Financial analysis 2006 ing

Financial analysis
and Financial
statements 2006

“A Petrobras luta para construir um futuro
melhor pra gente, investindo em novas e
AlexAndro dos sAntos BArBosA
Frentista(Posto Petrobras Hilário de Gouveia, boas tecnologias, como a do biodiesel, e
na Av. Atlântica, Copacabana, Rio de Janeiro)
preserva nossa saúde, procurando não
Visão de Futuro: Viver com mais saúde,
segurança e saneamento básico. poluir o meio ambiente”.

Contents
Financial Analysis
1 Economic and Financial Summary 2
2 Consolidate Net Income 3
3 Result by Business Area 4
4 Operating revenues – Petrobras System 9
5 Inventories 10
6 Investments 10
7 Indebtedness 11
8 Foreign exchange exposure 12
9 Added value 12
10 Shareholders equity and dividends 13

Financial statements
Independent Auditors’ Report 15
Balance Sheet 16
Statement of Income 18
Statement of Changes in Shareholders’ Equity (Parent company) 19
Statement of Changes in Financial Position 20
Statement of Cash Flows 22
Statement of Added Value 23
Statement of Segmentation of Business 24
Social Balance Sheet 28
notes to the Financial statements
1 Presentation of the financial statements 30
2 Consolidation principles 31
3 Summary of the significant accounting practices 33
4 Cash and cash equivalents 36
5 Accounts receivable, net 37
6 Related parties 38
7 Inventories 44
8 Petroleum and alcohol account - National Treasury Secretariat (STN) 44
9 Marketable securities 45
financings 45
10 Project
11 Judicial deposits 49
12 Investments 50
13 Property, plant and equipment 66
14 Intangible 71
15 Financings 72
16 Financial income and (expenses), net 77
17 Other operating expenses, net 78
18 Taxes, contributions and participations 79
19 Employee benefits 84
sharing for employees and management 93
20 Profit
21 Shareholders’equity 93

22 Commitments and contingencies 97
23 Commitments undertaken by the energy segment 102
24 Guarantees on concession contracts for oil exploration 104
information 104
25 Segment
26 Derivative instruments, hedging and risk management activities 106
27 Insurance 111
28 Health,safety and environmental 112

29 Remuneration of Parent Company directors and employees (in reais) 112
30 Subsequent events 113
Report of Fiscal Council 115
Board of Directors and Executive Board 116

Financial Analysis

1 economic and Financial summary (1)
CONSOLIDAteD PetrObrAS
006 005 006 005
Gross Operating Revenue (R$ million) 205.403 179.065 162.226 143.666
Net Operating Revenue (R$ million) 158.239 136.605 119.718 105.823
Income:
Company’s own activities 26.954 24.551 26.360 22.161
Subsidiaries/Afiliated Companies (233) (250) 424 1.782
26.721 24.301 26.784 23.943
Extraordinary items (2) (802) (576) (721) (493)
Profit (R$ million) 25.919 23.725 26.063 23.450
Net Indebtedness (3) 18.776 24.825 - (5) - (5)

EBITDA (R$ million) (4) 50.864 46.802 41.259 35.672
Net Indebtedness /EBITDA (%) (3) (4) 37 53 - (5) - (5)

Shareholder’s Equity (R$ million) 97.531 78.785 99.382 80.703
Permanent Assets (R$ million) (6) 126.958 109.184 84.986 71.717
Equity to debt ratio (3) 53/47 48/52 62/38 59/41
notes:
1. The amounts stated in Brazilian Reais (R$), in this financial analysis, were determined in accordance with the accounting practices prescribed by Brazilian Corporate Law and the rules
established by the Brazilian Securities Commission - CVM.
2. Extraordinary items are considered to be amounts referring to unusual or unforeseen business facts which are not therefore nonrecurrent.
3. Includes debts relating to leasing contracts.
4. Earnings before income and social contribution taxes, minority interests, net financial income and expenses, equity pickup, depreciation, amortization and abandonment cost.
5. The cash and cash equivalents exceed the overall indebtedness.
6. Includes investments in subsidiaries, property, plant and equipament, intangible and deferred assets.

| FINANCIAl ANAlySIS AND FINANCIAl STATEMENTS 2006 | PETROBRAS

Financial Analysis
2 Consolidate net income
ConsolidAte net inCome (R$ 148 million). In 2006 the write-off of abroad wells was
(in R$ million) noteworthy (R$ 382 million);
° These effects were partially offset by the increase of:
2006 5.919 ° Sales expenses (R$ 314 million), as a result of the increase

