T E R N AT I O N A L A C T I V I T I E S O N O P E N I N G U P N E W B U S I N E S S F R O N T S I N S T R AT E G I C M A R K E T S A N D C O N S O L I D AT I N G I T S A C T I V I T I E S I N C O U N T R I E S W H E R E I T A L R E A D Y H A S A S U B - S TA N T I A L P R E S E N C E , S U C H A S A R G E N T I N A . I N L I N E W I T H T H E O B J E C T I V E S O F V I S I O N 2 0 1 5 – W H I C H I N C L U D E G I V I N G T H E C O M P A N Y 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 B E I N G T H E L E A D E R O F L AT I N A M E R I C A — P E T R O B R A S A C Q U I R E D N E W A S S E T S , E S P E C I A L LY S E R V I C E S TAT I O N S I N C O L O M B I A , P A R A G U A Y Á LV A R O L Ó P E Z L Ó P E Z , M ATA C H I N S U L S TAT I O N O P E R AT O R I N C O L O M B I A , F I V E Y E A R S W I T H P E T R O B R A S A N D U R U G U A Y, T H R O U G H I N V E S T M E N T S T O TA L I N G U S $ 1 4 0 M I L L I O N T O S T R E N G T H E N I T S P O S I T I O N I N O I L A N D G A S E X P L O R AT I O N I N T H E G U L F O F M E X I C O , P E T R O B R A S P I C K E D U P 5 3 B LO C K S D U R I N G T H E L E A S E S A L E 19 6 A N D E N T E R E D T H E R E F I N I N G S E C TO R I N T H E U N I T E D S TAT E S B Y A C Q U I R I N G 5 0 % O F T H E P A S A D E N A R E F I N E R Y. S I M I L A R LY, I N O R D E R T O C O N S O L I D AT E I T S D E E P A N D U LT R A D E E P - W AT E R A C T I V I T I E S O N T H E W E S T C O A S T O F A F R I C A , T H E C O M P A N Y A C Q U I R E D , A S O P E R AT O R , T H E O P L 3 1 5 B L O C K I N N I G E R I A . N E W A N D P R O M I S I N G B U S I N E S S F R O N T S W E R E O P E N E D I N 20 0 5 I N L I BYA , I R A N , C H I N A A N D TA N Z A N I A .
  • 26. international activities e c o n O M IC I N F OR M AT IO N Petrobras’ average overseas production of oil and LNG reached 162,8 thousand bpd in 2005, while production of Proved Foreign Reserves of Oil Total Throughput - Foreign and Condensate by country (th bpd) natural gas was 95,900 boed – for a total of 258,700 boed. Average listing cost was US$ 2.90/boe. In 2005, the company‘s overseas proved reserves reached 1.68 billion boe, using ANP/SPE criteria. Petrobras‘ Tabela 5 SPE Criteria (MM bbl) 2001 30 refineries abroad, with an installed processing capacity of 129 thousand bpd, processed 103 thousand bpd, a 1% Angola volume 2.4% higher than in 2004. 4% 2% 2002 62 6% Argentina 9% 25% Bolivia Colombia 2003 94 Foreign Production of Oil, LNG, Condensate and Natural Gas 10% Ecuador (th boed) U.S. 25% 2004 100 2001 45 26 71 18% Nigeria Peru Venezuela 2005 103 2002 35 23 58 TARGET 154 2010 2003 161 85 246 Oil, LNG and condensate 2004 168 94 262 Natural gas 2005 163 96 259 META 2010 339 206 545 Unit Cost of Foreign Lifting Unit Cost of Foreign Refining (US$/bbl) (US$/bbl) Proved Foreign Reserves of Oil, LNG and Condensate and Natural Gas 2001 2.26 2001 1.15 SPE Criteria (MM boe) 2001 226 753 979 Oil, LNG and condensate 2002 2.08 2002 0.94 Natural gas 2002 320 803 1,123 2003 2.46 2003 1.17 2003 1,013 891 1,904 2004 2.6 2004 1.09 2004 1,010 860 1,870 2005 2.9 2005 1.30 TARGET TARGET 2005 955 726 1,681 2.1 1.8 2010 2010 Proved Foreign Natural Gas Reserves by country SPE Criteria (BCF) 3% 1% 4% With a presence in 21 countries, Petrobras participates in the entire chain of operations of the oil, natural gas 23% Argentina Bolivia and electricity industries on the continent and also is expanding its participation in projects in North America, Africa U.S. and Asia. Associated with 71 oil companies, Petrobras is the operator for 170 blocks of the 357 blocks in which it 69% Peru Venezuela has a share. 50 PETR OBRA S annual report 2005 PETR OBRA S annual report 2005 51
  • 27. ARGENTINA URUGUAY Natural gas distribution; pipelines transportation Exploration and Production; refining; pipelines transportation; commercialization; VENEZUELA Exploration and Production distribution; gas and energy; petrochemicals; eletric energy ANGOLA Exploration and Production BOLIVIA Exploration and production; refining; pipelines transportation; CHINA Representative Office and commercialization commercialization; distribution; gas and energy SINGAPURE Representative Office and commercialization CHILE Representative Office and commercialization EQUATORIAL GUINEA Exploration COLOMBIA Exploration and Production IRAN Exploration ECUADOR Exploration and Production ENGLAND Representative Office and commercialization THE UNITED STATES Exploration and Production; refining JAPAN Representative Office MEXICO Exploration and Production LIBYA Exploration PARAGUAY Distribuition NIGERIA Exploration PERU Exploration and Production TANZANIA Exploration petrobras OVERSEAS
  • 28. international activities south america SOUTH AMERICA Argentina, Bolivia, Colombia, Venezuela, Uruguay, Ecuador, Paraguay, Peru, Chile Argentina Natural gas sales were affected by the deregulation of the price of gas for generators and distributors, which began to use the Electronic Gas Market (MEG) for spot market operations. Government policy that directed gas Petrobras has a presence in the country through Petrobras Energía S.A. (PESA), which acts throughout the value that previously was exported to the domestic market impacted Petrobras Energía by approximately 115 thousand chain of an integrated oil and natural gas company. Its exploration and production area achieved an average m3/day. The company sold 7.9 million m3/day of gas, of which 0.9 million m3/day came from Bolivia. production of 61.9 thousand bpd of oil and LNG and 42.2 thousand boed of natural gas, totaling 104.1 thousand For the transportation of natural gas, Petrobras Energía has a 50% stake in the holding company of boed, comprising the Company’s largest overseas production region. Its Argentine company operated and Transportadora de Gás Del Sur (TGS), which has the largest gas pipeline network in the country, totaling 7,400 participated in 26 blocks – 16 in production and 10 in the exploratory phase. Lifting cost was US$ 3.76 per boe. kilometers with capacity for 62 million m3/day. TGS increased the capacity of a 495-kilometer stretch by 2.9 million Petrobras Energía operates the Ricardo Eliçabe (Bahía Blanca) and San Lorenzo (Rosário) refineries and also m3/day in order to satisfy growing Argentine demand. The BNDES and the gas producers financed this project, participates and operates Refinaria Del Norte (Refinor), with a 28.5% ownership stake. Considering the proportion requiring an investment of US$ 342 million. of its share, in Refinor, the company has installed capacity of 76.2 thousand bpd, and processed average In the electric energy segment, Petrobras Energía has 100% ownership of the Pichi Picún Leufú hydroelectric throughput of 68 thousand bpd in 2005. power plant and the Genelba natural gas thermoelectric plant. The company has a minority position in the Petrobras Energía has three units in the petrochemical and fertilizer segments in Argentina: Puerto General San Hidrelétrica de Piedra del Águila hydroelectric power plant (5.4%); in Edesur, a power distributor in the Buenos Martin, Zarate and Campana. The company also has a 40% stake in Petroquímica Cuyo and is the only producer in Argentina of products such as SBR (styrene butadiene rubber), polystyrene and UAN (urea + ammonium nitrate) and is the exclusive manufacturer in South America of bioriented polystyrene. It also has activities in Brazil, in Rio Grande do Sul, through Innova, producing styrene and polystyrene. In the distribution of oil products, PESA owns 746 service stations – 436 flying the Petrobras flag – and 24 exclusive Compressed Natural Gas (CNG) stations. In 2005, the company’s sales in the country totaled 50.7 thousand bpd. Among the products offered by Petrobras Energía service stations, of particular note are Podium gasoline and Lubrax lubricating oils. With high performance and low sulfur content, sales of Podium gasoline increased 70% compared to 2004, while overall sales of premium gasoline in the country rose 33.3%. Lubrax’s sales also continued to grow, rising 11% and guaranteeing an 8.7% share of the Argentrine lubricant market for Petrobras Energía. The good acceptance of Petrobras products in Argentina is related to the strategy to consolidate the brand in the country. With an 8.7% share of the automobile fuel market, Petrobras Energía extended the presence of the brand to 121 service stations in its network during 2005. As a result, sales increased on average 21%, while average market growth 8.8%.
  • 29. international activities south america Aires central region; and in Transener, the main electricity transmission company in the country. Its stake in the Bell refinery in Santa Cruz de la Sierra. In 2005, these units jointly processed 39,800 bpd, corresponding to 67% latter company was reduced from 32.5% to 26.33% in June as part of a financial restructuring agreement. of the installed capacity. The utilization rate of the refineries is low due to the characteristics of the Bolivian oil and Petrobras owns 34% of Cia. Mega, which has a separate natural gas unit in Loma la Lata, Neuquén province, of the local market. and fractioning facility in Bahía Blanca, Buenos Aires province. Furthermore, it operates a 600-kilometer multiple The average volume of sales for oil products distributed by the company in Bolivia was 7.9 thousand bpd during pipeline and has tank farms and facilities for exporting products. In 2005, this company sold 495 thousand tons the year. Of the company’s 105 service stations, 40 operate under the flag of the Empresa Boliviana de Refinación; of products (ethane, propane, butane and natural gasoline), with gross revenues of US$ 220 million. 46 are under a neutral flag and 19 are under the Petrobras brand. The stations, which have Spacio 1 and Lubrax Center facilities, are consolidating the company’s leadership of the market with a 25% share. Bolivia Colombia The main focus of Petrobras’ activities in Bolivia is exploration and production of natural gas for export as part of its strategy for the integration of the Southern Cone markets. Petrobras is entering the oil product distribution segment in the country, where it already conducts exploration and In 2005, while Petrobras’ production of oil and LNG in Bolivia was 8.5 thousand bpd, natural gas production production activities. In line with the strategy for expansion and leadership on the continent, the Company signed 3 reached 7.75 million m /day, the equivalent to 54.1 thousand boed. Gas exports to Brazil through the Bolivia-Brazil an acquisition contract which will allow it to incorporate retail and supply assets in the country. The negotiation, Gas Pipeline totaled 22.9 million m3/day, of which 6.1 million m3/day were commercialized by Petrobras, besides which also involves Uruguay and Paraguay, has an estimated value of US$ 140 million. The assets should pass over 3 the 0.9 million m /day that went to Argentina. to Petrobras’ control in 2006. Petrobras is associated in seven production blocks in Bolivia, and is the operator of six. With the new The acquisitions in Colombia, subject to governmental permits, include 38 own or long-term leased service Hydrocarbons Law effective as of May 2005, the concession contracts currently underway will need to be changed. stations in Bogotá with annual sales of 235 thousand m3 and commercial supply contracts of 149 thousand m3 per The Regulations still need to be defined for the oil companies to be able to adjust themselves to the new terms year. Also part of the accord are: a tank farm in Puente Aranda with capacity for 9 thousand m3; a lubricants mixing of the legislation approved by Congress. plant, with capacity of 38 thousand m3; and a basic products terminal in Santa Marta. The most important financial consequence of the new law is the institution of the Direct Hydrocarbon Tax, Furthermore, the company entered the lubricants market in the country through the launch of its Lubrax brand, which applies a 32% levy at the “wellhead.” Because royalties and other governmental participations already total which includes lubricants for diesel and gasoline engines, for transmissions, hydraulics and two-cycle motors. In 18%, the overall tax burden has now risen to 50%. The increase will have an important effect on the Company’s 2005, more than 800 m3 in products were sold, surpassing the target for the year by more than 75%. exploration and production operations in the country. Petrobras has a stake in 18 exploration and production contracts in the country (six of them in production), and Petrobras Bolívia is the largest company in Bolivia, having initiated its activities in 1996. With a significant share is the operator in 12 of them. Over 2005, the average production of oil and LNG was 16,520 bpd while natural in the GDP and a major taxpayer, it is recognized both for its operational quality as well as its commitment to gas production was, 11 thousand m3/d, totaling 16,582 boed. environmental and social questions. Besides participating in GTB, which is the operator of the Bolivian stretch of the Bolivia–Brazil Gas Pipeline, Petrobras has a 44.5% stake in Transierra, the controlling company of the Yacuíba–Rio Grande gas pipeline, with Venezuela capacity for transporting 17 million m3/day. Petrobras also owns the San With four production and two exploration Marcos gas pipeline and part of the Rio assets, Petrobras Energía produced 44.2 Grande gas compression station and thousand bpd of oil and LNG in the country two gas processing units at the San as well as 3.4 thousand boed of natural Alberto and Sábalo fields. gas, for total of 47.6 thousand boed. Through Petrobras Bolivia Refinación Because the Venezuelan Ministry of S.A. (the former Empresa Boliviana de Energy and Oil initiated a review of Refinación), the company is the owner operating concessions in exploratory of the Gualberto Villaroel refinery in blocks, Petrobras Energía signed Cochabamba and the Guillermo Elder transitional agreements committing it to 56 PETR OBRA S annual report 2005 PETR OBRA S annual report 2005 57
  • 30. international activities south america negotiate the conversion of these contracts to mixed-ownership companies in which the Venezuelan government Ecuador would have more than a 50% stake. Petrobras made the winning bid for the Moruy II block in the 2nd Round of the tender for underwater exploration With operations in two blocks, Petrobras Energía produced 9.1 thousand boed of oil and LNG in the country. The in Venezuela, denominated the Rafael Urdaneta – Phase B Project, together with Teikoku Oil Co., Ltd. The 874 km2- company negotiated an agreement with Teikoku for the cession of 40% of its stake in Block 18, currently in production, block that was picked up is located in the southeast section of the Gulf of Venezuela, north of Lake Maracaibo and and Block 31, in the exploratory phase. The transaction requires the final approval of the Ecuadorian government. 450 kilometers west of Caracas.. Petrobras and Teikoku each own 50% of the project and the Brazilian company In order to proceed with exploration operations in Block 31, part of which is located in the new of Yasumi will be the operator. National Park, Petrobras Energía is negotiating a solution with authorities that would permit activities in the location. Uruguay Paraguay In December 2004, Petrobras acquired shareholding control (55%) of Conecta S.A., thus beginning the activities Petrobras is entering the oil product distribution segment in Paraguay through an agreement that also includes assets of Petrobras in Uruguay. The Administración Nacional de Combustibles Alcohol y Portland (Ancap), which is in Colombia and Uruguay. Some 154 service stations with 52 convenience stores should pass over to the control of controlled by the Uruguayan government, has the other 45% of the voting shares of this company. the Company. Spread throughout Paraguay, the network has annual sales of 241 thousand m3 and commercial Conecta S.A. has the government concession to distribute natural gas, liquefied petroleum gas (LPG) and supply contracts totaling 67 thousand m3 per year. The agreement encompasses assets for the sale of LPG, offered manufactured gas through a 300-km-long pipeline network along with exclusivity to supply small and medium in 17 service stations for vehicular use. Furthermore, it includes commercialization of products for aviation at the consumers (up to 5 thousand m3 per day) to the upcountry regions of Uruguay. Revenues in 2005 were some Asuncion and Cidade Del Este airports, with an annual sales volume of 18 thousand m3. US$ 4.0 million, with sales volume totaling 39 thousand m3/day involving 3,400 clients. Natural gas distribution activities are being expanded through the acquisition of 51% of the shares of Gaseba Peru Uruguay S.A., which holds the concession to distribute gas to the province of Montevideo’s 1.4 million inhabitants until January 2025. The end of the negotiation with the Gaz de France Internacional Group, the parent company, Of the five blocks in the country in which Petrobras Energía is associated, one is currently in production (Lot X), depends upon compliance with legal requirements and approval by Uruguayan and French authorities. Gaseba, and the others are in the exploratory phase. In 2005, average production of oil reached 12.6 thousand bpd, and which services customers who consume less than 5 thousand m3/day in a regulated market, will be Petrobras’ the average production of gas was 1.8 thousand boed, totaling 14.4 thousand boed. second gas distribution company in the country. Petrobras is preparing to enter the oil product distribution market. Through an agreement signed in 2005 that Chile also encompasses assets in Colombia and Paraguay, the Company should assume control of a 89 service stations with annual sales of 227 thousand m3 and supply contracts totaling 62 thousand m3 per year. The agreement also With the establishment of a representation office in Santiago at the end of 2005, Petrobras began to prospect for includes the sale of marine products, asphalt and aviation fuel at the business opportunities in the Andean nation. In line with its strategy for expanding around the continent, the Carrasco International Airport. Company’s interests in the Chilean market include oil and natural gas activities, taking into account the agreements the country has with Argentina in this field. PETR OBRA S annual report 2005 59
