In 2011, the Company once again showed its ability to achieve results in a challenging economic environment. Our consolidated net income was R$ 33,313 million and our Adjusted EBITDA was R$ 62,246 million.

We boosted oil and gas output, installed new production systems, completed work on gas distribution infrastructure and achieved levels of operational excellence in Refining - 14 new units belonging to the plants modernization projects came on stream. We also increased our fleet of drilling rigs and added new reserves.

The startup of new production projects and the start of extended well tests offset the natural decline of fields and ensured a 1% increase in the domestic oil and liquid natural gas output, which reached 2,022,000 bpd. Our exploration activities led to significant discoveries both in the post-salt and pre-salt regions. We end the year with 16.4 billion barrels of oil equivalent (ANP/SPE criterion), which yielded a reserve replacement index of 148% and a Reserve/Production ratio of 18.5 years. With the results of 2011, the Company has replaced its proven reserves in Brazil for 20 consecutive years.

In the pre-salt region, the declaration of commerciality for the Guará area, which is now called Sapinhoá, is worthy of mention. The pre-salt's exploration success rate is still high: 37 wells were drilled in 2011, with announcements of hydrocarbon discoveries for all of them. Petrobras share of the pre-salt's oil output, which rose from 71,000 bpd in January to 133,000 bpd in December, has significantly contributed to the Company's overall output (6.6% in December). Results from the Lula Pilot Project confirm the area's potential: of the six production wells included in the project, the first turned out to be the Company's most productive well for eight consecutive months; as of December, the three wells currently producing are among the 30 most productive wells in Brazil. The expressive learning curves achieved and the potential of new technologies will increase the projects profitabilities.

Natural gas output amounted to 56.4 million m³/day, up 6.2% from last year. The startup in September of the Lula-Mexilhão gas pipeline, with its 10 million m³/day capacity, has made Brazil's natural gas market more flexible.

Fueled by the growing Brazilian economy, the domestic sale of oil products rose 9%. Gasoline sale rose 24% from 2010 and reached record levels. Annual jet fuel sale rose 12% from 2010 and diesel sale rose by 9%. In this context, we are moving ahead with four new refineries designed to meet future demand thus ensuring higher profits for the Company.

The success of the Progredir Program, one of our initiatives to develop our chain of suppliers in Brazil, also deserves attention. Financing reached R$1.024 billion with significant reductions in fund raising costs.

Our results represent the realization of our expectations, and indicate that our sustainable development strategy, based on social and environmental responsibility, operational safety, investments in technology, and recognition of human resources, is in the right way. I am very proud to have had the opportunity to be a part of these achievements after nearly 7 years as CEO, and to see that during this period Petrobras has consolidated its position of leadership as an integrated energy company and has built the foundations to continue growing. I am fortunate to be replaced by Maria das Graças Silva Foster, an executive of recognized ability who is committed to the Company's success.

FINANCIAL HIGHLIGHTS

Main Items and Consolidated Economic Indicators

The Company, from the fourth quarter of 2011 on, is adopting accounting practice under CPC 19 (R1), approved by CVM Resolution 666/11, which allows the use of the equity method for evaluating and reporting investments in jointly controlled entities. Previously, these investments were consolidated in the accounts of assets, liabilities, revenues and expenses in proportion to shareholding.

Despite the CPC 19 (R1) adoption have generated changes in assets, liabilities, revenues and expenses accounts and also in financial indicators, there was no effect on net income and on shareholders equity attributable to the shareholders of Petrobras.

The effect of the investments in jointly controlled entities excluded from consolidation was a decrease of R$553 million in income before financial results, profit-sharing and income taxes in the nine-month period ended September 30, 2011, against the increase in equity in earnings of investments.

Thus, for comparison, the information previously disclosed was retrospectively adjusted to the date of January 1, 2010, disclosed according to Note 3 of our Petrobras financial statements.

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(1) Net income per share calculated based on the weighed average number of shares.
(2) Calculated based on income before financial results, profit-sharing and income taxes.
(3) Income before financial income (expenses), net, equity in earnings of investments and depreciation, depletion and amortization.
(4) Average exports and of the internal transfer prices from Exploration & Production to Refining, Transportation and Marketing.
(5) As of September 2011, we have factored in natural gas realization prices.

RESULTS OF OPERATIONS

4Q-2011 x 3Q-2011 Results:

Gross Profit⁽⁶⁾

Gross profit reached R$17,306 million in the fourth quarter of 2011, a 14% decrease compared to the R$20,068 million in the third quarter of 2011, mainly due to:

•         Sales revenues, which increased by 3% to R$65,257 million in the fourth quarter of 2011 compared to R$63,554 million in the third quarter of 2011, primarily due to higher domestic oil products prices, due mainly to a 2% increase in diesel prices and a 10% increase in gasoline prices in November 2011, to the 12% increase on gasoline sales and also to the effect of the 10% decrease in the value of the Real against the U.S. dollar on export prices (considering the quarterly average commercial selling rate variation for R$/U.S.$).