in expenses related to oil exports (R$ 239 million) and inter-
2005 23.725 national sales (R$ 76 million), in particular the expenses
deriving from the acquisition of companies in 2006;
2004 16.887 ° General and administrative expenses (R$ 357 million), due
to staff wages, perks and benefits (R$ 272 million); higher
2003 17.795
expenses on outsourced services (R$ 52 million), in particu-
lar technical IT support and consultancy services;
2002 8.098
° Tax expenses (R$ 368 million), due to the regularization
of taxes payable on other revenue from prior years (R$ 117
million), the increased CPMF expenses (R$ 35 million),
Petrobras and its subsidiary companies reported consolidated taxes on the payment of dividends from abroad subsidiaries
net income of R$ 25.919 million in 2006, after the elimination of (R$ 15 million) and the payment of interest on loans (R$ 73
intercompany operations and deduction of minority interests, million);
presenting growth of 9% over previous year (R$ 23.725 million). ° Technological research and development costs (R$ 645
The main aspects that contributed to consolidated net million), which R$ 542 million was allocated to meet ANP
income were as follows: regulations;
° Increase of R$ 4.076 million in gross profit due to the increase ° Other operating costs (R$ 265 million) in particular the
on sales volumes (R$ 2.026 million) and on the oil products’s reduction to hedge revenue (R$ 324 million) and the write-
prices in Brazil (R$ 7.479 million) and abroad (R$ 1.240 mil- off of receivables (R$ 167 million), due to the termination
lion). It was offset by the increase on government participation of the contract with Empresa Petrolera Andina S/A, in addi-
(R$ 1.197 million) and on the oil, oil products and gas imports tion to the increase on expenses on institutional relations
(R$ 3.356 million). The exchange rate on the translation of the and cultural projects (R$ 255 million). These effects were
abroad companies’ financial statements (R$ 688 million) also offset by reducing contingency expenses and expenses
impacted the increase in gross profit; related to agreements with state tax authorities (R$ 118
° Decrease on exploration costs (R$ 186 million), that pre- million) and by reducing the operating expenses of thermo-
sented in 2005 more dry wells wrote off in Brazil, and on electric power stations (R$ 257 million).
expenses related to fields returned to ANP (R$ 466 million),
and on the revision of future abandonment of wells expenses

www.petrobras.com.br | FINANCIAl ANAlySIS AND FINANCIAl STATEMENTS 2006 |

Financial Analysis

3 result by
Business Area
° Improvement on net financial income (expenses) due mainly to: Petrobras operates in an integrated manner, and most of its oil
° Performance of financial investments (R$ 647 million), due and gas production in the Exploration and Production area is
to lower appreciation of the real (R$ 317 million) and higher transferred to other areas of the Company.
returns from abroad funds (R$ 199 million), in addition to The main criteria used to determine the income by business
the higher volume of investments in 2006; area are highlighted below:
° Reduction of financial expenses (R$ 149 million), due to
the enhanced debt profile and growth in financing linked to a. Net operating revenues include revenues related to sales made
projects which provided greater capitalization of interest, to external clients in addition to billings and transfers among
offset by the premium paid to the investors under the Bonds business areas, the reference price is the internal transfer price
buyback and early settlement of the fixed series of Senior defined among the areas, using methodologies based on mar-
Trust Certificates, with the aim of enhancing the debt profile ket parameters;
(R$ 344 million); b. Operating profit includes net operating revenues, costs of
° Termination of the hedge contracts over Pesa’s billing, goods and services sold (which are reported by business area
which in 2005, generated a loss of R$ 643 million; considering the internal transfer price), and other operating
° Tax benefit over interest on equity reserve of R$ 2.163 million cost incurred by each area, as well as operating expenses, which
in 2006 and R$ 1.864 million in 2005. include the expenses actually incurred by each area.
c. The financial results is allocated to the corporate group;
d. Assets: include the assets identified by each area. The financial
equity accounts are allocated to the corporate group.


Financial Analysis
a) explorAtion And produCtion b) supply

Result PeR business AReA eP Result PeR business AReA suPPly
(in R$ million) (in R$ million)

2006 .76 2006 6.110

2005 22.835 2005 5.546

In the 2006 financial year, the net income recorded by the The net income from the Supplies area in the 2006 financial year
Exploration and Production business segment was R$ 24.762 was R$ 6.110 million, 10% higher than the net income in 2005
million, 8% higher than the net income in the prior year (R$ 22.835 (R$ 5.546 million), due to the R$ 1.126 million increase in gross
million). This was due to the increase of R$ 2.794 million, mainly profit, as a result of the following factors:
generated by the 6% increase in the production of oil and LGN, ° Increase to the average realization value of oil products sold on
which enabled oil exports to rise, and the 20% increase in the ave- the local and international markets;
rage sale/transfer prices of national oil (US$/bbl). These effects ° 3% increase in the volume of oil products sales on the local
were partially offset by the lower valuation of heavy oil as compa- market;
red to light oil, the higher expenses on government participation, ° Lower valuation of heavy oil as compared to light oil.
freighting of probes, platforms and services for intervention in
wells, and the effect produced by the 11% appreciation to the These effects were partially offset by the following factors:
average exchange rate of the Brazilian real against the US dollar. ° Increase to the cost of acquiring and transferring oil and oil
The spread between the average price of national oil sold/ products, pressured by higher international prices;
transferred and the average price of Brent rose from US$ 8,96/bbl ° 9% increase in the volume of imported oil and oil products.
in 2005, to US$ 10,43/bbl in 2006.

5

Financial Analysis

c) GAs And enerGy d) distriBution

Result PeR business AReA GAs And eneRGy Result PeR business AReA distRibution

(1.188) 2006 2006 585

(520) 2005 2005 761

The loss recorded by the Gas and Energy area in the 2006 finan- In 2006 Distribution business area recorded net income of
cial year was R$ 1.188 million, 128% higher than the prior year R$ 585 million, 23% lower than the previous year (R$ 761 million).
(R$ 520 million), due to the following factors: The increase in gross profit, due to the higher volume of oil pro-
° R$ 413 million reduction in gross profit, noting the lower ducts sold in the period, was exceeded by the increase in opera-
energy sale margins due to the higher energy acquisition costs, ting expenses, in particular higher expenses on oil products sales
brought about by the reduction to the flows from hydroelectric and expenses on contingency provisions.
reservoirs in the south of Brazil up to September 2006. This The fuel distribution market share in the 2006 financial
effect was partially offset by the 7% increase in the volume of year was 33,6%, as compared to 33,8% in the prior year.
natural gas sold;
° R$ 116 million increase in research and development expenses,
which R$ 81 million derived from ANP regulations;
° Recognition of the loss of R$ 167 million due to termination
of the hedge contract to reduce the volatility of natural gas
prices, executed with the company Andina (gain of R$ 419 mil-
lion in 2005).
These variations were partially offset by the reduction to sales,
general and administrative expenses which in 2005 recorded
expenses relating to pending contractual items with the ther-
moelectric power stations and loan losses under gas supply
contracts.

