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  • 1. ANNUAL REPORT 2006
  • 2. “Petrobras is committed to the Renato Menezes FeRReiRa development of technology for the expansion of its activities and the Maintenance technician (Cenpes – Petrobras Research Center) outlook: To make a professional ongoing enhancement of the quality of its products.” contribution to society’s future and that of the generations to come.
  • 3. Contents 02 Profile, Mission, Vision and Values Petrobras Activities 04 Highlights 06 Message from the CEO 10 Oil Market 14 Corporate Strategy 16 02 18 Business areas Exploration and Production 20 Refining and Commercialization 26 Petrochemicals 30 Transportation 34 Distribution 38 Natural Gas 40 44 Energy 42 international expansion South America 50 North America 53 Africa 54 56 Asia 55 social and environmental Responsibility Sustainability Indices 58 Human Resources 60 Health, Safety and the Environment 65 76 Sponsorship 72 intangible assets Technological Capital 78 Organizational Capital 80 Human Capital 82 Relationship Capital 83 86 Business Management Business Performance 88 Capital Markets 91 Risk Management 96 Corporate Governance 99
  • 4. Profile Petrobras is a publicly listed company that operates on an integrated and specialized basis in the following segments of the oil, gas and energy sector: exploration and production; refining, commercialization, transportation and petrochemicals; distribution of oil products; natural gas and energy. Founded in 1953, Petrobras is now the world’s 14th largest oil company, according to the publication Petroleum Intelligence Weekly. Leader in the Brazilian hydrocarbons sector, Petrobras has been expanding, in order to become an integrated energy company with international operations, and the leader in Latin America. Duque de Caxias refinery – Rio de Janeiro | ANNuAl REPORT 2006 | PETROBRAS
  • 5. Mission Operate in a safe and profitable Profile | MISSION | VISION manner in the oil, gas and energy sector in Brazil and abroad, with social and environmental responsibility, providing products and services that meet clients’ needs and that contribute to the development of Brazil and the other countries in which it operates. Vision Petrobras will be an integrated energy company with a strong presence in the international market and as a leading force in Latin America, focusing on profitability and social and environmental responsibility. Values k Giving importance to the company’s principal stakeholders: shareholders, clients, employees, society, government, partners, suppliers and the communities within which the company operates; k A spirit of enterprise and the ability to meet challenges; k A focus on quality in the results; k An innovative and competitive spirit, focused on providing outstanding services and maintaining the highest technological standards; k Quality and leadership in the issues of health, safety and environmental preservation; k A constant quest for business leadership.
  • 6. Petrobras activities AN INTEGRATED ENERGY comPANY | ANNuAl REPORT 2006 | PETROBRAS
  • 7. | ANNuAl REPORT 2006 |
  • 8. Highlights oPERATIoNAL summARY 2006 00 00 PROVEN RESERVES – SPE criteria - (billions of barrels of oil equivalent – boe) (1)(2) 1.9 1.0 Oil and condensate (billion barrels) 12.3 12.3 Natural gas (billion boe) 2.6 2.7 AVERAGE DAILY PRODUCTION (thousand boe) (1) ,17 ,98 Oil and NGL (thousands of barrels per day - bpd) 1,847 1,920 Onshore 396 367 Offshore 1,451 1,552 Natural gas (thousands of boed) 370 378 Onshore 213 206 Offshore 157 172 PRODUCING WELLS (oil and natural gas) – december 31st (1) 1,7 1,89 Onshore 11,860 12,170 Offshore 697 725 DRILLING RIGS – december 31st 3 Onshore 22 19 Offshore 42 44 PRODUCING PLATFORMS – december 31st 97 103 Fixed 73 76 Floating 24 27 PIPELINES (km) – december 31 (1) 30,33 31,089 Oil and oil products 12,857 12,913 Natural gas 17,486 18,176 SHIPPING FLEET – december 31st Vessels – company operated 50 51 – operated by third parties 75 104 Tonnage (million deadweight tons – dwt) 8.2 11.1 TERMINALS – december 31st Number 66 66 Storage capacity (million m3) (3 ) 10.4 10.4 (1) Includes information from abroad, corresponding to Petrobras’ stake in each partnership (2) Proven reserves are calculated according to SPE (Society of Petroleum Engineers) criteria (3) Only includes Transpetro’s terminals (4) Excludes flare off, own EP consumption, liquefaction and reinjection (5) Only includes assets in which Petrobras has an equity stake of 50% or more (6) Only includes natural gas powered thermoelectric plants | ANNuAl REPORT 2006 | PETROBRAS
  • 9. Average daily production of 2,298 thousand boe 00 00 REFINERIES – december 31st (1)(5) Number 15 16 Nominal installed capacity (thousand bpd) 2,114 2,227 Average throughput (thousand bpd) 1,830 1,872 Brazil 1,727 1,746 Abroad 103 126 Average daily production of oil products (thousand bpd) 1,839 1,892 IMPORTS (thousand bpd) Oil 352 370 Oil products 94 118 EXPORTS (thousand bpd) Oil 263 335 Oil products 260 246 COMMERCIALIZATION OF OIL PRODUCTS (thousand bpd) Brazil 1,644 1,697 INTERNATIONAL SALES (thousand bpd) Oil, gas and oil products 385 503 NATURAL GAS SOURCES (million m3 per day) (4 ) Domestic gas 23 23 Bolivian gas 22 24 NATURAL GAS MARKET DISTRIBUTION (million m3 per day) (4 ) Distributors 31 33 Thermoelectric plants 7 6 Internal consumption 7 7 ENERGY (1 ) Number of thermoelectric plants (5)(6) 9 10 Installed capacity (MW) (5)(6) 3,203 4,126 Energy sales (TWh) 16.64 17.57 Number of hydroelectric plants 2 2 Installed capacity (MW) (5) 285 285 Transmission lines (km) 15,414 15,414 Energy distribution (TWh/year) 13 13 FERTILIZERS (1) Production units 3 3 | ANNuAl REPORT 2006 | 7
  • 10. FINANcIAL summARY 2006 CONSOLIDATED FINANCIAL INFORMATION (R$ million, unless otheRwise specified) 00 00 % change Gross operating revenue 179,065 205,403 15 Net operating revenue 136,605 158,239 16 Operating income 39,773 42,237 6 Net financial income (expenses) (2,843) (1,332) -53 Net earnings 23,725 25,919 9 Net earnings per share (R$) 5.41 5.91 9 EBITDA 47,808 52,061 9 Gross debt 48,242 46,605 -3 Net debt 24,825 18,776 -24 Market capitalization 173,584 230,372 33 Gross margin (%) 44 40 -4 pp Highlights Operating margin (%) 29 27 -2pp Net margin (%) 17 16 -1 pp FINANCIAL - ECONOMIC INDICATORS Brent oil (Us$ / baRRel) 54.38 65.14 20 Average exchange rate (R$ / Us$) 2.4350 2.1752 -11 Year-end exchange rate (R$ / Us$) 2.3407 2.1380 -9 INVESTMENT (R$ million) 00 00 % change Direct investment 22,927 29,769 30 Exploration Production 13,934 15,314 10 Downstream 3,286 4,181 27 Gas Energy 1,527 1,566 3 International 3,153 7,161 127 Distribution 495 642 30 Corporate 532 905 70 Specific purpose companies (spCs) 2,385 3,507 47 Projects under negotiation 311 409 32 Structured projects 87 1 -99 Total investment ,710 33,8 31 Voting CaPital 2006 COmmOn ShAreS CaPiTal SToCk 2006 8.% Federal Government .9% 18.3% .7% 3.3% Federal Government BNDESpar .% BNDESpar ADR (Common shares) 8.3% ADR Level 3 ADR (Preferred shares) 7.0% .% FMP-FGTS Petrobras FMP-FGTS Petrobras Foreign Investors Foreign Investors (CMN Resolution nº 2,689) 1.% 7. % (CMN Resolution nº 2,689) 1.8% Other individuals Other individuals and legal entities 1.% and legal entities non-Voting CaPital 2006 Preferred ShAreS SToCk YeaR-end CloSing PRiCe (r$ / ShAre) (2) 1.% 2006 .9 3.% 9.80 2005 41.30 37.21 BNDESpar 26.62 2004 3.1% 24.28 ADR Level 3 and Rule 144-A 21.02 2003 Foreign Investors 19.10 (CMN Resolution nº 2,689) Common shares 1.8% 13.20 Other individuals and 2002 legal entities 11.60 Preferred shares 8 | ANNuAl REPORT 2006 | PETROBRAS
  • 11. PRoduCTion of oil and naTuRal gaS ConSolidaTed neT inCoMe (r$ miLLiOn)(1) (thOuSAnd BOed) 2006 1,90 378 ,98 2006 ,919 2005 1,847 370 2,217 2005 23,725 2004 1,661 359 2,020 2004 16,887 2003 1,701 335 2,036 2003 17,795 2002 1,535 275 1,810 2002 8,098 Oil Natural Gas Highlights eaRningS/ShaRe (r$/ShAre) (1)(2) PRoven ReSeRveS of oil and naTuRal gaS (SPe CriteriA - BiLLiOn BOe) 2006 .91 2006 2005 5.41 1.3 .7 1.0 2005 2004 3.85 12.3 2.6 14.9 2004 2003 4.06 12.1 2.8 14.9 2002 1.86 2003 11.6 2.9 14.5 2002 9.9 2.3 12.1 MaRkeT CaPiTalizaTion vs neT equiTY (r$ BiLLiOn)(1) Oil Natural Gas 30 Market capitalization 174 gRoSS, oPeRaTing and neT MaRginS Net equity 0% 112 2006 7% 87 97 78 1% 62 54 49 44% 34 2005 29% 2002 2003 2004 2005 2006 17% debT RaTioS (3) 41% 2004 27% 8% 2006 15% 1% 2005 23% 45% 24% 2003 29% 17% 2004 19% 32% 2003 18% 36% 41% 2002 20% 2002 16% 54% 12% Short Term Debt/Total Debt Gross Operating Net Margin Margin Margin Net Debt/Net Capitalization (1) The fiscal years 2004, 2005 and 2006 include the figures for Special Purpose Companies (SPCs) whose activities are controlled, directly or indirectly, by Petrobras. (2) For the purpose of comparison, the Earnings per Share for the previous fiscal years have been recalculated, to reflect the share split approved at the EGM of July 22, 2005. (3) The fiscal years 2002 and 2003 include debt incurred by the SPCs which Petrobras used to structure project finance and consortia. The fiscal years 2002 to 2006 include leasing contracts. All indicators have been prepared in accordance with BR GAAP criteria. | ANNuAl REPORT 2006 | 9
  • 12. “Petrobras is on the right path to becoming an integrated energy company with international reach, José seRgio gaBRielli De azeVeDo Petrobras President and Ceo outlook: leadership in oil, natural striving always for growth allied with profitability and social and gas, oil products and biofuels in latin america by 2015, with selective environmental responsibility.” expansion in petrochemicals and renewable energy. 10 | ANNuAl REPORT 2006 | PETROBRAS
  • 13. Message from the cEo t he year 2006 was one of achievement and new prospects for Petrobras. In addition to the records attained — con- solidated earnings of R$ 25.9 billion and investments of R$ 33.7 billion — and a 4% increase in total production of oil and natural gas, the company is girding itself for a new challenge, set down in the Business Plan 2007-2011: to maintain its rapid growth rate. The targets are ambitious ones, leading Petrobras, for the first time, to plan its production over the long term: a total of 4 million 556 thousand barrels a day (bpd) of oil and natural gas will be produced in Brazil and abroad in 2015. The planned investments are in keeping with the grandeur of the projects, amounting to the sum of US$ 87.1 billion by 2011. Domestic production grew by 5% in 2006, due to a 340 thou- sand barrels a day increase in production capacity, as a result of the P-34, FPSO-Capixaba and P-50 platforms all coming on-stream. A new production record was set in October, with the company achieving an output of 1.91 million barrels per day. As a guarantee of a solid foundation for future growth, for every barrel that was produced during the year 1.739 barrels were added to the reserves. This was bolstered by the 27 new areas that had their commercial viability confirmed, with the total volume of recoverable oil estimated at 2.5 billion barrels of oil equivalent (boe). New exploration prospects arose with the discovery of light oil below a layer of salt in the Santos Basin. *** on top of the strong performance in oil, progress was also made in the area of natural gas. Along with a 1.5% increase in domestic production, Petrobras announced its Plan to Advance the Production of Natural Gas (Plangás), which will raise the sup- ply of natural gas in the southeast of Brazil from the present 15.8 million m3 to 40 million m3 a day by 2008. The plan, which also | ANNuAl REPORT 2006 | 11
  • 14. Message from the cEo The goals are ambitious, leading Petrobras, for the first time ever, to plan its production over the long term: 4 million 556 includes projects for the processing and transportation of natural thousand barrels gas, aims to increase the share of Brazilian gas supplying domestic a day (bpd) of demand. Following the company’s strategy to guarantee safety and oil and natural flexibility in supplying the Brazilian market, Petrobras sanctioned gas in 2015. its entry into the liquefied natural gas (LNG) market as an importer The anticipated and continued with its expansion of the gas pipeline network. . investment to bring this about is *** compatible with the other milestones in 2006 were the launching of Diesel huge scale of the Podium and the development of H-Bio – a pioneering technol- projects themselves: ogy from Petrobras that combines vegetable oil with fractions of us$ 87.1 billion up mineral oil in the production of diesel fuel. The company also to 2011. augmented the supply of diesel S500, with its reduced sulfur content, to eight metropolitan areas. In order to further raise the quality of its fuels, Petrobras continued to make improvements at its refineries, with the installation of new hydrotreatment and conversion units, which reduce the sulfur content in the oil prod- ucts and optimize the output of diesel fuel from Brazilian oil. In this way, the company enhances the value of domestic oil and meets the most rigorous environmental specifications, while at the same time opening up new export markets. In line with its announced its last readjustment in the price of gasoline and diesel social and environmental commitments, Petrobras fortified its fuel, in September 2005. biodiesel program, beginning the construction of three plants, which will produce 171 million liters annually, thus meeting 20% *** of the country’s demand in 2008. As well as generating employ- the company’s excellent results in Brazil are mirrored ment and income for family subsistence farmers, the product will by its performance abroad. In addition to strengthening activi- help to reduce imports of diesel fuel and light oil. ties in the countries where it is already established, Petrobras Despite the high prices and volatility of the oil market, the augmented its involvement in focus areas such as Africa and the company’s results were sustained by production growth, without American sector of the Gulf of Mexico. Furthermore, it expanded passing on the price instability to the domestic market. Brent oil its activities in international refining, with the acquisition of a 50% hit a peak of US$ 78.63 a barrel in August, but closed the year down stake in the Pasadena refinery, in the United States, and is looking 25%, back around the US$ 60 level, the same as when Petrobras at other refining prospects abroad. The objective is to add value 1 | ANNuAl REPORT 2006 | PETROBRAS
  • 15. Castor bean Record net plantation, Morro do Chapéu, Bahia 25.9 earnings of Mensagem do Prsidente billion reais in 2006 to the heavy oil the company produces, offering a mix of more esteemed and higher quality products to the market. The investors’ confidence was reflected in the 34% appre- ciation of Petrobras’ shares and the lower cost of securing fund- ing. As a result, the company’s market capitalization, for the first time, attained a monthly average of more than US$ 100 billion, in December, and its first global securities issue since becom- ing investment grade was at the lowest ever funding cost for a 10-year maturity. Petrobras’ good results are also the fruit of its investment in its human resources, who are considered essential to the imple- mentation of the strategies that have been delineated. In addition to heavy investment in training and skills development, the com- pany hired 8,539 new employees during 2006, to help sustain its growth. That the company’s measures in this area have been spot on is reflected in the increase in the staff satisfaction index, from 66% to 68%, and the reduction in accidents, leaks and spills and pollution emissions, which resulted in improved HSE (Health, Safety the Environment) indicators. These successes alone would be ample reward for the endeavors of the employees and the confidence of the share- holders, but Petrobras also won further important recognition of its performance: its selection for the Dow Jones Sustainability Index and the ISE (Bovespa Corporate Sustainability Index), and the classification of its shares as investment grade by the rating agency Standard Poor’s. These accomplishments all strengthen our faith that Petrobras is on the right path and will continue to grow, profit- ably and showing social and environmental responsibility. José seRgio gaBRielli De azeVeDo President and CEO | ANNuAl REPORT 2006 | 13
  • 16. oil market The year 2006 saw a break in the continuous upward movement with an accumulation of inventories, and yet prices remained of oil prices, which began in 2002. Although the price of Brent oil high. Despite a slowing of the growth in world demand, influenced reached a peak of US$ 78.63 a barrel in August, it had fallen back by the high prices, oil continued to earn a risk premium, due to 25% by the year end. The average price, over the course of the the geopolitical instability provoked by events such as Israel’s year, was US$ 11 higher than that of 2005, while the market has incursion into Lebanon and the nuclear issue in Iran. Aware that become more volatile. geopolitical questions in the Middle East would keep prices high, As in previous years, there was a supply surplus in 2006, OPEC maintained its production quotas at the same level for most oil PRiCeS (noMinal) (uS$/BArreL) August 7, 2006 Brent peak price US$ 78.63/barrel 80.00 July 14, 2006 WTI peak price US$ 77.03/barrel 70.00 60.00 January 2003 50.00 WTI US$ 31.85/barrel Brent US$ 30.77/barrel West Texas January 2001 Intermediate WTI US$ 27.21/barrel Brent US$ 22.97/barrel Brent 40.00 30.00 January 2005 WTI US$ 42.12/barrel Brent US$ 40.36/barrel 20.00 January 2004 WTI US$ 33.78/barrel Brent US$ 31.16/barrel January 2002 10.00 WTI US$ 21.01/barrel Brent US$ 20.40/barrel 0.00 Dec 06 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 1 | ANNuAl REPORT 2006 | PETROBRAS
  • 17. bRenT oil hiT 78.63 oil market dollaRS a baRRel in auguST of the year, thus favoring the building up of inventories. years may be coming to an end. The upward price trend began to be reversed when August Ever since the August peak, the market has been char- went by and fears that the Atlantic hurricane season would be as acterized by what analysts call a “correction movement” – with devastating as that of 2005 were not realized. Amid controversy over prices oscillating downwards, as the market seeks a new balance the influence of speculation on prices, the fact that there were no between supply and demand, against a backdrop of changing sen- major hurricanes obliged OPEC to announce cuts in production, timent regarding potential shortages brought about by a disrup- for the first time since December 2004 and the biggest reduction tion in supply. This downward movement in oil prices has, once since 2002. The first announcement was made in September and again, shown how susceptible prices are to the impact of unfore- the second came in December, effective as of February 2007. seeable events – something the world oil market has always had Another factor pushing down prices, towards the end of to live with. + 2006, was the abnormally mild winter temperatures in the north- ern hemisphere, with a consequent reduction in oil consumption. This led the market to feel the supply surplus more acutely, and could be another sign that the upward price spiral of the last four transpetro fleet tanker “navion stavangar” | ANNuAl REPORT 2006 | 1
  • 18. corporate strategy Petrobras has retained its aggressive growth targets in its Business Planned inveSTMenT 2007-2011 (uS$ BiLLiOn) Plan 2007-2011. For the first time, the company has released esti- mates of its oil and natural gas production for 2015 and listed the 1% main projects that will buttress its growth after 2011. The com- pany’s strategic positioning places emphasis on the expansion of refining in Brazil, so as to add value to the country’s increasing oil production – whether by augmenting sales to the growing Brazilian In Brazil market or by expanding the export of oil products. Petrobras thus 8% seeks to strike a long term balance between production growth Abroad and refining capacity. In the renewable energy market, the focus Planned inveSTMenT PeR buSineSS aRea is on biofuels, within a corporate strategy of leadership in the pro- 2007-2011 (uS$ BiLLiOn) duction of biodiesel in Brazil and augmenting sales of ethanol. Brazilian production of oil and natural gas will reach 2 million BUSINESS AREA Exploration Production 40.7 925 thousand boed by 2011. Paralleling this increase, the country’s Downstream 23.1 refineries will be processing 1 million 877 thousand bpd and the Gas Energy 7.2 daily throughput of Brazilian oil will rise to 1 million 710 thousand International 12.1 bpd. With this expansion, the company will raise the proportion Distribution 2.2 of domestic oil processed in the refineries from the current 80% Corporate Areas 1.8 Total 87.1 to 91%, thereby consolidating the country’s self-sufficiency. Sales of the surplus, which in 2006 amounted to 335 thousand bpd, will reach 584 thousand bpd by 2011. finanCial ReSouRCeS: SouRCeS vs uSeS (2007-2011 fOreCASt, in uS$ BiLLiOn) Of the total planned investment for the period 2007-2011 — amounting to US$ 87.1 billion, an average of US$ 17.4 billion a 86.7 12.6 99,3 year —, US$ 75 billion (86%) is to be invested in Brazil, leading to the creation of 838 thousand direct and indirect jobs. The greatest 87.1 12.2 99,3 investment will be in the areas of Exploration Production and Gas Own Resources Investment Energy and in the Downstream area of Supplies. With US$ 12.1 bil- lion (14%) earmarked for investment abroad, 65% will go into Latin Third Party Resources Debt Amortization America, western Africa and the Gulf of Mexico — which are all a priority within Petrobras’ strategy for international expansion. thousand boed by 2011, while the company’s throughput in refiner- Petrobras’ production abroad, which in 2006 amounted ies outside Brazil will reach 499 thousand bpd. to 243 thousand boed of oil and natural gas, will increase to 568 Growth in the production of oil and NGL and in the 1 | ANNuAl REPORT 2006 | PETROBRAS
  • 19. 87.1 billion dollars to be invested during the corporate strategy period 2007-2011 PRoduCTion vs Refining throughput of the refineries preserves the balance between (thOuSAnd BPd) Exploration Production, on the one hand, and the company’s Downstream area, on the other, while opening up opportunities for forecast 3,554 the integration of these activities in Brazil and abroad. 2015 3,201 As part of its corporate strategy for consolidation as an inte- grated energy company with international reach, Petrobras is placing 2,757 greater emphasis on its renewable energy goals. By 2011, the company target 2011 2,376 should be making available 855 thousand m3/year of biodiesel and exporting 3.5 million m3 of ethanol. The capacity of the thermoelectric 1,90 2006 1,87 and co-generation plants, meanwhile, will have reached 4,554 MW. Petrobras maintains the policy of keeping its prices aligned Total production of oil and NGL with those of the international market. The company’s forecast cash Total primary throughput flow generation for the period 2007 to 2011, of US$ 86.7 billion, will be sufficient to meet almost all its investment needs. The raising of PRoduCTion gRowTh funds in the financial markets and the amortization of debt will be (thOuSAnd BOed) in alignment with the company’s policy of extending its debt profile 4,556 2007-2015 and reducing its financial leverage. The average Return on Capital 7.9% p.a. 278 Employed (ROCE) for the period should be 16%. 2007-2011 8.7% p.a. 742 In line with its commitment to social and environmental 3,493 724 responsibility and being at the technological cutting edge, the 185 company will invest a total of US$ 6.2 billion in Health, Safety and ,98 383 2,217 2,812 the Environment (HSE), technology, telecommunications and 2,036 2,020 101 551 85 94 96 142 Information Technology (IT) during the period 2007 to 2011. 161 168 163 274 277 Petrobras is pursuing its endeavors to apply in the social and 250 265 2,374 1,493 1,684 1,778 environmental spheres the level of quality achieved in its business 1,540 performance, and remains committed to the principles of transpar- ency and responsibility in its relations with all the stakeholders. 2003 2004 2005 2006 target forecast Already internationally recognized for its standard of excellence in 2011 2015 the production of oil, natural gas and oil products, the company con- tinues to strive to raise those standards higher still and to enhance its Oil + NGL – Brazil Natural Gas – Brazil international reputation as a Brazilian business that is dedicated to Oil + NGL – Abroad Natural Gas – Abroad overcoming the challenges of producing energy. | ANNuAl REPORT 2006 | 17
  • 20. “Preservation of the environment has become urgent and is the responsibility of all of us, each one according to his FRanCisCo De assis PeReiRa Truck driver, for a Petrobras client, role. Petrobras is doing its bit, but it is at the betim cargo terminal too much to handle on its own.” outlook: The hope for a better life is what drives us on. 18 | ANNuAl REPORT 2006 | PETROBRAS
  • 21. Business Areas exploRAtion pRoduction 20 Refining And commeRciAlizAtion 26 petRochemicAls 30 tRAnspoRtAtion 34 distRibution 38 nAtuRAl gAs 40 eneRgy 42 The intensification of the company’s oil exploration and production led Petrobras to establish new records in 2006. With new platforms coming on-stream — notably the P-50 — output continued to grow, reaching almost 2 million barrels a day. Natural gas production also expanded and, in the southeast, should increase to 40 million m3 daily by 2008, from the present level of 15.8 million m3, according to the provisions of Plangás (Plan to Advance the Production of Natural Gas), drawn up to augment the production and supply of natural gas in that region. Under its strategy for the sustain- able growth of Brazilian consumption, Petrobras is preparing to become an importer in the global market for liquefied natural gas (LNG). The goals set out in the Business Plan 2007-2011, aimed at sustaining the country’s self-sufficiency and maintaining the rapid growth rate, take into account the coming on-stream, during this period, of 15 major oil and 10 natural gas projects. | AnnuAl RepoRt 2006 | 19