Part of crude oil and oil products exports volumes shipped in Brazil to the foreign market was underway and was not delivered abroad to international clients at the end of the fourth quarter of 2011 and then, the corresponding revenue was not recognized in income statement in the period.

•         Cost of sales, which increased by 10% to R$47,951 million in the fourth quarter of 2011 compared to R$43,486 million in the third quarter of 2011, mainly due to the 10% decrease in the value of the Real against the U.S. dollar on our U.S. dollars expenses (considering the quarterly average commercial selling rate variation for R$/U.S.$), to the higher participation of oil product imports, mainly gasoline, on the increased sales volumes and the recognition of depreciation, depletion and amortization of assets which were already in operation (R$670 million), as well as changes in rates of incidence on special participation over fields, which increase proportionally over fields, when their output and/or profitability increase.

Income before financial results, profit-sharing and income taxes

Income before financial results, profit-sharing and income taxes decreased by 37% to R$7,752 million in the fourth quarter of 2011 compared to R$12,372 million in the third quarter of 2011, due to the 24% increase in operating expenses, mainly due to:

•        Higher exploration costs (R$717 million), due to higher write-off amounts of dry wells in Brazil;

•        Increased other expenses, net (R$657 million), mainly due to higher losses on the realization of assets (impairment);

•        Increased administrative and general expenses (R$222 million), generated by higher personnel expenses attributable to salary increases arising out of the Collective Bargaining Agreement and increased third-party technical services.

Financial Income (Expenses), Net

Financial income (expenses), net reached an income of R$400 million in the fourth quarter of 2011 compared to an expense of R$5,227 million in the third quarter of 2011, which were affected by the lower exchange depreciation over debt (1.2% decrease in the value of the Real against the U.S. dollar in the fourth quarter of 2011, compared to the 18.8% decrease in the value of the Real against the U.S. dollar in the third quarter of 2011).

Net Income

Net income reached R$5,049 million in the fourth quarter of 2011, a 20% decrease compared to the R$6,336 million in the third quarter of 2011, due to the decrease of income before financial results, profit-sharing and income taxes, partially offset by the lower exchange depreciation on financial income (expenses), net and on equity in earnings of investments. Also contributed to the lower net income the higher tax burden on offshore operations and the non-controlling interests, due to the impact of the exchange rate variation on special purpose entity (SPE) debt expressed in U.S. dollars.

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⁽⁶⁾ Fore more details, see appendix 1.

RESULTS OF OPERATIONS

2011 x 2010 Results:

Gross Profit⁽⁷⁾

Gross profit reached R$77,237 million in 2011, a 1% increase compared to R$76,225 million in 2010, mainly as a result of:

- Sales revenues, which increased by 15% to R$244,176 million in 2011 compared to R$211,842 million in 2010, due to:

•     Increase in international Brent crude oil (40% increase) and oil products prices, which increased the prices of exports, international sales, trading operations and domestic oil products indexed to international prices;

•     Increase in domestic gasoline and diesel prices in November 2011, in 10% and 2%, respectively;

•     Higher domestic demand for oil products (6%), mainly of gasoline (24%), reflecting its higher competitive advantage compared to ethanol, diesel (9%) and jet fuel (12%); and

•     2% increase in oil and gas production in Brazil.

These effects were partially offset by lower crude oil exports, due to increased domestic feedstock processed by the refineries.

- Cost of sales, which increased by 23% to R$166,939 million in 2011, due to:

•     Higher domestic demand for oil products (6%);

•     Higher crude oil and oil products import volumes to support the domestic market;

•     Higher international prices on crude oil and oil products imports, trading operations and government participation.

Income before financial results, profit-sharing and income taxes

Income before financial results, profit-sharing and income taxes decreased by 2% to R$45,403 million in 2011 compared to R$46,394 million in 2010, due to the increase in operating expenses as a result of:

•     Increased administrative and general expenses (R$845 million), generated by higher personnel expenses attributable to salary increases arising out of the Collective Bargaining Agreement for 2011, by increased workforce and by higher personnel training costs and increased third-party technical services;

•     Higher exploration costs (R$631 million), due to increased operational activity and higher write-off amounts of dry wells in Brazil;

•     Higher research and development expenses (R$705 million), due to higher expenses related to the development of the technological project called Sistema de Separação Submarina de Água e Óleo SSAO (System of Submarine Separation of Water from Oil) and to the increased hired projects with institutions approved by the Agência Nacional do Petroleo (National Petroleum Agency, or ANP), according to ANP Rule 5/2005;

•     Higher losses on the realization of assets (impairment - R$588 million) ⁽⁸⁾.

These effects were partially offset by decreased losses from legal and administrative proceedings (R$1,164 million decrease) ⁽⁹⁾ compared to 2010 and gains from legal and arbitral proceedings in 2011 (R$883 million) generated by the recovery of COFINS tax amounts and also to the indemnification of the assembly of platform P-48.