6 | FINANCIAl ANAlySIS AND FINANCIAl STATEMENTS 2006 | PETROBRAS

Financial Analysis
e) internAtionAl The effects were partially offset by recovering the exploratory
costs in Nigeria, R$ 69 million, and recovery of tax credits in
Result PeR business AReA inteRnAtionAl Ecuador in the amount of R$ 85 million.
(in R$ million)

f) CorporAte
2006 5

Result PeR business AReA CoRPoRAte
2005 1.450 (in R$ million)

(.18) 2006

In 2006, the net income recorded by the International area
was equal to R$ 352 million, 76% lower than in 2005 (R$ 1.450 (5.180) 2005

million), as shown below:
° Increase of R$ 572 million in drilling and inspection expenses
due to the write-off of exploratory costs in the USA and Bolivia The Petrobras System’s corporate activities in 2006 generated a
and higher expenses on seismic inspection work in the plants loss of R$ 4.184 million, 19% lower than 2005 (R$ 5.180 million),
in the USA, Iran and other countries; due to the R$ 1.511 million reduction in net financial expenses.
° Decrease of R$ 544 million in gross profit due to: i) lower inter- This effect was partially offset by the increase of R$ 432
est in operations in Venezuela; ii) higher government participa- million in general and administrative expenses, mainly due to
tion in Bolivia; iii) 9% appreciation of the Brazilian real against higher expenses on outsourced services and personnel, deriving
the US dollar in the translation of financial statements iv) lower from the wage increase agreed under the collective-bargaining
oil products sale margins in Argentina due to the constraints agreement, executed at the end of 2005 and 2006, and the admis-
imposed by the Argentinean government on sale prices. These sion of new employees in 2006.
effects were partially offset by the following factors: i) increase
in international oil prices; ii) higher volume and price of elec-
tricity sold in Argentina; iii) better prices on the export of oil
products in Bolivia; and
° Increase of R$ 116 million in the general and administrative
expenses mainly due to the higher payroll expenses due to the
collective-bargaining agreement in Argentina and the inclu-
sion of expenses incurred on companies acquired in Uruguay,
Paraguay, Colombia and the USA.

7

Financial Analysis

In 2006 the following extraordinary items influenced the segmented and consolidated income statement of Petrobras System:

3.1 extrAordinAry items

statement of extraordinary items - 31.12.2006 (in R$ million)
GAS
eP SuPPLy eNerGy DIStrIb. INterN. COrP. eLIMIN. tOtAL
Net Income (Loss) per Business Area 39.383 9.472 (1.019) 947 1.235 (6.995) (786) 42.237
Extraordinary Items: - - - - - - - -
New Interpretation-ANP (Deductibility of Expenses on Project Finance) 426 - - - - - - 426
Ajustment of Expenses on Reinjection of Natural Gas 408 - - - - - - 408
Effect of Terminating Hedge Transactions with Andina - - 167 - - - - 167
Contractual losses on transportation services (Ship or Pay) - - - - 122 - - 122
Tax Expenses Regulations - PIS/COFINS on Other Revenue 22 73 15 - - 24 - 134
Recovery of loss on ICMS’ tax execution - (129) - - - - - (129)
Subtotal Extraordinary Items 856 (56) 182 - 122 24 - 1.128
Operational Result without the Extraordinary Items effects 40.239 9.416 (837) 947 1.357 (6.971) (786) 43.365
Net Income (Loss) per Business Area 24.762 6.110 (1.188) 585 352 (4.184) (518) 25.919
Extraordinary Items 856 (56) 182 - 122 24 - 1.128
Tax effects (291) 19 (5) - (41) (8) - (326)
Net Income (Loss) per Business Area excluding Extraordinary Items 25.327 6.073 (1.011) 585 433 (4.168) (518) 26.721

statement of extraordinary items - 31.12.2005 (in R$ million)
GAS
eP SuPPLy eNerGy DIStrIb. INterN. COrP. eLIMIN. tOtAL
Net Income (Loss) per Business Area 36.518 8.482 (456) 1.238 2.187 (6.427) (1.769) 39.773
Extraordinary Items: - - - - - - - -
Contractual Losses on transportation services (Ship or Pay) - - - - 147 - - 147
Net gains on assets exchange - - - - - (146) - (146)
Loss on fiscal claims related to ICMS tax - 286 - - - - - 286
Recomposition of Thermoelectric Ballast in the Northeast - - 118 - - - - 118
Expenses related to pending contractual obligations with thermoeletrics - - 376 - - - - 376
Other - - - - 23 - - 23
Subtotal Extraordinary items - 286 494 - 170 (146) - 804
Operational Result without the Extraordinary items effects 36.518 8.768 38 1.238 2.357 (6.573) (1.769) 40.577
Net income (loss) per Business Area 22.835 5.546 (520) 761 1.450 (5.180) (1.167) 23.725
Extraordinary items - 286 494 - 170 (146) - 804
Tax effects - (98) (93) - (87) 50 - (228)
Net Income (Loss) per Business Area excluding Extraordinary Items 22.835 5.734 (119) 761 1.533 (5.276) (1.167) 24.301