  • 22. Business Areas ExPLorATioN ProdUcTioN Sustained growth in production The increase in domesTic oil producTion in 2006 represenTed anoTher advance in peTrobras’ growTh sTraTegy. The company’s brazilian ouTpuT ToTalled 1 million 778 Thousand barrels per day (bpd) of oil, naTural gas liquids (ngl) and conden- saTe — up 5.6% in relaTion To The 2005 producTion figure, of 1 million 684 Thousand bpd. Two of the three major new projects contributing to the pro- duction increase are located in the Campos Basin: platform P-50, in operation since April 21st, and the FPSO P-34, in operation since December 17th. In the Espírito Santo Basin, the FPSO Capixaba came into operation on May 6th. With the addition of these new projects, Petrobras’ production capacity was raised by 340 thou- sand bpd. The P-50, operating in the Albacora Leste field, has a production capacity of 180 thousand bpd; the FPSO Capixaba, in the Golfinho field, and the P-34, in the Jubarte field, can process 100 thousand bpd and 60 thousand bpd, respectively. Despite the higher production in 2006, the annual average was 5.4% lower than the target, of 1 million 880 thousand bpd, that had been set for the year. This shortfall was due to delays in the operational start-up of the P-50 and P-34. However, new production records have brought Petrobras to the threshold of the 2 million barrels per day mark. On October 23rd, the company produced 1,912,733 barrels — 31 thousand more than the previous record, set on May 29th. In addition to the good perfor- mance of the P-50 and the other platforms in the Campos Basin, a The FPSO P-50, in the Campos Basin (RJ), contributing to the contribution to these production peaks came from the Recage pro- country’s oil self-sufficiency gram (Program for the Rejuvenation of Heavily Exploited Fields), 20 | AnnuAl RepoRt 2006 | petRobRAs
  • 23. Business Areas | exploRAtion pRoduction 1.91 millionbPd Production record in october which helps to minimize the decline of mature production areas. The company’s production of natural gas (excluding NGL) also increased in 2006, attaining an average of 44 million m3/day, a 1% rise in relation to the 43.5 million m 3/day of the previ- ous year. This growth was maintained as a result of continued efforts to expand the supply of domestic gas, in line with the corporate strategy of ensuring a reliable supply of the product to the Brazilian market. In the Espírito Santo Basin, a major gas project came into Production of oil and natural Gas (thousand boed)(1) forecast 2015 2,812 724 3,536 target 2,374 551 2,925 2011 2006 1,778 277 2,055 2005 1,684 274 1,958 2004 1,493 265 1,758 2003 1,540 250 1,790 2002 1,500 252 1,752 2001 1,336 232 1,568 2000 1,270 221 1,491 Oil, NGL and Condensate Natural Gas (1) Average annual growth in oil production: 6.76% Average annual growth in natural gas production: 3.71% | AnnuAl RepoRt 2006 | 21
  • 24. Petrobras declared to the ANP the commercial viability of 27 discoveries, some of which are classified as new Business Areas | exploRAtion pRoduction oil and natural gas fields. estimates indicate a recoverable volume of 2 billion 440 million boe: 53 million onshore and the rest all offshore. Production of oil, nGl and condensate unit liftinG cost, excludinG by water depth Government take (us$/barrell) 5% target 5.60 13% 2011 69% 2006 6.59 13% Onshore 2005 5.73 0 - 300 2004 4.28 300 - 1,500 Total Production: 1,778 thousand bpd 1,500 2003 3.36 2002 3.00 Production of natural Gas by water depth an 11% appreciation of the local currency (real) against the US dol- 3% lar and to contractual readjustments, particularly drilling contracts, as well as the oil market heating up, enlargement of the workforce, 39% in line with the Business Plan forecast, and the coming on-stream of the platforms P-50, FPSO Capixaba and P-34. 38% Onshore The Challenge OF gROwTh 0 - 300 The targets set down in Petrobras’ latest business plan provide for 15 20% 300 - 1,500 major oil and 10 natural gas production projects to come on-stream Total Production: 43,975 thousand m3/day 1,500 by 2011, when the company’s average production of oil and natural gas in Brazil is estimated to reach 2 million 925 thousand boed. operation on February 22nd: the Peroá platform (production of During 2007, the following platforms will come on-stream around 1 million m3/day). In Rio Grande do Norte, the Guamaré in the Campos Basin: the FPSO Cidade do Rio de Janeiro (100 UPGN III (production of 1.5 million m3/day) came on-stream, fol- thousand bpd), in the Espadarte field; the P-52 and P-54 (180 lowing a pre-operational phase that kicked off in December 2005. thousand bpd, each), in the Roncador field; the SSP 300 (30 thou- The average lifting cost in 2006, not including the government’s sand bpd), in the Piranema field; and the FPSO Cidade de Vitória take was US$ 6.59 per barrel of oil equivalent (boe) — an increase of (100 thousand bpd), in module 2 of the Golfinho field. In Bahia, 15% over the previous year’s figure. The increase was mainly due to the Manati platform (6 million m3/day) will come into operation 22 | AnnuAl RepoRt 2006 | petRobRAs
  • 25. Business Areas | exploRAtion pRoduction Cacimbas gas treatment plant, linhares, espírito Santo in 2007, augmenting the company’s production of natural gas. supplies in the southeast to a total of 55 million m3/day, by 2010, with Two more platforms destined for the Campos Basin are cur- initiation of the Mexilhão (2009) and Uruguá and Tambaú (2010) rently under construction: the P-51 and P-53 (180 thousand bpd, projects, located in the Santos Basin, in addition to the Caraguatatuba each), with operational start-up scheduled, respectively, for 2008 Gas Processing Plant, whose first module will come on-stream in and 2009, in the Marlim Sul and Marlim Leste fields. Additionally, 2009, followed by the second module in 2010. an FPSO will be leased in 2008, for use in the Jabuti area of the Marlim Leste field. OnShORe and OFFShORe Looking ahead to 2009, production is scheduled to begin diSCOveRieS under the Parque das Conchas Project (100 thousand bpd), oper- In 2006, Petrobras reported the commercial viability of 27 discov- ated by Shell. 2010 should see the Frade field (100 thousand eries to the ANP (National Oil, Natural Gas and Biofuels Agency). bpd) come into operation, in a partnership with Chevron, and in Some of these areas — 18 of which are located offshore and 9 2011 the P-57 platform (180 thousand bpd), under phase 2 of the onshore — were classified as new oil and natural gas fields, while Jubarte field, and the P-55 (180 thousand bpd), in module III of the others were incorporated within neighboring fields. The explora- Roncador field, will both come on-stream. tion highlight was the discovery of light oil and gas in ultra-deep The exploration and production of natural gas is also being waters in the Santos Basin block BM-S-11. intensified, under Plangás, which is fundamental to ensuring the Estimates of Petrobras’ stake in the new commercially viable supply of natural gas to the markets in the south and southeast of areas indicate a total recoverable volume in the region of 2 bil- Brazil. In the southeast, the supply will rise from the present 15.8 mil- lion 440 million boe, but this figure is subject to a more precise lion m3/day to 40 million m3/day by the end of 2008. In the Espírito assessment. Of this total, 2 billion 387 million boe lie in offshore Santo Basin, Plangás provides for the expansion of the Peroá proj- accumulations and 53 million boe are to be found onshore. Ten ect to 9.4 million m3/day and the development of the Canapu and of the 27 areas are located in the Campos Basin; four are in the Camarupim fields, in addition to expansion of the Cacimbas Gas Santos Basin; seven are in the Espírito Santo Basin; and six are Processing Complex to 20 million m3/day. The first phase of this located in basins in the north and northeast of Brazil. expansion (5.4 thousand m3/day) will be completed in early 2007, In the Santos Basin, three areas operated by Petrobras were when the Peroá Gas Processing Plant comes into operation. In the declared commercially viable and reclassified as the oil and natu- Campos Basin, Plangás gives priority to the production of non-associ- ral gas fields of Tambuatá, Pirapitanga and Carapiá. A fourth area ated gas from a variety of reservoirs located near the existing infra- was incorporated within the Mexilhão field. The total volume structure within the Albacora, Roncador and Marlim Sul fields, as is estimated at 560 million boe. In addition to these four areas, well as initial development of the Jabuti field. In the Santos Basin, the the company has a 40% stake in two other areas that were also Merluza platform’s output will be expanded to 2.5 million m3/day, reported to the ANP as being commercially viable. with increased production from the Merluza field and initial devel- What is more, the discovery of light oil and gas in block BM- opment of the Lagosta field. Plangás foresees the expansion of gas S-11, in which Petrobras has a 65% stake, opens up promising new | AnnuAl RepoRt 2006 | 23
  • 26. Business Areas | exploRAtion pRoduction Fazenda alegre oil treatment and transfer unit, Jaguaré, espírito Santo prospects not only for operations in the Santos Basin but for opera- exPloration success rate tions in ultra-deep waters in other regions. In order to reach the oil and gas, the company had to bore through a layer of salt that was 50% 55% more than two thousand meters thick, in waters with a depth of two thousand meters. 39% 49% In the Espírito Santo Basin, four offshore and three onshore areas operated by Petrobras were declared commercially viable. On the continental shelf, where the new discoveries are estimated at 168 24% 20% million boe, two areas were reclassified as the Carapó and Camarupim 23% gas fields and two areas containing gas and light oil were incorporated 2000 2001 2002 2003 2004 2005 2006 within the Golfinho and Canapu fields. The declaration of the onshore areas resulted in the creation of three new fields — Saíra, Seriema and for the development of production — 283 onshore and 48 offshore. Tabuiaiá —, with a total estimated volume of 7.4 million boe, which For exploratory purposes, 80 wells were drilled — 50 onshore and 30 will help to maintain the level of onshore production. offshore. The exploration success rate was 48.7%, as 39 of the 80 wild- With regard to the Campos Basin, the commercial declara- cat wells that achieved their geological objective show good prospects tions covered ten areas. Seven of these were classified as new fields: of becoming discoveries or producers of oil or natural gas. Maromba, Carataí, Carapicu, Catuá, Caxaréu, Mangangá and Pirambu. One area was incorporated within the Baleia Azul field and two others new COnCeSSiOnS into the Viola and Marlim Leste fields. The total estimated volume At the ANP’s Eighth Bidding Round, held in November, Petrobras comes to 1 billion 510 million boe. Another important discovery was proceeded with restructuring and extending the profile of its portfo- made in the Roncador field, in reservoirs below the productive seam. lio of exploration areas. The company acquired 21 of the 22 areas for Five declarations of commercial viability were made by which it bid, covering a total of 7,841.21 km2. The new concessions Petrobras for onshore areas within coastal basins in the northeast that have been added to its exploratory portfolio — 13 onshore, in of Brazil. Three were classified as fields: Tangará, in the Recôncavo the Tucano Basin, and eight in the Santos Basin — will be important Bahiano; and Pintassilgo and Jaçanã, in the Potiguar Basin. The other to the attainment of the oil and gas production levels called for in two areas were incorporated within the existing fields of Baixa do the company’s Business Plan 2007-2011. Juazeiro and Canto do Amaro, also located in the Potiguar Basin. The winning bids made by Petrobras and its partners in the In addition to those, three other onshore areas were discovered in eighth round came to a total of R$ 276,924,361, of which the com- the Sergipe-Alagoas Basin and two in the Recôncavo Basin. In the pany’s share was R$ 248,227,933.50. Petrobras has exclusive rights Solimões Basin, the company declared the commercial viability of to seven of the 21 blocks acquired, and is the operator in two of the Araracanga field — a natural gas discovery made in 1997. them, in partnership with other companies. In the other 12 blocks, During the year, a total of 331 wells were drilled and completed the operations will be carried out by partners. 24 | AnnuAl RepoRt 2006 | petRobRAs
  • 27. reserve Business Areas | exploRAtion pRoduction replacement index of 174% chanGe in level of Proven reserves The offshore concessions acquired in the Santos Basin, covering (spe Criteria - billion boe) a total area of 5,553.03 km2, are considered to offer great potential. The onshore concessions in the Tucano Basin, covering a total of 2,288.15 2006 12.52 13.75 km2, are in new frontier areas, with potential for the discovery of deep Production in 2006: 0.71 billion boe accumulations of natural gas. When the contracts are signed, these 0.24 concessions will probably be grouped by the ANP in various blocks. 0.98 With the various acquisitions and areas handed back over the course of the year, the company’s portfolio of exploratory 2005 13.23 concessions comprises 144 blocks, covering a total area of 149.2 thousand km2. Adding to this the ten areas with discovery evalu- Remaining 2005 reserves ation plans (3.6 thousand km2) in operation, Petrobras’ present Addition of new discoveries exploration area covers a total of 152.8 thousand km2. Additions from existing fields PROven ReSeRveS Petrobras’ proven reserves of oil, condensate and natural gas in Proven reserves of oil and natural Gas (spe Criteria - billion boe) Brazil amounted, at the end of 2006, to 13 billion 753 million boe, following ANP/SPE criteria — representing an increase of 3.9% in relation to the previous year. A total of 1 billion 226 million boe was 2006 11.67 2.08 13.75 added to the reserves over the course of 2006, against an accumu- 2005 11.36 1.87 13.23 lated production volume of 705 million boe, generating a Reserve Replacement Index (RRI) of 174%. This means that for every barrel 2004 11.05 1.97 13.02 of oil equivalent produced during the year, 1.74 barrels were added to the company’s reserves. Meanwhile, the reserves/production 2003 10.60 1.99 12.59 (R/P) ratio is at 19.5 years. Two factors underlie the increase in proven reserves — one 2002 9.56 1.45 11.01 being due to the appropriation of amounts discovered in fields declared commercially viable during the course of 2006. Some of 2001 8.32 1.35 9.67 these declared areas are close to fields that are in the development 2000 8.29 1.36 9.65 phase and were, therefore, included within the figures for those fields. The other contributing factor arises from reservoir manage- Oil, NGL and Condensate ment practices in discovered fields that are already in the develop- Natural Gas ment or production phase. + | AnnuAl RepoRt 2006 | 25
  • 28. Business Areas rEfiNiNG commErciALizATioN increased sales, both ReFining In 2006, Petrobras set new records for refining and the production of in Brazil and abroad oil products in Brazil. The average processed throughput (primary processing) of the company’s 11 Brazilian refineries amounted to a new refining record and a 3% increase in domes- 1 million 746 thousand bpd of oil, while the production of oil prod- Tic oil producT sales were oTher highlighTs of ucts totaled 1 million 764 thousand bpd — representing increases The year’s resulTs. The 11 peTrobras refineries saw of 1% and 2%, respectively, in relation to the previous year. The Their primary processing of oil and producTion 80 % share of domestic oil in the total 2006 processed throughput of oil producTs boTh rise in comparison wiTh 2005. is a reflection of the operational reliability of the units, which were The sTrong domesTic oil producTion and com- working at an average of 89 % of their refining capacity. pany logisTical sTrucTure, TogeTher wiTh The The company proceeded with its investments to adapt the opening up of new markeTs, enabled peTrobras To country’s refineries to process the heavy oils that are produced also seT new foreign sales records, and Thereby in Brazil. New catalytic cracking and retarded coking units came consolidaTe iTs posiTion as The counTry’s lead- on-stream at the Alberto Pasqualini Refinery (Refap) and a new ing exporTer. coking unit will start operating at the Duque de Caxias Refinery unit cost of refininG oil Products market (us$ /barrel) (thousand bpd) target 1,821 2011 2.90 1,755 1,766 1,749 1,700 1,764 1,735 1,641 1,696 1,697 2006 2.29 1,639 1,637 1,644 2005 1,609 1.90 1,510 2004 1.38 2002 2003 2004 2005 2006 2003 1.14 Demand for Oil Products 2002 Production of Oil Products 0.94 Sales of Oil Products 26 | AnnuAl RepoRt 2006 | petRobRAs
  • 29. Business Areas | Refining commeRciAlizAtion sales of 1.70 million bPd of oil Products in the brazilian market (Reduc) in 2007. With the coking units, Petrobras is able to opti- mize the rendering of domestic oil into diesel fuel. As part of the company’s strategy for improving the quality of its fuels, Petrobras pressed ahead with the installation of hydrotreat- ment units (HDTs) at nine refineries. The process of treatment with hydrogen, which reduces the sulfur content of the oil products, will meet the most stringent environmental specifications that are to come into effect as from 2009. At the same time, this will open up new export markets, such as the USA and the EU. The launching of Podium Diesel and the development of H-Bio were milestones for quality and environmental protection in 2006. As with Podium gasoline, the new diesel fuel offers improved performance with less engine wear and lower sulfur content. H-Bio, a pioneering process from Petrobras, blends vegetable oil with mineral oil to produce diesel fuel. The company also expanded the supply of diesel S500 to eight new metropolitan areas — Curitiba, Salvador, Recife, Fortaleza, Belém, Vitória, Aracaju and Porto Alegre. This product, launched in 2005, has a sulfur content that is just one quarter that of ordinary diesel fuel. Parallel with the growth in domestic oil production, Petrobras is developing two major projects — the Abreu Lima Refinery, in the state of Pernambuco, with a capacity of 200 thou- sand bpd, is a US$ 4.0 billion undertaking that is being studied, together with Petróleos de Venezuela (PDVSA); and the Premium Refinery, at an as yet undefined location, with a capacity of 500 thousand bpd, will be the largest in the country. With operational start-up scheduled for 2011 and 2014, respectively, these new refineries will cope with the growing domestic demand, reduce imports of diesel fuel and bolster the country’s exports of oil prod- isaac Sabbá ucts, thus making the most of any Brazilian oil surpluses. + refinery (Reman), Manaus, amazonas | AnnuAl RepoRt 2006 | 27
  • 30. The hydrodesulfurization unit at the getúlio vargas refinery (Repar), Business Areas | Refining commeRciAlizAtion araucária, Paraná COMMeRCializaTiOn stable in relation to those of 2005. In 2006, Petrobras sold an average of 1 million 697 thousand bpd The increase in domestic oil production, the optimization of oil products in the Brazilian market – a 3% increase in relation of the company’s logistical structure and the opening up of new to 2005. The leading products, in terms of sales volume, were commercial opportunities enabled Petrobras to set new records gasoline, naphtha, fuel oil, diesel fuel, liquefied petroleum gas (LPG) and aviation fuel. oil imPorts and exPorts (thousand bpd) Gasoline registered the biggest increase in sales, by 7%, mainly due to the reduction, in March, of the percentage of etha- nol that is mixed with the gasoline sold at service stations, from 450 370 25% to 20%. In November, it was raised to 23%. Another factor 352 326 319 was the expansion of the gasoline powered vehicle fleet, including 335 the users of flex fuel vehicles who chose to use gasoline. Working in the opposite direction were a 5.1% real increase in the pump 181 263 233 233 price and the growing use of natural gas to power vehicles. 2002 2003 2004 2005 2006 There was a 5% increase in sales of naphtha. Faced with growing demand from the petrochemical centers, Petrobras Imports expanded its production and partially substituted imports, thereby Exports securing increased business. After several years of declining business in the fuel oil seg- ment, sales were up 1%, helped by gains in market share and the oil Product imPorts and exPorts (thousand bpd) response to new consumers. Among the sectors showing strong demand were manufacturing in the state of Pará and the new ther- 228 260 moelectric power plants in the state of Amazonas. 216 246 Sales of diesel fuel were also up 1%, lagging behind the 213 country’s GDP growth. The principal reason was the poor per- 206 formance of the agribusiness sector, which is still recovering from 109 118 crisis in 2005/2006 and the appreciation of the real against other 105 important currencies. 94 2002 2003 2004 2005 2006 LPG saw an increase of 1.5% in sales, in response to a grow- ing population and their improved purchasing power, brought Imports about by a higher minimum wage and broad government measures Exports to safeguard household incomes. Sales of aviation fuel remained 28 | AnnuAl RepoRt 2006 | petRobRAs
  • 31. oil Product imPorts Per tyPe oil Product exPorts Per tyPe (volume) (volume) Business Areas | Refining commeRciAlizAtion 6% 17% 23% 12% 66% 17% 16% Naphtha Aviation Fuel Diesel Fuel Gasoline 43% Fuel Oil LPG Bunker Fuel Others Others oriGin of oil Product imPorts destination of oil Product exPorts (volume) (volume) 21% 11% Dutch Antilles 22% 3% Argentina 21% Argentina 4% 2% Aruba Bahamas 5% 3% Belgium Cyprus 4% 7% UAE Singapore 6% 18% 22% USA 8% USA 8% 12% India 11% 12% Italy Nigeria Nigeria Venezuela Uruguay Others Others oriGin of oil imPorts destination of oil exPorts (volume) (volume) 4% 4% 11% 6% 4% Aruba 31% 4% Bahamas 10% 43% 4% Angola Chile Saudi Arabia 8% China 11% Algeria S. Korea 10% 16% Congo USA 22% 12% Iraq France Nigeria Portugal Others Others in international sales and consolidate its position as the country’s products were down 5.4% compared with 2005, at an average of leading exporter. Oil exports hit a record 484 thousand bpd in 246 thousand bpd. Imports averaged 370 thousand bpd of oil and November and closed the year at an average of 335 thousand bpd, 118 thousand bpd of oil products. The company recorded a trade an increase of 27% in relation to the previous year. Exports of oil surplus of US$ 421 million in 2006. + | AnnuAl RepoRt 2006 | 29
  • 32. Business Areas PETrochEmicALs Strategically important products for the company’s businesses peTrochemicals are of sTraTegic imporTance To peTrobras, providing diversificaTion of The prod- ucT porTfolio and adding value To The oil and naTural gas, in synergy wiTh The company’s oTher operaTions. peTrobras’ acTiviTies in The secTor, under The aegis of iTs subsidiary peTrobras química s.a. (peTroquisa), have been selecTively builT up for The producTion, in associaTion wiTh parTners, of basic inpuTs and ThermoplasTic resins. Petroquisa, which in 2006 became a wholly-owned sub- sidiary of Petrobras, has a stake in all the country’s petrochemi- cal hubs, whose products, such as calcined petroleum coke and catalytic agent for cracking oil, are of strategic interest to Petrobras. Petroquisa’s net earnings for the year came to R$ 133.5 million. Notable among the various units that are being planned is the Rio de Janeiro Petrochemical Complex (Comperj), to be con- structed in the municipalities of Itaboraí and São Gonçalo, in part- nership with the Ultra Group and the Brazilian Development Bank (BNDES), at an estimated cost of US$ 8.3 billion. The technical and economic studies for the project were completed in March. This complex will process up to 150 thousand bpd of heavy oil, for the production of petrochemical raw materials and oil prod- Campos elíseos ucts, with an annual output of 1.3 million tons of ethylene, 880 petrochemical complex, duque de thousand tons of propylene, 600 thousand tons of benzene and 700 Caxias, Rio de Janeiro thousand tons of paraxylene, as well as other oil products, especially 30 | AnnuAl RepoRt 2006 | petRobRAs
  • 33. Business Areas | petRochemicAls net earninGs of 133.5 million reais in 2006 coke. In addition to the basic petrochemical unit (UPB), the utilities center and the second generation units, Comperj will be equipped with a business and employee training center and a distribution center for channeling liquid products to loading terminals on the shores of Guanabara Bay. The operational start-up is scheduled for the beginning of 2012. The second generation units will use as raw material the basic petrochemicals produced at the UPB, for the annual production of 880 thousand tons of polyethylenes, 850 thousand tons of polypro- pylene, 500 thousand tons of styrene, 600 thousand tons of ethylene glycol and 600 thousand tons of purified terephthalic acid (PTA). Another important undertaking that is under way is the indus- trial unit of Petroquímica Paulínia S.A., in an association between Petroquisa, which holds a 40% equity stake, and Braskem, at an estimated cost of US$ 328 million. Located in the municipality of Paulínia (SP), next to the Paulínia Refinery (Replan), this unit will produce 300 thousand tons per year of polypropylene, using propyl- ene supplied by the neighboring refinery and by the Henrique Lage Refinery (Revap). With an environmental license granted towards the end of 2006, construction of the production plant is going ahead and the unit is scheduled to go into operation in 2008. Petrobras is proceeding with the technical, economic and environmental evaluation of the Minas Gerais integrated acrylic complex — a US$ 540 million undertaking for the annual pro- duction of 160 thousand tons of raw acrylic acid and certain by- products. The complex, a pioneering initiative in Latin America, is scheduled for operational start-up in 2011. Petroquisa has taken further steps to set up a purified tere- phthalic acid (PTA) unit in Pernambuco, with the founding of Companhia Petroquímica de Pernambuco — PetroquímicaSuape. The industrial unit, involving the investment of US$ 514 million, will have a production capacity of 640 thousand tons per year, and is scheduled | AnnuAl RepoRt 2006 | 31
  • 34. Business Areas | petRochemicAls to start operations in 2009. The raw material for the process will be The rio de Janeiro petrochemical paraxylene, which at first will be imported, but will subsequently be complex is one of Petrobras’ supplied by the Rio de Janeiro Petrochemical Complex. most important projects in the Within the production chain to be created by the activities petrochemical area. involving an of PetroquímicaSuape, some of the PTA will serve as raw mate- investment of Us$ 8.3 billion, the rial for Companhia Integrada Têxtil de Pernambuco — CITEPE. complex will produce raw materials for This company, in which Petroquisa has a 40% stake, was founded the petrochemical processes, as well as in 2006, with a view to setting up an industrial plant to produce oil products, all deriving from heavy oils. polyester fiber (POY). The unit, budgeted at US$ 273 million, will produce 215 thousand tons of the product annually, and is scheduled to go into production in 2009. + Petroquisa equity Holdings Voting Total Company Product Capital (%) Capital (%) Braskem S.A. Basic, intermediate and final petrochemicals 9.8 8.3 Copesul - Companhia Petroquímica do Sul Basic petrochemicals 15.6 15.6 Petroquímica União S.A. Basic petrochemicals 17.5 17.4 Riopol - Rio Polímeros S.A. Polyethylenes, ethylene and propylene 16.7 16.7 Metanor S.A. Metanol do Nordeste Methanol and by-products 49.5 34.3 Deten Química S.A. Linear alkyl benzene and sulfonated linear alkyl benzene 28.6 27.7 Fábrica Carioca de Catalisadores S.A. Catalysts 50.0 50.0 Petrocoque S.A. Indústria e Comércio Calcined petroleum coke 40.0 40.0 Low density polyethylene, ethylene copolymer and Petroquímica Triunfo S.A. 70.5 85.0 vinyl acetate (EVA) Petroquímica Paulínia S.A. Polypropylene 40.0 40.0 Companhia Petroquímica de Pernambuco - Purified terephthalic acid (PTA) 50.0 50.0 Petroquímica Suape Companhia Integrada Têxtil de Pernambuco - Citepe Polyester fibers (POY) 40.0 40.0 Nitroclor Produtos Químicos Ltda. In the process of being wound up 38.8 38.8 32 | AnnuAl RepoRt 2006 | petRobRAs