Financial Income (Expenses), Net

Financial income (expenses), net reached R$122 million in 2011, a 95% decrease compared to R$2,620 million in 2010, mainly as a result of:

•     The 12.6% decrease in the value of the Real against the U.S. dollar over debt in 2011, compared to the 4.3% increase in the value of the Real against the U.S. dollar in 2010, which generated exchange variation expense of R$3,999 million in 2011 compared to an exchange variation gain of R$1,341 million in 2010;

•     Higher financial income with increased financial investments in Brazil (R$2,119 million).

Net Income

Net income reached R$33,313 million in 2011, a 5% decrease compared to R$35,189 million in 2010, due to the decreased income before financial results, profit-sharing and income taxes and the lower financial income (expenses), net, partially offset by the decreased income tax expenses and also by the non-controlling interests, due to the impact of the exchange rate variation on special purpose entity (SPE) debt expressed in U.S.dollars.

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⁽⁷⁾ Fore more details, see appendix 2.
⁽⁸⁾ See Other Operating Income (Expenses) by Segment on page 25.
⁽⁹⁾ Fore more details, see appendix 4.

NET INCOME BY BUSINESS SEGMENT

Petrobras is an integrated energy company, with the greater part of its oil and gas production in the Exploration & Production segment being transferred to other business segments of the Company.

In the computation of the results by business segment, transactions carried out with third parties and the transfers between the business departments are considered and they are valued by internal transfer prices defined between the departments using calculation methodologies based on market parameters.

EXPLORATION & PRODUCTION

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^(*) Unaudited.
⁽¹⁰⁾ Does not include LNG. Includes reinjected gas.

Lifting Costs - Excluding production taxes U.S.$/barrel

Lifting Costs - Including production taxes U.S.$/barrel

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^(*) Unaudited.

REFINING, TRANSPORTATION AND MARKETING

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The Brazilian biofuel sector is undergoing consolidation and as a result, we have not been able to achieve more favorable operational margins with current sales volumes and the price levels practiced at auctions. Changes occurred in auction rules generate improved economic stability for biofuels plants situated at the Brazilian semi arid region due to the consideration of logistic matters on the calculation of sales prices. The changes effects will be totally reflected in corporate results only as of January 1, 2012, because of the product billing cycle.

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13

^(*) Unaudited.

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LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents

Our cash and cash equivalents totalled R$35,747 million in 2011 compared to R$29,416 million in 2010.

Operating activities provided net cash flows of R$56,322 million in 2011 compared to R$52,871 million in 2010. Cash generated by operating activities was mainly affected by higher gross profit and by income on cash and cash equivalents.

Net cash used in investing activities decreased to R$ 57,838 million in 2011 compared to R$ 105,183 million in 2010. This decrease was primarily due to the financial investments with cash raised from the Global Offering in 2010.

Net cash provided by financing activities decreased to R$7,664 million in 2011 compared to R$53,777 million in 2010, highly influenced by the capital increase generated by the Global Offering in 2010, offset by higher funds raised in 2011, net of draw-downs.

The net cash from operating activities and net cash capitalization financed the investments and dividends payment, keeping the cash and cash equivalents level⁽¹⁸⁾ (R$52,532 million in 2011).

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⁽¹⁸⁾ Our adjusted cash and cash equivalents are not computed in accordance with International Standards -IFRS and should not be considered in isolation or as a substitute for cash and cash equivalents calculated in accordance with IFRS. Our calculation of adjusted cash and cash equivalents may not be comparable to adjusted cash and cash equivalents of other companies. Management believes that adjusted cash and cash equivalents is an appropriate supplemental measure that helps investors assess our liquidity and assists management in targeting leverage improvements.

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Capital expenditures and investments

In line with its strategic objectives, Petrobras operates through joint ventures with other companies, in Brazil and abroad, as a concessionaire of oil and gas exploration, development and production rights.

Currently the Company is a member of 99 consortiums in Brazil, of which it operates 67. Petrobras is a member of 145 partnerships abroad, of which it operates 75.

During 2011, we invested an amount of R$72,546 million, which were primarily directed toward increasing production, modernizing and expanding our refineries, integration and expansion of our pipeline transportation and distribution systems.

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The net debt of the Petrobras System in Reais increased by 69% over December 31, 2010, due to the raising of long-term funding and the effects of the 12.6% depreciation of the Real against the U.S. dollar.

⁽¹⁹⁾ Includes Capital lease obligations (R$ 82 million on December 31, 2011 and R$ 175 million on December 31, 2010).
⁽²⁰⁾ Includes Capital lease obligations (R$ 183 million on December 31, 2011 and R$ 191 million on December 31, 2010).
⁽²¹⁾ Our net debt is not computed in accordance with International Standards -IFRS and should not be considered in isolation or as a substitute for total long-term debt calculated in accordance with IFRS. Our calculation of net debt may not be comparable to the calculation of net debt by other companies. Management believes that net debt is an appropriate supplemental measure that helps investors assess our liquidity and assists management in targeting leverage improvements.
⁽²²⁾ Total liabilities net of cash and cash equivalents/financial investments.

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