Financial Analysis
4 operating revenues – petrobras system
The gross operating revenue of Petrobras, its Subsidiaries and yeAr
Controlled Companies reached the mark of R$ 205.403 million, 006 005 ∆%
which means an increase of 15% in comparison to previous Sales volume – thousand barrels/day

year. After sales taxes and other charges payable on billing, the Diesel 672 665 1

Company recorded a consolidated net operating revenue of Gasoline 308 287 7
Fuel Oil 100 99 1
R$ 158.239 million in 2006 (R$ 136.605 million in 2005).
Naphtha 165 157 5
The growth in sales is mainly related to the higher volumes
LPG 201 198 2
sold of gasoline (7%), petrochemical naphtha (5%) and natural
QAV 64 67 (4)
gas (7%) on the local market and higher volumes of oil exports
Others 187 171 9
due to the increase of local production.
Total oil products 1.697 1.644 3
The increase in gasoline sales is associated with the growth
Alcohol, Nitrogen and others 24 28 (14)
in the fleet of vehicles, the reduction of anhydrous ethanol in the
Natural gas 243 228 7
gasoline compound, higher consumer income and the loss of Total local market 1.964 1.900 3
competitiveness of ethanol among the owners of flexible-fuel Exports 581 523 11
vehicles. International sales 503 385 31
Naphtha sales has increased due to greater supply of naphtha Total international market 1.084 908 19
in Petrobras system associated with better prices in relation to Total 3.048 2.808 9
those practiced on the international market. Note that naphtha
deliveries in 2005 were affected by operating problems.
sAles Volume – loCAl mARket – 2006
The increase natural gas sales is due to the replacement of (1.964 thousands baRRels/day)

oil fuel in industrial activity, especially in the paper and cellulose,
Diesel
glass and chemical sectors, in addition to greater use of natural 3%
5% Gasoline
gas in vehicles. 35%
8% Natural gas
The volume of international sales rose by 31% mostly due
Others
to the increase in offshore operations, which aim to obtain 10%
LPG
abroad commercial opportunities, and the sales included from
Naphtha
the companies acquired in 2006. This was offset by lower sales
11%
in Venezuela, lower production in the mature fields of Angola Fuel oil
16%
and closure of the main fields in the Gulf of Mexico, after Rita and 12% QAV

Katrina hurricanes.

9

Financial Analysis

5 inventories 6 investments
The consolidated inventories of oil, oil products, raw material Petrobras System’s investment reached R$ 33.686 million, 31%
and alcohol amounted to R$ 16.406 million as of December 31, higher than 2005. From that amount, R$ 15.314 million was inves-
2006, 16% higher than at December 31, 2005 due to the increase ted to expand the future capacity of natural gas and oil production
on the international oil prices and to the acquisition of Pasadena in Brazil, which corresponds to the Company’s aggressive growth
Refinery – USA. targets disclosed in its 2007-2011 Business Plan.

inVentoRies – ConsolidAted – 31.12.2006 ConsolidAted inVestiments

862
Exploration and 15.1
production 13.934
5.968

4.349 .181
Supply
Raw Materials 3.286
Maintenance
supplies* Gas and Energy 1.566
Oil Products 1.527
5.227
Others
International 7.161
* Includes advances to suppliers
3.153

Distribution 6
inVentoRies – ConsolidAted – 31.12.2005 495
(in R$ million)

625 Corporate 905
532
5.400 Specific Purpose
3.715 Entities (SPEs) .507
2.385
Raw Materials Ventures under
negotiation 09
Maintenance 311
supplies*
Oil Products Structured
4.359 projects 1
Others 87 Jan/Dec 2006
* Includes advances to suppliers
Jan/Dec 2005


Financial Analysis
7 indebtedness
Considering the total investment made in the country by Petrobras On December 31, 2006, the consolidated indebtedness for local
System in 2006, 46% were applied to exploration and production and foreign loans and financings reached R$ 46.605 million,
development activities, of which R$ 6.023 million were invested as follows:
only in Campos Basin.
The main investments made in 2006 in the Exploration and r$ MILLION

Production area were in Marlim Sul (R$ 232 million), Roncador CONSOLIDAteD

(R$ 872 million), Albacora Leste (R$ 984 million), Jubarte/ 006 005

Cachalote (R$ 232 million), Marlim Leste (R$ 271 million), Short term:
Financing 12.522 10.503
Espadarte (R$ 632 million) and Marlim Phase 2 (R$ 157 million)
Leasing 552 613
fields, all located in the Campos Basin.
Subtotal 13.074 11.116
Long term:
Financing 31.543 34.439
Leasing 1.988 2.687
Subtotal 33.531 37.126
Total indebtedness 46.605 48.242
(-) Cash and cash equivalents (27.829) (23.417)
Net indebtedness 18.776 24.825

Petrobras System’s net indebtedness as of december 31, 2006
reached to R$ 18.776 million, 24% lower than December 31, 2005.
The operating cash generation and appreciation of the Brazilian
real against the US dollar (9%) has contributed in the net indeb-
tedness reduction, considering that 75% of the long-term debt is
indexed to the dollar.
The level of indebtedness, measured by the ratio Net debt/
EBITDA, firmed from 0,53, to 0,37 as of December 31, 2006. The
capital structure is represented by 47% originated from third par-
ties borrowed capital, which means a reduction of 5 percentage
points as compared to December 31, 2005.