  • 31. Petrobras operates 180 blocks in the NORTH AMERICA | The United States, Mexico AFRICA | Nigeria, Equatorial Guinea, Angola, Tanzania, Libya Gulf of Mexico. The United States Nigeria The Company picked In order to position itself among the companies that are most actively exploring for oil and natural gas in the Gulf With the governmental sanction for development of the gigantic Agbami field in up 53 exploration blocks of Mexico, Petrobras continued to apply its strategy of strengthening its operations along four fronts: ultra-deep February, Petrobras is preparing itself to invest US$ 460 million over the next four years during the 196th Bidding water activities; the search for deep fields with large gas reserves in shallow water and onshore; prospecting in the in the project. Scheduled to begin in 2008, total production will be 230 thousand bpd, extreme western section of the Gulf; and exploration efforts in lower-risk deep water areas. with the Company having the right to receive 30 thousand bpd in association with Round held in 2005. Petrobras has stakes in 271 blocks, and is the operator in 180. In the 196th Bidding Round for concessions in Chevron Texaco, the operator, Famfa Oil of Nigeria and Norway’s Statoi exploratory areas in 2005, the Company picked up 53 blocks. Of these, 18 cover three prospects that have the The development of Akpo – another giant field in the Niger River Delta – also was approved, in August. Petrobras will potential for large oil reserves and have the objective of consolidating Petrobras’ position in ultra-deep water. Also invest US$ 960 million over the next four years and its share of the production, which will total 185 thousand bpd as of 2008, during this round, and as a way of consolidating its position in the extreme western section of the Gulf, the is 36 thousand bpd. The company’s partners in the project are Total, the operator, and South Atlantic Petroleum of Nigeria. Company acquired 26 blocks, obtaining full control of 10 prospects with high potential for gas reserves; drilling is In September, exploration of the OPL 324 block was guaranteed for another three years. The operator, scheduled to begin in 2006. Petrobras’ participation is 37.5% together with Exxon Mobil and Statoil. During the year, its average production in the Gulf of Mexico was 4.6 thousand boed, which was lower than the 7.9 The company was successful in the tender for new blocks held in Nigeria in 2005, offering the best proposal thousand boed that had been forecast due to the unscheduled shutdowns in August and September imposed on the for the OPL 315 block, as operator in partnership with Statoil and Nigeria’s Ask Petroleum. Petrobras’ stake in this activities of oil companies in the Gulf of Mexico by Hurricanes Katrina and Rita and their effects in subsequent months. block is 45%. The acquisition is in line with the strategy to strengthen the Company’s position in the deep and Petrobras proved the extension of the oil reservoirs of the Cascade accumulation in ultra-deep waters in the ultra-deep waters of the West Coast of Africa. American sector of the Gulf of Mexico upon conclusion of the drilling of a discovery delineation well. After Moreover, the Company supports the use of alcohol as a fuel in the country. In August, Petrobras signed a evaluating productivity, to be carried out in 2006, the Company will establish the best manner of production. memorandum of understanding with the Nigerian National Petroleum Corporation (NNPC) for providing technical In the exploration of deep gas reservoir, the Company proceeded with drilling activities in the Blackbeard assistance to a project for mixing the product with gasoline, as is done in Brazil. prospect, whose objectives are deeper than 7 thousand meters. Petrobras also picked up a stake in the Mega Mata onshore prospect, scheduling drilling for 2006. Equatorial Guinea In deep waters, the Company has been seeking to increase its share in prospects located in the Garden Banks Quadrant, which presents comparatively smaller potential reserves but offers lower risk and the possibility of high In November, Petrobras obtained a 50% stake in L Block. Its partners are Chevron (operator), Amerada Hess, Energy profitability. Following this strategy Petrobras absorbed an 80% stake in the Cottonwood discovery where the first Africa and Sasol Oil. The work program includes the drilling of a pioneer exploration well during the second quarter of well operated by the Company in deep waters in the Gulf had been drilled. Once the size of the gas accumulation 2006. If successful, Petrobras will be the operator of the production development phase. is confirmed, production should begin in 2007. Meanwhile, drilling was initiated at the Live Oak exploratory prospect in 2005 and other wells should be drilled in the region in 2006. Angola Petrobras entered the refining sector of U.S. by acquiring 50% of the Pasadena Refinery in Texas, an investment of aproximately US$ 370 million. The Company has two E&P assets in the country –Block 2, located in shallow water in the Lower Congo Basin, and Block 34, in deep water. With a 27.5% stake of a consortium made up of Total, Sonangol and Chevron, which Mexico is the operator, Petrobras produced an average of 8.3 thousand bpd in Block 2 during 2005. In Block 34, located in 1,500 to 2,500 meters of water, after drilling two wells, Petrobras brought together a group of technicians to Petrobras participates, in association with Teikoku of Japan and Diasvaz of Mexico, in two multiple service contracts analyze the potential of the block, based upon accumulated knowledge and recent discoveries along the Brazilian with Pemex in the Cuervito and Fronterizo blocks. The services that are provided include exploration, production coastline. The study indicated good prospects in deeper layers. As a result, the consortium requested and development and production activities. Petrobras’ stake in each one of these contracts is 45%. In 2005, 14 obtained an extension of the contract exploration deadline. In Block 34, Petrobras is associated with Sonangol production wells were drilled and turned over to Pemex, surpassing the targets for the year. and Norsk Hydro. 60 PETR OBRA S annual report 2005 PETR OBRA S annual report 2005 61
  • 32. international activities asia Tanzania China Petrobras is getting ready to begin seismic surveys in Block 5, which should be extended to Block 6 in ultra-deep waters Petrobras signed its second agreement in the country in February 2005 for the formalizing of an understanding in the Gulf of Mafia. After having signed an exploration contract for Block 5 with the government and the state-owned with the China National Petroleum Corporation (CNPC) for the development of joint businesses. The terms of the Tanzania Petroleum Development Corporation in 2004, the company picked up Block 6 during the third exploration cooperation encompass activities such as oil exploration and production, refining and transportation via pipeline in area auction in May. Thus, it reinforced its position in a frontier exploratory region on the east coast of Africa, which is the country, in Brazil and other regions of the world. in line with its international expansion and portfolio diversification strategy. When the new contract has been signed, A Strategic Cooperation Agreement containing similar objectives had been signed in 2004 with Sinopec, another the project portfolio in the country will total 18.5 thousand km2 in concession areas that are fully operated by Petrobras. of the three Chinese state oil companies, upon the occasion of the inauguration of the Petrobras office in the country. Among the goals of this office is to support the sale of oil to China and to prospect new market Libya opportunities for the Company in Asia. Q U A L I T Y, S A F ET Y, E N V I R O N M E N T, AND H E A LT H With rights to Area 18 located in deep water (200-700 meters) in the Libyan sector of the Mediterranean Sea, obtained in an auction that was run in January 2005, Petrobras signed a contact for shared production The Company considers that the corporate requirements of Quality, Safety, the Environment and Health are with the state-owned National Oil Company (NOC) in March. Associated with Oil Search Limited, of Papua also an integral part of its overseas processes and products, where it seeks to act in a socially and New Guinea, the Company is the operator, with a 70% stake. In the event of exploration success, NOC will assume environmentally responsible manner, respecting each country’s legislation. 51% of the investments. Its overseas units obtained significant HSE results during the year. In Bolivia, the Gualberto Villarroel The work program in Area 18 to be carried out by the consortium calls for acquisition of 2 thousand kilometers Refinery in Cochabamba completed five years without any accidents with loss of time – a record among of 2D and 500 km2 of 3D seismic data and the drilling of an exploration well with a minimum total investment Petrobras’ refineries. In Argentina, Petrobras Energía’s Lost Time Injury Frequency Rate (LTIFR) continued to of US$ 21 million. decline — to 0.90 in 2005 from 5.67 in 2002, 2.13 in 2003 and 1.4 in 2004. Petrobras Energía inaugurated the first Environmental Defense Center in Argentina in June at the Ricardo Eliçabe Refinery in Bahía Blanca. By 2008, another 12 centers will be established in the country ASIA | Iran, China representing a total investment of US$ 15 million – the largest network of its kind by an oil and energy company in Argentina. The centers extend the Company’s logistics Iran concept overseas, making its response in the event of emergency spill situations quicker and more effective. In the search for business opportunities in the Middle East, guided by the strategic objective of becoming more active Among the distinctions obtained by the Company’s overseas units for recognition in the region, Petrobras maintains a subsidiary, Petrobras Middle East, in Iran. In 2005, the Company began of the care they exercised in the field of HSE was the Colombian Prize for Management preparations for exploration activities in the Tusan Block in shallow waters in the Persian Gulf. Petrobras is the operator, Quality offered by the federal government and awarded for the first time to a company in with a 100% stake, under the terms of an agreement signed in 2004 with the National Iranian Oil Company (Nioc). the oil industry. In Argentina, Petrobras Energía won the Environmental Excellence Prize Petrobras’ contractual commitments, with a minimum budget of US$ 32 million, includes reprocessing of 2,000 granted by the Buenos Aires University of Social and Environmental Sciences. The 2 kilometers of seismic 2D data, the acquisition and processing of 400 km of seismic 3D and the drilling of two award was for the company’s support of a program to stimulate student interest in exploration wells — the first in 2006. scientific knowledge and defense of the environment.
  • 33. Social and Environmental Responsibility social and environmental T H E C R E AT I O N O F A S O C I A L A N D E N V I R O N M E N TA L R E S P O N S I B I L I T Y M A N A G E M E N T C O M M I T T E E E N H A N C E D T H E P E T R O B R A S C O R P O R AT E G O V E R N A N C E M O D E L B Y A L I G N I N G A N D I N T E G R AT I N G T H E M A N A G E M E N T O F T H E C O M P A N Y ’ S S O C I O - E C O N O M I C A C T I O N S . T H E AT T R I B U T E S O F T H E C O M M I T T E E I N C L U D E T H E P R O P O S A L O F C O R P O R AT E S O C I A L A N D E N V I R O N M E N TA L R E S P O N S I B I L I T Y S T R AT E G I E S A N D G U I D E L I N E S , T H E S U G G E S T I N G O F P E R F O R M A N C E I N D I C AT O R S A N D TA R G E T S , T H E F O L L O W - U P O F T H E A C T I V I T I E S A N D T H E P U B L I C I Z I N G O F B E S T P R A C T I C E S A S A W A Y O F U N I F Y I N G T H E P R O C E D U R E S O F T H E B U S I N E S S U N I T S I N T H E R E L AT I O N S H I P W I T H S O C I E T Y. T H E C O M M I T T E E I S C O M P O S E D O F A C O N S U LTA N T T O T H E P R E S I D E N T A N D R E P R E S E N TAT I V E S O F T H E O M B U D S M A N O F F I C E , O F 12 E X E C U T I V E D E PA R T M E N T S A N D O F T H E P E T R O B R A S D A N C E R O F T H E P E T R O B R A S D A N C I N G P R O J E C T, R I O D E J A N E I R O . D I S T R I B U I D O R A A N D T R A N S P E T R O S U B S I D I A R I E S . A M O N G T H E I N I T I AT I V E S T H AT W E R E ADOPTED IN 2005 WAS THE C R E AT I O N OF THE GENDER COMISSION AND THE COMISSION OF P R E PA R AT I O N AND E V A L U AT I O N OF SOCIAL AND E N V I R O N M E N TA L RESPONSIBILITY REPORTS. WORK GROUPS FOR M A N A G E M E N T I N D I C AT O R S A N D C E R T I F I C AT I O N A N D T H E D O W J O N E S S U S TA I N A B I L I T Y I N D E X C H A L L E N G E A L S O W E R E E S TA B L I S H E D .
  • 34. responsability Social Investments responsability Social Investments O N E O F T H E F I R S T S I G N ATO R I E S O F T H E U N I T E D of civil society and public policies, the program fosters social activism by encouraging the direct participation of the communities that are involved. N AT I O N S G L O B A L C O M PA C T, P E T R O B R A S H A S The Petrobras Zero Hunger initiatives involve five lines of action — guarantee of the rights of children and I NTE N S I F I E D ITS S U P P O RT O F I N C LU S I O N P RO J ECTS teenagers, education and professional training, generation of jobs and income, social projects and volunteerism. On these fronts, the program runs programs aimed at promoting racial and gender equality and the inclusion of the handicapped. The great majority of the projects for the Petrobras Zero Hunger program was chosen through a public selection process. A total of R$ 18 million was earmarked in 2005 for this process, resulting in sponsorship of 74 new projects. As a result, Petrobras’ funds and knowledge were merged with society’s own resources in an effort to overcome misery and to foster the social inclusion of low-income communities around Brazil. The Petrobras System disbursed R$ 42 million to the Infancy and Adolescence Fund (FIA) through the National Council (Conanda), the Piauí State Council and municipal councils in order to guarantee the rights of children and teenagers. The funds were used in 190 municipalities, in a majority of the states, to finance more than 300 projects A signatory of the United Nations Global Compact, the Company is involved in the dissemination of the document’s for the prevention and eradication of child labor, the combat of sexual exploitation of children and teenagers and ten principles, which involves topics such as human rights, workplace conditions, the environment and combat of vocational training of young people. corruption. In 2005, Petrobras joined the UN task force and the European Foundation for Management Petrobras continued to support vocational training activities for both youths and adults. Its Mova-Brasil Project, Development, which develop the bases for the formation of business leaders committed to the vision that social run in conjunction with the Paulo Freire Institute and the Petroleum Workers’ Federation (FUP), taught more than and environmental responsibility is an integral part of business. It was the first oil and energy company and the 23 thousand people how to read and write in the states of São Paulo, Rio de Janeiro, Bahia, Sergipe, Rio Grande only Latin American participant among the 21 members of the group do Norte and Ceará. The project’s target is to teach literacy to 40 thousand people between August 2003 and May In 2005, Petrobras signed a declaration of intentions with the United Nations Children’s Fund (UNICEF) to 2006, and involves the training of 1,600 educators and 160 regional coordinators. Regarding the generation of develop technical planning, research, communication, and the generation of financial resources in order to jobs and income, projects designed to promote cooperative action succeeded in organizing nearly 10 thousand guarantee the rights of children and teenagers in Latin America and the Caribbean. The initiatives contributed to autonomous collectors of recyclable materials around Brazil, disseminating a socio-environmental consciousness helping meet the targets set for the UN’s Millennium Objectives. and knowledge about the selective collection and processing of waste materials. As a way of further enhancing transparency, Petrobras has participated as a monitor and contributed with With the support of the Advanced Program for Assistance and Treatment of Special Persons (Pate), Petrobras suggestions in the meetings of the Extractive Industries Transparency Initiative (EITI). This is a voluntary initiative helped handicapped people exercise their basic rights of citizenship. In 2005, as part of its policy of combating created in 2003 with the participation of governments, international organizations, NGOs and investors that is inequality and achieving social inclusion, the program focused on adapting society to the reality of these people designed to ensure that the money extractive industries pay to governments contributes to sustainable while also running programs in the fields of education, culture, sports and professional training. development and poverty reduction in the countries in which they operate. Social sponsorships The Petrobras Zero Hunger Program, which was launched in 2003, joins together the efforts of the Company in the fight for social inclusion and the eradication of misery and hunger in Brazil through citizen-based development actions. In 2005, we invested R$ 139.6 million in projects in every state in the country. In step with the initiatives 66 PETR OBRA S Annual report 2005