  • 35. Production of urea at the nitrogenous Fertilizer Plant (FaFen), laranjeiras, Sergipe Business Areas | petRochemicAls investment in fertilizer Plants boosts Production Petrobras pushed ahead with the modernization of its fertilizer production plants and the development of new projects to expand the production of nitrogen compounds, in line with the strategy of increasing its activities in the seg- ment. In 2006, sales of ammonia and urea generated US$ 350 million in gross revenue for the company – an increase of 6% in relation to the previous year. The company’s fertilizer plants, located in the states of Bahia and Sergipe, received R$ 92 million of investment in projects to improve their operational reliability, logistics and product quality, as well as in Health, Safety and the Environment (HSE). In Sergipe, completion of the new urea warehouse, with a capacity of 30 thousand tons, doubled the unit’s storage capacity and brought additional flexibility to the logistical operations. In a fifth successive year of sales growth, the two plants sold 213 thousand tons of ammonia in the domestic mar- ket. In the urea fertilizer segment, Petrobras retained its leadership in the Brazilian market, with 710 thousand tons sold in 2006. As a result of the investment in reliability, the Bahia plant achieved its highest production figure in the last seven years, of 285 thousand tons. A new urea granulation unit will come on-stream at the Sergipe plant in 2007, with an output of 600 tons a day. In order to substitute imports of nitrogenated fertilizers, Petrobras went ahead with the conceptual design of a new industrial plant — the UFN-3, which will use natural gas as a raw material. At an estimated cost of US$ 822 million, this unit should produce 1 million tons of urea and 760 thou- sand tons of ammonia a year, as from 2012. Another project that is being studied is the construc- tion, at the Bahia plant, of an industrial unit with the capa- city to produce 120 thousand tons of nitric acid a year for the Camaçari Petrochemical Complex. The unit would come on-stream in 2009. | AnnuAl RepoRt 2006 | 33
  • 36. Business Areas TrANsPorTATioN logistics yield competitive advantages for The TransporTaTion and sTorage of oil, oil producTs, eThanol and naTural gas, peTrobras works Through iTs fully-owned subsidiary peTrobras TransporTe s.a. — TranspeTro, which operaTes 53 ships, 44 Terminals and 9,958 kilome- Ters of pipeline. This company fulfills a sTraTe- gic role, providing The inTegraTed logisTical soluTions and operaTional flexibiliTy ThaT give peTrobras a compeTiTive edge. FleeT OF 46 TankeRS Transpetro is the largest shipowner in South America, with a total deadweight capacity of 2.6 million tons (dwt). The company has a fleet of 46 oil tankers and leases the rest from third parties on bareboat charters. On this basis, contracts were signed in 2006 for the Navion Stavanger (Suezmax) and two other vessels, which will be received in 2007. The fleet also includes a Floating Storage and Offloading unit (FSO) and an Anchor Handling Towing Supply vessel(AHTS). Transpetro operates at a high level of reliability, providing quality services at competitive prices and an excellent level of compliance with Health, Safety and the Environment (HSE) stan- dards. The vessels are regularly inspected under the Navio 1000 Program, which evaluates the fleet management, operating condi- The ilha d’Água maritime tions and safety, in accordance with international regulations. terminal, guanabara Bay, Rio de Janeiro As part of its strategy to expand the services it provides to Petrobras, in line with the increasing domestic oil production, 34 | AnnuAl RepoRt 2006 | petRobRAs
  • 37. a monthly 350 averaGe of Business Areas | tRAnspoRtAtion vesselsare handled at the terminals Transpetro proceeded in 2006 with its Fleet Modernization and electric generation, refining capacity and natural gas supplies. Expansion Program. Having completed the first phase tender- With planned investments totaling more than R$ 2 billion, ing process, 26 vessels have been ordered from shipyards with the plan includes the establishing of new pipeline courses and Brazilian operations. Under the second phase of the program, a the extension of existing ones, the construction of 500 kilometers further 16 tankers will be built. of pipeline and the deactivating of 110 kilometers of pipeline The first 26 vessels, divided into five tendering lots, rep- courses and 280 kilometers of pipelines in the Greater São Paulo resent a total investment of US$ 2.5 billion, and comprise ten metropolitan area. The Guararema terminal is to be expanded and vessels of the Suezmax type; five Aframax; four Panamax; four oil a new one will be built in Mauá. A total of 28 thousand direct and product carriers and three liquefied-gas tankers. In the negotia- indirect jobs will be created by these investments. tions with the shipyards, the company managed to obtain a 14% The company completed the studies for implementation of price reduction, bringing the average price to around the level it the Ethanol Export Corridor, which will raise the ethanol transpor- would have paid if the orders had been placed abroad. Having tation potential from the present 1.2 million m3/year to 4 million the vessels built in Brazil aids the recovery of the country’s large- m3/year in 2010. The first three projects — part of the plan to invest scale shipbuilding industry, as well as developing a new supply US$ 600 million over six years — will connect Replan by pipeline to center for Petrobras. Guararema and the Triângulo Mineiro, via Ribeirão Preto, as well as establishing integration with the Tietê-Paraná waterway, connecting TeRMinalS and Oil PiPelineS São Paulo with the country’s mid-western region. The operator of the majority of Petrobras’ oil pipelines, land-based The Transpetro Ethanol Program has aroused the interest and waterway terminals, Transpetro transported 654 million m3 of of other countries in Brazil’s experience with the transportation oil, oil products and ethanol in 2006. During the year, the water- of ethanol, creating opportunities for developing partnerships in way terminals handled an average of 350 vessels a month. Latin America, the United States, Europe, Africa and Asia. In 2006, The network operated by Transpetro comprises 7 thousand more than 80 thousand m3 of ethanol were exported to Venezuela, kilometers of oil and multi-product pipelines. The 44 terminals as a result of a bilateral agreement. have storage capacity for 65 million boe (10.3 million m3). Yet another initiative is the Underground Water Treatment In order to modernize and extend the network, adjusting it Program, which provides a logistical response to the growing quan- to the future requirements of both Petrobras and the country as a tity of water produced by Petrobras’ fields, due to the increased whole, the company is engaged in a number of initiatives. One of production, together with the maturing of reservoirs and the tech- these is the Master Plan for Pipelines in São Paulo, covering a total of nical methods used to recover the oil. In the area of tank storage, in 27 municipalities, under which the network will be redesigned, keep- order to eliminate logistical bottlenecks, Transpetro is augment- ing it away from more densely populated areas and thus improving ing its storage capacity by 500 thousand m3. + operational safety. The new logistical infrastructure will be inte- grated with the expansion of Petrobras’ petrochemicals, thermo- | AnnuAl RepoRt 2006 | 35
  • 38. Business Areas | tRAnspoRtAtion natural Gas: more Gas PiPelines in 2007 In the natural gas segment, Transpetro transported an average of 34 million m3 per day in 2006. In addition to expanding the system, with the integration of two new delivery points and a new gas pipeline (Dow-Camaçari), the company transferred the operation of its Espírito Santo and Bahia networks to the National Operational Control Center, which operates all the pipelines by remote control. The company is preparing the way for the integration into the system, in 2007, of 1.8 thousand kilometers of gas pipelines that are under construction. A further 1.6 thousand kilometers of gas pipeline that is on the draw- ing board should come into operation between 2008 and 2011, when the volume of natural gas transported by Transpetro will reach the milestone of 100 million m3 a day, including imported liquefied natural gas (LNG). The Cabiúnas Terminal (RJ), Brazil’s largest center for the processing of natural gas, will also see its capacity augmented in 2007, from the current 14.9 million m3 to 17 million m3 a day. Two new projects under way at the The admiral Maximiano Fonseca center will further raise the processing capacity, to 22.4 terminal, angra dos million m3 a day. Reis, Rio de Janeiro 36 | AnnuAl RepoRt 2006 | petRobRAs
  • 39. Petrobras in Brazil | AnnuAl RepoRt 2006 | 37
  • 40. Business Areas disTriBUTioN The country’s largest network of service stations peTrobras operaTes in The fuel disTribuTion markeT Through iTs subsidiary peTrobras disTribuidora, The markeT leader, wiTh The counTry’s largesT neTwork of service sTaTions. of The 5,870 peTrobras service sTaTions locaTed ThroughouT brazil, 638 belong To The company and The oTher 5,232 are run by dealers represenTing The peTrobras brand. The revenues of Petrobras Distribuidora in 2006 from prod- ucts and services came to a total of R$ 47.1 billion — up 8.0% in relation to the previous year, due to higher sales, which established a new record in October. The company’s share of the distribution market reached 33.6% — 0.2 percentage points below the figure for 2005, as a result of fierce competition in 2006. In the second half of the year, Petrobras Distribuidora managed to regain market share and in December accounted for 34.9% of sales. The leading position in sales of vehicular natural gas (VNG) is also held by Petrobras Distribuidora. Its market share in 2006 was 23.7%, with the product available at 355 service stations. In the liquefied petroleum gas (LPG) market, operating through Liquigás Distribuidora, Petrobras had a market share of 21.7% — a dip of 0.1% in comparison with 2005. One of the distinctive features of the network in 2006 was the increased supply of biodiesel. In line with the company’s strategy of Petrobras retaining its position as the consumer’s favorite brand and adding service station, Rio de Janeiro value for the Petrobras System, the distributor made the product available at 3,740 service stations all over Brazil. Biodiesel should 38 | AnnuAl RepoRt 2006 | petRobRAs
  • 41. Petrobras 47.1 distribuidora earns Business Areas | distRibution billion dollars in sales revenues be available throughout the entire network by June 2007. network of active service stations The arrival of biodiesel at the pumps reinforced the public total 5,870 association of Petrobras Distribuidora with virtues such as inno- Urban 4,560 vation, quality and social and environmental responsibility. Also Highway 1,282 launched in 2006 were Diesel Podium, with its low sulfur content; Maritime 28 the Evolua line of cleaning and protective products; and new lubri- own outlets 638 cants. The distributor also invested in the expansion and modern- third-party outlets 5,232 ization of the service stations, bringing them into compliance with convenience stores 740 the latest safety and environmental protection standards. To further please its customers, Petrobras Distribuidora vng outlets 355 extended projects such as the “Cartão Petrobras” card, carried out promotions and trained its attendants, under the “Capacidade Máxima” program. In terms of its relationship with dealers and fuel distribution market share in brazil end consumers, the company organized regular visits by commer- cial representatives and gatherings for the presentation of plans and strategies, as well as distributing the “Jornal do Revendedor” 30% newsletter. Petrobras Distribuidora has a 45.5% share of the direct con- sumer market, with notable participation in the segments of avia- 20% tion products (53.5%), asphalt (29.4%) and retail road transporta- tion (40.4%). During 2006, the company developed new services to gain customer loyalty in the transport sector. 10% Since 2005, Petrobras Distribuidora has been investing in the adaptation of the installations of its distribution network – the largest in Brazil – to handle biodiesel. Its 56 strategically posi- 0 tioned bases and terminals ensure ample reach for the placing Petrobras Ipiranga Shell Esso Texaco Others of Petrobras products. The network also allows the integration distribuidora of transport and storage solutions with service quality, thereby giving the company a competitive edge. + 2002 2005 2003 2006 2004 | AnnuAl RepoRt 2006 | 39
  • 42. Business Areas NATUrAL GAs Rising consumption is a reflection of the product’s quality The naTural gas markeT conTinues To grow, wiTh average sales To disTribuTors reaching 38.7 mil- lion m3/day in 2006 — 7% more Than in The previous year. This increased consumpTion is driven by fac- Tors such as The expansion of The logisTics infra- sTrucTure, The enTry of new large-scale consum- ers inTo The markeT and a sharp increase in The naTural gas powered vehicle fleeT. The increase also reflecTs The consumer’s growing recog- niTion of The producT’s Technological, opera- Tional, environmenTal and economic qualiTies. To supplement domestic production, in order to meet the level of demand, Petrobras imported an average of 24.7 million m3/day of natural gas — an increase of 9% in relation to the volume in 2005. Following its strategy of developing and consolidating the market, Petrobras set in motion its Plan to Advance the Production of Natural Gas (Plangás). The supply of domestic gas to the southeast of Brazil will be augmented in two stages — in the first, up to 2008, from the current 15.8 million m3/day to 40 million m3/day; in the second, up to 2010, the volume will reach 55 million m3/day. To ensure that the increasing level of consumption in the coun- try is sustainable, Petrobras is preparing the way for its entry into the global liquefied natural gas (LNG) market as an importer. The a natural gas company will set up two floating regasification terminals, one in the powered bus, São Caetano do state of Ceará and one in Rio de Janeiro, with respective capacities Sul, São Paulo of 7 and 14 million m3/day. 40 | AnnuAl RepoRt 2006 | petRobRAs
  • 43. averaGe sales of 38.7 Business Areas | nAtuRAl gAs million cubic meters a day TRanSPORTaTiOn Implementation of the Natural Gas Basic Transportation Network (RBTGN) proceeded through 2006. The putting together of a sup- ply system that is flexible, safe and competitive — a network of interconnected gas pipelines extending from Fortaleza to Porto Alegre and from São Paulo to Bolivia — is in alignment with the development of production in the Campos Basin and the explo- ration of the company’s offshore blocks, allowing the immediate channeling of production from new discoveries. One of the leading RBTGN projects that is under way is the Northeast-Southwest Interconnection Gas Pipeline (Gasene) — comprising three stretches of pipeline: Cabiúnas–Vitória (Gascav), Cacimbas–Vitória and Cacimbas–Catu (Gascac). In 2006, Petrobras closed two financing deals with the Brazilian Development Bank (BNDES), for the specific purpose company Transportadora Gasene S.A., which is responsible for the project, for the total sum of R$ 1.36 billion. The 131-kilometer stretch in the state of Espírito Santo (Cacimbas–Vitória) will be operational in early 2007. Work on the stretch connecting Rio de Janeiro and Espírito Santo (Cabiúnas–Vitória) began in June and is scheduled to be com- pleted in October 2007. The Cacimbas–Catu stretch, between Espírito Santo and Bahia, is at the tendering stage and should be ready in the second half of 2009. In the north, construction of the 670-kilometer Urucu–Manaus Gas Pipeline was started in June and is scheduled for completion in the first quarter of 2008. In the northeast, the Atalaia–Itaporanga pipeline, in the state of Sergipe, and the Dow–Aratu–Camaçari pipe- line, in Bahia, both came into operation. Another three pipelines – the Carmópolis–Pilar, between Sergipe and Alagoas, Itaporanga– Carmópolis (SE) and Catu–Itaporanga, connecting Bahia and Sergipe – should start up in 2008. + | AnnuAl RepoRt 2006 | 41
  • 44. Business Areas ENErGY Thermoelectric services by the UEG Araucária (428MW), which also allows for the efficient allocation of the natural gas, due to its adjusted cycle. generation Two thermoelectric plants are under construction — augments Termoaçu (RN) and Cubatão (SP) —, within co-generation pro- jects that are in synergy with Petrobras’ activities in these regions. integration Projects are also under way for cycle closure and the conversion of thermoelectric plants to dual fuel (natural gas and diesel), bring- peTrobras has increased iTs parTicipaTion in The ing enhanced efficiency and reliability in the supply of fuel to the ThermoelecTric energy segmenT, following power plants. + a sTraTegy of consolidaTion as an inTegraTed energy company. The company is involved in The enTire ThermoelecTric energy generaTing chain, as well as in The process of commercializaTion. At an energy auction organized by the National Electricity Agency (Aneel) in October, Petrobras sold 205 MW produced by its plants. As a result, the company has secured a stable revenue stream of R$ 103 million/year, for a period of 15 years, beginning in 2011. In 2006, Petrobras completed its acquisition of the merchant 855 million power plants, with the purchase of the UTE Mário Lago (formerly Macaé Merchant). This takeover, along with the acquisitions of the MPX Termoceará and Eletrobolt power plants, puts an end to the legal controversy surrounding the consortium contracts signed in 2001 and 2002, under which the company was obliged liters a year to make contingency payments in regard to taxes, fees, tariffs, is the Production tarGet operating expenses, maintenance and investment in the event for biodiesel that the plants did not earn sufficient revenue. These acquisitions have reduced expenses and guarantee full receipt of the revenue from power generation, in accordance with Petrobras’ guidelines for its participation in the electricity sector. Petrobras also purchased the UTE Bahia I (31MW), a fuel oil powered thermoelectric plant, to serve as a generation back-up. With the same intent, the company closed a contract for the provision of 42 | AnnuAl RepoRt 2006 | petRobRAs
  • 45. Business Areas | eneRgy Barbados nut cultivation under the “Molhar a Terra” project, Ceará Mirim, Rio grande do norte renewable enerGy: PursuinG market leadershiP Attaining leadership in the domestic production of biodiesel Petrobras aims to produce 855 million liters of biodiesel and expanding its ethanol business have become priorities for a year by 2011. In order to attain this level of production, the Petrobras. To this end, the company has developed a variety of company is analyzing some fifteen other projects in various activities in the field of renewable energy, with a view to hitting parts of the country, in partnerships with investors ranging the audacious targets set down in the Business Plan 2007-2011 from large corporate groups to rural workers’ cooperatives. — during this period a total of US$ 700 million will be invested in Biodiesel provides reduced emissions of greenhouse renewable sources of energy. gases, sulfur and particulates, as well as improving engine per- The generation of electricity by wind farms and small- formance. In addition to the environmental and social benefits, scale hydroelectric plants are other areas in which Petrobras in harmony with the growing use of sustainable sources of is investing in the field of renewable energy. According to the energy, this product will hasten the end of diesel imports. goals defined in 2006, by 2011 the company will be producing etHanol Petrobras’ strategy for its ethanol business is 855 million liters of biodiesel, exporting 3.5 billion liters of focused on exports, with a view to opening up new markets ethanol and generating 240 MW of electricity through renew- and developing long-term relationships with the clients, in able sources. increasing synergy with the company’s International area. In Biodiesel In order to attain leadership in Brazilian biodie- 2006, earnings from foreign sales of ethanol exceeded US$ 14 sel production and strengthen its position as an integrated million. The volume sold, amounting to more than 80 million energy company, Petrobras threw itself into large-scale liters, helped to consolidate the logistical corridor for the production in 2006, by beginning the construction of three exporting of ethanol from the south-central region, through plants. Representing a total investment of R$ 227 million, the Ilha D´Água Maritime Terminal, via the Paulínia Refinery. the units, located in Candeias (BA), Montes Claros (MG) and Concern over the imbalance between supplies and the Quixadá (CE), will have a combined annual production capac- growing demand for the product in the first few months of ity of around 57 million liters of biodiesel and will be inaugu- the year led the company, out of a sense of responsibility rated before the end of 2007. and commitment to sustaining domestic supplies, to export These undertakings are in alignment with the National ethanol only in the second half of the year, when the situa- Program for the Production and Use of Biodiesel. As from tion had stabilized and domestic demand was being met. This January 2008, it will become compulsory for diesel fuel to meant that the export volume was lower than had initially have a 2% biodiesel content. In order to obtain the necessary been forecast for the year. ingredients — soybeans, cotton, castor beans and oil palm To encourage the consolidation of the international etha- fruit, as well as animal fat —, the company is entering into nol market, Petrobras joined the board of the recently formed partnerships with entities formed by small-scale farmers, International Ethanol Trading Association (IETHA) and set up a thereby gaining the tax benefits allowed under the “Selo joint-venture, Brazil-Japan Ethanol (BJE), based in Tokyo, devoted Combustível Social (Seal of Approval for Socially Responsible to developing the Japanese market for the product. The company Fuels)”, granted to biodiesel companies that generate work also reached agreements with the Central Energy Fund (CEF), of and income for subsistence farmers. South Africa, and with Mitsui, of Japan, for exporting ethanol. | AnnuAl RepoRt 2006 | 43
  • 46. “Petrobras is very concerned about health, safety and the environment and this guides its actions. it is a company aguSTina hulJiCh in the Quality and hse area at the Puerto that helps to improve the quality of life, General san martín petrochemical plant – santa fé, argentina OuTlOOk: i hope to keep on learning, so not only of its employees, but of the general population.” that i can use this knowledge in my work as an environmental engineer. 44 | AnnuAl RepoRt 2006 | petRobRAs
  • 47. international Expansion south AmeRicA 50 noRth AmeRicA 53 AfRicA 54 AsiA 55 With a business presence in 19 foreign countries, Petrobras is consolidating its position as an integrated energy company with international presence and leadership in Latin America. The company is involved in the entire chain of activities in the Latin American oil, natural gas and electricity sector, while at the same time augmenting its stake in undertakings in North America, Africa and Asia. The sum of US$ 12.1 billion has been earmarked for investment abroad, representing 14% of the total investment under the Business Plan 2007-2011. Of that amount, 65% will go into Latin America, western Africa and the Gulf of Mexico, all priority areas for Petrobras expansion. | AnnuAl RepoRt 2006 | 45
  • 48. international Expansion new business in foreign markets The acTiviTies in The inTernaTional Business area encompass oil and gas exploraTion and pro- ducTion in 16 foreign counTries — argenTina, Bolivia, colomBia, ecuador, peru, venezuela, mexico, The uniTed sTaTes, angola, equaTorial guinea, mozamBique, nigeria, Tanzania, iran, liBya and Turkey. peTroBras is also developing oTher acTiviTies, including refining and disTriBuTion, as well as mainTaining represenTaTive offices in cerTain sTraTegic locaTions. The strategy for growth abroad provides for the bolstering of the company’s activities in countries where it is already present, such as Argentina, while opening up new business fronts in other markets, such as refining in the USA. In the areas of exploration and production, the priority regions are the Gulf of Mexico and Africa, where Petrobras is girding itself to produce oil in deep and ultra-deep waters off the Niger River Delta, in Nigeria, and is pursuing exploration opportunities in frontier regions, such as the ultra-deep waters off the coast of Tanzania. In refining, the goal is to augment the company’s activi- ties through investments in the expansion and conversion of the Pasadena refinery, in the United States, and seeking opportunities for new refineries abroad. The objective is to add value to the heavy oil produced by the company, providing the market with a product mix combining enhanced value and improved quality. To this end, investments will be focused on the adoption of technol- Fertilizer plant at campana, in the ogy that will enable refineries that were originally built to handle province of Buenos Aires, Argentina light oil to be able to process heavier throughput. 46 | AnnuAl RepoRt 2006 | petRobRAs
  • 49. 1.27 international Expansion billion boE In ProvEn ForEIGn rESErvES, In 2006 IntErnAtIonAl ProvEn rESErvES oF oIl, cHAnGE In IntErnAtIonAl ProvEn rESErvES nGl, condEnSAtE And nAturAl GAS (SPe Criteria – million boe) (SPe Criteria – million boe) 2006 1,240 30 1,270 2006 657 613 1,270 89 2005 955 726 1,681 352 2004 1,007 865 1,872 2005 1,681 2003 1,013 891 1,904 Remaining 2005 reserves 2002 320 803 1,123 Appropriations Production in 2006 Contractual revisions, etc. Oil, NGL and Condensate Natural Gas IntErnAtIonAl ProductIon oF oIl, nGl, IntErnAtIonAl lIFtInG And rEFInInG coSt condEnSAtE And nAturAl GAS (thoUSand boed) (US$ / barrel) target target 2011 383 185 568 2011 1.80 2006 142 101 243 2006 3.36 1.73 2005 163 96 259 2005 2.90 1.30 2004 169 94 263 2.60 2004 1.09 2003 161 85 246 2003 2.46 1.17 2002 58 2.08 2002 35 23 0.94 Oil, NGL and Condensate Natural Gas Lifting Refining | AnnuAl RepoRt 2006 | 47