11

Financial Analysis

8 Foreign exchange
exposure 9 Added value
The foreign exchange exposure of Petrobras System is measured Petrobras System generated resources to the amount of R$ 120.695
as follows: million (R$ 108.241 million in 2005), in terms of added value,
which was distributed to the interested parties as follows:
r$ MILLION
CONSOLIDAteD Added VAlue distRibuted in 2006
(in R$ million)
1.1.006 1.1.005
Assets 10.395
Current 8%
25.537 17.531
Cash and cash equivalents 13.494 4.658
72.041
Other current assets 12.043 12.873 27.375 60%
%
Non current 38.008 32.106
Personnel
Long term 5.264 3.009
Government entities
Investments 941 (272) 10.884
9% Financial institutions and
Property, plant and equipment 29.338 26.900 suppliers
Intangible 1.446 1.877 Shareholders
Deferred 1.019 592 R$ 120.695 million

63.545 49.637
Liabilities
Added VAlue distRibuted in 2005
Current 18.286 15.141 (in R$ million)

Financing 8.948 7.393 9.643
Suppliers 5.732 4.583 9%

Other current liabilities 3.606 3.165 63.810
Non current 26.367 30.082 24.715 59%
%
Financing 23.647 28.498
Other non current liabilities 2.720 1.584 Personnel
44.653 45.223 Government entities
10.073
Net assets in Reais 18.892 4.414 9% Financial institutions and
suppliers
(+) Financial Investments Funds - Foreign exchange 3.631 11.469
Shareholders
(-) FINAME loans - in Reais indexed to the dollar 553 627 R$ 108.241 million
Net assets in Reais 21.970 15.256
Net assets in U.S. dollars * 10.276 6.518
* Considers the translation of amounts expressed in Reais using U.S. Dollars selling rate
at the balance sheet data (2006 – R$ 2,1380 and 2005 - R$ 2,3407).


Financial Analysis
10 shareholders equity and dividends
a) CApitAl The dividends and the final portion of the interest on capital
Petrobras Management will propose to the Extraordinary General will be monetarily restated from December 31, 2006 to the initial
Meeting to be held on April 02, 2007 to raise the Company’s capi- date of payment, according to the variation in the SELIC rate.
tal from R$ 48.264 million to R$ 52.644 million by capitalizing
part of the profit reserves made in prior years, to the amount of c) retention oF eArninGs
R$ 4.380 million, with R$ 1.008 million from the statutory reserve The proposal of destination of net income for the year ended
and R$ 3.372 million from the retained earnings reserve, without December 31, 2006 includes retention of profits of R$ 17.112
the issuance of new shares. million, to which partially meet the annual investment program
established in the 2007 capital budget, ad referendum of the
b) shAreholders’ remunerAtion General Shareholders’ Meeting of April 2, 2007.
The proposal for 2006 dividends that is being submitted by the
Petrobras Board of Directors for approval of the shareholders
at the Ordinary General Meeting to be held on April 02, 2007,
in the amount of R$ 7.897 million, corresponding to 31,27% of
the adjusted net income for calculation of dividend equivalent
to R$ 1,80 per common and preferred share, with no difference
between them.

AMOuNt Per
COMMON AND
DIVIDeNDS tO be reSOLVeD by PreferreD AMOuNt
the ANNuAL GeNerAL MeetING ShAre r$ MILLION
Interest on capital - Approved by the
Board of Directors on October 20, 2006
- Paid on January 04, 2007, over the share
position at October 31, 2006. 1,00 4.387
Interest on capital - Approved by the
Board of Directors on December 15, 2006
- To be paid on March 31, 2007, over the
share position at December 28, 2006. 0,45 1.974
Dividends - Proposed by the Board of
Directors on February 12, 2007. The
payment date will be set by the Annual
General Meeting which will resolve the
matter, to held on April 02, 2007, over the
share position at the same date. 0,35 1.536
TOTAL DIVIDENDS 1,80 7.897

1


1

independent auditors’ report
to the BoArd oF direCtors And shAreholders Our examination was performed with the objective of
petróleo BrAsileiro s.A. - petroBrAs expressing an opinion on the aforementioned financial state-
rio de JAneiro - rJ ments taken as a whole. The statements of cash flows, of added
value, segmentation of business, and the social balance sheet,
We have examined the accompanying balance sheet of Petróleo for the year ended December 31, 2006, are supplementary to the
Brasileiro S.A. - Petrobras and the consolidated balance she- aforementioned financial statements, are not required by the
et of Petróleo Brasileiro S.A. – Petrobras and its subsidiaries as accounting practices adopted in Brazil and have been included
of December 31, 2006 and the related statements of income, to facilitate additional analysis. This supplementary informa-
changes in shareholders’ equity and changes in financial position was subject to the same audit procedures as applied to the
tion for the year then ended, which are the responsibility of its financial statements referred to in the first paragraph and, in our
management. Our responsibility is to express an opinion on these opinion, are presented fairly, in all material respects, in relation
financial statements. to the financial statements taken as a whole.
Our examination was conducted in accordance with au- The accompanying financial statements of Petróleo Brasileiro
diting standards generally accepted in Brazil and included: S.A. – Petrobras, the consolidated financial statements of Petróleo
(a) planning of the audit work, considering the materiality of Brasileiro S.A. - Petrobras and its subsidiaries and the related sup-
the balances, the volume of transactions and the accounting plementary information for the year ended December 31, 2005
systems and internal accounting controls of the Company and its were examined by other independent accountants, who issued
subsidiaries; (b) verification, on a test basis, of the evidence and an unqualified opinion dated February 17, 2006.
records which support the amounts and accounting information
disclosed; and (c) evaluation of the most significant accounting February 12, 2007
policies and estimates adopted by Company management and
its subsidiaries, as well as the presentation of the financial sta-
tements taken as a whole. KpmG Auditores independentes
In our opinion, the aforementioned financial statements CRC-SP-14.428 “S” RJ
present fairly, in all material respects, the financial position of
Petróleo Brasileiro S.A. - Petrobras and the consolidated financial Manuel Fernandes Rodrigues de Sousa
position of Petróleo Brasileiro S.A. – Petrobras and its subsidiaries Accountant CRC-RJ-052.428/O-2
as of December 31, 2006, and the results of its operations, changes
in its shareholders’ equity and changes in its financial position
for the year then ended, in conformity with accounting practices
adopted in Brazil.