  • 35. Petrobras continues to be the largest Cultural sponsorship sponsor of culture in Petrobras continues to be largest sponsor of culture in Brazil with an annual the country, with annual investment of about R$ 150 million and more than 700 active projects. The guidelines for cultural support are in tune with public policy for the sector and seek investments of some to encourage national culture and the expansion of opportunities for the creation, R$ 150 million and circulation and fruition of projects as well as the permanent building of a Brazilian cultural memory. more than 700 Petrobras’ cultural sponsorships are structured through the Petrobras Cultural projects underway. program, which earmarks 75% of the funding to projects that have been chosen through a public selection process. In 2005, of the 4 thousand projects that were in the running, 200 publicly selected projects received R$ 46 million, distributed in the fields of filmmaking, scenic arts, visual arts and music. Approximately another 100 projects directly invited to participate received funding in the amount of R$ 15 million. Environmental Projects The third edition of Petrobras Cultural (2005-2006) was launched in November with total funds of R$ 62 million. Support to publicly selected projects covered actions for cultural preservation, production and A number of projects accepted as part of the first public selection of the Petrobras Environmental Program in 2003 dissemination of films, theater productions, bands, choral groups, orchestras and regional musical groups. are being developed in biomes such as the Amazon region, the Caatinga and Cerrado areas, the Atlantic Forest and The directly chosen projects involved film, scenic arts, visual arts and music as well as the maintenance of the Pantanal. Being run in partnership with NGOs, universities and labor organizations, the projects are involved in archeological sites such as those at Xingó (SE) and Serra da Capivara (PI). the preservation of hydrographic basins, ecosystems and landscapes, encompassing approximately 5 thousand The Company encourages registration of projects throughout the country through the Petrobras Cultural species of Brazilian fauna and flora. Caravan, which visits Brazilian state capitals between September and December each year. In 2005, a In the more than 250 municipalities that were benefited, taken together the projects influence over 900 workshop was added to the caravan for formatting the projects, being at helping cultural producers in all thousand hectares. About 3 million people were directly helped while another 20 million received indirect assistance. regions to prepare their proposals. Decentralization already can be seen in the 2004–2005 edition of the The first selection of Petrobras Environmental Program projects involved an investment of some R$ 40 million over program: of the 171 publicly selected projects, 57% were produced outside the Rio–São Paulo axis. During the first two years they were being run, with approximately 5 thousand people working to conserve water resources. the previous edition, the figure was 32%. In December 2005 during the National Environmental Conference, the Company presented the results of the analyses of samples that were collected in Brazil’s main rivers, reservoirs and lakes through the Brasil das Águas project that was carried out over 14 months and covered 120 thousand kilometers. The second phase of the project calls for preservation actions in seven rivers that have been selected based upon the results of the research study and the existing social, economic and environmental situation of the regions that are involved. The Company continues to sponsor programs aimed at preserving marine biodiversity — including the Tamar Marine Turtle, Humpback Whale, Manatee and Southern Right Whale projects. Sponsored since 2002, the Humpback Whale Project has catalogued 332 individuals of this threatened species along Brazil’s South Region coastline, representing a 14% increase per year. Approximately 2,000 whales have been catalogued by the Southern Right Whale project, which is conducted on the Northeast coast. This is the third largest group of the species found to date on the planet. The project has recorded an annual increase of 13% in their numbers. 68 PETR OBRA S Annual report 2005
  • 36. responsability Hum an Resources T H E C R E AT I O N O F A M A N A G E M E N T C O M M I T T E E A N D T H E E S TA B L I S H M E N T O F A N A G E N D A O F P R I O R I T I E S WE R E H I G H LI G HTS O F TH E AR EA I N 2005 Sports sponsorship One of the major partners of Brazilian sports, during the year Petrobras destined some R$ 50 million in support of different sporting activities. Besides traditional sponsorship — such as Formula 1 motor racing, the Petrobras Lubrax Team and the Flamengo soccer club, the Company sought to consolidate the presence of its brand in the worlds of surfing, tennis and handball. The latter, which is the most practiced sport in public schools in the country, was chosen One important milestone in the Human Resources area in 2005 – year dedicated to improving and adjusting its as the focus of its support of the Olympic ideals. strategies to the 2015 Strategic Plan and the 2006-2010 Business Plan - was the creation of the HR Management Sponsorship of tennis was definitively incorporated into the Company’s internationalization strategy in South Committee made up of executives from different Petrobras areas. The idea is to foster alignment between business America. Through the second holding of the Petrobras Tennis Cup, disputed in Brazil, Argentina, Colombia, Uruguay development, management of the Company and the main HR initiatives. Towards this end, an agenda of medium and Chile, the Company brand was on display in countries where it has commercial interests in view of its business and long-term priorities was created consisting of topics related to the organization and management of the HR expansion around Latin America. In surfing, Petrobras sought to associate youthful characteristics with its brand name as well as the energy and Gráfico 1 Function, the management of human capital, business education, external relations and organizational climate. In order to publicize the best HR management practices, Petrobras organized a series of in-house forums and strength of the ocean, in reference to the offshore production of oil of gas. The Company sponsored four important seminars during the year. It also obtained 100% participation of the employees in the new system used to manage tournaments disputed by top athletes — the Petrobras Women’s Surfing Circuit, the Petrobras Longboard Classic, the personnel performance. Petrobras Men’s Selective Surfing Championship and the Petrobras Surfing Festival. The Company continued sponsor the Brazilian Handball Confederation (CBH) and initiated a partnership with the Brazilian Olympic Committee (COB). Its sponsorship of the Handball Brazil project encompasses the Brazilian national Salary Policy handball team as well as actions that encourage the practice of the sport. Through the COB, Petrobras’ brand name remains associated with the Olympic movement, emphasizing the role of sports in the education of young people. Furthermore, Expenditures on personnel totaled R$ 6.569 billion during the year, including fixed and variable compensation Petrobras is a sponsor of the XV Pan-American Games Rio 2007, involving athletes from more than 40 countries. components that make up the Company’s salary policy. Fixed compensation encompasses remuneration such as In motor sports, Petrobras continued its sponsorship of a number of different types of events, with wages, extras, bonuses and promotion increases payments; variable compensation involves profit and results particular emphasis on presence of its brand in Formula 1 motor racing. Since 1998, the Company has been developing a special fuel used by England Tabela 2 sharing (PLR) linked to the business results tied to the Strategic Plan’s targets. Williams F1 team in the most important automobile competition in the Percentage of Employees Gas and Energy 2% 1% Support of Senior Management Research 3% 1% International Area - Brazil world. The development of motor sport products is part of the strategy in the Petrobras System International Area - Overseas 11% by Area of Activity 33% E&P to use auto race courses as laboratories. One example is the production of the Podium gasoline, created thanks to the work carried out with Subsidiaries 13% Williams and available in Brazil and Argentina. (for more information, Corp. Consulting and Support 16% 20% Downstream consult our social and environmental report 2005) 70 PETR OBRA S Annual report 2005 PETR OBRA S Annual report 2005 71
  • 37. responsability Human Resources Petrobras System Number of Employees in the number of employees. These positions, in a number of different areas, will be filled gradually, using the existing candidate database and the conducting of public selection processes The Company ran a public selection 60.000 in 2005 for the admission of professionals at several different job levels. During the year, 1,806 employees were admitted — 835 college-educated professionals and 971 high-school educated. 50.000 40.000 Professional Training 30.000 In order to satisfy the requirement for the transmission of knowledge throughout the Company, the Petrobras 20.000 University had 1,216 new employees enrolled during 2005, of which 749 completed training courses. With 60 professors — 13 with PhDs, 28 holders of Masters degrees and 19 specialists — the University’s Human Resources 10.000 Development (HRD) process was certified to IS0 9001/2000 standards. In collaboration with all areas of the Company, the University’s Business and Management School prepared a 0 2001 2002 2003 2004 2005 management training model involving the instruction of 4 thousand managers and supervisors. A Business Subsidiaries 5,674 5,875 6,625 7,007 7,197 0 6,328 5,810 5,939 6,166 Teaching Plan was created to improve the learning-apprenticeship process. International Area - Overseas PETROBRAS Holding 32,809 34,520 36,363 39,091 40,541 Moreover, Petrobras University had its specialization courses in the fields of Petroleum Engineering and Process System 38,483 46,723 48,798 52,037 53,904 Engineering recognized by the Ministry of Education. Created in partnership with the Federal University of Bahia (UFBA) and the State University of Rio de Janeiro (UERJ), respectively, these courses are in line with the strategy Collective Wage Agreements of strengthening the relationship of the University with Brazilian and international teaching and research institutions. In the collective wage agreements with onshore union employees in september and offshore employees in november, Petrobras remained open to negotiation, being represented also in regular follow-up meetings. Health Care As in previous years, the agreements consolidated important advances for employees. Among the main results were: a salary readjustment of 6.02% and the granting of a level of career progression for all employees; the creation The Multidisciplinary Health Care Service (AMS) helped an average of 249 thousand people per month — of an Onshore Field Production Bonus; the commitment to present a proposal encompassing all of the union employees, retirees and pensioners and their dependents. Petrobras disbursed R$ 460 million to help pay for demands pertaining to Petros, with a two-month deadline as of the signing of the Collective Wage Agreement of 2005. medical appointments, examinations and hospitalization. The effective network encompasses 21,260 establishments throughout Brazil, including hospitals, clinics, laboratories and healthcare specialists. Under the free choice option, beneficiaries may choose health professionals from outside of the accredited network. Admissions In 2005, as a part of the collective work agreements, three important changes were introduced in AMS: the increase, from 8 to 18 years, of the age limit for including children and teenagers in an adoption process; the In order to face the needs that expansion is bringing to Petrobras and are foreseen in the 2015 Strategic Plan, in adjustment of the major risk contribution table to the National Health Agency’s (ANS) age groups, according to the October the Executive Board approved the opening up of 9 thousand new jobs, representing an increase of 23% Statute for the Elderly; and the use of the same consignable margin of 13% for active participants as well as retirees.
  • 38. Pension Plan The Petros Plan is a defined benefit plan that is closed to new participants. The new employees were covered in 2005 by a life insurance policy fully underwritten by the Company until the creation of a supplemental pension responsability H e a lt h , S a f e t y a n d E n v i r o n m e n t THE SEARCH FOR EXCELLENCE INCLUDES TRAINING PROGRAMS, plan for them. Petrobras expects to discuss a proposal for a new plan submitted by a committee made up of A U D I TS A N D I N V E S T M E N TS TOTA L I N G R $ 2 . 8 B I L L I O N I N 2 0 0 5 representatives of the company, Petros, the Petroleum Workers’ Federation (FUP) and labor unions. Educational Benefits The benefits are of a supplemental nature, complementing the beneficiary’s contribution to the overall cost and encompass day care centers, helpers, kindergarten, grade school and middle school as well as supplemental education. In 2005, the amounts disbursed directly to employees totaled R$ 65 million and the total cost, including taxes, was nearly R$ 100 million. Through the Collective Wage Agreement, Petrobras began to offer the benefits to employees with minor children under their care who they were seeking to adopt. Petrobras’ health, safety and environment (HSE) policy, laid out in the 2015 Strategic Plan, seeks to consolidate HSE aspects as values that are intrinsic to the Company’s planning and management processes, based upon 15 Career Plan corporate guidelines approved by the executive board in 2001. Subsequently they were divided into different levels Petrobras continued to review its Job Classification and Evaluation Plan (PCAC) in order to adjust its Career Plan to of guidelines and published as the HSE Management Manual. the challenges defined in the Strategic Plan. The study — conducted by a work group comprised of representatives The HSE guidelines have being implemented since 2002 through the Process Safety Program (PSP). This has of all company areas, the Petroleum Workers Federation (FUP) and the labor unions – received contributions from involved the development and implementation of corporate action plans and specific programs for the business more than one thousand employees during the job description phase. The conclusion of the project is scheduled and service units, designed to ensure that the objectives of the HSE policy are met at all levels of the Company. for May 2006, according to the 2004/2005 collective bargaining agreements. The visible commitment of the top management and qualification are also the focus of the HSE corporate Transparency and the participation of the workforce have been encouraged throughout the entire PCAC review guidelines. The president and the Company’s directors participated in 10 HSE audits conducted in the business process. Among the review premises are: adjustment of the length of careers to the expectation of time with the units during 2005. The training programs have had the participation of 36,000 persons since 2002. company and the mobility mechanisms; the analysis of positions and careers based upon the market and their In April 2004, the Business Committee approved, in its Strategic Plan, the HSE Excellence Strategic Project, importance to Petrobras; and the observance of the weight of personnel costs and its impact on the Petros Plan. designed to equip the Company with international standards of excellence in the fields of accident prevention, incidents and failures; emergency readiness; worker health; ecoefficiency in operations and products; and HSE management, following up on the actions that were initiated by the PSP. Clubs The Company invested R$ 2.8 billion in HSE in 2005. Of the total, R$ 1.6 billion was earmarked for With the creation of a Leisure Center in Vitória, safety programs, projects and actions, R$ 1 billion went to the environment and Petrobras expanded its network of clubs open to health got R$ 184 million. These values did not include expenditures on behalf of the employees, retirees, pensioners, dependents and other Multidisciplinary Health Assistance program or sponsorship of environmental members of the local community, on a membership programs and projects run by society’s organizations. basis. Its more than 30 clubs have recreational and Part of the disbursements – R$ 777 million – was made through the Program for sports infrastructure, helping integrate employees and Excellence in Environmental and Operational Safety (Pegaso). Transpetro subsidiary also provide well being for their families. invested R$ 502 million in the program, totalling a amount of R$ 1.3 billion in 2005. PETR OBRA S Annual report 2005 75
  • 39. Implemented since 2000, Pegaso strives to eliminate the risks and the liabilities in Petrobras’ installations and Number of Fatalities The number of fatal activities, constituting one of the largest initiatives of its kind in the world oil industry. Overall, Pegaso has had some 12 accidents was stable R$ 9.26 billion in investments and operating expenses since it was created in 2000. 2001 18 30 The Pegaso project includes the Pipeline Integrity Program, which absorbed R$ 226.5 million in investments 3 compared to 2004. The 2002 18 during 2005. The program covers inspection projects, tests, appraisals, repair and rehabilitation of oil and gas 21 company pays special 3 pipelines designed to guarantee the safety of its operations and to minimize the impact of eventual accidents on 2003 16 nearby communities. 19 attention to this aspect, 1 The HSE Management Evaluation Program oversees the execution of Petrobras’ safety, environment and health policy. 2004 15 16 because the corporate Employees In 2005, 20 appraisals were conducted – 13 in facilities in Brazil and seven outside of the country. The evaluations 0 Outsourced Workers encompassed the degree of compliance with corporate guidelines and the requirements of ISO 14001 and OHSAS 2005 15 15 Totals target for this type of 18001 standards, which certify environmental, health and safety systems in 171 units in the country and 26 abroad. incident is zero. Environment Operational Safety Environmental responsibility actions implemented in 2005 were aimed mainly at atmospheric emissions Petrobras continues to reduce its Lost Time Injury Frequency Rate (LTIFR), and is approaching the levels of management, liquid effluents and waste management; ecosystems evaluation and monitoring; remediation and excellence prevailing in the international oil and gas industry benchmarks. emergency responses. The total number of manhours of exposure to risk rose from 483 million in 2004 to 533 million in 2005, a result of the increase in the Company’s operating activities. The number of accident fatalities remained stable as compared Emissions to 2004. The company gives special attention to this topic cause the corporate target for this type of incident is zero. The Fatal Accident Rate (TAF), which corresponds to the number of fatalities per 100 million men-hours of In December, Petrobras published an Air Emissions Management Performance Report, consolidating information exposure to risk, maintained a trend in 2005 consistent with the overall decline that has been seen. The rate for of its operations in Latin America between 2002 and 2004. The report was filed for public consultations with the the year was substantially under the average for the world oil and gas industry that, in 2004, according to Oil and Global Greenhouse Gas Register of the World Economic Forum (www.ghgr.org/public) and Petrobras website Gas Producers (OGP) data, was 5.2. (www.petrobras.com.br/environment). The data contained in the report resulted from an inventory conducted by the Air Emissions Management System (Sigea) and verified by an independent international consulting firm. Lost Time Frequency Injury Rate (LTIFR) Fatal Accident Rate (TAF) Through the system, Petrobras monitors the emissions of the main greenhouse gases (carbon dioxide, methane Number of accidents with injuries and time lost from work Number of fatalities per 100 million manhours and nitrous oxide) as well as carbon monoxide, sulfur and nitrogen oxides, volatile organic compounds and per million manhours of exposure to risk, encompassing of exposure to risk, encompassing own own employees and outsourced workers. employees and outsourced workers. particulate matter. The Company has over 20,000 sources registered of emissions in its facilities in South America. 2001 2.89 2001 15.70 Emission of Greenhouse Gases 2002 30.43 (in millions of tons of equivalent CO2) 2002 1.53 2002 6.29 Total emissions (direct + indirect) associated with Petrobras’ 2003 39.09 installations in Brazil and abroad and consolidated by Sigea 2003 1.23 2003 4.57 As of 2003, the data includes the emissions from the Gas and energy area, from the assets of Petrobras Energia S.A. 2004 44.41 2004 1.04 2004 3.30 located in Brazil, Argentina, Bolivia, Peru and Venezuela and from the shipsof Petrobras´ own fleet and vessels chartered 2005 51.56 for international trips 2005 0.97 2005 2.81 76 PETR OBRA S Annual report 2005 PETR OBRA S Annual report 2005 77