  • 50. Petrobras around the world great britain usa libya mexico venezuela nigeria colombia equatorial guinea ecuador peru angola Exploration Production bolivia Refining chile paraguay Gas argentina Petrochemicals uruguay Power Distribution Representative office 48 | AnnuAl RepoRt 2006 | petRobRAs
  • 51. international Expansion turkey iran japan china singapore tanzania mozambique IntErnAtIonAl ProvEn rESErvES oF oIl IntErnAtIonAl ProvEn rESErvES oF And condEnSAtE PEr country (SPe Criteria) nAturAl GAS PEr country (SPe Criteria) 10% 1.1% Angola 1.5% 2.1% Argentina 5.2% 12% 27.1% 22% Bolivia Colombia 7.4% Argentina Ecuador Bolivia 6.4% USA 25.6% USA Nigeria 64.1% 11.7% Peru 3.8% Peru Venezuela Venezuela | AnnuAl RepoRt 2006 | 49
  • 52. 492 service stations in Argentina under the international Expansion Petrobras banner sOutH AmericA Petrobras has a 34% equity stake in Cia. Mega, which works ArgentinA As an integrated energy company, Petrobras par- with oil products and logistical services. In 2006, this company ticipates throughout the entire value chain for oil and natural gas, sold 1 million 433 thousand tons of ethane, propane, butane along with electricity generation. The company’s 2006 produc- and natural gasoline. tion in Argentina – its highest outside Brazil – attained an average of 62.1 thousand bpd of oil and NGL and 45.8 thousand boed of BOliviA The Bolivian production of natural gas for export is natural gas, making a total of 107.9 thousand boed. Petrobras had essential to sustaining the growing consumption in Brazil, which a stake and operated in 17 blocks that are in production and in in 2006 imported 24.7 million m3/day. Petrobras sold 7.27 million 10 that are in the exploration phase, and initiated its exploration m3/day of Bolivian natural gas, representing 23.4% of the total of deep waters off the Argentinean coast. The lifting cost was exported by that country. US$ 4.4 per boe. In 2006, as a result of the Hydrocarbons Law, introduced In the areas of petrochemicals and fertilizers, Petrobras the previous year, the nationalization of foreign assets imposed owns the Puerto General San Martin, Zarate and Campana plants significant changes on the sector, with taxation, operational and and has a 40% stake in Petroquímica Cuyo. The operations in financial impacts. Even with the new regulatory framework estab- Argentina are tied in with the southern Brazilian state of Rio lished by the nationalization decree, signed in May 2006, Petrobras Grande do Sul, where its subsidiary Innova turns out products remains the largest oil and natural gas company in Bolivia, and such as styrene, polystyrene and UAN. contributed 22% of the country’s taxation revenue for the year. Petrobras distributes oil products through a network of 719 The decree tied companies’ continuation in Bolivia to the service stations, which sold 48 thousand bpd of fuels and lubricants signing of new contracts. In its negotiations with the govern- in 2006 and has a 13.8% share of the gasoline and diesel market ment regarding exploration and production activities, Petrobras and 11.1% of the lubricants market. The number of service sta- reached the following agreements: contracts will be for shared tions operating under the Petrobras banner increased from 457 to production, and not for the provision of services; the company 492 during the year. Reflecting the growing brand presence, sales will bear the full cost and risk of all oil operations; payment of increased by an average of 2.7%. The company has a 50% stake in royalties and other government quotas is to be made through the parent company of Transportadora de Gás Del Sur (TGS), which Yacimientos Petrolíferos Fiscales Bolivianos (YPFB), through owns the country’s largest network of gas pipelines. which the production is channeled, and amounts to some 80% In the area of electricity generation, Petrobras owns the of revenue; compensation will be paid by YPFB, to be calculated Genelba thermoelectric plant, which uses natural gas, and the Pichi based on the recovery of costs, prices, volumes and investments, Picún Leufú hydroelectric plant. It also has a 27.3% stake in Edesur, net of due taxes. the distributor for the central area of Buenos Aires. Petrobras is Moreover, Petrobras retains responsibility for operations in negotiating the sale of its equity stake in Transener, the country’s the San Alberto, Rio Hondo, Ingre and Irenda blocks, ownership leading electricity transmission company. of the assets and rights to the reserves that are to be booked by 50 | AnnuAl RepoRt 2006 | petRobRAs
  • 53. natural gas plant in san Alberto, Bolivia international Expansion the company. The contracts, which are still pending approval by the Bolivian Congress, are valid for 30 years. The new regulations reduce to 49.9% the proportion of Petrobras’ stake in the refineries of Gualberto Villaroel, in Cochabamba, and Guillermo Elder Bell, in Santa Cruz de La Sierra, which process a total of 39.9 thousand bpd. The company’s refining activities are now performed as a provision of services. Negotiations are still under way with the Bolivian government over the amount of compensation to be paid to Petrobras. In the area of oil product sales, YPFB has become the only wholesale distributor. Petrobras has fully withdrawn its EBR (Empresa Boliviana de Refinación) brand and currently retains just 26 service stations under the Petrobras name. With regard to natural gas, in February 2007 it was decided that no changes would be made in the volumes or in the formula for calculating the purchase price of natural gas from Bolivia contained in the present contract between YPFB and Petrobras (GSA). The company agreed to pay YPFB, at the prevailing international market prices, for the net hydrocarbon fractions (ethane, butane, propane and natural gasoline) present in the natural gas effectively delivered that raise its calorific value to over 8,900 kilocalories (kcal) per m3, equivalent to 1,000 BTU per cubic foot. YPFB will ensure that the minimum calorific value of 9,200 kcal/m3 is met, and Petrobras will study the best way to exploit these components in the future. In the area of transportation, in addition to its stake in GTB, operator of the Bolivian stretch of the Bolivia–Brazil gas pipeline, Petrobras retains its stakes in the Yacuiba–Rio Grande (Transierra) gas pipeline, as operator, and in the San Marcos gas pipeline. | AnnuAl RepoRt 2006 | 51
  • 54. international Expansion cOlOmBiA In the area of exploration and production, Petrobras has a stake in 16 contracts — 7 for production and 9 for exploration —, and is the operator in ten of these. In 2006, the average production amounted to 16,843 bpd of oil and NGL and 6.25 thousand m3/day of natural gas, making a combined total of 16,880 boed. One of the high- lights is the company’s involvement as operator of the Tayrona block, the country’s only offshore block, in partnership with Exxon and the state-owned company Ecopetrol. Following a 50% contractual devolution, the block still covers an area of more than 22,000 km2. The first wildcat well is to be drilled in 2007. The company has also formed a consortium with Ecopetrol for the revitalization of the Tibu field. The investment, which will raise the production from 2,000 bpd to 15,000 bpd, is estimated at US$ 500 million over the next six years, with the consortium members having the option to withdraw from the contract at the end of the first or second year, having made investments of US$ 20 or US$ 40 million, respectively. cHile Petrobras continues to seek business opportunities in this country, through a representative office in Santiago that was opened in 2005. The company sells the lubricant Lubrax here, with sales amounting to 848 m3 in 2006. ecuAdOr Petrobras, operating in two blocks, produced 11.9 thousand boed of oil and NGL in the country in 2006. At the begin- ning of 2007, the company received government approval for the sale of 40% of its stakes in Block 18, which is in production, and Block 31, which is in the exploration phase, to the Japanese com- pany Teikoku. Petrobras is also negotiating with the government for EIA approval of the development of Block 31. gas plant in the guando PArAguAy In 2006, Petrobras entered the segment of oil product field, colombia distribution. The company presently owns 131 service stations and 52 | AnnuAl RepoRt 2006 | petRobRAs
  • 55. In Texas, the company has a 50% equity stake in the Pasadena refinery and is conducting studies for the doubling of its present 100 thousand bpd capacity and the installation of units for the processing of heavy oils, at an estimated investment of US$ 2 billion. international Expansion 45 convenience stores. The network has annual sales of 317 thou- Venezuelan sector of the Caribbean. The agreements also embrace sand m3 of oil products. Among the assets acquired are installations studies for the setting up of a mixed company to produce oil from five for the sale of LPG and the marketing of aviation products. mature fields, onshore, in the Oriente and Maracaibo basins. Peru The company has a stake in six blocks — one of them in nOrtH AmericA production (Lot X) and the others in the exploration phase. In 2006, united stAtes The company has stakes in 302 blocks within the average production amounted to 12.7 thousand bpd of oil and the American sector of the Gulf of Mexico, and is the operator in 1.8 thousand boed of gas, making a total of 14.6 thousand boed. 149 of them. In an auction held in September, Petrobras secured the greatest number of blocks – 34 –, at a cost of US$ 45 million. uruguAy Petrobras entered the oil product distribution seg- The company has begun exploratory work, in the extreme ment, taking over 89 service stations racking up annual sales of west of the Gulf of Mexico, to test new geological possibilities. 330 thousand m3 of oil products, in addition to maritime prod- The first well drilled indicated the presence of natural gas, but the ucts, asphalt and aviation products. The company is also involved thickness of the reservoir was not sufficient to make it commer- in the distribution of natural gas, in the province of Montevidéu cially viable. Nevertheless, the result demonstrated the potential and in the interior of the country, selling a total of 120 thousand of the area, where at least one more well will be drilled in 2007. m3/day of gas. Petrobras’ average production in the Gulf was 4.0 thousand boed, below the forecast for the year, largely due to the effects of venezuelA The new legal framework for the country’s oil the hurricane season, towards the end of 2005. Normal production industry introduced a new contractual model for the activities was restored only in August 2006. of companies operating mature fields under a provision of services In ultra-deep waters, the company managed to obtain a contract. As from April 2006, the fields in this country operated larger stake in the discoveries of Cascade and Chinook, becom- by private national or foreign companies under this type of con- ing the operator for the two projects. The production, with start- tract will be operated by mixed companies under the control of up scheduled for 2009, will make use of a Floating Production, Petróleos de Venezuela S.A (PDVSA), which will have a 60% stake. Storage and Offloading (FPSO) platform ship. Putting into effect Petrobras, which operated the Oritupano-Leona, Acema, Mata a project of this kind, embracing new technology, represents a and La Concepción fields, became a partner in the corresponding landmark in the American oil industry. mixed companies, with stakes ranging between 22% and 36 %. In deep waters, in the Garden Banks Quadrant, Petrobras Petrobras continues to operate the Moruy II block, in the Gulf pushed ahead with the development of the Cottonwood field, in of Venezuela, for the exploration of natural gas. Moreover, the com- which it has assumed full control, having bought out its partner’s pany is studying a partnership with Petróleos de Venezuela (PDVSA) 20% stake. Production began in February 2007. for the production of extra-heavy oil from Carabobo I, in the Orinoco At the Pasadena Refinery, in Texas, in which the company Strip; and for the production of natural gas in Mariscal Sucre, in the has a 50% equity stake, studies are proceeding for the doubling | AnnuAl RepoRt 2006 | 53
  • 56. international Expansion of the processing capacity, from the present 100 thousand bpd, As the operator of Block OPL 324, in the Gulf of Guinea, and the installation of units for the processing of heavy oils. The Petrobras drilled a 6,091 meter well in 2,670 meters of water investment is estimated at US$ 2 billion. — a new record for the Gulf of Guinea — , but without finding hydrocarbons. The company expanded its activities in the Gulf mexicO Petrobras is participating, in partnership with Teikoku, of of Guinea, strengthening its presence in deep waters off the Japan, and Diasvaz, of Mexico, in two contracts for the provision of multiple services to Pemex, in the Cuervito and Fronterizo blocks. The services include exploration, production development and production. Petrobras has a 45% stake in each of these contracts. During 2006, 12 wells were drilled and the company obtained ISO 14001 and OHSAS 18001 certification of the process of “development, infrastructure and maintenance in the operation of fields for the production of non-associated gas”. AFricA 17% nigeriA The Agbami and Akpo projects — giant fields in the Niger Delta — continue to be implemented, with start-up sched- uled for 2008. Production at Agbami should attain 250 thousand bpd, the company’s part being 37 thousand bpd. Akpo will pro- duce 185 thousand bpd, with Petrobras’ share amounting to 36 PetrOBrAs’ stAke in thousand bpd. The company has already invested US$ 930 million the Zambezi Delta block, in the projects, of a forecast total of US$ 1.9 billion. the company’s first investment In Block OML 130, in which it has a 16% stake, Petrobras in mozambique. received an indemnity of US$ 354 million from the Nigerian com- pany South Atlantic Petroleum (Sapetro), which sold its stake (45%) to China National Offshore Oil Company (CNOOC). This compensation, provided for in the contract, corresponds to 50% of the investments made by the company, which will be respon- 6,091 meters, A lOcAl recOrd. sible for 20% of the future investment. The existence of significant that is the depth of the well drilled accumulations of oil in the block has been confirmed, following by petrobras in the Gulf of Guinea, the drilling of four wells at the Egina hub. Testing of the field’s in 2,670 meters of water. commercial viability will be carried out in 2007. 54 | AnnuAl RepoRt 2006 | petRobRAs
  • 57. international Expansion Petrobras’ office in nigeria West African coast. With a 45% stake, Petrobras is the operator tAnzAniA Petrobras completed the seismic surveying of blocks of Block OPL 315, along with partners Statoil, of Norway, and 5 and 6, in ultra-deep waters of the Máfia Basin, having signed the Ask Petroleum, of Nigeria. Studies are in progress to place the contract for Block 6 in December. The company has full rights over block in its regional geological context, with a view to drilling the blocks and, depending on the seismic analysis and technical the first exploration wells. and economic evaluation, could take on partners, while working In support of the use of ethanol as a fuel in this country, as the operator. The company’s presence in Tanzania reinforces its Petrobras continued its negotiations with the Nigerian National position at the frontier of exploration off the east coast of Africa. Petroleum Corporation (NNPC) to supply the product. The Petrobras has 20.2 thousand km2, in ultra-deep waters, under full accords include the providing of technical support for adding concession and operation rights. the product to the country’s gasoline. mOzAmBique Petrobras bought a 17% stake in the Zambezi AngOlA Taking a stake in four more contracts, Petrobras Delta block, off the coast of Mozambique, in its first opportunity brought its total assets in this country at the end of 2006 to six — for investment in this African nation. The commitments under- among them, Block 2 of the Lower Congo Basin, where the com- taken provide for the acquisition of 2D seismic data and the drill- pany produced 5.4 thousand bpd. In Block 34, despite not finding ing of a well in 2007. Petrobras’ effective entry into the consortium oil in two wells that have been drilled, technical analyses have led is still awaiting local government authorization, which ought to to the conclusion that deeper geological layers present good pros- be granted in 2007. pects, and therefore the exploration deadline has been extended, with the drilling of another well planned for 2007. Petrobras is the AsiA operator, for the first time in Angola, in the new exploration blocks irAn In November, the company started drilling the first of 6, 18/06 and 26, and is a partner in Block 15/06. two exploration wells in the Tusan block, in shallow waters in the south of the Persian Gulf. Petrobras is the operator, holding equAtOriAl guineA In negotiations with the government, a 100% stake, according to a contract closed in 2004 with the Petrobras has extended for another two years the contract to National Iranian Oil Company (Nioc). explore Block L, with no obligation to drill an exploration well. turkey Petrobras is in a partnership with the Turkish state- liByA The company proceeded with its exploration of Area 18 in owned company TPAO for exploration and production in two the Libyan sector of the Mediterranean. Partnered by Oil Search Black Sea blocks with potential for holding large reserves — the Limited, of Papua New Guinea, Petrobras is the operator, with a 70% Kirklarelli block, in the western part of the Turkish sector, under stake, and has a contract for the sharing of the production with the 1,200 meters of water; and the Sinop block, to the east, with a state-owned company National Oil Company (NOC). In the event depth of 2,200 meters. + of exploration success, NOC will assume 51% of the investment. | AnnuAl RepoRt 2006 | 55
  • 58. “Information about preserving the environment should be made available FáBiO lugAtO de sOuzA to everybody from an early age, at school. this is the biggest environmental problem Equipment operator at the Guanabara bay center for environmental protection. OutlOOk: My future is already today. Petrobras invests heavily in technology and environmental protection.” determined; I’m going to give my 10-year old daughter a better life. 56 | AnnuAl RepoRt 2006 | petRobRAs
  • 59. Social and Environmental Responsibility 58 sustAinAbility indices HumAn ResouRces60 HeAltH, sAfety And tHe enviRonment 65 sponsoRsHip 72 Petrobras has broadened its commitment to the reduction of social inequality, envi- ronmental conservation and ecological efficiency. The first Latin American company to join the UN Global Compact, in 2003, Petrobras made further advances in its alignment with the ten principles of the compact — which address issues such as human rights, working conditions, the environment and fighting corruption — when in 2006 it joined the Council of the Global Compact and assumed the vice-presidency of the Brazilian arm. Other triumphs in the area of Social and Environmental Responsibility were the company’s inclusion in the Dow Jones Sustainability Index (DJSI) and Bovespa’s Corporate Sustainability Index (ISE). Under the former, Petrobras has been recognized as one of the world’s most sustainable companies, among 13 oil and gas companies worldwide and just 6 Brazilian companies. Inclusion in the ISE, in addition to emphasizing the company’s commitment to sustainability, also expanded its investor base, by attracting those that place a premium on the criteria of social and environmental responsibility when compil- ing their investment portfolios. | AnnuAl RepoRt 2006 | 57
  • 60. Social and environmental Responsibility SUSTAINABILITy INDICES global Compact, dJSi (NYSe) and iSe (bovespa) Because of its socially and environmentally responsiBle performance, petroBras was selected in septemBer for the dow Jones sustainaBility index (dJsi) – a yardstick for investors who are concerned aBout social and environmental responsiBility, provided By the new york stock exchange. in Brazil, since decemBer, the compa- ny’s shares have Been included in the corporate sustainaBility index (ise) of the são paulo stock exchange (Bovespa). the company’s inclusion in these indices is recognition of petroBras’ com- mitment to ideals such as environmental equi- liBrium, social Justice, economic efficiency and good corporate governance. Petrobras made further advances in its alignment with the ten principles of the United Nations (UN) Global Compact, addressing themes such as human rights, working conditions, the environment and fighting corruption. In 2006, the company joined the Compact’s Council and assumed the vice-presidency of the Brazilian arm of this initiative. This participation is an extension of the company’s pioneering attitude, in voluntarily signing up to this global agreement, back in 2003, driven by its commitment to the reduction of social inequality, environmental conservation and ecological efficiency. In December, the Executive Board gave approval to sup- porting the Extractive Industry Transparency Initiative (Eiti), as 58 | AnnuAl RepoRt 2006 | petRobRAs
  • 61. Social and environmental | sustAinAbility InclusIon In ThE DJsI sPoTlIGhTs PETroBras as onE 13 of ThE worlD’s MosT susTaInaBlE oIl Gas coMPanIEs Petrobras has been a member of the Eiti International Advisory the hybrid environmental robot “Chico Group since 2005. In January 2007, the company joined the World Mendes”, developed by the Cenpes Robotics Lab, performs environmental Business Council for Sustainable Development (WBCSD), a coali- monitoring of the strip of land in the amazon region where the Coari- tion of 180 international corporations that are dedicated to sus- Manaus gas pipeline is to be installed tainable development. Petrobras’ international involvement also extended into other forums. The company joined the ISO 26000 committee, as the representative of Brazil, which is leading, together with Sweden, the preparation of international rules for social respon- sibility, to be issued in 2008. Within Arpel (Regional Association of Oil and Natural Gas Companies in Latin America and the Caribbean), where it already presides over the Corporate Social Responsibility Committee, the company has joined the working group for Relations with Indigenous Peoples. Another accomplishment by Petrobras was to pick up three of the five prizes awarded at the International Pipeline Conference Exhibition (IPCE), one of the most important global events in the area of pipeline transportation, held in Canada. Winner of the main prize, the “Agricultura Familiar em Faixa de Dutos (Family Subsistence Farming in the Pipeline Strip)” project has become a model around the world in terms of community relations. The company was also awarded the “Selo Pró-Eqüidade de Gênero (Pro Gender Equality Seal)” 2007 by the federal govern- ment’s Special Secretariat for Women’s Issues (SPM), for promot- ing gender equality. The Petrobras Gender Commission saw its mandate extended, becoming the Commission for Diversity. At the international level, the company chose as the focus of its social activities the issues of the Rights of Children and Adolescents. In addition to this principal line of support, the Business Units are able to define other priorities abroad, in accor- dance with local needs in a regional context. + | AnnuAl RepoRt 2006 | 59
  • 62. Social and environmental Responsibility HUmAN RESOURCES extra staff taken on to sustain company expansion the most recent version of the strategic plan 2015 singles out human resources as one of the key factors in the implementation of the compa- ny’s strategies. 2006 saw the consolidation of the hr strategic proJect, which will contriBute to attainment of the corporate targets for 2011. the challenge is “to Be an international Benchmark for the energy sector in personnel management, with the employees as its most precious asset.” Code oF ethiCS The Petrobras System’s Code of Ethics has been revised, by means of a transparent and participative process that involved the clients, suppliers, executive board, board of directors and workforce of the company’s various organizational units, with the aim of bring- ing it into alignment with the values specified in the Strategic Plan, the prevailing business context and the requirements of the Sarbanes-Oxley Law. The adopted themes were those of the Ethos Institute’s Corporate Social Responsibility Indicators. adMiSSioNS In order to sustain the increasing expansion of the company’s activi- ties and areas of operation, public selection processes have been systematically carried out, in order to build the right permanent Schist processing unit at São Mateus staff to meet the needs of the Strategic Plan. During 2006, a total do Sul, Paraná of 8,539 new employees were taken on. As a result, the company’s 60 | AnnuAl RepoRt 2006 | petRobRAs
  • 63. 8,539 Social and environmental | HumAn ResouRces new hirings through public selection processes aDMIssIons In 2006 PETroBras sTaff PEr BusInEss arEa Downstream 8,006 International Business area abroad 451 Parent 12,999 International company 20,585 Business area Brazil 44 Transpetro Subsidiaries Petrobras 6,857 Senior Management 31 Distribuidora support 515 1,312 Refap S.A. Corporate support 7 7,454 1,814 Petroquisa 363 10,367 RD Gas Energy PETroBras sTaff EP 2006 47,955 suBsIDIarIEs – nuMBEr of EMPloyEEs 6,857 7,454 2005 40,541 6,166 7,197 742 2004 39,091 2,910 5,939 7,007 2003 36,363 5,810 6,625 3,691 Transpetro 2002 34,520 111 6,328 5,875 Petroquisa Petrobras Parent company Distribuidora Petrobras abroad Subsidiaries Refap S.A. | AnnuAl RepoRt 2006 | 61
  • 64. Social and environmental | HumAn ResouRces nuMBEr of EMPloyEEs aBroaD permanent staff has steadily increased, from 46,723 in 2002 to 62,266 at the end of 2006. The total number of employees, including the subsidiaries in Brazil and the companies abroad, grew by 15% in 2006. Among the companies abroad, the increase was 11%. 116 284 15 Angola 841 ReMuNeRatioN PoLiCY Argentina The personnel expenses at the parent company amounted to 274 164 Bolivia R$ 7,337 million, based on the fixed remuneration, which com- 14 21 Colombia prises salaries, extras, bonuses and the respective payroll taxes. 5,128 USA The variable remuneration includes profit and results shar- Libya ing schemes, which are linked to the achievement of corporate targets, so as to stimulate the employees’ commitment to the goals Nigeria of the Strategic Plan. As in previous years, the employees received Paraguay their allocations in relation to the 2005 profits and results, divided Uruguay in two payments, one in January and the other in July. EDucaTIonal allowancE (R$ million) 2006 54.5 59.2 2005 54.0 2004 25.2 29.7 24.0 19.5 20.0 16.8 1.0 0.4 0.6 1.0 0.4 0.7 Basic education Secondary Kindergarten Child supervision Day-care education centers 62 | AnnuAl RepoRt 2006 | petRobRAs