15

BAlAnCe sheet
december 31, 2006 and 2005
(in thousands of Reais)

CONSOLIDAteD PAreNt COMPANy
ASSetS NOte 006 005 006 005
Current assets
Cash and cash equivalents 4 27.829.105 23.417.040 20.098.892 17.481.555
Restricted bank accounts 85.229
Accounts receivable, net 5 14.412.159 14.148.064 10.376.356 10.676.578
Dividends receivable 6a 47.462 41.907 777.593 945.676
Inventories 7 15.941.033 13.606.679 12.968.740 10.337.565
Taxes, contributions and participations 18a 6.825.757 6.550.997 4.381.752 4.037.175
Prepaid expenses 998.477 941.016 669.892 680.787
Other current assets 1.165.430 1.444.258 170.573 535.395
67.219.423 60.235.190 49.443.798 44.694.731
Noncurrent assets
Long-term assets
Accounts receivable, net 5 1.122.336 1.587.771 34.510.261 28.151.479
Petroleum and Alcohol Account - STN 8 785.791 769.524 785.791 769.524
Marketable securities 9 409.531 618.091 8.062 7.601
Projects financings 10a 927.830 569.030
Advances to suppliers 706.746 684.235 564.266 684.235
Judicial deposits 11 1.750.119 1.818.185 1.438.384 1.443.834
Investments in privatization process 12d 3.228 3.454 1.366 1.475
Prepaid expenses 1.838.778 1.362.800 818.953 1.060.967
Advance for migration - pension plan 1.242.268 1.205.358 1.242.268 1.205.358
Deferred income tax and social contribution 18c 6.398.532 4.337.361 3.762.457 2.333.641
Compulsory loans Eletrobras 203.728 117.811 115.923 117.811
Inventories 7 464.783 492.777 464.783 492.777
Other long-term assets 1.434.671 1.104.861 544.332 763.818
16.360.511 14.102.228 45.184.676 37.601.550
Investments 12b 4.755.148 2.280.702 22.776.506 20.366.625
Property, plant and equipment 13 115.340.798 100.824.365 58.682.236 48.187.534
Intangible 14 4.413.939 4.604.989 2.778.773 2.584.531
Deferred charges 2.448.310 1.473.634 748.565 578.175
143.318.706 123.285.918 130.170.756 109.318.415
210.538.129 183.521.108 179.614.554 154.013.146
See the accompanying notes to the financial statements.


LIAbILItIeS NOte 006 005 006 005
Current liabilities
Financing 15 11.932.301 8.589.629 1.141.352 1.499.012
Interest on financing 15 589.975 1.913.369 138.093 156.709
Suppliers 11.510.166 8.976.359 28.900.459 24.865.115
Taxes, contribution and participation 18b 8.413.040 8.931.341 6.854.934 7.292.508
Dividends 7.896.669 7.017.843 7.896.669 7.017.843
Projects financings 10d 34.163 28.135 1.565.296 2.421.806
Provision for pension plan 19c 414.821 482.942 391.783 461.848
Payroll and related charges 1.451.660 1.196.281 1.137.832 978.222
Contingency accrual 22a 54.000 167.645 54.000 167.645
Advances from customers 1.991.177 1.626.854 1.119.891 1.054.783
Other payables 3.869.451 3.429.752 1.596.720 1.780.189
48.157.423 42.360.150 50.797.029 47.695.680
Noncurrent liabilities
Financing 15 31.542.849 34.439.489 5.094.223 6.408.872
Subsidiaries and affiliated companies 46.555 39.954 2.506.957 1.925.046
Deferred income tax and social contribution 18c 9.116.271 8.461.721 7.522.436 6.270.290
Provision for pension plan 19c 3.047.789 1.898.360 2.777.184 1.749.036
Provision for health care benefits 19c 8.419.171 7.030.939 7.769.189 6.477.127
Contingency accrual 22a 513.880 614.568 190.671 225.251
Provision for dismantling of areas 3.148.398 1.969.072 2.979.031 1.807.730
Other payables 1.126.368 1.259.491 595.500 750.848
56.961.281 55.713.594 29.435.191 25.614.200
Deferred income 413.378 483.274
Minority interest 7.475.399 6.178.854
Shareholders’ equity 21
Capital 48.263.983 33.235.445 48.263.983 33.235.445
Capital reserves 372.064 372.064 372.064 372.064
Revaluation reserve 66.422 60.120 66.423 60.120
Revenue reserves 48.828.179 45.117.607 50.679.864 47.035.637
97.530.648 78.785.236 99.382.334 80.703.266
210.538.129 183.521.108 179.614.554 154.013.146