  • 40. responsability Environment Sulfur Oxide - SOx Emissions Biodiversity 2001 158,620 (in tons) Conserving biodiversity of the ecosystems that are influenced by Petrobras’ activities is a permanent concern of the Emissions consolidated by Sigea; methodological 2002 156,677 Company. This attitude reflects its strategic commitment to apply the principles of social and environmental improvements led to a review of the previously published values for the 2002-2004 period responsibility to all of the stages of its projects, including planning, construction, operation and decommissioning. 2003 160,845 As of 2003, the data includes the emissions from the Gas In 2005, Petrobras established a workgroup to prepare a corporate standard to manage potential impacts to and energy area, of the assets of Petrobras Energia S.A. located in Brazil, Argentina, Bolivia, Peru and Venezuela and biodiversity. This standard, scheduled to begin implementation in 2006, covers strategies and actions for 2004 153,717 the ships from Petrobras´own fleet and vessels chartered for characterizing protected or environmentally sensitive areas influenced by the Company’s operations, guide international trips 2005 151,617 protection measures or recovery of the ecosystems involved. With this objective, the Company in March initiated an environmental assessment of a number of ecosystems in Guanabara Bay at an estimated investment of R$ 9 million. In the Amazon region, studies being carried out with universities Water Resources and Effluents and research institutes are evaluating the potential impact of Petrobras’ operations in the surrounding ecosystems. Petrobras directed its efforts in re-utilizating and optimizating water use in its refineries, prioritizing the facilities where operating scenarios point to a potential scarcity of the resource. EMERGENCY PREPAREDN ESS In 2005 the Company concluded evaluation of the current and future availability of water sources that supply Repar, Refap, Rlam, Lubnor and its nitrogenous fertilizer plants in Sergipe and Bahia. Similar studies already had Petrobras’ strategy for acting during emergency situations is based on the integration of the contingency resources been carried out at refineries in the Southeast region, at the Campos Basin production units and Transpetro’s of its business units with dedicated vessels along the Brazilian coast and the Environmental Protection Centers Cabiúnas Terminal. (CDAs). The CDAs operate 24 hours a day and have trained professionals and equipment at their disposal in order These studies provided subsidies for the initiatives designed to optimize and re-use water. Among them, two to act quickly and effectively. This includes ships and oil collectors, contention barriers and absorbers. There are nine are in a phase of conclusion: closing the refrigeration cycle at Reduc, which will no longer make use of water from CDAs around the country and six advanced bases in the North Region of Brazil and one in the Center-West Region. Guanabara Bay for this purpose; and the re-utilization by Replan’s cooling towers of 80 m3/h of water coming from This network of protection against accidents effects, which also can count on funds from public agencies and the vacuum distillation units. communities, has six emergency plans in place that cover all Brazilian regions and are evaluated through emergency simulation exercises. Civil Defense, police, environmental agencies, city governments and the population participate, Solid Wastes as well. In 2005, six regional exercises were run in various locations around Brazil. The Company maintains three vessels dedicated to emergency operations in a state of permanent The Company’s Corporate Waste System registered 532 readiness — in Guanabara Bay, on the coast of São Paulo and the coast of Sergipe and thousand tons of hazardous solid wastes generated in Alagoas. In 2005, Petrobras invested nearly R$ 36 million in Transpetro’s waterway 2005. This corresponded to the total of the wastes CDA terminals to establish Emergency Response Centers (CREs) to reinforce Amazônia generated by operating activities in Brazil and abroad, of the (Manaus) protection of the coastal regions. Belém Coari wastes produced during remediation processes in impacted Cruzeiro CDA Belo Monte Maranhão do Sul CDA areas and that which constitute environmental liabilities of Urucu I (São Luís) II Rio Grande do Norte (Guamaré) assets that were acquired by the Company. During the year, CDA Porto Velho V Centro-Oeste Marati III CDA Environmental Defense Center 468 thousand tons of hazardous wastes were treated and (Goiânia) CDA Bahia (Madre de Deus) CDA Environmental Defense Center - São Paulo disposed of in environmentally appropriate manner. National / International Logistics VI Advanced Base Treatment and disposal plans were agreed to with Uberaba Dedicated Ships CDA Bacia de Campos (Macaé) environmental agencies and will be initiated in 2006 for I a VI Regional Emergency Plans CDA Rio de Janeiro (Rio de Janeiro) CDA São Paulo (Guarulhos) Fauna Rehabilitation Units more than 90% of the stock of hazardous solid wastes Astro Ubarana IV Rebelo XV accumulated at the Company’s facilities at the end of 2005. CDA Sul (Itajaí) 78 PETR OBRA S Annual Report 2005 PETR OBRA S Annual report 2005 79
  • 41. responsability health Oil and oil product spills Regarding the reasons leading to Petrobras’ own employees leaving their jobs in 2005, as shown in the following chart, by far the main cause was non-occupational disease — that is, reasons that were not related to professional The volume of spills in 2005 was significantly lower than in 2004, maintaining , as it has in the last three years, activities of employment. the standards of excellence in terms of the global oil and gas industry. In 2005, without any reported large spills This fact justified the Company’s emphasis on the Health Promotion Program, both on and off the job, which of oil and oil products, the Company obtained its second best annual result for this indicator over the past six years. encourages the adoption of healthier lifestyles. The Company also seeks to motivate employees to participate in the annual medical checkup campaigns it offers and promotes the idea that they should follow the recommendations that are made as a result of the exams they take. Oil and oil products spills (m3) 2001 2,619 Gráfico 1 Cause of Employee Missed Time Spills of more than 1 barrel (0,159 m 3) impacting 2002 197 the environment outside installation perimeter. 4.5% 1.1% 0.1% 5.9% 2003 276 Non-occupational disease Work-related (occupational) disease 2004 530 Workplace accident Non-workplace accident 2005 269 88.4% Accident on way to work Health The underpinnings of Petrobras’ actions on behalf of employee health rest upon the fostering of good health and disease prevention, based on the integral health concept — both at work and outside of it. The programs and Tabela 2 interventions in the area are guided by epidemiological analysis of information such as mortality, morbidity and the prevalence of risk factors. This systematic procedure has produced positive results regarding the health of our employees. The Percentage of Time Lost index, which measures the amount of time lost due to illness or accidents, has declined consistently over the past four years. Percentage of Time Lost (PTP) The Company also has been running an Occupational Hygiene and Ergonomics Program designed to identify, control 2001 2.90 and eliminate occupational risks at all units. The procedures for guaranteeing the good health of employees during trips, Percentage of the total potential work hours lost which include medical check-ups prior to travel and medical supervision upon return, also are being standardized. due to medical authorization caused by 2002 3.01 occupational diseases or not and work accidents; In order to provide better levels of health for its employees and members of their families, Petrobras and the calculated only for own employees. National Cancer Institute (Inca) trained nearly 500 health professionals to deal with and treat employees who 2003 2.88 smoke cigarettes. They represent 11% of the workforce – a percentage that is lower than the maximum prescribed 2004 2.57 by the World Health Organization (WHO), of 15%. 2005 2.48 80 PETR OBRA S Annual report 2005 PETR OBRA S Annual report 2005 81
  • 42. Intangible assets Intangible assets P E T R O B R A S I S S T R U C T U R I N G T H E F U N C T I O N O F K N O W L E D G E M A N A G E M E N T, S E E K I N G T O E S TA B L I S H T H E G U I D E L I N E S F O R T H E C R E AT I O N , P R O T E C T I O N , M A I N T E N A N C E A N D M E A S U R E M E N T O F I T S I N TA N G I B L E A S S E T S — C L A S S I F I E D I N T O F O U R T Y P E S O F C A P I TA L — H U M A N C A P I TA L , O R G A N I Z AT I O N A L C A P I TA L , R E L AT I O N S H I P S O N I A C A B R A L , C O O R D I N AT O R O F T H E C E N P E S M A G N E T I C R E S O N A N C E L A B O R AT O R Y, 3 1 Y E A R S W I T H P E T R O B R A S C A P I TA L A N D T E C H N O L O G I C A L K N O W - H O W — A S C A L L E D F O R B Y T H E 2 0 1 5 S T R AT E G I C P L A N . P E T R O B R A S W A S A P I O N E E R I N T H E M A N A G E M E N T O F I N TA N G I B L E A S S E T S – E S P E C I A L LY A F T E R C R E AT I O N O F T H E L E O P O L D O AMÉRICO MIGUEZ DE M ELLO RESEARCH CENTER (CENPES) IN 1963. CONSISTENT TECH NOLOGIC AL M A N A G E M E N T H A S M A D E I T P O S S I B L E F O R T H E C O M PA N Y TO A C H I E V E T E C H N O LO G I C A L E X C E L L E N C E I N A L L S E G M E N T S O F T H E O I L A N D G A S I N D U S T R Y. T H I S E XC E L L E N C E WA S R ECO G N I Z E D W I T H T H E S E L EC T I O N O F P ET R O B R A S A M O N G T H E F I N A L I ST S F O R T H E MAKE (MOST ADMIRED KNOWLEDGE ENTERPRISES) PRIZE – GLOBAL 2005 EDITION, AWAR D E D BY THE E N G L I S H - B A S E D K N O W N E T W O R K . I N T H E O V E R A L L C L A S S I F I C AT I O N , P E T R O B R A S C A M E I N 3 5 T H A N D , I N T H E O I L A N D G A S S E C T O R , I T W E N T F R O M 1 0 T H P L A C E I N 2 0 0 4 T O 5 T H P L A C E I N 2 0 0 5 A M O N G C O M P A N I E S T H AT B E S T A P P LY A N D D E V E L O P T H E I R B U S I N E S S K N O W L E D G E . PETR OBRA S annual report 2005 83
  • 43. In the fields of natural gas, thermoelectric Intangible assets T E C H N OL O G I C A L K N O W - H O W C A P I TA L The continuity of the Deep Water Technological Program (Procap) is in line with the priorities that Cenpes has established. The objective of the program is to anticipate solutions for production in the Marlim Leste and Albacora Leste fields, in the next generation and renewable energy sources, C E N P E S C O N D U C TS R E S E A R C H I N TO T H E O P T I M I Z AT I O N O F O F F S H O R E H E AV Y stages of Roncador and Marlim Sul fields, in the deep water blocks in the Santos and Cenpes participates in O I L P R O D U C T I O N , O P E R AT I O N S I N U LT R A - D E E P W AT E R A N D M AT U R E O I L F I E L D S Espírito Santo Basins and in fields found in up to 3,000 meters of water depth. efforts to consolidate Cenpes restructured its exploration R&D program in 2005. Until then based upon joint projects with Brazilian universities, research now has a central focus on Petrobras as an integrated the identification of exploration targets with a high degree of probability of an energy company. accumulation of oil and the detection of the exploration risks in ultra-deep waters and onshore basins. As a result, Cenpes’ participation in solving the Company’s specific challenges has grown. Restructuring led to the creation of the Basin Modeling Program (Promob) and a Geophysics Department. Promob is aimed at running geological simulations designed to reduce exploration risks. The new department will intensify the development of computer applications, emphasizing 4D seismic imaging used to explore areas with complex geological compositions. Technological research Beside reducing costs and optimizing Petrobras’ investments, Cenpes’ programs seek to achieve high levels of operational reliability, safety excellence and the preservation of the environment. For the Company’s downstream Technological know-how is a strategic imperative for sustaining self-sufficiency in Brazilian oil production. The and refining activities, one of the main R&D programs strives to adjust Petrobras’ refineries to the characteristics of Leopoldo Américo Miguez de Mello Research and Development Center (Cenpes), located on the Ilha do Fundão heavy oil in view of the increase production of this type of oil in Brazil. campus of the Federal University of Rio de Janeiro (UFRJ), is responsible for anticipating and supplying the Technologies to be applied in processes, products and services also are under development by Cenpes, including the technological needs for all of Petrobras’ areas. formulation of fuels with lesser environmental impact. Another line of research is aimed at the development of solutions Cenpes, whose 1,569-person staff has 350 members who hold Master’s degrees and 130 researchers with PhD to increase the useful life of the Company’s pipeline network and to reduce operating costs and transportation risks. qualifications, is composed of technological programs in Research and Development (R&D) and Basic Engineering In the field of natural gas, thermoelectric power generation and renewable fuels, Cenpes is a part of Petrobras’ (BE). The integration of the Center with the 2015 Strategic Plan’s targets has resulted in a number of contributions overall efforts to consolidate itself as an integrated energy company. Besides working on innovations for expanding to the Company’s activities. Among them are the basic projects for the P-34 and P-50 platforms, which are the use of gas, in order to boost gas consumption to 78 million m3/day in 2010, Cenpes is developing programs hallmarks of sustained self-sufficiency. With regard to production R&D, in 2005 Cenpes gave priority to three lines to enable the Company’s operations to achieve environmental excellence and sustainability and become eco- of research: improving the production of heavy oil in an offshore environment; achieving technological advances in ultra-deep water areas; and the minimizing of the decline of mature onshore and offshore oil fields. In its efforts to improve production technology, one of Cenpes’ objectives is to reduce costs for the Company. Horizontal wells are one of Cenpes’ technological contributions for enhancing resources since they increase the flow of oil out of offshore fields by up to a factor of five — thus making Petrobras’ large projects economically feasible. The use of artificial oil lifting equipment, installed at a depth of 2,000 meters, also has been a decisive factor for the development of heavy oil production. PETR OBRA S annual report 2005 85
  • 44. efficient. Furthermore, it seeks technologies that will make it possible to optimize the use of renewable sources of Intangible assets Or g a n i z at i o n a l C a p i ta l T H E M A R K ET I N G A N D B R A N D S C O M M I T T E E WA S B O R N W I T H T H E M I S S I O N energy, satisfying the business targets of a number of segments within the Company. O F C R E AT I N G A M A N A G E M E N T M O D E L F O R T H E P E T R O B R A S B R A N D Cenpes’ basic engineering area participated in seven large projects in 2005, including natural gas production projects in the Santos Basin and heavy oil production projects in the Jubarte field in the Campos Basin. In downstream activities, it was involved in projects at RPBC, Replan and Repar encompassing improvements in fuel quality, the reduction of polluting emissions and expansion of heavy oil refining operations. The Center also developed the new formulation of Podium gasoline in Argentina and continued its research for the production of biodiesel fuel. Cenpes carried out a number of relationship activities with its stakeholders, strengthening the role of the Company as a technological leader and adding value to the brand. The Center launched a second edition of the Petrobras Technology Prize, created in 2004 to encourage the work of researchers and students in the field of oil and gas. For their innovative contributions to the Company’s oil, gas and energy sectors, the authors of 27 projects that were selected during the first edition of the Prize received their awards in October. Petrobras has initiated expansion of Cenpes in view of the new research demands that have emerged in fields Brands such as the environment, gas and energy. New facilities, totaling 88.7 thousand m2, will be built on its land directly in front of the current buildings. The new building will contain effluent treatment and recycling stations and other The Petrobras brand is managed as a strategic asset due to its importance and its potential to add value to prod- technological resources, incorporated into the project according to the eco-efficiency concept. ucts and services. Based on the 2015 Strategic Plan, the Company created a Marketing and Brand Committee to improve management of this asset in view of the demand stemming from the expansion of its activities. Among the attributes of the new committee, which is linked to the Businesses Committee, is the preparation of a brand management operating model, designed to establish the guidelines for use of brand names within the Petrobras System. By the creation of these guidelines, the Company is seeking greater protection of the asset while, at the same time, it continues to be involved in the legal defense of its brand in the markets where it is active. The global management of the brand is in step with Petrobras’ strategy of an integrated effort to increase its visibility and strengthen the identity of its products and services on the markets. At the corporate level, the Company has been implementing initiatives that are designed to develop global brands for its products and services, standardizing the visual aspects of its installations and communication actions. PAT E N TS Management Practices Petrobras is the company that files the most patents in Brazil and the Brazilian company with the most The Management Quality Evaluation Program, created at the beginning of the 1990s, was held for the sixth time patents filed in the United States. In 2005, ten patents were granted and 80 patent requests were filed during the year, During the cycle, the units that are evaluated organize programs for implementing improvements, in Brazil. Overseas, 49 patents were filed while 58 patent requests were granted. based upon the results of the appraisal. Many of the management practices that have been widely adopted The Company requested nine trademarks in Brazil while 141 trademarks were requested in 29 other throughout the Company were created or improved as result of this program. countries. Overseas, Petrobras obtained 89 trademark requests as well as the registration of seven Management excellence was responsible for two important distinctions received by the Company during 2005. software and three copyrights requests. Petrobras Colombia received the Colombian Prize for Management Quality, becoming the first Business Unit overseas to obtain a prize of this nature. In Brazil, the Downstream area won silver in the Federal Government Quality Award competition (PQGF). 86 PETR OBRA S annual report 2005 PETR OBRA S annual report 2005 87