  • 65. Social and environmental | HumAn ResouRces 302 million rEaIs was InvEsTED In TraInInG In 2006 eduCatioNaL beNeFitS The educational benefits paid by the company are of a supple- mentary nature, in the form of an allowance to complement the beneficiary’s own payments for these services, which comprise day-care centers or child supervision, kindergarten, basic educa- tion and secondary education. The corresponding cost amounted to R$ 107 million, including taxes. heaLth CaRe The Multidisciplinary Health Care Scheme, covering current and retired employees and their dependents, made a total of 112 thou- sand attendances, through a network of 21 thousand accredited establishments throughout Brazil, including hospitals, laborato- ries and dental and medical offices and clinics, including special- ized areas such as psychology and phonoaudiology. The net cost to the company of the medical appointments, examinations and internments was R$ 510 million. Under the Collective Labor Agreement, Petrobras has taken on the commitment to implement a Pharmacy Benefit, which is to be added to the range of benefits already provided by the company. PeNSioN FuNd In 2006, Petrobras presented a proposed new Supplementary Pension Model, the fruit of the combined efforts of the company, Petros and the employee representatives. The proposal aims to stabilize the financial situation of the existing Petros Plan, solv- ing the structural problems and providing it with a sustainable future, as well as providing a new supplementary pension scheme to employees who do not have one. The new supplementary pension scheme, which is close to health promotion center at the Petrobras headquarters, approval by the official bodies, is of the variable or mixed con- Rio de Janeiro tribution kind, purely for pension purposes, with defined risk, | AnnuAl RepoRt 2006 | 63
  • 66. Social and environmental | HumAn ResouRces guaranteed minimum benefit, a lifetime income option and con- for Young People in the Energy Industry. tribution defined annually by the participant. During the year, the Petrobras University had 2,275 people enrolled on its project management development and special- CoLLeCtive LaboR agReeMeNt ization courses, which, added to all the other courses on offer, The ongoing process of negotiations with the union bodies aims to brought total enrollments to more than 50 thousand. align the employees’ expectations with those of the company, thus Petrobras invested R$ 302 million, over the course of 2006, facilitating the putting together of a Collective Labor Agreement in human resources development, and the total amount of training that is satisfactory to all parties. provided came to 5.7 million man-hours. In 2006, this process took as its basis the Collective Agreement signed in 2005, which is valid for two years, with the CoRPoRate CuLtuRe exception of the economic clauses. These were the focus of the Alignment between the corporate values laid down in the negotiations between Petrobras and the employee representatives, Strategic Plan and those embedded within the culture of the which led to an adjustment of 2.80%, making up for losses due to organization is extremely important to the attainment of the inflation, as measured by the ICV-Dieese index, plus a collective company’s objectives. increase of one level on the salary scale and a gratuity payment To this end, discussions were initiated to disseminate equivalent to 80% of monthly remuneration. and expand upon the results of the cultural analysis carried out during the period 2004/2005. This study identified the charac- CaReeR PLaN teristic traits of the Petrobras corporate culture — its essential As part of the process of adjusting the career plan structure to meet values, as well as tracing newly emerging values within the com- the challenges of the Strategic Plan 2015, the company approved pany environment. + the new structure for middle level employees. Technical stud- ies are proceeding regarding the plan for upper level employees, as well as for defining job descriptions and values and the rules governing career progress. PRoFeSSioNaL tRaiNiNg The Petrobras University, devoted to the education and training of the company’s technical and administrative staff, had a total of 2,469 new employees enrolled in its training program during 2006. Based on the results it has achieved, the Petrobras Training Program was chosen as one of the five finalists in the Petroleum Economist Awards 2006, in the category Best Educational Program 64 | AnnuAl RepoRt 2006 | petRobRAs
  • 67. Social and environmental Responsibility HEALTH, SAfETy AND THE ENvIRONmENT a quality agenda through to 2015 the management of health, safety and the environment (hse) at petroBras aims to consoli- date hse considerations as values that are intrin- sic to the company’s planning and management processes. the company’s hse policy, laid out in the strategic plan, contains 15 corporate guidelines, approved By the executive Board, which have Been expanded into standards at various different lev- els, all compiled in a management handBook. These guidelines orientate the development and implementa- tion of corporate action plans and specific plans for the Business and Service Units, so that the HSE policy objectives will be met at all levels of the company. The visible commitment of the senior management and professional training are also among the issues addressed by the corporate guidelines. The senior management, executive managers or general managers participated in 1,143 HSE audits during 2006. This involved field trips to the operational front lines in order to observe the activities and correct any errors or omissions. The CEO or directors participated in 28 of these visits. Petrobras’ strategic agenda includes the Strategic Project for HSE Quality, which aims to ensure that, by 2015, the company has attained performance levels equivalent to those of the best companies in the world’s oil and gas sector, by means of corpo- rate action across six focus areas: Integrated HSE Management; Ecological Efficiency in Operations and Products; Prevention of Community vegetable Accidents, Incidents and Failures; Health of the Workers; Readiness gardens along the strip of land covering pipelines in for Emergencies; and Minimizing Remaining Risks and Exposure. Nova iguaçu, Rio de Janeiro Petrobras invested R$ 3.21 billion in HSE during 2006. | AnnuAl RepoRt 2006 | 65
  • 68. Social and environmental | Hse training with oil containment and absorption equipment in the Campos basin, Rio de Janeiro frEquEncy raTE of InJurIEs rEsulTInG In Of this total, R$ 1.77 billion was directed to programs, projects and TIME off work (Tfca) other activities in the area of safety; R$ 1.20 billion to the environ- (Compound TFCA) mental area, and R$ 238 million into health. These amounts do not include spending on the Multidisciplinary Health Care Scheme nor the sponsorship of environmental programs and projects 2011 0.5 Maximum Limit developed by third sector organizations. Part of this spending — R$ 850 million — was channeled 2006 0.77 through the Program for Quality in Environmental Management and Operational Safety (Pegaso), for the purpose of eliminating 2005 0.97 the risks and exposure in the company’s installations and activi- 2004 1.04 ties. This initiative — one of the most important of its kind in the industry — has absorbed investments and operating expenses 2003 1.23 amounting to R$ 10.49 billion since 2000. 2002 1.53 Pegaso also includes expenditure of R$ 373 million by Transpetro, of which R$ 90 million was allocated to the Pipeline average Integrity Program and invested in the inspection, testing, appraisal, 2005 0.97 OGP repair and restoration of oil and gas pipelines. average The implementation of HSE policy at Petrobras is overseen 2005 1.20 API by the HSE Management Evaluation Program. In 2006, apprais- average 2005 2.40 als were conducted at 27 operational units in Brazil, Argentina, ARPEL Bolivia, Venezuela and Colombia, representing 96% of the total Number of accident victims requiring time off work per million man-hours of exposure to risk, covering the company’s own employees and outsourced appraisals scheduled for the period. workers. These appraisals are based on the company’s corporate Sources: OGP – Oil and Gas Producers – Safety performance indicators – 2005 data guidelines and the ISO 14001 and OHSAS 18001 standards, which API – American Petroleum Institute – 2005 survey of petroleum industry occu- have certified the health, safety and environmental management pational injuries, illnesses, and fatalities summary report Arpel – Association of Oil and Gas Companies in Latin America and the systems at 160 installations in Brazil and a further 20 abroad, Caribbean – Accident statistics for the oil and gas industry in Latin America representing approximately 85% of the certifiable installations and the Caribbean 2005 in Brazil and 91% of those located abroad. (TAF), to levels comparable with those of the international oil oPeRatioNaL SaFetY and gas sector benchmarks. The TFCA of 0.77 recorded in 2006 Petrobras continues to cut down the Frequency Rate of Injuries is below the ceiling of 0.81 that had been set for the year. resulting in Time Off work (TFCA) and the Fatal Accident Rate The number of fatalities was down in relation to the previous 66 | AnnuAl RepoRt 2006 | petRobRAs
  • 69. Social and environmental | Hse 3.21 billion rEaIs InvEsTED In hsE faTal accIDEnT raTE (TAF) year. The company gives special attention to this number, as the cor- porate target for this type of incident is zero. This reduction in the number of injuries and fatalities occurred at the same time as the 2006 1.60 company’s activities are augmenting — the total number of man- 2005 hours of exposure to risk increased from 533 million to 564 million. 2.81 2004 3.30 eNviRoNMeNt Activities in 2006 in the area of environmental responsibility 2003 4.57 were related mainly to controlling atmospheric emissions, water 2002 6.29 resources, liquid effluents and waste; the appraisal and monitor- ing of ecosystems; the recuperation of affected areas and ensuring average that the company’s installations and operations are in compliance 2005 OGP 3.50 with the legal requirements. average 2005 4.50 ARPEL eMiSSioNS Number of fatalities per 100 million man-hours of exposure to risk, covering Through its System for Controlling Atmospheric Emissions the company’s own employees and outsourced workers. (Sigea), Petrobras monitors the principal greenhouse gases – nuMBEr of faTalITIEs 21 19 18 16 16 15 15 15 9 8 3 3 Employees 1 1 Outsourced 0 Workers 2002 2003 2004 2005 2006 Total | AnnuAl RepoRt 2006 | 67
  • 70. 0.77 Social and environmental | Hse TfCA; compatible with international quality benchmarks carbon dioxide, methane and nitrogen monoxide – that are emit- of CO2, one of the principal greenhouse gases. ted as a result of its activities. This monitoring is extended also In order to meet the established targets for the reduction of to carbon monoxide, sulfur and nitrogen oxides, volatile organic energy consumption and emissions, in addition to the projects compounds and particle matter. mentioned, energy analyses have been carried out at the company’s In 2006, Petrobras introduced the indicator Prevented industrial units, and this will be extended to the business units that Emissions of Greenhouse Gases, in order to monitor the results will operate future production platforms, so that the basic designs of its efforts to reduce emissions of these gases in its operations. can also be developed with a view to energy efficiency. The company is committed to the 2011 goal of preventing the The program’s activities brought about a saving of approxi- emission of 3.93 million tons (CO2 equivalent) of greenhouse mately 2,500 barrels of oil equivalent a day in 2005. The gain is gases. Between 2006 and 2011, the emission of a total of 18.5 not just economic, but also environmental, since the company million tons of CO2 equivalent will have been prevented. reduced its CO2 emissions, through a proportional decline in electricity consumption and the flaring off of fossil fuels. eNeRgY eFFiCieNCY The In-House Energy Conservation Program is responsible for WateR ReSouRCeS aNd eFFLueNtS the development, coordination and implementation of activities In 2006, Petrobras approved the corporate standard for the man- related to energy efficiency, promoting a proportional reduction in the flaring off of fossil fuels and, consequently, of the emission EMIssIons of sulfur oxIDE – sox (ThousAnd Tons) GrEEnhousE Gas EMIssIons (million Tons oF Co2 equivAlenT) 137.2 2011 Maximum Limit (not including chartered vessels) 2006 50.43 2006 131.0 21.0 2005 51.56 2005 135.7 15.9 2004 44.41 2004 140.1 13.6 2003 39.09 2003 148.5 12.3 2002 30.43 2002 156.7 n.a. Total emissions directly or indirectly connected with Petrobras’ operations in Brazil and abroad. Chartered vessels 68 | AnnuAl RepoRt 2006 | petRobRAs
  • 71. Social and environmental | Hse Reforestation project at Pontal do Paranapanema, São Paulo agement of water resources and effluents, embracing the reutiliza- logical diversity and recuperation of these areas. To this end, backed tion and optimal use of water in its operations and the protection by an investment of around R$ 9 million, a study has been under way of bodies of water within its areas of influence. since March 2005 to make an assessment of the various ecosystems of The drawing up of detailed statements of water resources for the Guanabara Bay area, in Rio de Janeiro. Approximately 75% of the the refineries and fertilizer plants is one of the activities aligned work of characterizing the fauna around the bay, included in the study, with the requirements of the standard. The studies, which include has already been completed. In the Amazon region, studies carried assessing the tolerance capacity of the water bodies that receive out alongside universities and research institutes assess the potential effluents from these units, should be completed in 2007. impact of Petrobras’ operations on the surrounding ecosystems. In the area of Exploration Production, one project is aim- ing to make the Campos Basin platforms self-sufficient in fresh eMeRgeNCY ReadiNeSS water, which will reduce the volume of water taken from the River Petrobras’ strategy for dealing with emergencies is based upon the Macaé by 1.1 thousand m3/day. Another initiative, concluded in integration of the contingency resources of its business units, with 2006, promotes the reinjection of the water from oil production vessels dedicated for this purpose operating along the Brazilian at the Fazenda Belém field, thus reducing by 2 thousand m3/day coastline, and the company’s Environmental Protection Centers the amount of water removed from the Açu aquifer, the principal (CDAs). The CDAs operate around the clock, staffed by trained water reservoir serving that semi-arid region. professionals and equipped to react quickly and effectively to any situation. Their resources include special vessels, oil collectors SoLid WaSte and contention and absorption barriers. The company produced 315 thousand tons of hazardous solid There are nine CDAs located in Brazil, comprising six out- waste, in Brazil and abroad, in 2006. During this period, 268 thou- posts in the north, one in Natal, one at the Mocanguê naval base, sand tons of hazardous waste was treated or disposed of in an in Rio de Janeiro, and one in Uberaba. This network of protection environmentally appropriate manner. against the potential repercussions of accidents, which can also count on the resources of public agencies and local communities, bioLogiCaL diveRSitY has emergency contingency plans covering the whole country and In 2006, Petrobras approved the corporate standard for control- is regularly tested by means of simulated exercises. During 2006, ling the potential impact of the company’s activities on biological seven regional exercises were conducted, with the participation diversity, based on the strategic commitment to apply the principles of the Brazilian navy, the Civil Defense Corps, the fire brigade, the of environmental responsibility in all stages of its projects, including police, environmental bodies, local governments and communi- planning, construction, operation and decommissioning. ties. Two exercises were also conducted at units in Argentina. The standard envisages the definition of the protected or envi- The company has three vessels for dealing with emergencies that ronmentally sensitive areas that are influenced by the company’s operate around the clock in the Guanabara Bay, off the coast of the state operations, with a view to protection, mitigating the impact on bio- of São Paulo and off the coast of the states of Sergipe and Alagoas. | AnnuAl RepoRt 2006 | 69
  • 72. Social and environmental | Hse oIl anD oIl ProDucT sPIlls (m3) 2011 601 Maximum Limit 2006 293 2005 269 2004 530 2003 276 2002 197 Spills exceeding 1 barrel (0.159 m3) that have affected the environment beyond the installation perimeter. SPiLLS The volume of oil and oil product spills in 2006 remained at the same level as in 2005, an excellent result by the standards of the world oil and gas industry. The volume was below the ceiling of 475 m3 that had been set for the year. The 2011 ceiling for oil and oil product spills has been set at 601 m3, taking account of the forecast increase in production and the addition to this indica- tor of potential new sources of leakages, such as the tank trucks working for Petrobras Distribuidora. heaLth The promotion by Petrobras of good health and the prevention of illness among the workers is based on the concept of integral Simulation drill at Repar; health — inside and outside the workplace. The company’s pro- evacuation of the local community near the refinery grams and other endeavors in this area are guided by the epide- in araucária, Paraná miological analysis of information on, for example, mortality, 70 | AnnuAl RepoRt 2006 | petRobRAs
  • 73. At the São Caetano do Sul Center for the Study of Physical Aptitude, Petrobras trained 500 health professionals to help promote physical activities among its employees, following Health ministry guidelines. Social and environmental | Hse ProPorTIon of TIME losT morbidity and the prevalence of risk factors. (pTp) This systematic approach has yielded positive results. In 2006, the indicator Proportion of Time Lost (PTP), based on the 2011 2.18 employees’ time off work due to illness or accidents, continued the Maximum Limit downward trend of recent years. The figure was below the ceiling that had been established for the year, of 2.34. The ceiling for 2011 2006 2.06 has been set at 2.18. Non-occupational illness, unrelated to work activities, pre- 2005 2.48 dominated among the reasons for employees’ time off work in 2004 2.57 2006, as in previous years. This explains the emphasis given by the company to the Program for Health Promotion, which encourages 2003 2.88 employees to adopt healthy lifestyles. Petrobras also motivates and monitors the participation of all its employees in the annual medical 2002 3.01 check-ups and encourages them to follow the recommendations Percentage of the total potential working hours lost due to medically autho- of the doctors. rized time off (for illness, occupational or otherwise, or accidents in the work- place); counting only the company’s own employees. tiMe oFF WoRk Through its Occupational Hygiene and Ergonomics Program, the rEason for TIME off work company is able to identify, control and eliminate occupational haz- ards at all its units. The procedures to ensure the health of employ- ees on trips, which include check-ups prior to traveling and medical 0.06% observation following their return, are also being standardized. 3.59% 0.04% 4.41% In order to provide a better standard of health for its workers Non-occupational illness and their families, Petrobras has trained 500 health professionals, Occupational illness through the São Caetano do Sul Center for the Study of Physical Workplace accident Aptitude, to promote physical activities among its employees, fol- Accident unrelated to work lowing Health Ministry guidelines. 91.89% Accident on the way to or from work The company also has a corporate policy for addressing HIV/ aids. In trying to further the well-being of all its workers, without distinction as to background, race, gender, creed or sexual prefer- abroad, the company maintains relations with government and ence, Petrobras collaborates in an affirmative manner to promote non-government organizations devoted to monitoring, assistance an appropriate attitude to this illness. Moreover, both in Brazil and and research with regard to HIV/aids. + | AnnuAl RepoRt 2006 | 71
  • 74. Social and environmental Responsibility SPONSORSHIP 76 new projects were chosen for sponsorship SoCiaL PRoJeCtS The Petrobras Zero Hunger Program has been running for three years and during this time has invested a total of R$ 366 million in projects devoted to generating employment and income, to education and professional training, and to protecting the rights of children and adolescents. In the 2006 public selection process, 76 projects were chosen for sponsorship, from a total of 4,517 registered. These initiatives, synchronized with public policies for the eradication of poverty and hunger, also seek to promote racial and gender equality and concern for the handicapped. During 2006, R$ 175.8 million was invested in the program. One of the program’s projects is “Molhar a Terra (Irrigate the Soil)”, under which inactive oil wells are used to supply drinking water to communities in the country’s semi-arid region. Another activity is “Mova Brasil (Mobilize Brazil)”, which, in a joint edu- cational and work-related effort, in partnership with the Paulo Freire Institute, the Oilworkers’ Federation (FUP) and the federal government, has taught 46 thousand young people and adults how to read and write. In stimulating cooperativism, in addition to the Family Subsistence Farming in the Pipeline Strip project, men- tioned earlier, the company helps some 10 thousand autonomous collectors of recyclable materials in different parts of the country to organize themselves, in an initiative that combines the goals of Sports training under the social inclusion and environmental protection. Mangueira Social Project, sponsored by Petrobras, Through the Petrobras Zero Hunger Program, which, since Rio de Janeiro 2003, has drawn corporate efforts together in the fight against hun- 72 | AnnuAl RepoRt 2006 | petRobRAs
  • 75. Social and environmental | sponsoRsHip 10 million PEoPlE havE BEEn assIsTED By ThE coMPany’s socIal ProJEcTs ger and misery, Petrobras has accumulated a wealth of institutional relationships covering more than 15 thousand governmental and non-governmental partnerships. More than 10 million people have been assisted by these sponsored projects, which are contributing to the building of social justice in Brazil. Another activity in the social area is passing on resources to the Fund for Childhood and Adolescence (FIA). In 2006, a total of R$ 48.6 million was provided to projects in more than 200 munici- palities in almost every state. These actions, in partnership with the Special Secretariat for Human Rights and the National Council for the Rights of Children and Adolescents (Conanda), seek to prevent the sexual exploitation of children and teenagers and put a stop to child labor and the unlawful employment of teenagers. The spon- sorships also include initiatives to reduce school drop out rates and for the social inclusion of people with special needs. eNviRoNMeNtaL PRoJeCtS During 2006, Petrobras invested R$ 44.6 million in environmental projects. In its second public selection process, the Petrobras Environmental program received 856 applications and chose to sponsor 36 new projects, which will receive investments amount- ing to R$ 48 million over the next two years. The program retained the theme of “Water: bodies of fresh and salt water and their bio- logical diversity”, to preserve the focus defined in the first selec- tion process, in 2004, when the sum of R$ 40 million was invested. The theme was chosen because Brazil, which accounts for 12% of the volume of water in all the planet’s rivers, has a considerable proportion of the world’s available fresh water. Because it gives importance to sharing responsibility for the protection of water resources, the company also supports initiatives that develop awareness and promote the rational use of water, the preservation and restoration of the vegetation bordering streams and | AnnuAl RepoRt 2006 | 73
  • 76. The Petrobras Cultural Program has begun sponsoring education in the arts. Directly chosen projects in the areas Social and environmental | sponsoRsHip of the cinema, theater, visual arts and music and maintaining archaeological sites such as those at Xingó and Serra da Capivara are also sponsored. rivers and the protection of marine environments. The projects, which embrace a variety of ecosystems, river basins and landscapes, are developed in all the country’s biomes, notably the Amazon Rainforest, the Caatinga, the Cerrado, the Atlantic Forest and the Pantanal. The activities of the Petrobras Environmental program, launched in 2003, cover more than 5 thousand species of Brazilian fauna and flora. Sponsorship has enabled the setting up of 15 data- bases and 12 Geographical Information Systems , as well as the pub- lication of 70 specialized works, with 220 thousand copies distrib- uted. The initiatives reach out to 250 municipalities, having an area of influence of over 900 thousand hectares, and benefit 20 million Brazilians — 3 million of them directly. The work involved in the projects provides an income for more than 5 thousand people. Other programs are also developed by Petrobras, which has been investing in the environmental sphere for decades, with the disbursement of R$ 103 million in environmental sponsorship since 2004. To help marine biological diversity, the company sponsors projects and behavioral studies, as well as the protection of endan- gered species, such as the manatee, the humpback and right whales, the spinner dolphin and the marine turtle (the Tamar Project has been active on Brazil’s coast for over 20 years). Under the “De Olho no Ambiente (Keep an Eye on the Environment)” program, 335 communities neighboring the operational units are encouraged to plan the area’s sustainable development, introducing at the local level the global commitments of the UN’s Agenda 21. CuLtuRaL PRoJeCtS Petrobras continues to be the country’s greatest cultural sponsor, making an annual investment of R$ 288 million and with a portfo- the Petrobras Cultural Program lio of more than one thousand ongoing projects. The company’s provides support for the National policies and guidelines for this area emphasize the Brazilian cul- Circus School ture and seek more opportunities for the creation, distribution and 74 | AnnuAl RepoRt 2006 | petRobRAs