17

stAtement oF inCome

NOte 006 005 006 005
Gross operating revenues

Sales
Products 205.181.776 177.595.324 161.868.048 143.276.549
Services, mainly freight 221.261 1.469.960 357.925 389.181
205.403.037 179.065.284 162.225.973 143.665.730
Sales deductions (47.164.218) (42.460.206) (42.508.173) (37.843.204)
Net operating revenues 158.238.819 136.605.078 119.717.800 105.822.526
Cost of products and services sold (94.665.842) (77.107.946) (65.798.449) (57.512.113)
Gross profit 63.572.977 59.497.132 53.919.351 48.310.413
Operating expenses
Selling (5.790.648) (5.477.419) (4.975.402) (4.195.157)
Financial
Expenses 16 (3.720.347) (4.564.773) (2.226.462) (2.242.658)
Income 16 2.378.793 1.351.410 3.038.657 2.369.097
Net monetary and exchange variation 16 9.359 370.536 (778.277) (1.187.233)
General and administrative
Management and board of directors remuneration (31.035) (28.845) (3.898) (4.089)
Administrative (5.757.130) (5.401.953) (3.962.968) (3.449.664)
Taxes (1.262.936) (895.208) (679.756) (443.415)
Cost of research and technological development (1.579.711) (934.600) (1.568.946) (932.627)
Impairment (45.063) (126.032) (40.395) (49.368)
Exploratory costs for the extraction of crude oil and gas (2.036.838) (2.222.792) (1.118.839) (1.876.411)
Benefits expenses (1.940.582) (2.011.016) (1.823.391) (1.888.903)
Other operating expenses, net 17 (2.891.132) (2.626.419) (2.428.110) (2.692.062)
(22.667.270) (22.567.111) (16.567.787) (16.592.490)
Participation in subsidiaries and affiliated companies
Equity pickup 12b (233.215) (250.124) 423.995 1.782.023
Operating income 40.672.492 36.679.897 37.775.559 33.499.946
Non-operating expenses (66.950) (124.531) (111.650) (199.982)
Income before social contributions, income tax, profit
sharing for employees and management and minority
interest 40.605.542 36.555.366 37.663.909 33.299.964
Social contribution 18e (3.104.576) (2.845.244) (2.883.191) (2.466.083)
Income tax 18e (8.791.825) (7.956.912) (7.724.545) (6.537.799)
Income before profit sharing for employees and
management and minority interest 28.709.141 25.753.210 27.056.173 24.296.082
Profit sharing for employees and management 20 (1.196.918) (1.005.564) (993.000) (846.000)
Income before minority interest 27.512.223 24.747.646 26.063.173 23.450.082
Minority interest (1.593.303) (1.022.923)
Net income for the year 25.918.920 23.724.723 26.063.173 23.450.082
Net income per share of paid-up capital
at year end - R$ 5,91 5,41 5,94 5,35


stAtement oF ChAnGes in FinAnCiAl position

006 005 006 005
Sources of funds

Operations
Minority interest 1.593.303 1.022.923
Equity pickup 189.936 158.529 (411.993) (1.816.395)
Gain (loss) from changes in equity pickup (61.071)
Goodwill/discount - amortization 43.279 91.595 (12.002) 34.372
Dividends 101.509 172.977 954.437 990.935
Depreciation and amortization 9.823.557 8.034.718 4.934.119 3.739.373
Monetary and exchange variation of fixed assets 2.252.194 3.999.654
Residual value of assets written off from fixed assets 2.292.040 2.411.575 513.231 1.106.798
Income from the sale of plataforms, ships and equipments (6.453)
Monetary and exchange variation and ner earnings on noncurrent
assets and long-term liabilities (698.938) (4.083.087) (6.067) (768.921)
Employee benefits and other provisions 3.456.550 3.306.932 3.077.259 2.928.199
Deferred income tax and social contribution, net 608.173 1.983.578 968.490 491.471
Other (211.085) 174.011 19.167
45.369.438 40.824.117 36.193.587 30.168.628
From shareholders
Capital increase 16.314
16.314
From other sources
Financing 5.930.698 5.747.298 373.199
Credits and subventions for investments 17.391 17.391
Proceeds from the sale of assets 506.187 2.488.610
Other 48.736 48.736
5.979.434 6.270.876 48.736 2.879.200
Resources from operations 51.348.872 47.094.993 36.258.637 33.047.828
Applications of funds
Increase in petroleum and alcohol account - STN 18.727
Investments 3.126.484 2.101.870 3.041.246
Cost of exploration and developing production of oil and gas 12.750.790 11.005.130 6.474.880 5.041.315
Other 13.427.136 14.430.915 8.665.635 6.950.936
Intangible 1.568.699 1.135.903 392.249 726.581
Deferred charges 763.810 360.839 265.624 204.812
Transactions with subsidiaries and affiliated companies 6.559.580 (3.277.858)
Increase in ventures under negotiation 354.212 907.459
Transfer of financing and suppliers to current liabilities 7.541.273 9.879.227 1.152.061 1.719.940
Decrease in other noncurrent liabilities 2.606.048 1.061.627 871.774 582.606
Increase (decrease) in other long-term assets 481.003 370.055 (123.635) 639.817
Proposed dividends 7.896.669 7.017.843 7.896.669 7.017.843
50.161.912 45.280.266 34.610.919 23.554.697
Increase in working capital 1.186.960 1.814.727 1.647.718 9.493.131
Changes in working capital
Current assets
At end of year 67.219.423 60.235.190 49.443.798 44.694.731
At beginning of year 60.235.190 52.786.200 44.694.731 35.443.270
6.984.233 7.448.990 4.749.067 9.251.461
Current liabilities
At end of year 48.157.423 42.360.150 50.797.029 47.695.680
5.797.273 5.634.263 3.101.349 (241.670)
Increase in working capital 1.186.960 1.814.727 1.647.718 9.493.131