  • 45. In 2005, for the second consecutive year Intangible assets R e l at i o n s h i p C a p i ta l Investor relations Petrobras has constant dialogue with its investors and shareholders, aligned with the principles of transparency for the disclosure of information. In order to improve Petrobras won the Transparency Trophy P ETRO B R AS I NVESTS I N O P I N I O N S U RVEYS I N O R D E R TO M OVE awarded by Anefac in E N HAN C E D IALO G U E WITH ITS I NVESTO RS AN D S HAR E H O LD E RS this relationship, the Company conducts two surveys annually focused in two dis- tinct audiences. recognition of the The quality of the work with relation to the institutional investors and analysts is transparency of its verified through a perception study conducted by the Investor Relations department that encompasses the disclosure media and the entire IR program. Its financial reports. results are indicators for the IR’s Balanced ScoreCard (BSC) performance – with a part of them being replicated on the Financial Department’s panel. Furthermore, at the end of each conference call about the Company’s quarterly results, a study is conducted to evaluate the degree of perception of the messages that were transmitted by the IR director and the other managers. Quantitative and qualitative surveys have made it possible to obtain the socio-economic profile of the Company’s minority shareholders, allowing us to evaluate the quality of the service that is provided to them and to check up on their perception of Petrobras. The aspects that are monitored include competitiveness, technology, Company evaluation vision of the future, profitability, overseas activities, management, the environment, energy diversification, social efforts, transparency, ethical behavior, corporate governance, communication with society and the shareholders. Petrobras has been carrying out increasingly wider ranging opinion surveys to check on how its practices and These results also have become performance indicators for the BSC. products are viewed and evaluated by stakeholders. The surveys, which have given the Company substantial In 2005, Petrobras won the Transparency Trophy for the second consecutive year awarded by the National knowledge about the socio-economic environment in which it operates, are based upon 18 indicators that make Association of Finance Executives (Anefac) in recognition of the transparency of its financial reports and in the it possible to evaluate perceptions regarding management, competitiveness, growth, overseas activities, vision of providing of information. It also received the Best Investor Relationship Program Prize, in the Individual Investors the future, social support, ethics, social and environmental responsibility. category, granted by Investor Relations Magazine of the U.S. The weight point average of the indicators in the public opinion segment led to the creation of a general indicator. The information resulting from the surveys its consolidated within the Corporate Image Monitoring System Relationship with suppliers (Seismic). Using this company reputation monitoring tool, management can follow the evolution of Petrobras’ image and adjust its communication policies and actions and management practices in different areas. Petrobras adopted a new registration process for outsourced suppliers in 2005, integrating materials and services companies into a single system that is aligned with the corporate Health, Safety and Environment (HSE) and social responsibility guidelines. Besides incorporating the requirements of these two areas, the Company Corporate image monitoring system (Seismic) Clients perfected the technical, legal-tax and economic-financial aspects of the registration process. Shareholders Communities Public opinion Employees Seismic Government Suppliers Social NGOs Press Environmental NGOs 88 PETR OBRA S annual report 2005
  • 46. Intangible assets The registry also was improved in order to include other processes, both centralized and regional, for the evaluation and qualification of suppliers in order to standardize methodologies and rationalize efforts. Petrobras currently has some 5,000 companies enrolled in its database for the acquisition of goods and services for operating requirements and new H u m a n C a p i ta l projects. Moreover, there are about 40,000 smaller companies throughout Brazil that supply Petrobras with goods and P I LOT P RO J ECTS K I C K O F F TH E B U I LD I N G O F A P RO G R AM services. The Company also created a Registration Portal in 2005, in order to strengthen the relationship with its suppliers. D E S I G N E D TO M A N A G E T H E C O M PA N Y ’ S K N O W L E D G E For the acquisition of goods, the new Materials Supply Conditions (CFM) are in effect for contracts signed as of November 1st. The result of interaction between Petrobras and professional associations of suppliers, the CFM adapted contract clauses to legislation and current market practices. The Company also adopted new payment conditions for goods that have a long manufacturing timeframe, supplied by companies in Brazil. Petrobras continued its partnership with the Brazilian Service for the Support of the Micro and Small Business (Sebrae) to encourage the competitive insertion of micro and small companies into the oil, natural gas and electric energy productive chain. The agreement covers the 12 states where there are Petrobras Business Units and is worth R$ 12 million over a three-year period, with the Company committed to investing R$ 6 million and Sebrae putting up the remaining R$ 6 million. In addition, an investment of some R$ 3 million has been earmarked for participating companies. Due to the large number of companies that are participating, the portion of the investments destined for the small companies rose to R$ 16.7 million in 2005. Knowledge management In compliance with the corporate policies to strengthen operational, managerial and technological competencies to M AT E R I A LS PROCUREMENT ensure the internal dissemination of knowledge, construction of a Knowledge Management Program for the Petrobras System was initiated based upon a model developed by the International area. During the year, pilot The Materials Procurement System made US$ 2.89 billion in direct purchases in 2005. Thanks projects were set up for knowledge management practices (case histories, the recording of narratives, a best to an increase in the competitiveness of Brazilian-based suppliers, their share in the practices database, a catalogue of specialists, a meeting about lessons learned, communities of practice and transactions was the highest of the past few years, reaching 89% of all purchases made. taxonomies), which provided methodological support to the program. Part of the acquisitions were conducted through the electronic trading portal Petronect, Designed to disseminate the E&P experiences and best practices to the area’s professionals, the E&P which ended 2005 with 2,686 suppliers registered in Brazil, Argentina, Bolivia, Communities of Practice Program was instituted in 2005. This program makes it possible to merge the different Colombia, Ecuador, the United States, Peru, Singapore and Venezuela. In three knowledge environments without the limitations imposed by organizational boundaries. In the six communities years of operations, Petrobras System companies used the Petronect for originally covered, the involvement of some 2,500 employees is expected. concluding 81 thousand purchases, 56 direct auctions and 138 reverse auctions. Seeking to improve the Company’s internal practices using world-class corporate examples, Petrobras participated in two international study groups of benchmarking practices in the field of Knowledge Management, coordinated by the American Productivity & Quality Center (APQC). The focus was on two knowledge management topics: Communities of Practice and the Extended Value Chain. Petrobras participated in the 4th Annual Oil and Gas Industry Knowledge Management Conference in Singapore. The Company presented the Knowledge Memory Project that records the history of the development of knowledge within Petrobras and the Knowledge Management initiatives that support the Program for Excellence in Environmental Management and Operational Safety (Pegaso), and notably its information management system (Infopae). PETR OBRA S annual report 2005 91
  • 47. BUSINESS MANAGEMENT business management P E T R O B R A S ’ S B U S I N E S S P E R F O R M A N C E I N 2 0 0 5 , M E A S U R E D B Y S O M E O F I T S P R I N C I P L E I N D I C AT O R S , W A S O F H I S T O R I C P R O P O R T I O N S . F O R O N E T H I N G , B E C A U S E O F I T S N E T C O N S O L I D AT E D E A R N I N G S — O F R $ 2 3 . 7 BILLION — AND FOR THE INCREASE OF THE PRODUCTION OF OIL AND GAS IN BRAZIL – 1,958 THOUSAND B A R R E L S O F O I L E Q U I V A L E N T P E R D A Y, 1 1 . 4 % H I G H E R T H A N I N 2 0 0 4 . P E T R O B R A S S P E N T R $ 2 5 . 7 B I L L I O N O N C A P I TA L E X P E N D I T U R E S I N 2 0 0 5 , 1 4 % M O R E T H A N I N 2 0 0 4 . PETROBRAS’ PREFERRED SHARES WERE THE ONES WITH HIGHER LIQUIDITY IN TERMS OF THE FINANCIAL C L Á U D I A S C A L C O , I N S T I T U T I O N A L C O M M U N I C AT I O N C O O R D I N AT O R , 1 0 Y E A R S W I T H P E T R O B R A S V O L U M E T R A D E D , W I T H A N A V E R A G E O F R $ 1 3 1 . 6 M I L L I O N P E R D A Y. T H E Y A L S O B E C O M E T H E O N E S W I T H G R E AT E R W E I G H T O N T H E I B O V E S P A T H E O R E T I C A L P O R T F O L I O – 9 . 2 2 7 % F O R T H E J A N U A R Y - A P R I L P E R I O D O F 2006. ADDING THE NUMBERS OF THE ON AND PN SHARES, PETROBRAS SECURITIES HAD TURNOVER OF A P P R O X I M AT E LY R $ 1 6 3 M I L L I O N P E R D A Y, R E P R E S E N T I N G M O R E T H A N 1 0 % O F T H E A V E R A G E F I N A N C I A L V O L U M E O F T H E B O V E S PA I N 2 0 0 5 . T H E C O M P A N Y ’ S M A R K E T C A P I TA L I Z AT I O N , P R O P E L L E D B Y I T S P E R F O R M A N C E O N T H E S T O C K M A R K E T S , E N D E D T H E Y E A R AT R $ 1 7 3 . 6 B I L L I O N – T H E H I G H E S T A M O U N T A M O N G A L L P U B L I C LY T R A D E D C O M P A N I E S I N L AT I N A M E R I C A . T H I S R E P R E S E N T S A N I N C R E A S E O F 5 4 % C O M P A R E D T O 2 0 0 4 PETR OBRA S Annual report 2005 93
  • 48. Petrobras maintained management transportation units; the full utilization rate of coke and de-asphalting units, resulting the price policy it from the high heavy oil refining capacity; and the development of markets for the adopted in 2004, production surpluses of oil and oil products. It should be noted that this result was B u s i n e s s p e r f or m a n c e avoiding immediately achieved without expanding installed refining capacity and fully respecting the PETROBRAS’ NET EARNINGS WERE 40% HIGHER THAN IN 2004 WHILE Company’s principles for Health, Safety and Environment. passing along the C A P I TA L E X P E N D I T U R E S S U R PA S S E D T H E R $ 2 5 B I L L I O N M A R K The production of oil and natural gas in Brazil hit 1,958 thousand boe/day, volatility of oil prices representing an increase of 11.4% compared to the previous year, mainly because of the start up of platforms FPSO-MLS (Marlim Sul) in June 2004, P-43 (Barracuda) on the international in December 2004 and P-48 (Caratinga) in February 2005, and the coming on market to consumers. stream of the UPGN-3 (Urucu) in June 2004, that increased the LNG production of the Solimões Basin Unit. Overseas, the production of oil and gas declined 1.1% over 2004, totaling 259 thousand boe/day, due to the maintenance shutdown of the Palanca terminal for equipment change (Angola) and a strike in the Austral Basin (Argentina) area over labor-related issues. This result was partially compensated for by the increase in gas production by the Bolivia in order to satisfy an increase in demand. Petrobras’ proved reserves of oil, condensate and natural gas were 14.913 billion boe on December 31, 2005, Oil prices reached very high levels on the international market; the Brent average (US$ 54.38/bbl) was 42.3% above an increase of 0.13% (0.018 billion boe) over the previous year, according to Society of Petroleum Engineers (SPE) the 2004 average, hitting a peak monthly average of US$ 64.12/bbl in August. This rise directly impacted the lifting cost criteria, with 89% of the reserves located in Brazilian territory and 11% overseas. For each barrel of oil equivalent of Brazilian oil and the portion of oil that is imported, which represented 20.4% on average of the processed throughput. produced in 2005, 1.023 barrels of oil equivalent were appropriated, resulting in a Reserves Replacement Ratio Petrobras maintained the price policy it adopted in 2004, of avoiding the immediate pass-through to consumers (IRR) of 102.3%. The Reserves-Production Ratio (R/P) was 19.6 years. of the volatility of the price of oil on the international market. In 2005, the Average Realization Price of oil products Of particular note was the 208 thousand bpd increase in net exports of oil and oil products. From a deficit of on the domestic market in 2005 was R$ 141.57/barril, 19.5% higher than in 2004. This was principally due to the 150 thousand bpd in 2004, 2005 saw a surplus of 58 thousand bpd. From a financial point of view, this meant a increase in the prices of gasoline and diesel that took place at the end of 2004 and in September 2005, the reduction in the oil and oil products trade deficit of some US$ 3 billion. commercializing of S500 diesel as of the beginning of 2005 and sales of other oil products, notably naphtha and Consolidated gross operating revenues were R$ 179.1 billion, whereas the net operating revenues totaled R$ 136.6 aviation fuel, whose prices were readjusted to accompany the higher prices on the international market. billion, surpassing these indicators in 2004 by 19% and 22.9%, respectively. Contributing to Petrobras’ total sales, including exports, natural gas and international sales, totaled 2,780 thousand barrels of oil this result was the increase in prices on the domestic and overseas markets together with equivalent (boe), growing 4.3% over 2004 (2,665 thousand boe). However, excluding sales based on imports, the increase in the domestic market volume of sales, including natural gas and exports. the Company’s sales rose 11%, that is by 210 thousand boe. On the domestic market, the effect of the increase in the realization price of oil The energy segment grew 2.6%, considerably under the 9.5% obtained in 2004. Gas sales in 2005 rose 7.8% products and the growth in volumes sold led to a rise in net operating revenues over 2004, mainly due to growth of the South/Southeast market, while the oil products market saw sales expand of R$ 14.3 billion, mainly due to the increases in revenues from diesel by 1.9%. Energy sales volumes rose 76.8% the result of the beginning of contracts signed in previous years (27.3%), gasoline (24.7%) and aviation fuel (26.5%). Gasoline sales coupled with an increase in the volume of sales linked to existing contracts. volumes grew 4.4% (12 thousand bpd), surpassing the 1.4% increase in The share of domestic oil in the processed throughput (79.6%) was 3.7 percentage points higher than the diesel (9 thousand bpd) and 5.4% rise in aviation fuel (4 thousand bpd). previous year (75.9%), going from 1,296 thousand bpd in 2004 to 1,376 thousand bpd in 2005 — without However, the effect of the price of diesel was stronger when compared harming the production of medium oil products such as diesel and aviation fuel. This significant performance was to gasoline and aviation fuel, with these products presenting, due to a series of factors, of which the following can be highlighted: the excellent and collaborative integrated respectively, increases of 25.8% (R$ 0.21/lt), 19.7% (R$ 0.15/lt) management of the supply chain, from the shipping of oil from the production regions until the delivery of oil and 20.2% (R$ 0.19/lt) of their average realization prices in 2005 products to Petrobras’ customers in Brazil and abroad; the high operating reliability of the production, refining and in relation to 2004. 94 PETR OBRA S Annual report 2005