  • 77. Social and environmental | sponsoRsHip 5,000 diFFeReNt SPeCieS oF FLoRa aNd FauNa: that is the number embraced by the activities of the petrobras environmental fruition of projects, in addition to the preservation of a permanent program, which was launched in 2003 58.19 Brazilian cultural legacy. Sponsorship is structured under the Petrobras Cultural pro- gram, which earmarks 75% of its resources for projects by public selection and 25% for those chosen directly. In 2006, of the 4,700 projects registered in the public selection process, just 230, in the MiLLioN ReaiS fields of the cinema, the scenic and visual arts, cultural heritage, was directed into supporting sporting activities over the course of last year artistic legacy and music, received a total of R$ 46 million in spon- sorship. The support to another hundred projects, chosen directly, amounted to R$ 15 million. The fourth edition of the Petrobras Cultural Program(2006- Olympic Committee (COB), strengthening the association of the 2007) was launched in December, with R$ 80 million in funding and Petrobras name with the ideals of the Olympic movement and with a new feature, sponsorship directed at education in the arts. The sports promotion, recognizing the important role sport plays in the public selection process covered action for cultural preservation, development of young people. The Pan-American Games, attracting cinema production and dissemination, the sustaining of theater and athletes from 42 different countries, is the greatest sporting event in dance groups, and the recording and distribution of popular and the Americas. classical music. The projects chosen directly include the cinema, In motor racing, Petrobras continues to support the Williams scenic arts, visual arts, music and the maintenance of archeological Formula 1 team, the Petrobras Lubrax team in rallying, the Action sites, such as those at Xingó (SE) and Serra da Capivara (PI). Power team in stock car racing, Team Scud Petrobras in motorcycle The company stimulates the registration of projects from all racing, the Petrobras “Seletiva de Kart”, “Formula Truck” and the SAE over the country, through the Petrobras Cultural Caravan, which competitions “Baja” and “Fórmula”. The development of products visits the state capitals between September and January. In 2005, a for motor racing is part of the company’s strategy to use the race project workshop was added to the caravan, to help the producers tracks as laboratories. of cultural activities in the development of their proposals. In this With its sponsorship of the 3rd edition of the Petrobras way, Petrobras has managed to extend the reach of its sponsorship Tennis Cup, held in Brazil, Argentina, Colombia, Uruguay and Chile, to all parts of the country. Petrobras reinforced the dissemination of its brand name in Latin America. The company also maintained its support for the Brazilian SPoRtS SPoNSoRShiP Handball Confederation (CBH) and the Brazilian national team – this Petrobras is one of Brazilian sport’s greatest partners and is the sport is the one most widely played in the country’s state schools. sponsor of the XV Pan-American Games, to be held in Rio in 2007. Support for surfing, associated with the characteristics of youth and A total of R$ 58,19 million went into supporting sporting activities energy, has also been continued. Sponsorship of the Flamengo Soccer in 2006. The company bolstered its partnership with the Brazilian team also kept the Petrobras name in the spotlight. + | AnnuAl RepoRt 2006 | 75
  • 78. “for everything that it represents, Petrobras is a fundamental agent áLvaRo heNRique aRouCa de CaStRo for development in Brazil. nurturing Geophysicist / Manager of Geotechnology outLook: To continue working for the Petrobras means nurturing the dream company, helping to build a world that offers a better quality of life. of a better country.” 76 | AnnuAl RepoRt 2006 | petRobRAs
  • 79. Intangible Assets technologicAl cApitAl 78 oRgAnizAtionAl cApitAl 80 humAn cApitAl 82 RelAtionship cApitAl 83 The management of intangible assets is essential to the creation of value and devel- opment of a competitive edge for a business, as well as to the attainment of sustain- able results. At Petrobras, these assets are divided into four types of capital: human, organizational, relationship and technological. Petrobras took a pioneering step in the management of technological know-how, when, in 1963, it set up the Leopoldo Américo Miguez de Mello Research Center (Cenpes). The management of this asset is the basis of the company’s acknowledged technological excellence, which is reflected in its market capitalization and makes the company a sought after partner for the world’s major oil companies. The sustaining of technological quality is upheld by invest- ment in developing the employees’ technical and management skills. This constant process of up-grading, and also accelerating the learning curve of new workers, is all done at the Petrobras University. The management of organizational and relation- ship capital has gained ground in recent years. At the same time as it progresses in the control of systems and key processes, the company refines the management of its relations with clients, suppliers, partners, shareholders and the general public. The outside perception of the strength of the management of intangible assets opens up the possibility of partnerships, influences the decision making of investors and boosts the results of Petrobras. | AnnuAl RepoRt 2006 | 77
  • 80. Intangible Assets TeChnoLogiCAL CAPiTAL Cenpes: the pursuit of new technology The masTery of Technological know-how is a con- sTanT challenge for PeTrobras, which has been exPanding The insTallaTions of cenPes, on The ilha do fundão camPus of The federal universiTy of rio de Janeiro (ufrJ). wiTh over 1,800 emPloyees, 30 PiloT PlanTs and 137 laboraTories, in an area of 122 Thousand m2, The cenTer has been anTiciPaTing and suPPlying The comPany’s Technological needs since 1963. iT Plays a decisive role in The corPoraTe sTraTegy of growTh allied wiTh social and envi- ronmenTal resPonsibiliTy. Research into biological fuels was the highlight of 2006. A mixture of vegetable oils and mineral diesel oil, the H-Bio tech- nology was tested on a pilot scale at the Gabriel Passos (Regap), Alberto Pasqualini (Refap) and Presidente Getúlio Vargas (Repar) refineries, with a view to starting commercial production in 2007. Biodiesel, made with vegetable oils or oleaginous seeds, is being produced at two experimental plants in the state of Rio Grande do Norte, using innovative technology. Another new development was the laboratory production of ethanol from sugar cane bagasse (lignocellulose), which would enable an increase in the production of alcohol without having to increase the planted area. The technologies developed by Cenpes have also led to improvements in the quality of the fuels. At the end of the year, Petrobras launched Diesel Podium, a cleaner diesel fuel containing only 200 parts per million (ppm) of sulfur, thus taking another step H-Bio pilot plant at Cenpes, forward in the innovations relating to this product, which began in Rio de Janeiro 2005, with the commercialization of diesel with 500 ppm. 78 | AnnuAl RepoRt 2006 | petRobRAs
  • 81. Intangible Assets | technologicAl cApitAl 1,000 a total of Patent aPPlICatIons Have Been fIled By tHe ComPany (numBeR 1,000 was foR tHe PRoduCtIon of etHanol fRom vegetaBle waste) Another advance in the refining area was the development, and climate change, which brought together specialists from 17 by Cenpes, of technology to optimize the use of the heavy oil from different countries in Rio de Janeiro. the Campos Basin. One of these developments, which increases Significant advances in the development of new technol- the production of ethylene and propylene, will be utilized at the Rio ogy for the reutilization of effluents and the reduction of water de Janeiro Petrochemical Complex; another, already tested on an consumption to a minimum have made it possible to meet the industrial scale, will be utilized at the Northeastern Refinery, increas- necessary environmental requirements for the new refining proj- ing the production of diesel fuel from heavy oil by 30%. The con- ects, with a saving, in terms of water catchment and the release of ceptual designs for both the Rio de Janeiro Petrochemical Complex effluents, equivalent to a city of 300 thousand inhabitants. and the Northeastern Refinery were completed by Cenpes. With a view to Cenpes and the operational units work- Important technological advances helped to augment the ing more closely with one another, Petrobras inaugurated the company’s proven reserves of oil and gas. In the Marlim field, in the Experimental Center for Renewable Energy, in the state of Rio Campos Basin, the use of chemical tracers in the process of defin- Grande do Norte. Two more centers should start up in 2007, one ing the reserves — the first time this has been done in deep waters in Ceará and the other in Minas Gerais. As part of the company’s — added 500 million barrels of oil to the field’s reserves. Together strategy for relations with the Brazilian scientific community, with suppliers, Cenpes also developed new equipment and new tech- Cenpes launched a new partnership concept, in 2006. The new nology for separating the oil, gas and water at the maritime units. model involves the participation of 76 institutions from 18 units Three basic platform designs were completed by Cenpes in of the Brazilian federation, organized into 38 thematic networks 2006: Mexilhão 1 (PMXL1), to be installed in the Santos Basin; and 7 regional centers. By 2008, Petrobras should have invested and, for the Campos Basin, the P-55 (Roncador field) and the P-57 about R$ 1 billion in this new model. (Jubarte field). Another challenge that was overcome during the year relates to the technology for drilling wells, in about 2 thou- Patents sand meters of water in the Santos Basin, through thick layers of Petrobras is the company that files the most patents in Brazil and salt. The technique made it possible to identify accumulations of is also the Brazilian company with the most patents filed in the light oil at a depth of over 6,400 meters. USA. In 2006, a total of 14 patents were granted to the company In the area of environmental protection, Cenpes has com- in Brazil. Seventy-seven new patent applications were filed during pleted the prototype of a hybrid robot, given the name Chico the course of the year — among them, the company’s thousandth, Mendes, designed for environmental monitoring in the Amazon for the process of producing ethanol from vegetable waste, devel- region. A collaborator in the efforts to preserve the world’s largest oped at Cenpes. Outside Brazil, in 2006, a total of 81 applications tropical forest, Petrobras, in liaison with other scientific and tech- were filed and 69 patents were obtained. nological organizations, proposed to create a Petrobras Center of With all these technological innovations, Petrobras is con- Environmental Quality in the Amazon. Cenpes was also an active stantly refining its processes, so as to be able to guarantee to meet participant in an international seminar on carbon sequestration society’s demands in a sustainable manner. + | AnnuAl RepoRt 2006 | 79
  • 82. Intangible Assets oRgAnizATionAL CAPiTAL the Petrobras brand: technological sponsorship: a strategic asset the cars of the att williams formula 1 team run on high-tech fuel developed by Petrobras The PeTrobras brand is managed as a sTraTegic asseT, due To iTs imPorTance and iTs PoTenTial To enhance The value of ProducTs and services. The markeTing and brand commiTTee, linked To The business commiTTee, is resPonsible for devising a manage- menT model wiTh guidelines for The uTilizaTion of The brand ThroughouT The PeTrobras sysTem. The defining of the rules, allied to the legal defense of this asset in the various markets, provides even more protection for the Petrobras brand. The global management of this asset follows a strategy of giving the company a higher profile and strengthen- ing the identity of its products and services. This management is aligned, in the corporate sphere, with the uniform appearance of the installations and the standardization of the company’s com- munication activities. A survey by the international consulting firm Interbrand dem- onstrated the success of the company’s brand management, which is associated with technological and quality leadership and social and environmental responsibility. In 2003, the firm calculated the value of the Petrobras brand at US$ 286 million, which surged to US$ 485 million the following year and hit US$ 554 million in 2005, an increase of 94% in just two years. The Petrobras brand was the one whose value increased the most in Brazil between 2003 and 2005. management PRaCtICes In 2006, the Management Quality Assessment Program continued to encourage the adoption of programs for improvements at the operational units. The assessments are guided by the Petrobras 80 | AnnuAl RepoRt 2006 | petRobRAs
  • 83. Between 2003 and 2005, Intangible Assets | oRgAnizAtionAl cApitAl the value of the Petrobras brand appreciated by 94% Management for Quality Handbook, which combines the criteria of the National Quality Award with the specific requirements of the company, derived from the policies of the Strategic Plan. Petrobras entered into a formal agreement with the National Quality Foundation for the dissemination of the corporate model of management quality. Among the resources developed under this partnership are ‘quality’ notebooks and a program that simplifies the process of self-assessment by the units, stimulating improve- ments to be made more quickly. Petrobras participates, both in Brazil and abroad, in various movements and bodies devoted to management quality, productivity and competitiveness. + 286 million dollars: the brand value in 2003 554 million dollars: the brand value in 2005 tHe PetRoBRas BRand aPPReCIated moRe tHan any otHeR In BRazIl duRIng tHe PeRIod | AnnuAl RepoRt 2006 | 81
  • 84. Intangible Assets hUMAn CAPiTAL Knowledge Construction of part of management the P-52 platform in 2006, PeTrobras consolidaTed The meThodol- ogy for PreParing knowledge managemenT Pro- grams for The business uniTs in brazil, based on The inTernaTional area’s Program for The inTegraTion of knowledge. This Program sTrengThens oPera- Tional, managemenT and Technological exPerTise, disseminaTing knowledge and acceleraTing The develoPmenT of new emPloyees. In the Exploration Production area, the Communities of Practice Program is disseminating knowledge and best practices in four more fields of activity. Specialists in the ‘communities’ of reservoir definition, well engineering, naval engineering, lifting and off-loading, water management and operational practices are all now sharing their experience. Overcoming organizational bound- aries, the program embraces 2.5 thousand employees at units in Brazil and abroad. The participation of the employees in passing on techni- cal, cultural and business know-how is showcased in the project “Petrobras Stories”, which collects personal narratives and case ing and implications of the corporate communication guidelines. studies. The project systematically organizes information relating Petrobras participates in two Knowledge Management study to historical milestones, thereby spreading strategic know-how, as groups coordinated by the American Productivity Quality Center well as an understanding of the company’s past. The first themes (APQC), with a view to refining its own internal practices in the to be tackled are the backgrounds of the oil producing area of light of the example of world-class corporations. In the 2006 edi- Urucu, in the Amazon, and the Guando field, in Colombia. tion of the Most Admired Knowledge Enterprise (Make), an award As part of the ongoing improvement of the company’s rela- presented by the British institution Know Network for outstanding tionship with general society, it has set up the Communication achievement in the area of business knowledge, Petrobras came area’s Collaboration Network (ReCol). This initiative highlights fourth, among the world’s 18 largest companies in the oil sector. It good practices developed at the units, reinforcing the understand- was the only Latin American company among the 55 finalists. + 82 | AnnuAl RepoRt 2006 | petRobRAs
  • 85. Intangible Assets ReLATionshiP CAPiTAL surveys assess The information from the surveys is consolidated in the Corporate Image Monitoring System (Sísmico). Using this company reputation outside perceptions monitoring tool, the management can follow changes in Petrobras’ image and appropriately adjust its communication policies and Petrobras carries out wide ranging opinion surveys, in order to actions, as well as its management practices, in different areas. learn how its practices and projects are viewed and assessed by the stakeholders. These surveys, which have provided the company InvestoR RelatIons with considerable insight into the socio-economic environment At the end of 2006, the company had more than 350 thousand in which it operates, are based upon 18 indicators that make it pos- shareholders and investors in funds devoted to Petrobras shares. sible to evaluate the perceptions regarding its management, com- In order to refine its relationship with these parties, the company petitiveness, growth, activities abroad, vision of the future, social has an ongoing program directed at the investors, through road support, ethics, and social and environmental responsibility. shows, open meetings, conference calls, chats, a shareholders’ The weighted average of the points awarded for each indicator newsletter, telephone and e-mail response, specialized events, in the public opinion segment provides a general indicator value. website, and other means of communication.What is more, the * Corporate Image Monitoring System | AnnuAl RepoRt 2006 | 83
  • 86. Intangible Assets | RelAtionship cApitAl Survey of Shareholder approval ratingS (points, from 0 to 100) company conducts an annual survey which assesses the quality of the service and the perception of Petrobras in terms of profit- ability, competitiveness, management, vision of the future, cor- Activities abroad 95 porate governance, ethics, technology, transparency, and social and environmental responsibility. View of the future 93 Profitability 92 RelatIonsHIP wItH suPPlIeRs In 2006, Petrobras retained the system of listing the companies that Technology 90 provide outsourced materials and services all together in a single register of suppliers, in alignment with the corporate Health, Safety Feeling 89 and the Environment (HSE) and Social Responsibility guidelines. In a process of standardizing its methodology and rationalizing its efforts, Competitiveness 88 the company refined the technical, legal-fiscal and economic-finan- cial criteria for registration, in addition to adopting new centralized Working conditions 84 and regional procedures for evaluation and ratification. Management 81 The new registration form also contains questions relat- ing to social responsibility, prepared by the Ethos Institute for Ethics 80 Companies and Social Responsibility. The purpose of this inquiry is to form a picture of the practices developed in this area by the Alternative energy 79 suppliers and stimulate them to give due importance to such ini- Environmental tiatives and to show appreciation of existing efforts, as well as to responsibility 79 make improvements in them. Communication 78 The Registration Portal was set up by the company to use the with shareholders internet as a tool for developing closer relations with suppliers. Transparency 78 Petrobras currently has around 5 thousand companies registered in its database for the acquisition of goods and services for its Social support 77 operations or new projects. Moreover, there are approximately 40 thousand firms, located throughout the country, that supply goods Corporate 76 governance and services on a small scale to the company’s operating units. For the acquisition of goods, the new Terms of Materials General indicator 85 Supply (CFM) apply to all contracts signed since November 1, 2005. The product of liaison between Petrobras and associations 84 | AnnuAl RepoRt 2006 | petRobRAs
  • 87. trading board at the são Paulo stock exchange (Bovespa) 40,000 companieS in Brazil provide goodS and ServiceS on a Small Scale to the company’S operational unitS representing suppliers, the CFM adapted the contractual clauses to the prevailing legislation and market practices. The company has also adopted new terms of payment for goods that have a long manufacturing timeframe, supplied by Brazilian companies. Petrobras continued its partnership with the Brazilian Service for the Support of Small and Medium-Sized Enterprises (Sebrae), to encourage the competitive insertion of small businesses in the production chain for oil, natural gas and electricity. The agreement covers the 12 states that have Petrobras business units and is worth R$ 12 million over a period of three years — R$ 6 million of which is invested by Sebrae. Due to the enthusiastic response to this initia- tive, the investments of the participating companies, initially put at R$ 3 million, have risen to R$ 16.7 million. PRoCuRement Petrobras made direct purchases of goods and services to the sum of US$ 20.8 billion in 2006, of which US$ 4 billion was for the acquisition of materials and US$ 16.8 billion for the hiring of services. Of these totals, 88% of the materials purchases and 70% of the services were acquired from suppliers located in Brazil, who thus had a 73% overall share of the purchases made in 2006. Part of the procurement was carried out through the on-line trading portal Petronect, which has a total of 22,719 registered suppliers in Brazil, Argentina, Bolivia, Colombia, Ecuador, Peru, Singapore, the USA and Venezuela. Since October 2003, the com- panies of the Petrobras System have completed 216 thousand purchases, 125 direct auctions and 274 reverse auctions using the Petronect portal.+ 16937 | AnnuAl RepoRt 2006 | 85
  • 88. “petrobras has the capability to mIguel Ângelo estePHanIo develop projects in various areas of the energy sector, thereby generating terminals and pipelines engineer / Business consultant outlooK: the company’s example wealth and employment and improving the people’s quality of life.” should always inspire a striving for progress and continual improvement. 86 | AnnuAl RepoRt 2006 | petRobRAs
  • 89. Business Management Business peRfoRmAnce 88 cApitAl mARkets 91 Risk mAnAgement 96 coRpoRAte goveRnAnce 99 Prices in the international oil markets were high in 2006, yet Petrobras retained the policy it had adopted in the preceding year, of avoiding passing on the oscillations in international prices to the consumer. The increase in gasoline and diesel prices, in September 2005, and the readjustment of the other oil product prices, resulted in an average domestic sales price for oil products that was 8% higher than that of 2005. The company’s good results over the course of the year were recognized by the market, with a nominal increase in its stock market quotations. The price of the company’s common stock increased by 31.94% in the year, while that of the more liquid preferred stock was up by 33.83%. Risk management, taking into account the nature of the company’s activities, is carried out in an integrated manner, seeking a balance between the twin goals of growth and return, on the one hand, and the level of exposure, on the other. In the area of corporate governance, the company adopts procedures that are compatible with the standards of the markets in which it operates, and constantly monitors the implementation and application of the practices that have been determined. | AnnuAl RepoRt 2006 | 87
  • 90. Business Management BuSIneSS PeRfoRmance Outstanding earnings and investments Oil prices in the internatiOnal market hit extrem- ely high levels during 2006. the Brent average (us$ 65.14/Barrel) was up 19.8% in relatiOn tO the previ- Ous year, having hit a peak mOnthly average Of us$ 73.66/Barrel in July. this rise had a direct impact On the lifting cOst Of dOmestic Oil and the cOst Of impOrted Oil, which represented, On average, 20.5% Of the primary thrOughput at the refineries. The pricing policy adopted in 2005 was maintained, so as to avoid immediately passing on to the consumer the volatility of the international prices. The average realization price of oil products in the domestic market was R$ 154.45/barrel — 8% higher than in the previous year. The main underlying reasons were the increase in gasoline and diesel prices, in September 2005; the commercialization of Diesel S500 — of superior quality — from the beginning of 2005; and the adjust- ment of the prices for other oil products, notably naphtha, fuel oil and aviation fuel, in line with the fluctuations in international prices. Petrobras’ total sales — including natural gas, alcohols, nitrogen compounds, exports and international sales — amounted to 3 million 48 thousand boe, a 9% increase over the 2 million 808 thousand boe sold in 2005. The company’s sales in the domestic market were up by 3%. Sales of natural gas increased by 7%, driven by the growth of the market in the south/southeast, while sales of oil products rose by 3%. Electricity sales grew 8.7%, due to contracts signed in previ- ous years coming into effect, coupled with increased sales under contracts already in effect. 88 | AnnuAl RepoRt 2006 | petRoBRAs
  • 91. The average oil producT Business Management | Business peRfoRmAnce price in The domesTic 154.45 markeT was reais a barrel 19% growTh in inTernaTional sales HigHer revenues Petrobras headquarters lit up The consolidated gross operating revenue amounted to R$ to celebrate the self-sufficiency milestone, rio de Janeiro 205.4 billion, while the net operating revenue was R$ 158.2 bil- lion — amounts that exceeded the 2005 figures by 15% and 16%, respectively. Underlying the results were the higher prices in the domestic and international markets and the increases of 3% in domestic sales and 19% in international sales. In the domestic market, net revenue was up by R$ 10.9 billion (12.3%), due mainly to higher revenue from diesel fuel (11.6%), gasoline (18.8%) and naphtha (12.2%). Gasoline sales increased by 7.3% (21 thousand bpd) — stimulated, above all, by the reduc- tion, in March, of the ethanol content —, outstripping the increase in sales of diesel fuel, up 1.1% (7 thousand bpd), and of naphtha, up 5.1% (8 thousand bpd). The impact of the price rises was great- est for diesel fuel, which saw an increase of 11% (R$ 0.11/liter), while gasoline and naphtha saw respective increases of 9.1% (R$ 0.08/liter) and 6.5% (R$ 0.08/liter). The net revenue in foreign markets was up by R$ 3 billion, led by oil exports, which increased by 29% in relation to 2005, while the revenue from oil products declined by 2.3%. ecOnOMic and Financial results The operating profit amounted to R$ 42.2 billion — 6% higher than that obtained in the previous year, due to the increases in net operating revenue, production and the processing of more domestic oil, which pushed the cost of goods and services sold by 23%, whereas the increase in the benchmark price of Brent oil was 19.8%. Net earnings were R$ 25.9 billion, 9% higher than the figure for 2005. As a result, the EBITDA (earnings before deducting interest, taxes, amortization and depreciation) was R$ 50.9 billion, 9% higher than in 2005. The return on capital employed (ROCE) was 23% — a | AnnuAl RepoRt 2006 | 89