19

stAtement oF ChAnGes in shAreholders’ equity (pArent CompAny)

CAPItAL CAPItAL reSerVeS
SubSCrIbeD AND MONetAry SubVeNtIONS
PAID-uP CAPItAL reStAteMeNt AfrMM tAx INCeNtIVeS
Balances at December 1, 00 32.896.138 339.307 140.907 213.766
AFRMM funds used 17.391
Realization of reserves
Net income for the year
Appropriation of net income to reserves
Retention of earnings
Proposed dividends (Note 21c)
Balances at December 1, 005 32.896.138 339.307 158.298 213.766
Prior year adjustment
Capital increase on April 3, 2006 15.351.531 (339.307)
Capital increase on June 30, 2006 16.314
Constitution of reserves
Realization of reserves
Net income for the year
Appropriation of net income to reserves
Retention of earnings
Proposed dividends (Note 21c)
48.263.983 158.298 213.766
Balances at December 1, 006 48.263.983 372.064


reVeNue reSerVeS
reVALuAtION reteNtION retAINeD
reSerVe LeGAL StAtutOry Of eArNINGS eArNINGS tOtAL
69.094 4.035.410 843.639 25.715.375 64.253.636
17.391
(8.974) 8.974
23.450.082 23.450.082
1.172.504 164.480 15.095.255 (16.432.239)
8.974 (8.974)
(7.017.843) (7.017.843)
60.120 5.207.914 1.008.119 40.819.604 80.703.266
480.366 480.366
(15.012.224)
16.314
15.884 15.884
(9.581) 9.581
26.063.173 26.063.173
1.303.159 241.320 16.622.025 (18.166.504)
489.947 (489.947)
(7.896.669) (7.896.669)
66.423 6.511.073 1.249.439 42.919.352
66.423 50.679.864 99.382.334

1

Additional information to the financial statements

stAtement oF CAsh Flows

006 005 006 005
Operating activities
Adjustments:
Equity pickup 189.936 158.529 (411.993) (1.816.395)
Goodwill/discount - amortization 43.279 91.595 (12.002) 34.372
Minority interest 1.593.303 1.022.923 (61.071)
Depreciation and amortization 9.823.557 8.034.718 4.934.119 3.739.373
Net book value of permanent assets written off 2.292.040 2.411.575 513.231 1.106.798
Monetary and exchange variation and financing and related parties
transaction’s interests 868.733 (1.477.086) 482.549 (694.414)
Exchange variation over fixed assets 3.056.760 3.999.654
Deferred income tax and social contribution, net 766.329 889.869 1.535.939 422.392
Change in Accounts Receivable (47.920) (2.256.555) 260.237 (2.200.799)
Change in inventories (2.334.354) 429.358 (2.603.181) 990.581
Change in the Petroleum and Alcohol Account - STN (16.267) (20.736) (16.267) (20.736)
Change in other assets (1.057.270) (1.308.871) 1.228.015 (227.382)
Change in suppliers 2.463.525 (248.122) 945.773 (381.943)
Change in taxes and social contributions (1.756.394) 1.239.008 (1.957.790) 92.010
Change in project financing liabilities (486.306) 22.057
Change in pension plan and health care plan 2.430.269 2.640.215 2.250.145 2.410.406
Change in other liabilities (690.060) (2.714.390) 39.225 646.281
Change in short-term transactions with subsidiary and affiliated companies:
Accounts Receivable 574.047 508.889 (505.017) (934.994)
Accounts payable 6.601 (236.374) (1.057.593) (1.451.454)
Oil and oil products supply foreign transactions 4.147.164 (961.720)
Effect on cash and cash equivalents from merger of subsidiaries and affiliated companies 32
Cash generated by operating activities 44.125.034 36.888.954 35.288.350 24.224.515
Financing activities
Financings and intercompany loans, net 96.991 (5.603.269) (8.517.142) 2.531.278
Dividends paid to shareholders (6.751.304) (4.829.762) (6.751.304) (4.829.762)
Cash generated by (used in) financing activities (6.654.313) (10.433.031) (15.268.446) (2.298.484)
Investing activities
Investments in Exploration and production (17.671.680) (13.558.093) (11.416.009) (9.895.016)
Investments in Refining and transportation (4.591.524) (3.328.258) (4.088.751) (4.403.980)
Investments in Gas and energy (2.445.906) (1.655.094) (1.356.124) (850.353)
Investments in International segment (6.726.921) (2.884.954)
Investments in Distribution (632.624) (490.627)
Other investments (1.091.510) (1.238.960) (745.818) (815.542)
Dividends received 101.509 130.255 928.551 531.224
Ventures under negotiation (724.416) (591.097)
Cash used in investment activities (33.058.656) (23.025.731) (17.402.567) (16.024.764)
Increase in cash and cash equivalents 4.412.065 3.430.192 2.617.337 5.901.267
At end of year 27.829.105 23.417.040 20.098.892 17.481.555


Financial analysis 2006 ing

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