  • 49. On the export market, net revenues increased by R$ 7.3 billion, with the export of oil, which was responsible for about 59.6% of the total, being particularly noteworthy. Moreover, Petrobras’ offshore sales grew by R$ 0.8 billion over 2004. management C a p i ta l M a r k e t s P ETRO B R AS’ S HAR ES WE R E O N E O F TH E YEAR’S H I G H LI G HTS, A N D I TS M A R K E T C A P I TA L I Z AT I O N R E A C H E D R $ 1 7 3 B I L L I O N Operating Profit was R$ 39.8 billion, some 32.9% higher than the previous year, basically due to the increase of net operating revenues, the significant rise in production and the respective processing of more domestic oil, leading to an increase in the Cost of Goods and Services Sold, which presented growth of 18.5% whereas the increase in the price of Brent benchmark oil was 42.3%. In 2005, the Financial Result was a negative R$ 2.8 billion in counterpart to 2004, when it was R$ 3.3 billion. This result was influenced by the appreciation of the real, substantially greater than the variation during the same period of 2004 with respect to the main currencies traded by Petrobras. Thus, Net Profit was R$ 23.7 billion, 40.5% higher than in 2004. Share performance Consequently, the EBITDA was R$ 47.8 billion, 29.9% above the result for the previous year, while the Return on Capital Employed (ROCE) increased 4 percentage points over 2004, reaching 24%. The year was a positive one for Petrobras on the stock markets. The nominal appreciation of the Company’s shares – Petrobras’ total assets reached R$ 183.5 billion, representing growth of 11.5% over 2004. This was the result 55.12% for its common shares (PETR3) and 53.21% for its preferred shares (PETR4) – surpassed the most often of a 12.6% increase of fixed assets and 14.1% in current assets (cash on hand and financial investments alone used market indicators in the country, such as the IBrX (37.32%), the Ibovespa (27.71%) and the IGC (43.76%). represented 46.1% of the variation in current assets), compared to a reduction of 5.4% in long-term assets. Petrobras’ preferred shares had higher liquidity in terms of the financial volume traded, with an average of R$ 131.6 The counterpart in liabilities occurred mainly in net equity, which grew 26.8%, with the 57.6% rise in reserves million per day. They also had greater weight on the Ibovespa theoretical portfolio – 9.227% for the January-April being particularly noteworthy. period of 2006. Adding the numbers of the ON and PN shares, Petrobras securities had turnover of approximately R$ Regarding the Company’s debt, leverage (Net Debt over Net Capitalization) declined from 37% to 24%. 163 million per day, representing more than 10% of the average financial volume of the Bovespa in 2005. Petrobras had capital expenditures totaling R$ 25.7 billion (equivalent to US$ 10.6 billion), 14% higher than in 2004. The E&P area invested R$ 15.5 billion, with the priority being given to the need for an increase in production 200 I Large increase in production due to startup of the P-43 (Dec/2004) and the oil and gas reserves. The Downstream area invested R$ 3.3 billion to add value to the Petrobras System’s and P-48 (Feb/2005) platforms. raw materials (oil and gas), focusing on a higher value and higher quality product mix. In the International area, II Stock split investments of some R$ 3.2 billion were in step with the Company’s efforts to become the leading integrated III III 9/10 Increase in the price of 150 gasoline and diesel energy company in Latin America. IV V II IV 10/13 Petrobras is raised to Of the total, about R$ 2.3 billion was through Specific Purpose Companies (SPCs), a figure that was 208% Investment Grade I I VI V Fields in Campos, Espírito Santo higher than the previous year. I and Santos Basins declared VI commercially feasible as well as 100 discoveries of light oil in deeper Campos Basin water VI Petrobras rises more than the Ibovespa 50 2/28/05 4/29/05 6/30/05 8/30/05 10/31/05 12/29/05 Preferred Shares Preferenciais Common SharesIbovespa Ordinárias Ibovespa 96 PETR OBRA S Annual report 2005 PETR OBRA S Annual report 2005 97
  • 50. business management CAPITAlS MaRkets On the New York Stock Exchange (NYSE), as a result of the appreciation of the real over the dollar, the returns In financial volume, the turnover of Petrobras’ common shares for the year on the NYSE was US$ 24.04 billion, for holders of Petrobras’ ADRs were even greater: the receipts representing the ON shares (PBR) had a nominal while transactions with preferred shares totaled US$ 14.4 billion. Respectively, Petrobras securities were the fifth appreciation of 79.19%, and the PN shares (PBRA) rose 77.77%. Petrobras’ shares rose higher than important and 13th most actively traded ADRs in the U.S. Adding together both the PBR and PBRA positions, Petrobras came indexes such as the Dow Jones Industrial (- 0.61%), a major benchmark for the American stock market; the Amex in third among the corporations with the most transactions on the ADR market. Oil Index (36.85%), made up of large companies in the oil and gas industry; and the NYSE's International 100 The Company’s market capitalization, propelled by its performance on the stock markets, ended the year at R$ (8.09%), which contains the 100 most liquid ADRs. 173.6 billion – the highest amount among all publicly traded companies in Latin America. This represents an increase of 54% compared to 2004 (R$ 112.5 billion) and 96% over 2003 (R$ 88.7 billion). In U.S. currency, its market capitalization reached US$ 75 billion in 2005, against US$ 42 billion in 2004 and US$ 30.9 billion in 2003. R$ US$ ON PN PBR PBRA Closing price 2005 41.30 37.21 71.27 64.37 2004 26.63 24.29 39.78 36.21 Real Accumulated Appreciation (%) Data deflated by the IGP-DI Daily average volume ($ billion) 2005 30.88 131.48 95.17 55.68 Source: Economática 2004 30.59 100.61 43.32 23.52 12.000 Average price 2005 32.32 28.63 53.76 47.61 10.228 10.000 2004 23.24 20.97 32.01 28.82 8.000 Average number of daily transactions 2005 392 2,009 6.871 2004 397 1,394 6.000 Ibovespa index relative weight 2005 2.05% 7.93% 4.000 2004 2.63% 9.17% 2.109 1.984 2.000 Source: Economática 945 26 57 58 29 158 164 190 0 1 year 5 years 10 years 15 years Ibovespa Ibovespa Preferred Shares Preferenciais Common Shares Ordinárias Stock split In order to facilitate access of small investors and to increase share liquidity, on September 1st Petrobras conducted a stock split, substituting one former share for four new ones. Capital stock now is represented by 2,536,673,672 common shares and 1,849,478,028 preferred shares, with the number of investors having risen by 11 thousand at the end of 2005. This increase reflectes the excellent operating and financial performance of the Company and how it is perceived by the market, as well as confidence about its future results. 98 PETR OBRA S Annual report 2005 PETR OBRA S Annual report 2005 99
  • 51. The split changed the relationship of the shares with the ADRs. Each Petrobras receipt in the U.S. market now 70% supported operations for importing oil and oil products and 30% went for The recognition of represents four Brazilian shares. As a result, the trading price of ADRs in the U.S. was not affected. ensuring compliance with the obligations of other operations for various areas of the quality of During the year, Petrobras’ shareholders received dividends relative to 2004 totaling R$ 4.77 gross per pre-split the Company. ON or PN share – an amount that corresponds to R$ 1.19 per post-split share. Regarding credit lines through the international banking market, PIFCo, PEB and Petrobras’ credit by Refap S.A. raised a total of US$ 1.578 billion, an amount that was 26% more than banks, investors and during 2004. Of the total, US$ 1.538 billion was used to support activities for the official credit Corporate financing commercialization of oil and oil products while the remainder went for specific operations at the subsidiaries. The increase in funding, despite the Company’s agencies led to The recognition of the quality of Petrobras’ credit by banks, capital market investors and official credit agencies favorable liquidity situation, was a consequence of Refap’s cash flow requirements, favorable conditions provided favorable conditions enabling the Company to raise funds for financing its activities. The highlight was the which represented nearly 70% of the total volume raised. for the Company to upgrading, in October, of the Company’s risk rating by Moodys Investor Services, which moved Petrobras up to As part of its debt extension policy, US$ 485 million (31%) all the total raised through the lines of credit were contracted to mature in three, five and seven years. obtain funds to investment grade level Baa2. Besides reducing the cost of financing, this resulted in expansion of the number of investors in the Company. The other US$ 1.093 billion (69%) had maturities of up to 60 days in view of finance its activities. As a result of the high liquidity of Petrobras, the total of the new funds that were raised was lower than during Refap’s cash flow requirements. 2004, obtained at more favorable conditions not only regarding costs but also in terms of maturities. Also due to In order to provide a liquidity “cushion” for the Company, PIFCo has contracted, its strong cash generation, the Company realized debt pre-payment operations totaling approximately US$ 406 since 2004, US$ 675 million in standby facilities. These facilities allow Petrobras to make disbursements maturing million, and renegotiated financing contracts, improving the profile of its debt and reducing financial expenses. in two years up to the limit of the amount contracted, with the principle to be paid back within one year. In operations with official and multilateral credit agencies, approximately US$ 525 million was used from loans In 2005, Petrobras returned to access the capital market in Brazil through the issuance of Certificates of Real guaranteed by the Export Credit Agency (ECA) in contracts signed in 2005 and previous years. Petrobras Netherlands Estate Receivables (CRI) for the construction of new administrative buildings in Macaé (RJ). Valued at R$ 200 B.V. (PNBV) signed a US$ 40 million contract with the Nordic Investment Bank to finance goods and services million with a 10-year maturity, the operation was structured by the Rio Bravo group and distributed to investors acquired from Nordic countries for the construction of the P-51 and P-52 platforms. PIFCo signed a contract with by the Santander Banespa Bank. The issue was one of the largest ever conducted in the CRI market with the Sumitomo Mitsui Banking Corporation, guaranteed by Nippon Export and Investment Insurance (Nexi), an official distribution aimed at individuals. agency of the Japanese government, in the amount of US$ 300 million for financing the Pegaso project. The Company used about US$ 211 million from the financing contract signed by PNBV with the Brazilian National Economic and Social Bank (BNDES) for the purchase of Brazilian goods and services used in construction Project Finance of the P-52 platform. In 2005, PNBV signed another contract with the bank, worth US$ 403 million, earmarked for the acquisition of nationally produced goods and services for the P-51 platform. Through project finance operations, Petrobras raised funds on the Brazilian and overseas financial markets for oil The volume of bank guarantees contracted by Petrobras and its subsidiaries was US$ 1.985 billion – 3.1% exploration and production and natural gas projects. The operations are conducted through Special Purpose more than during 2004, when a total of US$ 1.926 billion was contracted. Of the guarantees obtained in 2005, Companies (SPCs) created for each project. 100 PETR OBRA S Annual report 2005 PETR OBRA S Annual report 2005 101
  • 52. In March, the Company signed the contracts for the financial structuring of the Master Plan for the Delivery and Treatment of Campos Basin Oil (PDET). The US$ 910 million funding comes through the Japan Bank for International Cooperation (JBIC), commercial bank consortia and Mitsubishi and Marubeni of Japan. Another exploration and production financing operation was signed in November. Through the specific purpose management Risk management T H E VA L U E O F P ET R O B R A S ’ I N S U R E D A S S ETS G R E W 2 3 % I N company Charter Development Company (CDC), Petrobras raised US$ 500 million from a syndicate of overseas 2 0 0 5 , W I T H PAY M E N T O F U S $ 2 9 . 3 M I L L I O N I N P R E M I U M S banks for the construction of the FPSO P-53 platform, which will be used in the Marlim Leste field. In the gas area, two bridge loans in the amount of R$ 800 million each were signed in November with the Brazilian National Economic and Social Development Bank (BNDES) for construction of the Southeast-Northeast Gas Pipeline (Gasene) and the Urucu–Coari–Manaus Gas Pipeline (The Amazônia Project). Thanks to an improvement of Brazil’s and Petrobras’ image on the international financial markets, the Company also has been seeking to renegotiate some structured financing operations in order to adjust its costs to current market levels. In September, refinancing of US$ 380 million balance due on a loan granted by commercial banks to the Barracuda/Caratinga Project was concluded. Structured Projects Projects Year Structure Value USD Million Marlim 1998 1,500 In its evaluation of risk, the Company takes into account the effect of the integration of its activities, adopting Albacora 2000 410 guidelines and limits to activities throughout the entire Petrobras System. The Executive Board’s policies and Barracuda / Caratinga 2000 3,100 guidelines are previously discussed by the Risk Management Committee. Cabiúnas 2000 850 Containing a number of commissions, this committee centralizes the examination of risk management actions, Espadarte, Voador e Marimbá (EVM) 2000 1,076 facilitating communication with the Executive Board and the Board of Directors. Novamarlim 2001 834 The Company is exposed to a series of market risks deriving from its operations. The risks mainly involve the Pargo, Congo, Garoupa, Cherne e Carapeba (PCGC) 2001 86 fact that eventual variations in the price of oil and oil products, exchange or interest rates could negatively affect Malhas 2003 1,000 the value of its financial assets and liabilities or the Company’s future cash flow and profits. Rental Company of oil equipament (Clep) 2004 1,250 In view of this, the risk management policy seeks to contribute to an appropriate balance between Petrobras’ Master Plan for Delivery and treatment of Oil from da Campos Basin (PDET) 2005 910 growth objectives and returns and its level of exposure to risks, whether inherent to its activities or stemming from the context in which it operates. Thus, through the effective allocation of its resources — physical, financial and human — the Company is able to meet its strategic objectives. In the management of the oil and oil products market risks, according to the premise of considering only the consolidated net exposure to the risk of oil and oil products prices, operations with derivatives are, in general, limited to protecting the result of specific short-term transactions (up to six months). In these hedges, futures, swap New Projects being Structured Projects Value USD Million and option contracts are used, always linked to physical market operations. From January-December 2005, hedge Urucu-Coari-Manaus (Amazônia) Gas Pipeline and Manaus thermo power plant 1,300 operations for 23.30% of the total volume sold (imports and exports) were realized. Revap Refinery Expansion and Modernization 900 In a specific business, Petrobras exceptionally conducted a long-term hedge operation, which is still ongoing, P-53 Platform Construction 1,030 involving the sale of 52 million barrels of WTI oil from 2004 to 2007. The operation seeks to establish a price GASENE 2,000 protection for this volume of oil in order to guarantee a minimum margin for the financing agents of the Barracuda/Caratinga Project to cover the debt service. 102 PETR OBRA S Annual report 2005 PETR OBRA S Annual report 2005 103
  • 53. In 2005, the Company increased the final Petrobras Energía S.A. (Pesa), an indirect subsidiary of Petrobras, also makes use of derivative financial instruments Like other oil companies, in the light of its investments in Health, Safety to mitigate its exposure to the oil and oil products market risks. From January to December of 2005, Pesa had 7.3 and environment (HSE) and Quality, Petrobras retains a significant portion of the premium paid on its million barrels of oil covered. risk, which includes increasing deductibles to as much as US$ 40 million. main policies — major Because a considerable portion of Petrobras’ debt and future operating cash flow is in dollars or strongly tied to Consequently, the Company does not insure against lost profits, wellhead controls the U.S. currency, the Company does not have too large an exposure to exchange risk. Depending upon specific or its pipeline network. fire/operational risk, analyses, the use of derivatives is limited to reducing exposure regarding other currencies, such as the euro or the Platforms, refineries and other facilities are covered by insurance policies against petroleum risk and Japanese yen. major fire/operational risk, petroleum risk and named risk. Freight movement is The company does not currently make use of derivative financial instruments to manage its exposure to swings covered through transportation policies while ships are insured by hull and engine named risk. in interest rates, which is only used by its indirect subsidiary Petrobras Energía S.A. (Pesa). insurance. Civil liability and environmental risks, depending upon the case, are covered by one or more policies. Projects and facilities under construction are insured against engineering risk through a policy taken out by Petrobras or the contractors. Insurance For insurance purposes, the Company’s assets are valued at replacement cost, as appraised by Petrobras and/or appraisal companies. In order to stipulate the maximum probable damage at each installation, this appraisal The Company increased the final premium paid on its main policies in 2005 — major fire/operational risk, serves as a basis to set a maximum indemnity limit for the major fire/operational risk policies, today fixed at US$ petroleum risk and named risks. The premium rose from US$ 25.2 million in 2004 to US$ 29.3 million in 2005, 600 million. an increase of 16%. During the period, the value of insured assets rose 23%, going from US$ 26.6 billion to The majority of Petrobras’ overseas activities are insured or reinsured by the captive insurance company Bear US$ 32.7 billion. Insurance Co. Ltd., domiciled in Bermuda. Bear retains none of the risk, completely laying it off on the market. The greater part of Petrobras’ risk is laid off in the international reinsurance market. To this end, the Company Due to the size of its activities, Petrobras is subject to legal actions in the commercial, labor and tax spheres. In has a permanent policy in Brazil and overseas of disclosing the quality and practices of its risk management. order to minimize these risks, the Company strictly complies with all the legal provisions of the various aspects Relevant information, such as accidents, their causes and improvements that have been introduced, are promptly related to its businesses. In the case of legal actions currently in progress, the Company has recourse to the courts and transparently passed along to the insurance market. in order to assure its defense and to seek the reversal of unfavorable decisions. Oil Risks | Operating Risks | Named Risks 60.000 50.000 40.000 30.000 20.000 10.000 0 1999 2000 2001 2002 2003 2004 2005 Premium US$ M Values insured US$ MM Prêmio US$ M Valores segurados US$ MM 104 PETR OBRA S Annual report 2005