  • 92. 23% Business Management | Business peRfoRmAnce return on capital employed (Roce) reduction of one percentage point. The financial result for 2006 was a net expense of R$ 1.3 billion, compared to a net expense of R$ 2.8 billion in 2005. The result was affected by the much 33.7 greater appreciation of the real against the principal currencies with which Petrobras works than was seen in 2005. Petrobras’ total assets amounted to R$ 210.5 billion, an increase of 15% over the figure for 2005. The value of the company’s fixed billion assets increased by 14.4%, while current assets were up by 11.6% and long term assets by 16%. Cash and short term financial investments alone accounted for 63% of the variation in current assets. The corresponding change in liabilities was accounted for reais in capital expenditure during the year, mainly by net equity, which increased by 23.8%, the principal 31% more than in 2005 15.3 item being a 45% increase in realized capital. With regard to the company’s debt, the leverage (net debt to net capitalization ratio) was reduced to 16%, from 24% in 2005. caPital exPenditure Petrobras made investments amounting to R$ 33.7 billion — 31% more than in 2005 —, in line with the Strategic Plan 2015. Capital expenditure in the area of Exploration Production came to R$ billion reais went into the exploration production area, with the prime aim of 15.3 billion, with priority being given to augmenting production augmenting production and reserves and reserves. In the Downstream area, a total of R$ 4.2 billion was invested, with the aim of adding value to the company’s oil and natural gas. The capital expenditure in the International area, of R$ 7.2 billion, was invested in pursuing the strategy of leadership, 7.2 billion as an integrated business, of the Latin American energy market. Of the total figure, R$ 3.5 billion was invested through spe- cific purpose companies (SPCs), which was up 47% in compari- son with the amount invested through SPCs in 2005. + reais was invested in the international area, in order to attain leadership of the latin American energy market 90 | AnnuAl RepoRt 2006 | petRoBRAs
  • 93. Business Management caPITal maRkeTS 40% increase in share value abroad it was a gOOd year fOr petrOBras in the stOck mar- kets. the nOminal appreciatiOn Of the cOmpany’s shares — Of 31.94% fOr the cOmmOn stOck (petr3) and 33.83% fOr the preferred stOck (petr4) — was in line with the Overall perfOrmance Of the iBOvespa (sãO paulO stOck exchange index), which rOse By 33% in 2006. hOwever, taking intO accOunt the dividends paid Out Over the cOurse Of the year (in relatiOn tO the 2005 results), the appreciatiOn Of petrOBras’ shares amOunted tO 38% (cOmmOn) and 41% (preferred). The company’s preferred stock showed the greatest liquid- ity, in terms of volume traded and number of trades, with respec- tive daily averages of R$ 282 million and 4,414. This performance placed Petrobras at the top of the ranking, as the company with the greatest weighting in the Ibovespa theoretical portfolio — with 13.80% for the period January-April 2007. Taking the combined figures for common and preferred stock, the company had a daily turnover of R$ 336 million, representing over 16% of the average Bovespa trading volume in 2006. At the New York Stock Exchange (NYSE), the return to Petrobras shareholders was even greater, due to the apprecia- tion of the real against the dollar. The receipts (ADRs) represent- ing common shares (PBR) showed a nominal appreciation of 45%, while those for preferred shares (PBRA) were up 44%. The seminar promoting Petrobras stock outperformed the major indices: the Dow Jones best practice in the disclosure of (+ 16%), the US market’s leading benchmark; the Amex Oil Index information (20%), comprising major companies in the oil and gas sector; and | AnnuAl RepoRt 2006 | 91
  • 94. Business Management | cApitAl mARkets the trading desk at Petrobras’ london office Trading volume aT The nYse the NYSE’s International 100 (21%), which brings together the (2006 daily average – US$ million) 100 most liquid ADRs. Petrobras was the most heavily traded non-American company on the New York Stock Exchange, taking the combined daily average Petrobras* 326 trading volume of the two classes of receipt. The average daily NYSE turnover of the company’s common receipts came to US$ 227 mil- BP 242 lion, and for the preferred receipts it was US$ 99 million. In 2006, for the first time, Petrobras’ monthly average market CVRD* 232 capitalization passed US$ 100 billion (in December), closing the Petrobras (common) 227 year at US$ 108 billion. This is the largest amount of any publicly traded Latin American company, and is up by 45% in relation to Nokia 212 the 2005 figure (US$ 74 billion) and by 155% compared to 2004 (US$ 42 billion). In reais, the company’s market capitalization CVRD (common) 172 amounted to R$ 230 billion at the end of 2006, compared to R$ 174 billion in 2005 and R$ 112 billion in 2004. America Movil* 154 Over the course of the year, the company’s Bovespa share- America Movil holder base grew by 20%, closing 2006 with a total of 168 thousand (series L) 153 shareholders. This is not only the outcome of the split carried out BHP Billiton 114 in 2005, which made the shares more accessible to small inves- tors, but also a reflection of the growing confidence of investors Cemex 105 in Petrobras’ management model. In April, the company listed its common and preferred shares Total 100 at the Buenos Aires stock exchange, thereby opening up the pos- sibility for Argentinean investors to have direct access to Petrobras Petrobras (preferred) 99 shares, as well as enabling the company to broaden its shareholder Taiwan 93 base and strengthen its brand name among the local population. Semiconductor The quality of Petrobras’ corporate governance, which is RD Shell 90 fully committed to the principles of ethics, transparency and social and environmental responsibility, secured the company a Elan 87 place on the select Dow Jones Global Sustainability Index. This is the world’s most important sustainability index, which serves as a * Sum of all the company’s ADR programs Source: Bloomberg parameter for socially and environmentally responsible investors. 92 | AnnuAl RepoRt 2006 | petRoBRAs
  • 95. for the first time, the monthly average market capitalization of Petrobras exceeded us$ 100 billion, in December, closing the year at uS$ Business Management | cApitAl mARkets 108 billion. This is the highest value for a publicly traded latin american company. bovespa shareholder base 7,897 million in dividends, equivalent to R$ 1.80 per share, which is up 8.7%, in line with the profit increase. Dec 31/06 167,580 cOrPOrate Finance Petrobras retained its high degree of liquidity in 2006 and obtained Jun 30/06 160,395 more favorable terms in its fund raising, which received a boost from the investment grade ratings assigned by Moody’s Investor Dec 31/05 140,060 Services in October 2005 and Standard Poor’s in January 2007. Within this scenario, the company developed strategies for man- aging its liabilities that included the prepayment of debt, the rene- Jun 30/05 128,962 gotiation of contractual terms and strategic new fund raising. With regard to the early repayment of debt, in March, Petrobras prepaid two series of the Program for the Securitization In November, it was announced that Petrobras’ shares had also of Bunker Fuel and Fuel Oil, reducing the outstanding principal been included in the Bovespa Corporate Sustainability Index. to US$ 577.6 million. The company also obtained the consent of the investors in the remaining series for the withdrawal of bun- sHare BuyBack ker fuel from the program, a reduction in the insurance cost and A share buyback program was announced in December, which a reduction in the minimum daily average exports. The terms will allow the company to repurchase up to 91.5 million preferred of other financial contracts were also revised, resulting in lower shares — 4.9% of the total preferred shares in circulation — up to interest rates and the exclusion of certain insurance mechanisms December 2007. This decision reflects the management’s belief (political risk insurance and letters of credit). that the company’s shares are undervalued, in view of Petrobras’ In the international capital markets, operating through its prospects for growth and profitability, and is aimed at reducing subsidiary PIFCo, the company repurchased securities in July with the company’s short term financial costs. a total value of US$ 888 million. Including the amount already repurchased by Petrobras, this operation has led to the canceling dividends of US$ 1,215 million of the company’s debt. In February 2007, an During the year, Petrobras shareholders received dividends in rela- operation was carried out for the exchanging of five series of old tion to the 2005 base year equivalent to R$ 1.6562 per common or PIFCo securities for new securities maturing in 2016, with a total preferred share. This represents an increase of 39% in comparison face value of US$ 399,053,000. with the dividends paid out in relation to the previous year, which In September, PIFCo carried out a private 10-year bond issue is in line with the 40% rise in the company’s net earnings. For the in Japan, denominated in yen, for the equivalent of US$ 300 mil- 2006 fiscal year, the Board of Directors proposes to pay out R$ lion, at a rate of 2.15% p.a. and partially guaranteed by JBIC, with | AnnuAl RepoRt 2006 | 93
  • 96. 888 Business Management | cApitAl mARkets million dollars: the value of the securities repurchased in the international market in June the objective of reopening the Japanese market and diversifying In the Downstream area, Petrobras closed the project the company’s investor base. finance contracts, in May, for the modernization of the Henrique In October 2006, PIFCo made its first issue of Global Notes Lage refinery (Revap), amounting to US$ 900 million. since the company obtained its investment grade, in order to The ABN AMRO bridge loan on the project for the construc- establish a new benchmark for the group’s funding costs. The issue tion of the P-53 platform, to go into production in the Campos represented the lowest ever cost to PIFCo for a ten year maturity Basin’s Marlim Leste field, was renewed in August and the syn- (a rate of 6.125% p.a., with a return to investors of 6.185% p.a.) dicated loan was refinanced in September. The total amount of and most of the demand was high grade. Moreover, the company these operations comes to US$ 1.1 billion, of which US$ 350 mil- introduced improvements to its covenants. lion corresponds to the bridge loan and US$ 750 million to the In transactions with the Brazilian Development Bank syndicated loan. (BNDES), Petrobras drew down US$ 314 million, through its subsid- In the area of Exploration Production, the refinancing of a iary PNBV, for the construction of the P-51 and P-52 platforms. syndicated commercial bank loan in relation to the Master Plan for Under lines of credit in the international banking market, the Delivery and Treatment of Oil from the Campos Basin (PDET) the company raised a total of US$ 2,112 million, 20% more than in was concluded in September. The improvement in Petrobras’ 2005, 97% of which was earmarked as support for the operations credit rating since the original structuring of the financing, in of subsidiaries, with the remainder going into the commercializa- March 2005, enabled the company to obtain a reduced spread tion of oil and oil products. and the cancellation of the political and commercial risk insur- In order to provide the company with a liquidity cushion, ance on the transaction. PIFCo has secured, since 2004, a total of US$ 675 million in In the area of Gas Energy, two additional bridge loans for standby facilities. These allow the company to draw down any the Southeast–Northeast Gas Pipeline Interconnection (Gasene) amount, up to the contract limit, over a period of two years, and were arranged with the Brazilian Development Bank (BNDES) in gives the company a year to repay the principal. December. One of the loans, amounting to R$ 1.05 billion, will be With regard to bank guarantees, the total amount under used to purchase pipeline for the stretch between Cacimbas (ES) contract to Petrobras and its subsidiaries amounted to US$ 4,126 and Catu (BA); the other, for R$ 312 million, will be used for the million — 107.86% more than at the end of 2005. stretch between Cabiúnas (RJ) and Vitória (ES). In November, Petrobras Netherlands BV (PNBV) signed structured PrOJects a financing contract (a Co-Financing Term Loan Facility Through structured project finance operations, the company Agreement) with the Export-Import Bank of Korea — K-Exim secured funding in the Brazilian and foreign financial markets for (the official credit institution for South Korea) and BNP Paribas. its undertakings in the Downstream, Exploration Production, The contract, for US$ 360 million over a term of eight years, is to and Gas Energy areas, using Specific Purpose Companies (SPCs) finance Petrobras’ investment in two oil production platforms to set up for each project. be constructed by the South Korean shipyards of Hyundai Heavy 94 | AnnuAl RepoRt 2006 | petRoBRAs
  • 97. Business Management | cApitAl mARkets P-52 platform deck- mating operation, angra dos reis, rio de Janeiro Industries and Daewoo Shipyard Marine Engineering. The plat- forms will be used in foreign oilfields in which Petrobras has a financial stake. + Structured ProjectS Year structured Amount (US$ million) Marlim 1998 1,500 Albacora 2000 410 Barracuda / Caratinga 2000 3100 Cabiúnas 2000 850 Espadarte, Voador and Marimbá (EVM) 2000 1076 NovaMarlim 2001 834 Pargo, Congo, Garoupa, Cherne and Carapeba (PDCG) 2001 85,5 Pipeline networks 2003 1,000 CLEP (Oil Equipment Leasing Company) 2004 1,250 PDET (Master Plan for the Delivery Processing of Oil from the Campos Basin) 2005 1,270 1 CRI Macaé (Certificate of Real Estate Receivables) 2005 200 2 Modernization of the REVAP refinery 2006 900 Notes: 1 Due to increased costs, the total amount for the project went from US$ 910 million to US$ 1.27 billion. 2 Amount in reais (R$). ProjectS being Structured Amount (US$ million) Urucu-Coari-Manaus gas pipeline and Manaus thermoelectric plant (Amazon region) 1,300 Construction of P-53 platform (Marlim Leste) 1,180 Gasene 2,000 Mexilhão 595 | AnnuAl RepoRt 2006 | 95
  • 98. Business Management RISk managemenT Management aligned natural gas processing with corporate goals unit at the urucu industrial complex, amazonas petrOBras manages its risks in an integrated man- ner, taking advantage Of any pOssiBle natural fOrms Of prOtectiOn. the cOmpany seeks tO attain a suitaBle Balance Between its gOals Of grOwth and return On investment, On the One hand, and its level Of expOsure tO the risks inherent tO its OperatiOns Or stemming frOm the cOntext in which it Operates. By the very nature of its activities, Petrobras is subject to a whole series of market risks, such as variations in the prices of oil and oil products, in foreign exchange rates and in interest rates. Through its risk management policy, aligned with its corporate goals and objectives, the company seeks the security of its opera- tions and the execution of its planned investments, so as to be able to maintain its profitability and grow in a sustainable manner. Any proposals for the management of risk are put before the Risk Management Committee, comprising executives from the company’s business and corporate areas. This allows an integrated view of the issues and makes it easier for the Executive Board and the Board of Directors to comprehend the risk exposure and take the appropriate decisions. In the management of oil and oil product market risks, fol- lowing the premise of regular and systematic evaluation of the consolidated net exposure to price risk, operations using deriva- tives have consequently been limited to specific short term trans- actions (up to six months), involving futures contracts, swaps and options and utilizing control methodologies in accordance with specific risk management guidelines, in order to safeguard the 96 | AnnuAl RepoRt 2006 | petRoBRAs
  • 99. Business Management | Risk mAnAgement The companY’s asseTs are insured for 43.2 billion dollars results of its physical operations. credit risk In line with the recent alterations in the country’s regulatory envi- ronment, Petrobras has adapted its credit policy to the new market circumstances. This has preserved the attractiveness of sales on credit, without unnecessarily raising the company’s exposure to credit risk. In order to analyze these operations, in 2006, the company set up the Petrochemicals Area Credit Committee, following the model of the committees for the Downstream and Gas Energy areas, set up in 2004, when a system of credit flow analysis was also introduced. Outside Brazil, in line with Petrobras’ growing sales, the processes for analyzing and conceding credit to clients (exports and the provisioning of vessels) were standardized and central- ized in 2006. insurance In 2006, the final premium on the company’s principal insurance policies — major fire/operational risk and petroleum risk — was raised to US$ 34.5 million, from US$ 29.4 million in 2005, an increase of 17%. On the other hand, the value of the company’s insured assets increased by 32%, from US$ 32.7 billion to US$ 43.2 billion. Most of Petrobras’ risk is reinsured in the international market. The company has a fixed policy of publicizing its risk management practices, in Brazil and abroad. Pertinent informa- tion regarding losses and improvements made are promptly and candidly passed on to the insurance market. Like other large oil companies, Petrobras bears a significant portion of the risk, with insurance exemptions as high as US$ 40 mil- lion. The company does not insure against lost profits and wellhead | AnnuAl RepoRt 2006 | 97
  • 100. The greater part of Petrobras’ risk exposure is reinsured in the international market and the company has a policy of disclosing its risk Business Management | Risk mAnAgement management practices. controls in Brazil, nor does it insure its pipeline network. For insurance purposes, the company’s assets are valued at Platforms, refineries and other installations have insurance replacement cost. Based on the maximum likely damages at each cover against major fire/operational risk and petroleum risk. The installation, the maximum indemnity in the major fire/operational movement of cargoes is covered by transportation insurance poli- risks policy has been fixed at US$ 600 million. cies and the vessels are covered by hull and machinery insurance. Most of the company’s activities abroad are insured or rein- Civil liability and environmental risks are covered by one or more sured by the Bear Insurance Co. Ltd., based in Bermuda. As a cap- policies, according to the circumstances. Projects and installations tive insurance company, Bear retains none of the risk, but passes under construction, where the maximum likely damages would it on in full to the market. + exceed US$ 40 million, are covered against engineering risks under a policy taken out by Petrobras or by the contractors. insurance 50 0.30% 0.25% 40 0.20% 30 0.15% 20 0.10% 10 0.05% 0 0 1999 2000 2001 2002 2003 2004 2005 2006 Amount Insured (US$ b) Premium (US$ m) Rate (%) 98 | AnnuAl RepoRt 2006 | petRoBRAs
  • 101. Business Management coRPoRaTe goveRnance Practices are The aim of the process was to update this instrument and bring it into alignment with the requirements of the Sarbanes-Oxley Law constantly reviewed (SOX) regarding specific items in the Codes of Ethics of companies listed with the New York Stock Exchange. petrOBras is cOnstantly striving tO perfect its In compliance with SOX requirements, Petrobras discloses cOrpOrate gOvernance practices and relatiOns in Form 20-F (the Annual Report, an SEC requirement) that one of with sharehOlders, custOmers, suppliers, emplOy- the nine members of its Board of Directors, elected at an Ordinary ees and Other stakehOlders. the cOmpany adOpts General Shareholder’s Meeting held on April 3, 2006, is a financial management prOcedures that are cOmpatiBle specialist. + with the regulatiOns gOverning the markets in which it Operates and cOntinually mOnitOrs the applicatiOn Of these prOcedures. In Brazil, Petrobras is subject to the rules of the Brazilian Securities Commission (CVM) and the São Paulo stock exchange (Bovespa). Outside Brazil, it obeys the rules of the Securities and Exchange Commission (SEC) and the New York Stock Exchange (NYSE), in the USA, and of the Madrid stock exchange (Latibex), in Spain. As from 2006, with its listing in Argentina, the company is also subject to the rules of the Argentinean Securities Commission k in its annual report 2006, filed (CNV) and the Buenos Aires stock exchange. with the SeC, Petrobras attests Petrobras is studying the process for formally adhering to to the effectiveness of its the Bovespa’s differentiated levels of corporate governance and, internal controls, in compliance since changes were made to its by laws, in 2002, the company with SoX section 404. has been in full compliance with the practices and regulations defined therein. The training program in corporate governance for executives k a review of the Petrobras and staff whose functions are directly linked to relations with the code of ethics has been companies of the Petrobras System, which continued through completed, with the participation 2006, fosters awareness of the importance of this topic and dis- of the employees, bringing it up seminates the best practices adopted in Brazil and abroad. to date and into line with most The process of reviewing the Petrobras Code of Ethics, which recent legal requirements. involved the participation of the employees, was concluded in 2006. | AnnuAl RepoRt 2006 | 99
  • 102. Business Management | coRpoRAte goveRnAnce internal cOntrOls The Program of Integrated Internal Control Systems and Methods (Prisma), included in Petrobras’ strategic agenda and currently assimilated in the company’s General Management of Internal corporaTe Controls, concluded the work for compliance with the require- ments of Section 404 of the Sarbanes-Oxley Law. governance The activities carried out in 2006, under the guidance of sTrucTure the Committee for the Management of Internal Controls and monitored by the Audit Committee, consisted of completion of Petrobras’ corporate governance structure comprises the the charting, documenting and maintenance of the internal con- Board of Directors and its advisory committees, the Executive trol structure for the mitigation of risks relating to the Petrobras Board, the Fiscal Council, the Internal Auditors, the General System’s consolidated financial reports. Ombudsman, the Business Committee and the Management Petrobras’ General Management of Internal Controls, basi- Committees. cally following the guidelines of the Public Company Accounting BOard OF directOrs Oversight Board (PCAOB), the Committee of Sponsoring An independent collegial body with powers and responsibilities Organizations of the Treadway Commission (Coso) and the laid down in the law and in the company’s by laws, whose main Control Objectives for Information and Related Technology duties are to define the company’s strategic guidelines and supervise the actions of the Executive Board. There are nine (Cobit), continued to implement the best practices in corporate board members, elected at a General Shareholders’ Meeting governance and the control over the business, service, financial for a term of one year, with the possibility of reelection. Seven and information technology processes. of the board members represent the controlling shareholder; Petrobras, along with the independent auditors, endorsed one represents the minority common shareholders; and one represents the preferred shareholders. the design of the processes and controls that have a substantial impact on the Consolidated Financial Reports. All shortcomings executive BOard that could significantly or materially jeopardize the certification The Executive Board runs the business, in line with the mission, of the company’s internal controls were rectified. The System’s objectives, strategies and guidelines defined by the Board of Directors. The Executive Board consists of a CEO and six Internal Auditors, directly linked to the Boards of Directors, con- directors chosen by the Board of Directors for a term of three ducted further tests of the effectiveness of the controls, and no years, with the possibility of reelection, who may be removed at problems were found that might compromise the evaluation of any time. Only the CEO is a member of the Board of Directors, the company’s control structure, both in terms of the whole entity but may not preside over that body. and in terms of processes and information technology. Documentation of the design of the processes, controls and tests is being regularly stored in an integrated system of internal 100 | AnnuAl RepoRt 2006 | petRoBRAs