  • 54. business management c or p or at e g o v e r n a n c e management C or p or at e G o v e r n a n c e THE TRAINING OF EXECUTIVES AND IMPROVEMENT OF INTERNAL CONTROLS of the Board to satisfy the requirements of SOX Section 301 and its relevant regulations. In this manner, adjustments were made to the Board’s jurisdiction in order to include, among its attributes, those required by the U.S. law in a way that did not conflict with Brazilian legislation. Petrobras’ Ombudsman’s Office, linked to the Board of Directors, was formally included in the Company’s organizational chart. This body is responsible for being a channel to receive and process accusations regarding accounting, H A S B E E N F O C U S E D O N M A N A G E M E N T T R A N S PA R E N CY A N D E F F I C I E N CY internal controls and auditing questions, including confidential and anonymous submissions from employees. The Company published in its 2005 Form 20-F filing (Annual Report document required by the SEC) relative to the 2004 fiscal year, among the nine members of the Board of Directors elected by the Ordinary General Shareholders’ Meeting held on March 31, 2005, one of them is a financial specialist, as called for under Section 407 of the SOX. The review of the Petrobras System’s Code of Ethics, with the participation of the employees, was another initiative adopted in 2005, designed to update and enhance it in view of the SOX’s requirements. Controls and Procedures for Disclosing Information Petrobras has an internal document that formalizes its Controls and Procedures for Disclosing Information (CPDI). The CPDI Petrobras constantly strives to improve its corporate governance practices and relationships with shareholders, establishes the rules to be followed by the Company’s staff to ensure that the information released to the market can be customers, suppliers, employees and other stakeholders. The Company adopts management procedures that are registered, processed, prepared and disseminated within the timeframes and regulations of the prevailing legislation. compatible with the rules governing market activities in Brazil and other countries, which requires constant effort According to SOX Section 302 and SEC Rule 13a-14, the filing of the Annual Report through Form 20-F must be in order to monitor and implement the practices established in the various nations in which it operates. accompanied by certifications signed by the Company’s President and CEO and the Chief Financial Officer (CFO) In Brazil, Petrobras is subject to the rules of the Brazilian Securities and Exchange Commission (CVM) and the attesting their responsibility for the preparation and maintenance of the CPDI. São Paulo Stock Exchange (Bovespa). Abroad, it submits itself to the regulations of the Securities and Exchange They must supervise the conception and updating of these controls and disclosure Commission (SEC) and the New York Stock Exchange (NYSE) in the United States; of the Latibex market of the procedures, which is carried out by the Investor Relations Department. Madrid Stock Exchange in Spain; and the Buenos Aires Stock Exchange in Argentina. The process described in the document allows the collection, control, analysis Since changes were made to its bylaws in 2002, Petrobras has been in compliance with the practices and and tracking of all of the information periodically released by Petrobras in its regulations of the São Paulo Stock Exchange, and its process of formal adhesion to the differentiated corporate quarterly and annual reports, including through the Form 20-F. The use of a governance levels of the Bovespa continuing to be a subject of permanent analysis by the Company. responsibility matrix makes it possible to identify the origin of each piece of The corporate governance executive training program continued to be run during the year. Besides disseminating information and who was responsible for generating it, subsequently certified by the the best governance practices adopted in Brazil and abroad within the Company, the program fosters awareness executive managers involved in the process. Thus, it is possible to know where about the importance of this topic to both senior management and employees in general. In 2005, training focused and in what corporate system information is recorded and who was responsible on the alignment between the holding company and the other Petrobras System companies. for processing, summarizing and registering the information in the reports. The controls and procedures for disclosing information applies to the Sarbanes-Oxley Law preparation of the following documents: Annual Report, Annual Information Report to the CVM, Form 20-F Annual Report, Form 6-K reports, Prospectuses Petrobras has been working in a fully integrated manner since 2002 to adjust its procedures to the U.S. Sarbanes- for the issue of securities filed with the regulatory agencies for Oxley Act (SOX), which introduced new standards of corporate governance for companies listed on the New York each issue in Brazil and abroad, Announcements of Material Stock Exchange and subject to SEC regulations. Facts, publishing of information on the Company’s Internet In 2005, the Board of Directors chose to constitute an Audit Committee comprised of independent members site and other announcements to the public. 106 PETR OBRA S Annual report 2005
  • 55. business management c or p or at e g o v e r n a n c e C O R P O R AT E GOVERNANCE STRUCTURE Petrobras’ corporate governance structure is made up of the Board of Directors and its committees, the Executive Board, the Statutory Audit Committee, the Internal Auditors, the Business Committee and the Management committees. Board of Directors Auditors A collegial and autonomous body in accordance with its legal powers and responsibilities established by law The Internal Auditors plan, execute and appraise Petrobras’ internal auditing activities and advise senior and through the Company’s bylaws, the Board of Directors’ main functions are to set the strategic guidelines management and external control bodies. The Company also has an outside auditor, appointed by the Board of Petrobras and to supervise the acts of the Executive Board. There are nine members of the Board of of Directors, which is restricted regarding the consulting services it can provide. It is mandatory that the external Directors, all elected at Ordinary General Shareholders Meetings to one-year terms, with reelection permited. auditor is rotated among the various auditing companies every five years. Seven members represent the controlling shareholder; one represents the minority common shareholders and one represents the preferred shareholders. Board Advisory Committees There are three: Audit; Environment; and Compensation and Succession. These committees are a part of the Executive Board Board of Directors and they assist the Board carrying out its responsibilities to provide the Company with overall The Executive Board manages the Company’s businesses in compliance with the mission, objectives, strategies guidance and direction. and guidelines established by the Board of Directors. It is made up of the president and CEO and six directors elected by the Board of Directors to three-year terms, with re-election permitted. They may be removed at any Business Committee time. Only the president is a member of the Board of Directors without, however, presiding over this body. This committee is a forum for integration. It seeks to align business development, Company management and the Strategic Plan’s guidelines, supporting Senior Management’s decision-making process. Fiscal Council The committee is permanently installed and independent of management and the external auditors, Management Committees as required by under the Brazilian Corporate Law. It is made up of five members, with one-year These committees are forums for delving deeper into the issues to be presented to the Business Committee, terms, with re-election permitted. One of these members represents the minority shareholders; with which it closely works. Such integration also exists between the Management Committees and their another represents the preferred shareholders; and three represent the Federal government, relationships with the Board of Directors’ committees. one of whom is appointed by the Minister of Finance as representative of the National Treasury. Currently, the company has the following management committees: E&P, Downstream, Gas and Energy; It is incumbent on the Fiscal Council to represent the shareholders as part of its supervisory HR, HSE; Organization and Management analysis; Information Technology; Internal Controls; Risks; function, monitoring the actions of management to ensure compliance with their legal and Petrobras Technology; Social and Environmental Responsibility; and Marketing and Brands, which was statutory duties as well as to defend the interests of the Company and the shareholders. established in 2005. 108 PETR OBRA S Annual report 2005 PETR OBRA S Annual report 2005 109
  • 56. business management c or p or at e g o v e r n a n c e Internal Controls Petrobras’ Organization The work to satisfy Section 404 of the Sarbanes-Oxley Act was continued during the year in an effort to maintain Petrobras’ organizational model, approved by the Board of Directors in October 2000, is constantly being improved the structure of the internal controls and procedures for properly preparing the consolidated financial reports, with to adjust it to the 2015 Strategic Plan. Besides formalizing the establishment of the Office of the Ombudsman, a first filing relative to the 2006 fiscal year to be made with the SEC scheduled for June 30, 2007. Petrobras made changes in the general structure of the Company in 2005 resulted in the reorganization of its Finance Area. advances in monitoring, standardization and integrated management of these controls, with emphasis on those that have an impact on its financial reports. Through the evaluation of the Integrated Program for Systems and Methods and Internal Control (Prisma), created in 2004, the Company further reinforced its commitments to corporate governance and the integrated Fiscal Council management of its internal controls. The Financial, Business and Services areas and internal auditors of the Board of Directors Petrobras System participate in this program. With the involvement of specialized consultants, Prisma encompasses 32 companies, besides the methodological follow up of its subsidiary Petrobras Energía Participaciones S.A. – Ombudsman Internal Auditors PEPSA, which has its own certification. Prisma’s scope is based on the permanent review of the Financial Statements and other information from the Executive Board consolidated financial reports. The methodology follows the guidelines of the Public Company Accounting President & CEO Oversight Board (PCAOB) and the Commitee of Sponsoring Organizations of the Treadway Commission (Coso) for the best control practices applicable to the Company’s businesses and services, as well as Control Objectives for Business Strategy Management System Business Committee & Performance Development Information and Related Technology (Cobit), for information technology. In 2005, Prisma concluded the phases for designing the macroflows of the 16 macroprocesses and 183 New Business Legal processes, and the evaluation of approximately 10 thousand controls of processes and another approximately CEO’s General Cabinet Secretariat Institutional Human Resources 7,400 information technology controls. In Phase 3, in conclusion, the internal auditors tested the applicable internal Communication controls of the processes for eventual vulnerabilities. A report on the principal problems was sent to management at the end of the year offering solutions through remedial plans. Finance Gas & Energy E&P (Upstream) Downstream International Services The internal control documentation is being recorded on a specific portal on the Company’s intranet to permit the Health, Safety integrated management of the design of the processes, risks and controls. Through this, Senior Management, the Corporate Corporate Corporate Corporate Corporate & Environment internal auditors and the Audit Committee are able to view the updated diagnosis of the certification of the Petrobras Financial Planning Marketing Production Technical Support Logistics Materials & Risk Management & Trading Engineering for the Businesses System’s internal controls, participating in the continuous self-assessment of the business units and corporate areas. Research Operations Business Finance Services Refining & Development & Holdings Development (Cenpes) Power Marketing Accounting Exploration Southern Cone Engineering Development & Trading Petrochemicals Americas, Africa Information Tax North/Northeast & Fertilizers & Eurasia Technology Investor South/Southeast Shared Services Relations 110 PETR OBRA S Annual report 2005 PETR OBRA S Annual report 2005 111
  • 57. business management executive board Executive Board E X P L O R AT I O N A N D P R O D U C T I O N JOSÉ SERGIO GABRIELLI DE AZEVEDO PRESIDENT AND CEO GUILHERME DE OLIVEIRA ESTRELLA DIRECTOR C O R P O R AT E E&P CORPORATE I FRANCISCO NEPOMUCENO FILHO E&P NORTH-NORTHEAST I SOLANGE DA SILVA GUEDES OMBUDSMAN I MARIA AUGUSTA CARNEIRO RIBEIRO E&P SOUTH-SOUTHEAST I JOSÉ ANTONIO DE FIGUEIREDO INTERNAL AUDITING I GERSON LUIZ GONÇALVES E&P PRODUCTION ENGINEERING I JOSÉ MIRANDA FORMIGLI FILHO GENERAL SECRETARIAT I HÉLIO SHIGUENOBU FUJIKAWA E&P EXPLORATION I PAULO MANUEL MENDES DE MENDONÇA CEO’S CABINET I ROGÉRIO GONÇALVES MATTOS E&P SERVICES I ERARDO GOMES BARBOSA FILHO STRATEGY AND BUSINESS PERFORMANCE I CELSO FERNANDO LUCCHESI MANAGEMENT SYSTEM DEVELOPMENT I IRANI CARLOS VARELLA NEW BUSINESS I JOSÉ LIMA DE ANDRADE NETO INSTITUTIONAL COMMUNICATION I WILSON SANTAROSA DOWNSTREAM LEGAL I NILTON ANTONIO DE ALMEIDA MAIA HUMAN RESOURCES I HEITOR CORDEIRO CHAGAS DE OLIVEIRA PAULO ROBERTO COSTA DIRECTOR DOWNSTREAM CORPORATE I VENINA VELOSA DA FONSECA DOWNSTREAM LOGISTICS I PAULO MAURÍCIO CAVALCANTI GONÇALVES FINANCE DOWNSTREAM REFINING I ALAN KARDEC PINTO DOWNSTREAM MARKETING AND TRADING I NILO CARVALHO VIEIRA FILHO ALMIR GUILHERME BARBASSA DIRECTOR DOWNSTREAM PETROCHEMICALS AND FERTILIZERS I MARIA DAS GRAÇAS SILVA FOSTER PROJECT FINANCE I PEDRO AUGUSTO BONÉSIO FINANCIAL PLANNING AND RISK MANAGEMENT I JORGE JOSÉ NAHAS NETO CORPORATE FINANCE AND TREASURY I DANIEL LIMA DE OLIVEIRA GAS AN D E N E RGY ACCOUNTING I MARCOS ANTONIO SILVA MENEZES TAX ADMINISTRATION I MARIA ALICE FERREIRA DESCHAMPS CAVALCANTI ILDO LUÍS SAUER DIRECTOR INVESTOR RELATIONS I RAUL ADALBERTO DE CAMPOS GAS AND ENERGY CORPORATE I RAFAEL SCHETTINI FRAZÃO On November 30, 2005 the Executive Board approved a new structure for the Finance Area, comprised of the following Executive Departments: Corporate Finance, Financial Planning and Risk GAS AND ENERGY POWER DEVELOPMENT I PAULO KAZUO TAMURA AMEMIYA Management, Finance, Accounting, Tax and Investor Relations. However, by the end of 2005 not GAS AND ENERGY MARKETING AND TRADING I ROGÉRIO ALMEIDA MANSO DA COSTA REIS all executive managers for the respective departments had been appointed. GAS AND ENERGY OPERATIONS AND HOLDINGS I JOSÉ MARIA CARVALHO RESENDE SERVICES INTERNACIONAL RENATO DE SOUZA DUQUE DIRECTOR NESTOR CUÑAT CERVERÓ DIRECTOR HEALTH, SAFETY AND ENVIRONMENT I CLÁUDIO FONTES NUNES MATERIALS I ARMANDO OSCAR CAVANHA FILHO INTERNATIONAL CORPORATE I CLÁUDIO CASTEJON LEOPOLDO A. MIGUEZ DE MELLO RESEARCH AND DEVELOPMENT CENTER I CARLOS TADEU DA COSTA FRAGA INTERNATIONAL AMERICAS, AFRICA AND EURASIA I JOÃO CARLOS ARAÚJO FIGUEIRA ENGINEERING I PEDRO JOSÉ BARUSCO FILHO INTERNATIONAL SOUTHERN CONE I DÉCIO FABRÍCIO ODDONE DA COSTA INFORMATION TECHNOLOGY I WASHINGTON LUIZ FARIA SALLES INTERNATIONAL BUSINESS DEVELOPMENT I LUÍS CARLOS MOREIRA DA SILVA SHARED SERVICES I RICARDO ANTONIO ABREU IANDA INTERNATIONAL TECHNICAL SUPPORT TO THE BUSINESSES I ABÍLIO PAULO PINHEIRO RAMOS 112 PETR OBRA S Annual report 2005 PETR OBRA S Annual report 2005 113
  • 58. annexannex Board of Directors DILMA VANA ROUSSEFF CHAIRWOMAN MEMBERS JOSÉ SERGIO GABRIELLI DE AZEVEDO JORGE GERDAU JOHANNPETER ANTONIO PALOCCI FILHO FÁBIO COLLETTI BARBOSA GLEUBER VIEIRA JAQUES WAGNER ARTHUR ANTONIO SENDAS CLÁUDIO LUIZ DA SILVA HADDAD Fiscal Council MARIA LÚCIA DE OLIVEIRA FALCÓN CHAIRWOMAN EFFECTIVE MEMBERS NELSON ROCHA AUGUSTO TÚLIO LUIZ ZAMIN DENISE MARIA AYRES ABREU MARCUS PEREIRA AUCÉLIO ALTERNATES EDUARDO COUTINHO GUERRA CELSO BARRETO NETO EDISON FREITAS DE OLIVEIRA MARIA AUXILIADORA ALVES DA SILVA OSWALDO PETERSEN FILHO 114 PETR OBRA S Annual report 2005 PETR OBRA S Annual report 2005 115
  • 59. GlossARY, abBreviations and conversion table Glossáry, abbreviations and conversion table AMERICAN DEPOSITARY RECEIPTS (ADR) | Negotiable BLOCK | A small portion of a sedimentary basin where oil CO–GENERATION | The simultaneous generation of INDEX (IGC) | A share index calculated by the São Paulo certificates in the United States and representing one or and natural gas exploration and production is carried out. electricity and thermal energy (heat/steam from the Stock Exchange that measures the performance of a more shares of a foreign company. A US depositary bank process), through the sequential and efficient use of theoretical portfolio of shares of companies that present issues the ADRs against a deposit of underlying shares, held BOVESPA INDEX (IBOVESPA) | Indicator of the price quantities of energy from a single source. This increases the good levels of corporate governance. by a custodial institution in the country of origin of the shares changes of a variable share portfolio that is defined thermal efficiency of the thermodynamic system as a whole. periodically by the São Paulo Stock Exchange. DISPATCH | Functioning (bringing into operation) of a AMERICAN PETROLEUM INSTITUTE API DEGREE (°API) | CONDENSATE | Natural gas liquids recovered in the normal thermoelectric power station (UTE), when this begins A measurement of the relative density of an oil or oil product. BRENT PETROLEUM | A blend of petroleum produced in oilfield separation process and maintained in liquid state generating electricity for supply to consumers/ grid – “to The API scale, measured in degrees, varies inversely with the the North Sea from fields under normal pressure and temperature conditions. dispatch power from a thermoelectric power station” – means relative density – in other words the greater the relative bringing it into operation for producing electric power. density, the lower the API degree. Conversely, the lighter the BS 8800 | British Standard for implementing a health and CONFERENCE CALL | A telephonic conference with market Currently, in Brazil with its predominantly hydroelectric oil, the higher the API degree. Oils with an API of more than occupational (SMS) Management System. analysts, institutional and individual investors that takes place generating capacity, thermoelectric plants only dispatch 30 degrees are considered light; between 22 and 30 degrees when the Company reports its most recent quarterly financial electricity at certain peak demand times (when hydro sources API are medium; lower than 22 API degree are heavy while BUNKER | Fuel for ships. results. The conference call normally also includes are insufficient to supply demand), during hydrological an API degree equal or lower than 10 indicates an information on the Company’s future prospects. shortfalls (low rainfall) or whenever the National System extra–heavy oil. The higher the API degree, the greater the CARBON MARKET | Regulated trading system between Operator (ONS) so determines to stabilize the system. product’s market value. companies or other institutions of credits corresponding to CORPORATE GOVERNANCE | The relationship between certified reductions in the emission of greenhouse gases, the economic agents (shareholders, executives, board E&P | Exploration and production of oil and natural gas. ASSOCIATED NATURAL GAS | Natural gas produced objective being to meet business, regional, national or global members) that can infl uence or determine the course and together with oil. Crude petroleum is made up of three targets for reducing the emission of these gases performance of a company. Good corporate governance EBITDA | Earnings before interest, taxes, depreciation and states: oil, gas and water. In this respect, gas is obtained after assures stakeholders equitable treatment, transparency and amortization expenses. the physical separation of the liquid fraction of the CATALYST | Any substance that speeds up or retards a responsibility for the results. petroleum. Gas can also be of a non– associated nature and chemical reaction but does not itself undergo any lasting E–COMMERCE | Commercial transactions carried out produced from purely gas deposits. Under these chemical alteration during the process CRUDE PETROLEUM (OR CRUDE OIL) | The oil that first electronically through the exchange of bits. The relationship is circumstances, there is no need for physical separation enters a refinery for processing. digital and therefore virtual. The sale of goods and services during production. However, in both cases, after production CATALYTIC CRACKING UNIT | Refining process whereby involve a digital communication medium – the multimedia – and/or separation, the gas is processed to the required heavier distilled oils are converted into lighter fractions of DELAYED COKING UNIT (DCU) | This is the most extreme and the principal vehicles for this type of transaction are: standards and quality before being sold. greater commercial values, such as gasoline, liquefied form of thermal cracking, transforming vacuum residue into CD–Rom, kiosks, BBS and the Internet. Also known as virtual petroleum gas (LPG) and naphtha. lighter products, in addition to coke. commerce or electronic commerce. BALANCED SCORECARD | Described by Kaplan and Norton, is more than a tactical or operational measurement system. An CERTIFICATES OF REAL ESTATE RECEIVABLES (CRI) | A DERIVATIVE | A contract or security, the value of which is EQUITY VALUE | This is the value of a company’s net equity, explicit strategy and a vision form the basis for four perspectives security linked to real estate loans, issued exclusively by related to the price of another security, instrument or (financial, customer, business process and learning and growth). securitization companies. They are created to obtain funds underlying index. It can be used as a hedge instrument. ETHENE OR ETHYLENE | A basic petrochemical product of For each one, strategic objectives, measurements, specific from institutional investors, with maturities compatible with the light olefin family (C2H4) produced from naphtha or targets and action plans are formulated. the characteristics of real estate loans DIFFERENTIATED CORPORATE GOVERNANCE SHARE ethane. executives, board members) that can influence or 116 PETR OBRA S Annual report 2005 PETR OBRA S Annual report 2005 117
  • 60. business management GLOSSary determine the course and performance of a company. Good securities can be acquired by more conservative investors. those set from the outset of the agreement among the parties. OPEC BASKET PRICE | Saharan Blend (Algeria), Minas corporate governance assures stakeholders equitable (Indonesia), Bonny Light (Nigeria), Arab Light (Saudi Arabia), treatment, transparency and responsibility for the results. ISO 14001 | An international standard, prepared and NAPHTHA | A petroleum product, mainly used as feedstock Dukhan (Qatar), BCF-17 (Venezuela), Iranian Heavy, Kuwait managed by the International Organization for in the petrochemical industry to produce ethane and Crude, Es Sider (Libya), Murban (United Arab Emirates) and EXPLORATORY SUCCESS RATE | The number of exploratory Standardization, which specifies the requirements for propane together with other liquid fractions such as benzene, Basrah (Iraq). wells with commercially environmental management systems with a view to the toluene and xylene. certification of these systems. OPERATING MARGIN | Operating Profit ÷ Net Revenue. FIELD | An oil or natural gas producing area from a continuous NATIONAL PETROLEUM, NATURAL GAS AND BIO-FUEL reservoir or more than one reservoir at variable depths, LIQUEFIED PETROLEUM GAS (LPG) | A mixture of AGENCY (ANP) | The Brazilian regulatory agency for the oil OPTION | A type of derivative that gives the buyer the right including the associated production installations and equipment. hydrocarbons and high pressure steam obtained from natural and natural gas sector to purchase (call option) or sell (put option) an asset or gas at special processing units, which is kept in a liquid state security for a given price (strike price) at a future date FLOATING, PRODUCTION, STORAGE & OFFLOADING under special conditions for surface storage. NATURAL GAS | Any hydrocarbons or mixture of (FPSO) | A floating unit for the production, storage and hydrocarbons that remain in a gaseous state under normal ORGANIZATION OF PETROLEUM EXPORTING COUNTRIES transfer of hydrocarbons using a ship as platform LIQUID NATURAL GAS (LNG) | Part of natural gas that is atmospheric conditions, extracted directly from reservoirs of (OPEC) | Algeria, Indonesia, Iran, Iraq, Kuwait, Nigeria, Qatar, found in the liquid phase at a given pressure and temperature petroleum or gas, including moist, dry, residual and rare gases. Saudi Arabia, United Arab Emirates and Venezuela. FUEL OIL | The heavier fractions from the atmospheric on the surface, obtained during field separation processes, in distillation of petroleum, widely used as and industrial fuel in natural gas processing units or in gas pipeline transfer operations. NATURAL GASOLINE | Natural gas liquids with a steam PETROLEUM | Any liquid hydrocarbon in its natural state boilers, ovens, etc. pressure halfway between that of condensate and LPG, such as crude oil and condensate. LIQUEFIED NATURAL GAS (LNG) | Natural gas cooled obtained from natural gas through a process of compression, GROSS MARGIN | Gross Profit ÷ Net Revenue. to temperatures below 160 C° for transfer and storage in a distillation and absorption. POLYETHYLENE | A petrochemical product used to make liquid state. casks, receptacles, film canisters, plastic packaging for HEDGE | A financial position or combination of positions for NET MARGIN | Net Profit ÷ Net Revenue. clothing and lightweight objects. the purpose of reducing some kind of risk. LOCAL GOODS CONTENT | The percentage that is equivalent to the coefficient between: The difference between NEW FRONTIERS | Areas of sedimentary basins or POLYMER | The generic designation for some second IBRX | Brazil Index -This is a price index that measures the the total sale value of a good (excluding IPI and ICMS taxes) sedimentary basins where exploration has occurred. generation petrochemicals such as plastics, rubber and return on a theoretical portfolio composed of 100 shares and the value of the associated imported portion and; Its total synthetic fibers. selected from the most traded shares on the Bovespa, in terms sale value (excluding IPI and ICMS taxes). OFFSHORE | Located or operating in the sea. of trading volume and financial volume. They are weighted in POLYPROPYLENE | A petrochemical product with uses the portfolio by their respective number of shares available for MARKET CAPITALIZATION | This is a company’s value OHSAS 18001 | A standard prepared and managed by BSI similar to those of high–density polyethylene, such as film, trading on the market in the Brent and Ninian Systems with a measured by the price of its shares in the market, according Management Systems, which specifies the requirements for beverage crates and packaging, etc 39.4 (thirty–nine and four tenths percent) degree API and a to the following formula: (share price x number of shares). the health and occupational safety management systems with 0.34% (zero decimal point thirty–four per cent) a view to certifying these systems among other purposes. PROCESSED CRUDE | Total volume processed in a refinery. MARKET SHARE | Percentage or participation of the market. INSTALLED CAPACITY | Project capacity of the unit OIL | The portion of petroleum that exists in a liquid state PROPENE OR PROPYLENE | A basic petrochemical product, authorized by the ANP. MERCHANT POWER PLANT | In general, merchant power under original reservoir conditions and remains liquid under produced from naphtha propane that serves as feedstock for plants sell their power to the spot market. Under this form of surface pressure and temperature conditions. making polypropylene. INVESTMENT GRADE | Risk classification level that business structure, there are natural gas supply contracts with considers a company to have a low risk and, thus, its clauses, which govern the division of gains and losses above ONSHORE | Located or operated on land. PROVED RESERVE | Reserves of petroleum and/or natural 118 PETR OBRA S Annual report 2005 PETR OBRA S Annual report 2005 119
  • 61. business management GLOSSary gas that, based upon analysis of geological and engineering SECOND GENERATION PETROCHEMICAL COMPANIES | ABBREVIATIONS CONVERSION TABLE data, are estimated to be commercially recoverable from The companies that make up a petrochemical complex are discovered and evaluated reservoirs, to a high degree of classified in three segments. The second generation BBL | Barrel. A) Cubic meters (m3) into barrels (b): b= m3 certainty, taking into account the prevailing economic companies process basic petrochemicals (ethane, propane, 0,158984 circumstances, the usually feasible operational methods and benzene, etc.) to manufacture intermediate products BOE | Barrels of oil equivalent. Normally used to express the Brazilian petroleum and tax regulations. (plastics, rubber and synthetic fibers) volumes of oil and natural gas in the same unit of B) Barrels (b) into cubic meters (m3): m3 = b x 0,158984 measurement (barrels) by converting Brazilian gas at the rate RATING | Classification or rating of risk. SECURITIES AND EXCHANGE COMMISSION (SEC) | The of 1,000 cubic meters of gas to 1 cubic meter of oil. 1 cubic C) Cubic meters (m3) into tons (t): U.S. capital market oversight and regulatory agency, whose meter of oil = 6.289941 barrels of oil. As an international t = m3 x D RECOVERABLE VOLUME | Volume of petroleum, expressed equivalent in Brazil is the Comissão de Valores Mobiliários (CVM). standard, one barrel of oil equivalent equals approximately D) Tons (t) into cubic meters (m3): under basic conditions which can be obtained from the 6,000 cubic feet of natural gas. m3 = t production of a reservoir from the time of its initial conditions SPE | Society of Petroleum Engineers. D to the time of its abandonment using the best alternative BOED | Barrels of oil equivalent per day. E) Barrels (b) into tons (t): indicated by technical- economic studies carried out at the SWAP | Contract between two parties to exchange payment t = b x 0,158984 x D time of appraisal. Formula: recoverable volume = original flows. A typical oil swap consists of a contract in which one BPD | Barrels per day. volume x recovery factor. party buys at a certain price and sells at a future floating price. F) Tons (t) into barrels (b): DWT | Deadweight tonnage. Unit that measures the freight b= t D x 0,158984 RESERVE | Discovered oil and/or natural gas resources that TOTAL PROCESSED THROUGHPUT | Total of crude oil, plus transportation capacity of a ship. are commercially recoverable as of a given date. reprocessing and intermediate products processed in the G) 1 m3 = 1.000 liters = 6,28994113 b distillation plants. H) 1 b = 158,984 liters = 0,158984 m3 RESERVE REPLACEMENT INDEX (IRR) | Variation in the proved recoverable volume of reserves in relation to TOTAL THROUGHPUT | Total of crude oil processed in the I) 1.000 m3 natural gas= 1 m3 oil aggregate production in a given year. distillation plants viable oil and/or gas, as a proportion of the (approximately) total number of exploratory wells drilled and evaluated in any J) D = M , where RESIDUE | There are two kinds of residue: firstly the given year. V atmospheric (RAT) kind, the fraction of oil from an atmospheric distillation unit, the distillation of which varies VOLATILITY | Statistical measure of variation of a price or D = Density M = Mass from 420 degrees Celsius upwards; secondly – asphalt, the rate over time. Normally calculated by variance or standard V = Volume refined products from de–asphalting residue, resulting from deviation – the higher the price volatility, the more extensive the extraction of light fractions from vacuum residue using a its variation above or below an average value. paraffin solvent (propane or butane). WEST TEXAS INTERMEDIATE (WTI) | Petroleum with an ROCE (RETURN ON CAPITAL EMPLOYED) | Calculated by API degree between 38 and 40 and approximately 0.3% of using the following formula: Net earnings – financial results sulfur, the daily price of which reflects the price of a barrel of (net of income tax (IR) and social contribution (CSSL)) / oil delivered in Cushing, Oklahoma, in the United States. average borrowings (loans and financing) + average shareholders equity – financial investments. WORK– RELATED ILLNESS | Illness arising from or triggered by special conditions of work and related directly to it. 120 PETR OBRA S Annual report 2005 PETR OBRA S Annual report 2005 121
  • 62. business management ADdRESSES HEAD OFFICE SUBSIDIARIES BAIXADA SANTISTA ENERGIA LTDA. Praça Mal. Stenio Caio de Albuquerque Lima, 1 (parte) – PETRÓLEO BRASILEIRO S.A. – PETROBRAS BRASPETRO OIL SERVICES COMPANY - BRASOIL Jardim das Indústrias Avenida República do Chile, nº 65 – Centro 4th Floor, Harbour Place, 103 south Church Street – 11555-900 – Cubatão – SP – Brazil 20031-912 – Rio de Janeiro – RJ – Brazil Georgetown Grand Cayman – Cayman Island (BWI) Tel.: (13) 3362-4004 Tel.: (21) 3224-4477 P.O. Box 1034 GT Fax: (13) 3362-4818 Tel.: 0.0021-1 (345) 814-1557 Fax: 0.0021-1 (345) 814-1557 SFE – SOCIEDADE FLUMINENSE DE ENERGIA LTDA. Rodovia Presidente Dutra – KM 200, s/nº – Jardim Maracanã BRASPETRO OIL COMPANY 23890-000 – Seropédica – RJ – Brazil REPRESENTATIVE OFFICES IN BRAZIL Second Floor, Anderson Square Building Tel.: (21) 2665-9204 Georgetown Grand Cayman – Cayman Island (BWI) Fax: (21) 2665-9249 BRASÍLIA P.O. Box 714 Setor de Autarquias Norte – SAN – Quadra 1, bloco D, Tel.: 0.0021-1(345) 949.8888 / 8889 FAFEN ENERGIA S.A. Edifício Petrobras – 2º andar Fax: 0.0021-1(345) 949.8899 Rua Eteno, 2198 – Pólo Petroquímico 70040-901 – Brasília – DF – Brazil 42810-000 – Camaçari – BA – Brazil Tel.: (61) 3429-7131 PETROBRAS NETHERLANDS B.V. Tel.: (71) 642-4706 Fax: (61) 3226-6341 Rokin 55 Fax: (71) 642-4300 1012 KK Amsterdam SÃO PAULO The Netherlands TERMOCEARÁ LTDA. (MPX) Avenida Paulista, 901 – 11º andar – Cerqueira César Tel.: 0021-31 20 521 4805 Rodovia CE-422, Km 0 – Nihil 01311-100 – São Paulo – SP – Brazil Fax: 0021-31 20 521 4827 61600-000 – Caucaia – CE – Brazil Tel.: (11) 3523-6501 Tel.: (85) 3372-2200 Fax: (11) 3523-6488 DOWNSTREAM PARTICIPAÇÕES S.A. Fax: (85) 3372-2212 Avenida República do Chile, 65 – 22º andar (parte) – SALVADOR Centro TERMORIO S.A. Avenida Antônio Carlos Magalhães, 1113 – sala 112 – Pituba 20031-912 – Rio de Janeiro – RJ – Brazil Avenida Almirante Barroso, 63 – salas 815 a 817 (parte) 41825-903 – Salvador – BA – Brazil Tel.: (21) 3224-4819 – Centro – 20031-003 – Rio de Janeiro – RJ – Brazil Tel.: (71) 3350-3700 Fax: (21) 2262-4228 Tel.: (21) 2532-6572 Fax: (71) 3350-3080 Fax: (21) 2532-1957 PETROBRAS INTERNATIONAL FINANCE COMPANY 4th Floor, Harbour Place, 103 south Church Street PETROBRAS QUÍMICA S.A. – PETROQUISA Georgetown Grand Cayman – Cayman Island (BWI) Avenida República do Chile, 65 – Salas 902/903 – Centro P.O. Box 1034 GT 20031-912 – Rio de Janeiro – RJ – Brazil OVERSEAS REPRESENTATIVE OFFICES Tel.: (0.0021-1) (345) 814-1557 Tel.: (21) 3224-6397 Fax: (0.0021-1) (345) 814-1557 Fax: (21) 2262-1918 / 2262-4728 NEW YORK 570, Lexington Avenue 43rd Floor 5283 PARTICIPAÇÕES LTDA. PETROBRAS NEGÓCIOS ELETRÔNICOS S.A. 10022-6837 – New York – NY – USA Avenida República do Chile, 65 – sala 1003 – Centro Avenida República do Chile, 65 – 16º andar (parte) – Centro Tel.: (1) 212 829-1517 20031-912 – Rio de Janeiro – RJ – Brazil 20031-912 – Rio de Janeiro – RJ – Brazil Fax: (1) 212 832-5300 Tel.: (21) 3224-7308 Tel.: (21) 3224-3990 / 3224-7210 Fax: (21) 3224-2703 / 3224-3558 TOKYO PETROBRAS INTERNATIONAL BRASPETRO B.V. Togin Building 5th Floor, Room 508 4-2 Marunouchi 1 – Rokin 55 PETROBRAS DISTRIBUIDORA S.A. – BR Chome Chiyoda–Ku 1012 KK Amsterdam Rua General Canabarro, 500 – 16º andar – Maracanã Tokyo 100-0005 – Japan P.O. Box 990 20271-900 – Rio de Janeiro – RJ – Brazil Tel.: (81) 3 5208-5285 1000 AZ Amsterdam Tel.: (21) 3876-4001 Fax: (81) 3 5208-5288 The Netherlands Fax: (21) 3876-4977 Tel.: (0021) 3120 521-4805 CHINA Fax: (0021) 3120 521-4827 PETROBRAS TRANSPORTE S.A. – TRANSPETRO Petrobras Beijing Representative Office Avenida Presidente Vargas, 328 – 10º andar – Centro China World Trade Center Tower 1, Units 1221-1225 PETROBRAS COMERCIALIZADORA DE ENERGIA LTDA. 20091-060 – Rio de Janeiro – RJ – Brazil Nº 1, Jian Guo Men Wai Avenue,Chao Yang District, Avenida República do Chile, 500 – 27º andar – Centro Tel.: (21) 3211-9100 Beijing 100004 – P.R. China 20031-170 – Rio de Janeiro – RJ – Brazil Fax: (21) 3211-9121 Tel.: (86-10) 6505-9838 Tel.: (21) 3212-6202 Fax: (86-10) 6505-9850 Fax: (21) 3212-6205 PETROBRAS GÁS S.A. – GASPETRO Avenida República do Chile, 500 – 28º andar – Centro SINGAPORE USINA TERMELÉTRICA NOVA PIRATININGA LTDA. 20031-170 – Rio de Janeiro – RJ – Brazil 435 Orchard Road # 19-05/06 – Wisma Atra Avenida Paulista, 901 – 14º andar – Centro Tel.: (21) 3212-6053 Singapore – 238877 13111-000 – São Paulo – SP – Brazil Fax: (21) 3212-6165 Tel.: (65) 6550-5080 Tel.: (11) 5613-2700 Fax: (65) 6734-908 Fax: (11) 5614-9222 122 PETR OBRA S Annual report 2005 PETR OBRA S Annual report 2005 123
  • 63. PREPARATION, EDITING AND GENERAL COORDINATION Investor relations and Institutional communication GRAPHIC PROJECT Traço Design GRAPHIC PROJECT Soter Design EDITORIAL PRODUCTION Letra Viva Comunicação TEXT EDITION Ofício de Letras TEXT Escrita Fina PHOTOGRAPHY Ari Gomes, Banco de Imagens Petrobras, Bruno Veiga, Claudia Martins, Cris Isidoro, Eliana Fernandes, Fabio Oliveira, Felipe Goifman, Geraldo Falcão, Geraldo Kosinski, J. Valpereiro, Jônio Machado, José Caldas, Juarez Cavalcanti, Patrícia Santos, Paulo Arthur, Paulo Rubens, Projeto Tamar, Publius Vergilius, Rogério Reis PRINTING Ipsis Gráfica e Editora COVER PHOTOGRAPH P-50 – Petrobras Image Bank This oil and gas FPSO Platform (Floating, Production, Storage and Offloading) is the milestone of the oil self-sufficiency conquest in Brazil. It is the greatest production capacity unit in the country - 180 thousand bpd - and will operate in the Albacora Leste Field in the Campos Basin. 124 PETR OBRA S Annual report 2005