  • 103. Business Management | coRpoRAte goveRnAnce asphalt emulsion plant in são José dos campos, são Paulo Fiscal cOuncil BOard advisOry cOMMittees A permanent body, independent of the company’s management, There are three Advisory Committees: for Auditing; the as laid down in Brazilian Corporate Law, the Fiscal Council com- Environment; and Remuneration and Succession. Their mem- prises five members, with terms of one year, with the possibil- bers belong to the Board of Directors and assist the Board in ity of reelection. One of the members represents the minority carrying out its responsibility to provide the company with high shareholders; another represents the preferred shareholders; level guidance and direction. and three act in the name of the federal government — one of these is appointed by the Finance Minister, as the representative audit committee of the National Treasury. It is incumbent on the Fiscal Council to In full compliance with the requirements of the Sarbanes-Oxley represent the shareholders in a supervisory capacity, monitoring Law, this committee comprises three independent Board mem- the actions of the company’s management to verify compliance bers and its president needs to be a financial specialist — in accor- with their legal and statutory obligations, as well as defending the dance with SEC definitions. The committee’s function is to analyze interests of the company and its shareholders. questions regarding the integrity of the company’s US GAAP financial reports and the effectiveness of its internal controls, as internal auditOrs well as supervising Petrobras’ outside and internal auditors. The Internal Auditors plan, execute and evaluate the company’s internal auditing procedures and assist the senior management Business cOMMittee and external control bodies. The company also has outside audi- This committee is a forum for integration, seeking to align busi- tors, appointed by the Board of Directors, who are restricted as to ness development, management of the company and the guide- the consulting services they may provide. It is mandatory that the lines of the Strategic Plan, in support of the senior management’s outside auditors be changed every five years, on a rotation basis. decision making process. general OMBudsMan ManageMent cOMMittees The Ombudsman, directly linked to the Board of Directors, These are forums for delving deeper into issues that are to be plans, guides, coordinates and evaluates activities aimed at gath- presented to the Business Committee, with which it liaises. Such ering the opinions, suggestions, criticism, complaints and accu- integration also exists between the Management Committees sations of interested parties having some form of relationship themselves and in their relations with the Board Advisory with the company, and arranges for investigations to be carried Committees. out and appropriate steps to be taken. In compliance with the At present, the company has the following Management requirements of the Sarbanes-Oxley Law, this office must also Committees: Exploration Production; Downstream; Gas serve as a channel to receive and process accusations regarding Energy; Human Resources; Health, Safety the Environment; accounting, internal control and auditing issues, including confi- Organization and Management Analysis; Information dential and anonymous tip-offs from employees. Technology; Internal Controls; Risk; Petrobras Technology; Social and Environmental Responsibility; and Marketing Brands. | AnnuAl RepoRt 2006 | 101
  • 104. Business Management | coRpoRAte goveRnAnce control management, which automatically monitors the chang- ing roles and responsibilities, making it possible to visualize the internal control structure, from the managers who are directly responsible for the controls all the way up to the senior levels, even to the CFO and the CEO of Petrobras. Hence, the manag- ers, the General Management of Internal Controls, the Internal Auditors, senior management and the Audit Committee can see, at any given moment, an up-to-date analysis of the position of the Petrobras System’s internal controls. inFOrMatiOn disclOsure In line with its policy of transparency in its relationship with the capital markets, the company holds quarterly open meetings at which it announces its results and releases its quarterly BR GAAP and US GAAP balance sheets. Due to the listing of the company’s shares in Argentina, as of the year end 2006, Petrobras will now also disclose its annual US GAAP balance sheet reconciled to the Argentinean standard. Petrobras has an internal document formally defining the controls and procedures for the disclosing of information, that is to be followed by all the company’s staff. This ensures that the information released to the market has been recorded, processed, developed and made available in compliance with the legal rules and time limits. + Worker at the duque de caxias refinery (reduc), rio de Janeiro 102 | AnnuAl RepoRt 2006 | petRoBRAs
  • 105. Petrobras Organization Model Business Management | coRpoRAte goveRnAnce The Petrobras organization model, ratified by the Board of Directors Basin Exploration Production business unit. Furthermore, in October 2000, is constantly being refined in order to tailor it to reviews were carried out of the organization and management the Strategic Plan. Changes in the company’s organizational struc- model for the International business area and of some business ture in 2006 resulted in, among other things, the reorganization of unit structures abroad, in addition to the implementation of a new the Gas Energy business area and the setting up of the Santos organizational structure for the Financial area. + | AnnuAl RepoRt 2006 | 103
  • 106. Business Management execuTIve BoaRD JOsé sergiO gaBrielli de azevedO ceo coRpoRAte AReA General Ombudsman Office Maria augusta carneirO riBeirO Internal Auditors gersOn luiz gOnçalves Petrobras General Secretary HéliO sHiguenOBu FuJikaWa CEO’s Cabinet arMandO raMOs triPOdi Business Strategy Performance celsO FernandO luccHesi Management System Development antOniO sergiO Oliveira santana New Business rOgeriO gOncalves MattOs Institutional Communications WilsOn santarOsa Legal niltOn antOniO de alMeida Maia Human Resources diegO Hernandes finAnciAl AReA alMir guilHerMe BarBassa cfo Corporate daniel liMa de Oliveira Finance PedrO augustO BOnésiO Financial Planning Risk Management JOrge JOsé naHas netO Accounting MarcOs antOniO silva Menezes Taxation Maria alice Ferreira descHaMPs cavalcanti Investor Relations raul adalBertO de caMPOs gAs eneRgy AReA ildO luís sauer Director Corporate antOniO eduardO MOnteirO de castrO Energy Development MOzart scHMitt de QueirOz Marketing Sales luiz antOniO cOsta Pereira Energy Operations Stakeholdings FernandO JOsé cunHa Natural Gas Logistics Stakeholdings sydney granJa aFFOnsO 104 | AnnuAl RepoRt 2006 | petRoBRAs
  • 107. exploRAtion pRoDuction AReA guilHerMe de Oliveira estrella Director Business Management | executive BoARD Corporate FranciscO nePOMucenO FilHO North-Northeast sOlange da silva guedes South-Southeast JOsé antOniO de FigueiredO Production Engineering JOsé Miranda FOrMigli FilHO Exploration PaulO Manuel Mendes de MendOnça Services erardO gOMes BarBOsa FilHO DoWnstReAm AReA PaulO rOBertO cOsta Director Corporate venina velOsa da FOnseca Logistics PaulO MauríciO cavalcanti gOnçalves Refining alan kardec PintO Marketing Sales nilO carvalHO vieira FilHO Petrochemicals Fertilizers JOsé liMa de andrade netO inteRnAtionAl AReA nestOr cuñat cerveró Director Corporate cláudiO casteJOn Southern Cone Region déciO FaBríciO OddOne da cOsta Business Development luís carlOs MOreira da silva Business Technical Support aBíliO PaulO PinHeirO raMOs Americas, Africa Eurasia saMir PassOs aWad seRvices AReA renatO de sOuza duQue Director Health, Safety, the Environment ricardO santOs azevedO Materials MarcO aureliO da rOsa raMOs Cenpes carlOs tadeu da cOsta Fraga Engineering PedrO JOsé BaruscO FilHO Information Technology WasHingtOn luiz Faria salles Shared Services ricardO antOniO aBreu ianda Board of directors fiscal council Chairwoman Members dilMa vana rOusseFF Maria lúcia de Oliveira Falcón nelsOn rOcHa augustO Board Members túliO luiz zaMin silas rOndeau cavalcanti silva erenice alves guerra guidO Mantega Marcus Pereira aucéliO JOsé sergiO gaBrielli de azevedO gleuBer vieira* Substitute members artHur antOniO sendas celsO BarretO netO rOger agnelli Maria auxiliadOra alves da silva FáBiO cOlletti BarBOsa MarcelO cruz JOrge gerdau JOHannPeter edisOn Freitas de Oliveira * Replaced by Francisco Roberto de Albuquerque as from April 2, 2007 eduardO cOutinHO guerra | AnnuAl RepoRt 2006 | 105
  • 108. gloSSaRY adrs - aMerican dePOsitary receiPts | Certificates represent- ing one or more shares in a foreign company, that are traded in the of cracking and esterification. United States. An American depositary bank will issue ADRs against underlying shares deposited with a custodian in the country of BlOck | A small portion of a sedimentary basin where oil and natural origin of those shares. In the case of Petrobras, in 2006, each ADR gas exploration and production is carried out. represented four underlying shares. BOOk value | The value of a company’s net equity or sharehold- anP - natiOnal agency FOr Oil, natural gas BiOFuels | The ers’ equity. Brazilian regulatory body for the oil and gas sector. Brent | Oils extracted from the Brent and Ninian systems, in the aPi degree (0aPi) | A scale developed by the American Petroleum North Sea, with an API of 39.4o and 0.34% sulfur content. Institute to indicate the relative density of an oil or a by-product. The API scale, measured in degrees, varies inversely with differ- Br gaaP | The Generally Accepted Accounting Principles in Brazil. ences in the relative density, i.e. the greater the relative density, the lower the API degree. Conversely, the lighter the oil, the higher the Bunker Fuel | Fuel for a vessel. The bunker is the place where it API degree. Oils with an API of more than 30o are considered light; is stored. between 22o and 30o are medium; lower than 22o are heavy; while an API equal to or lower than 10o indicates an extra-heavy oil. The catalytic cracking | Refining process whereby heavier distilled higher the API degree, the greater the product’s market value. oils are converted into lighter fractions of greater commercial value, such as gasoline, liquefied petroleum gas (LPG) and naphtha. assOciated natural gas | Natural gas produced along with oil. A petroleum reservoir usually contains oil, gas and water. This gas cO-generatiOn | The simultaneous generation of electricity and is obtained once the liquid oil fraction has been separated. There thermal energy (heat and steam from the process), through the is also non-associated gas, produced from gas reservoirs without sequential and efficient use of quantities of energy from the same the need for separation. In the case of both types, however, the gas source. This increases the thermal efficiency of the entire thermo- is processed before it is sold, in order to ensure that it meets the dynamic system. required quality standards. cOndensate | Usually produced with natural gas and recovered BiOdiesel | A renewable and biodegradable alternative to diesel from an underground reservoir in the normal process of separa- fuel, obtained from the chemical reaction of animal or vegetable tion. It is gaseous in its reservoir state but becomes liquid under oils and alcohol in the presence of a catalyst, a process known as the normal surface pressure and temperature conditions at which transesterification. It can also be obtained through the processes it is subsequently kept. 106 | AnnuAl RepoRt 2006 | petRoBRAs
  • 109. FPsO (FlOating, PrOductiOn, stOrage OFFlOading) | A float- cOnFerence call | A telephone conference wherein company rep- ing unit for the production, storage and transfer of petroleum, using resentatives talk to analysts and institutional and individual inves- a ship as a platform. tors, normally held when the company is disclosing its most recent quarterly financial results. The company representatives will usually FrOntier areas | Basins or parts of basins in which there has been also provide information relating to its outlook for the future. little exploration. cOrPOrate gOvernance | The relationship between economic Fuel Oil | The heavier fractions from the atmospheric distillation of agents (shareholders, executives, board members), which can influ- petroleum, widely used as an industrial fuel in boilers, furnaces, etc. ence or determine the course and performance of a company. Good corporate governance provides the shareholders with an assurance grOss Margin | Gross profit divided by net revenue. of equitable treatment, transparency and responsibility for the company’s results. Hedge | A financial position or combination of positions, taken out for the purpose of reducing some kind of risk. crude Oil | The primary feedstock at a processing plant. iBOvesPa (BOvesPa index) | Indicator of the price changes of a derivative | A contract or security whose value is related to the hypothetical share portfolio that is defined periodically by the São changes in the price of another security, financial instrument or Paulo stock exchange (Bovespa). underlying index. Consequently, it can be used as a hedge. installed caPacity | A plant’s processing capacity, as authorized dJsi | The Dow Jones Sustainability Index, which reflects the return by the ANP. on a hypothetical portfolio of companies listed at the New York stock exchange (NYSE) that have the best performance in all aspects of investMent grade | A level of risk classification indicating that the business sustainability. Considered to be the world’s premier sus- company is considered to be a low credit risk and that its shares may tainability index, it is used as a parameter by socially and environ- therefore be acquired by more conservative investors. mentally responsible investors. ise (BOvesPa cOrPOrate sustainaBility index) | The Corporate dOWnstreaM | Collective term for the activities of refining crude Sustainability Index reflects the return on a hypothetical portfolio of oil, treating natural gas and transporting and commercializing/dis- companies listed at the São Paulo stock exchange (Bovespa) that have tributing the oil products. the best performance in all aspects of business sustainability. The 34 companies, whose 43 shares (common and preferred) comprise the eBitda | Earnings before interest, taxes, depreciation amortiza- index, were chosen for their policies, management practices, perfor- tion expenses. mance and compliance with legal obligations regarding economic efficiency, environmental equilibrium, social justice, product charac- eBitda Margin | Informs how much net revenues contribute teristics and corporate governance. The ISE is a pioneering initiative in towards the EBITDA. Latin America that seeks to create an investment environment com- patible with the demands of sustainable development in modern day eP | Exploration and production of oil and natural gas. society, as well as to encourage corporate ethics and responsibility. etHene Or etHylene | A basic petrochemical product (C2H4) of isO 14001 | Prepared and run by the International Organization for the light olefin family, produced from naphtha or ethane. Standardization, it specifies the requirements for the certification of environmental management systems. exPlOratOry success rate | The number of exploratory wells with commercially viable oil and/or gas, as a proportion of the total num- liQueFied natural gas (lng) | Supercooled natural gas that is ber of exploratory wells drilled and evaluated in that same year. maintained as a liquid, at -160° Celsius or less, for the purpose of storage and transportation. Field |A geographical area encompassing a group of one or more underground oil or natural gas reservoirs, possibly at variable depths, liQueFied PetrOleuM gas (lPg) | A mixture of hydrocarbons and and the production infrastructure (facilities and equipment). high-pressure steam, obtained from natural gas at special process- | AnnuAl RepoRt 2006 | 107
  • 110. ing units, which is kept in a liquid state by pressure or cooling, to members of the Organization of Petroleum Exporting Countries: facilitate storage, transport and handling. Saharan Blend (Algeria); Minas (Indonesia); Iranian Heavy (Iran); Basrah (Iraq); Kuwait Crude (Kuwait); Es Sider (Libya); Bonny Light Market sHare | The proportion of total market sales represented (Nigeria); Dukhan (Quatar); Arab Light (Saudi Arabia); Murban by a specific company or product. (UAE) and BCF-17 (Venezuela), used as a base of reference. Market value | The value of a company, as measured by the market OPerating Margin | Operating profit divided by net revenue. price of its shares, multiplied by the number of shares issued. PetrOleuM | Any liquid hydrocarbon in its natural state, such as MercHant POWer statiOn | A commercial power station that normally crude oil and condensate. produces power for the spot market. Petrobras’ contracts with three merchant power stations were signed at the time of electricity rationing, POlyetHylene | A petrochemical product used to make objects during the Brazilian energy crisis of 2001/2002, and provide for the pay- such as casks, receptacles, film containers, plastic packaging for ment of contingency contributions in the event that their sales revenues clothing and lightweight objects. are not sufficient to cover the costs of running the plants. POlyPrOPylene | A petrochemical product with uses similar to naPHtHa | A petroleum by-product, mainly used as a feedstock by those of high-density polyethylene, such as film, drink crates and the petrochemical industry, to produce ethylene and propylene, along packaging. with other liquid fractions such as benzene, toluene and xylene. PriMary PrOcessed tHrOugHPut | The quantity of crude oil natural gas | Refers to all hydrocarbons or hydrocarbon mixtures processed at the distillation plants. that remain in a gaseous state under normal atmospheric conditions, extracted directly from reservoirs of petroleum or gas. The term PrOcessed tHrOugHPut | Total amount of crude oil plus reprocess- embraces moist, dry, residual and rare gases, predominantly methane ing and intermediate products processed at the distillation plants. and ethane, used for industrial, domestic and automotive fuel. PrOPene Or PrOPylene | A basic petrochemical product, pro- natural gas liQuids (ngl) | Refers to the portion of natural gas duced from naphtha or propane, that serves as feedstock for making that is found in its liquid state under a determined surface pressure polypropylene. and temperature, obtained during natural gas production through field separation processes, in natural gas processing units or in gas PrOven reserves | Reserves of petroleum and/or natural gas that, pipeline transfer operations. based upon analysis of geological and engineering data, are esti- mated to be profitably recoverable from reservoirs discovered and natural gasOline | A liquid with a steam pressure halfway between evaluated, to a high degree of certainty, taking into account the those of condensate and LPG, obtained from natural gas through a prevailing economic circumstances, feasible operational methods process of compression, distillation and absorption. and petroleum and tax regulations. net Margin | Net earnings divided by net revenue. rating | Classification or evaluation of risk. OFFsHOre/ OnsHOre | Located, respectively, at sea or on land. recOveraBle vOluMe | The volume of petroleum that can be removed from a reservoir, from start-up to abandonment, using the OHsas 18001 | An international standard, prepared and run by BSI best current technology, as determined through technical-economic Management Systems, it specifies the requirements for the certifica- studies carried out up to the time of the evaluation. Recoverable tion of health and work safety management systems. volume = original volume x recovery factor. Oil | The portion of petroleum that exists in a liquid state under reserve | Discovered oil and/or natural gas resources that are com- original reservoir conditions and remains liquid under surface pres- mercially recoverable as of a given date. sure and temperature conditions. reserve rePlaceMent index (rri) | The ratio between the volume OPec Basket | A basket of oils representing the production of the of reserves incorporated during any given year and the total produc- 108 | AnnuAl RepoRt 2006 | petRoBRAs
  • 111. tion volume over the course of that same year. cOnversiOn taBle retarded cOking | The most severe form of thermal cracking, a) Cubic meters (m3) into barrels (b): that transforms vacuum residue into lighter products, as well as m3 b= producing coke. 0.158984 rOce – return On caPital eMPlOyed | Calculated using the equa- B) Barrels (b) into cubic meters (m3): tion: net earnings — financial income (net of income taxes) / aver- m3 = b x 0.158984 age borrowing (loans and financing) + average stockholders’ equity — financial investments. c) Cubic meters (m3) into tons (t): t = m3 x D sec – securities and excHange cOMMissiOn | The regulatory body that oversees the US capital market. The Brazilian equivalent d) Tons (t) into cubics meters (m3): is the CVM - Comissão de Valores Mobiliários. t m3 = D sPe | Society of Petroleum Engineers. e) Barrels (b) into tons (t): sWaP | Contract between two parties to exchange flows of payments. t = b x 0.158984 x D A typical oil swap consists of a contract in which one party buys at a certain set price and sells at a future floating price. F) Tons (t) into barrels (b): t b= uPstreaM | Collective term for the activities of exploration and D x 0.158984 production. g) 1 m3 = 1,000 liters = 6.28994113 b us gaaP | The acronym for Generally Accepted Accounting Principles in the United States of America. It is the US accounting standard. H) 1 b = 158.984 liters = 0.158984 m3 vOlatility | Statistical measurement of the changes in a price or rate i) 1,000 m3 natural gas = 1 m3 oil (approximately) over time, usually expressed as a standard deviation from a norm. The greater the volatility, the wider is the variation from the mean. J) D = M , where V D = Density, M = Mass, V = Volume WOrk-related illness | An illness acquired or caused as a result of the special conditions under which a job is performed and to which it is directly related. aBBreviatiOns Wti |West Texas Intermediate is an oil with an API of between BOe | Barrels of oil equivalent. Normally used to express volumes of oil and 38º and 40º and a sulfur content of around 0.3%, whose daily spot natural gas in the same unit of measurement (barrels) by converting Brazilian market quotation represents the price of barrels of oil in Cushing, gas at the rate of 1,000 m3 of gas to 1 m3 of oil. As an international standard, Oklahoma, in the USA. one barrel of oil equivalent equals approximately 6,000 cubic feet of natural gas (1 m3 = 35.31 ft3). BOed | Barrels of oil equivalent per day. BPd | Barrels per day. | AnnuAl RepoRt 2006 | 109
  • 112. aDDReSSeS Head OFFice rePresentatiOn aBrOad PetróleO BrasileirO s.a. – PetrOBras neW yOrk Av. República do Chile, 65 – Centro 570, Lexington Avenue – 43rd Floor 20031-912 – Rio de Janeiro – RJ 10022-6837 New York – NY – USA Tel.: (++55) 21 3224-4477 Tel.: (++1) 212 829-1517 Fax: (++1) 212 832-5300 lOcal rePresentatiOn tOkyO Brasília Togin Building – 5th Floor, Room 508 Setor de Autarquias Norte – SAN 4-2 Marunouchi 1 – Chome – Chiyoda-Ku Quadra 1, bloco D, Edifício PETROBRAS - 2º andar Tokyo 100-0005 – Japan 70040-901 – Brasília – DF Tel.: (++81) 3 5208-5285 Tel.: (++55) 61 3429-7131 Fax: (++81) 3 5208-5288 Fax: (++55) 61 3226-6341 cHina sãO PaulO Petrobras Beijing Representative Office Avenida Paulista, nº 901 – 11º andar - Cerqueira César China World Trade Center – Tower 1 – Units 1221-1225 01311-100 – São Paulo – SP No1, Jian Guo Men Wai Avenue – Chao Yang District Tel.: (++55) 11 3523-6501 Beijing 100004 – P. R. China Fax: (++55) 11 3523-6488 Tel.: (++86) 10 6505-9838 Fax: (++86) 10 6505-9850 salvadOr Avenida Antônio Carlos Magalhães, nº 1113 - sala 112 - Pituba singaPOre 41825-903 – Salvador – BA 435 Orchard Road - Room 19-05/06 - Wisma Atra Tel.: (++55) 71 3350-3700 Singapore – 238877 Fax: (++55) 71 3350-3080 Tel.: (++65) 6550-5080 Fax: (++65) 6734-9081 110 | AnnuAl RepoRt 2006 | petRoBRAs
  • 113. sHareHOlder services PetróleO BrasileirO s.a. – PetrOBras dePartMent FOr latin aMerica relatiOns Shareholder Support Tel.: (++55) 3048-3507 Tel.: (++55) 21 3224-1524 or 3224-1550 Av. Brigadeiro Faria Lima, 3729 – 14º andar 0800-2821540 04538-000 – São Paulo, SP Fax: (++55) 2262-3678 Av. República do Chile, 65 – sala 2202-B investOr services CEP 20031-912 – Centro – Rio de Janeiro – RJ e-mail: PetróleO BrasileirO s.a. – PetrOBras Investor Relations Area dePOsitOry Banks Tel.: (++55) 21 3224-1510 or 3224-9947 Fax: (++55) 21 3224-6055 BancO dO Brasil s.a. Avenida República do Chile, 65 – sala 2202-B Shareholder Services CEP 20031-912 – Centro – Rio de Janeiro – RJ Tel.: (++55) 21 4004-0001 State capitals and metropolitan areas e-mail: 0800 72 99 001 Other locations Capital Market Investment Area WeBsite Asset Accounting Department The address of the Petrobras internet website is www.petrobras. Rua Lélio Gama, 105 - 260º andar There you can find general information about the com- CEP 20031-201 – Centro – Rio de Janeiro – RJ pany and there is a section devoted specifically to investor rela- e-mail: tions, with details about the company’s results, financial state- Obs.: Shareholder services are provided throughout the bank’s branch network. ments (BR GAAP and US GAAP), annual reports, recordings and adrs transcripts of presentations to investors, the bylaws, share prices, information for shareholders, etc. JP Morgan Chase Bank Tel.: (++1) 201 680-6630 annual general Meeting Fax: (++1) 212 623-0079 PO BOX 3408 Annual General Meetings – AGMs are held within the first four South Hackensack – 07606-3408 – NJ – USA months immediately after the end of the financial year, in accordance e-mail: with article 39 of the bylaws, at the company’s head office, located website: at Avenida República do Chile, 65 – Centro, Rio de Janeiro. | AnnuAl RepoRt 2006 | 111
  • 114. Overall cOOrdinatiOn, PrOductiOn and editing: Investor Relations and Institutional Communication design: Tabaruba Design editOrial cOOrdinatiOn: Flávia Cavalcanti text editing: Vania Mezzonato text: Francisco Noel englisH translatiOn and PrOOFreading: Bruce L. Rodger Printing: RR Donnelley Moore PHOtOgraPHs: Petrobras Picture Database, Bruno Veiga, Estefano Lessa, Felipe Goifman, Geraldo Falcão, J. Valpereiro, José Caldas, Juarez Cavalcanti, Roberto Rosa, Rogério Reis, Segundo Luchia Puig, Thelma Vidales cover: P-52 platform deck-mating operation, Angra dos Reis, Rio de Janeiro (Felipe Goifman) Page 10: Petrobras president and CEO José Sergio Gabrielli at the company headquarters, Rio de Janeiro (Rogério Reis) Page 18: Supply terminal at Betim, Minas Gerais (Bruno Veiga) Page 44: Puerto General San Martin plant, Santa Fé province, Argentina (Segundo Luchia Puig) Page 56: Environmental Protection Center (CDA) at Reduc, Rio de Janeiro (Rogério Reis) Page 76: EP Area Virtual Reality Center, Rio de Janeiro (Geraldo Falcão) Page 86: Downstream trading room, Rio de Janeiro (Geraldo Falcão) PaPer: This Petrobras Annual Report 2006 was printed on recycled paper (Reciclato, by Suzano) nOte tO tHe reader This document contains forward-looking statements that merely reflect the expectations of the company’s manage- ment. Such forward-looking statements clearly involve risks or uncertainties that may or may not have been fore- seen by the company. Consequently, the future results of the company’s operations may differ from current expecta- tions, and the reader is advised not to base his or her own expectations or investment decisions exclusively upon the information presented herein. The company is under no obligation to update these forecasts in the light of new information or future developments. 112 | AnnuAl RepoRt 2006 | petRoBRAs
  • 115. ANNUAL REPORT 2006 |