SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 6-K
 
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934
 
For the month of November, 2003

Commission File Number 1-15106
 
 
PETRÓLEO BRASILEIRO S.A. - PETROBRAS
(Exact name of registrant as specified in its charter)
 

Brazilian Petroleum Corporation - PETROBRAS
(Translation of Registrant's name into English)
 

Avenida República do Chile, 65
20035-900 - Rio de Janeiro, RJ
Federative Republic of Brazil
(Address of principal executive office)
 

 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F. 

Form 20-F ___X___ Form 40-F _______

 Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.  

Yes _______ No___X____

INCORPORATION BY REFERENCE

THIS REPORT ON FORM 6-K IS INCORPORATED BY REFERENCE INTO THE REGISTRATION STATEMENT ON FORM F-3, FILE NO. 333-92044, OF PETRÓLEO BRASILEIRO S.A -- PETROBRAS AND PETROBRAS INTERNATIONAL FINANCE COMPANY.

 

PETROBRAS ANNOUNCES THIRD QUARTER OF 2003 RESULTS
(Rio de Janeiro – November 25, 2003) – PETRÓLEO BRASILEIRO S.A. – PETROBRAS today announced its consolidated results stated in U.S. Dollars, prepared in accordance with U.S. GAAP.

PETROBRAS reported consolidated net income of U.S.$ 5,665 million for the nine month period ended September 30, 2003 (an increase of 153% in relation to the same period of 2002) and consolidated net operating revenues of U.S.$ 22,648 million.

Because the statements of income of PEPSA and PELSA for the period from May 13, 2003 to May 31, 2003 are not available we have consolidated the statements of income of PEPSA and PELSA as of June 1, 2003.

We believe that the inclusion of the statements of income of PEPSA and PELSA for the period from May 13, 2003 to May 31, 2003 would not have materially affected our net income for the nine-month period ended September 30, 2003.

COMMENTS FROM THE CEO , MR. JOSÉ EDUARDO DE BARROS DUTRA

This year we are commemorating our 50th anniversary as a company, and we have more than enough reasons to celebrate this event. We have completed a half-century of existence as the 15th largest oil company in the world, the largest company in Brazil, and a leader in Latin America.

We are, for the second consecutive year (2001 and 2002), one of ten finalists for a prestigious financial transparency award, in which we are evaluated against the 500 largest and best private companies in Brazil and the 50 largest state-owned Brazilian companies.

Our total capital expenditures increased to U.S.$ 4.1 billion, in the nine-month period ended September 30, 2003 and were directed mainly towards crude oil and natural gas exploration and production. As a result, not only did production increase, but we also made important oil discoveries including important discoveries in the state of Espírito Santo. On a consolidated basis, in the last 12 months, our discoveries in Brazil totaled nearly 4 billion barrels of crude oil and 419 billion cubic meters of natural gas, representing 6.6 billion barrels of potentially recoverable oil equivalents.

Our positive evaluation by the capital markets was evidenced by the successful issue of U.S.$ 750 million of bonds in the international capital markets in the third quarter of 2003. The strong interest shown by international investors resulted in issues being subscribed in record time, with demand substantially higher than the offer amount.

We have also signed contracts securing U.S.$ 1 billion of financing to implement the Malhas Project. This project involves the extension of gas pipelines into southeastern and northeastern Brazil and will expand the transport capacity of natural gas by 9 million cubic meters per day to the Northeast, and by 13 million cubic meters per day to the Southeast.

We are an energy company with an international presence that seeks profitability in our businesses, and our activities are strongly associated with environmental and social responsibility, making it particularly significant for us to be awarded the Brazilian Social Balance Prize – “Prêmio Balanço Social” – in the category of National Outstanding Company for the year 2002.

Our important contribution to the country, measured by taxes and duties paid, already exceeds U.S.$ 12 billion in the first nine months of the year.

With this positive landscape as a backdrop, we have reached our 50th year with renewed energy and embrace the challenge of continuing to grow over the next 50 years.

FINANCIAL DATA

Financial Highlights

  U.S. $ million
(except earnings per share or unless otherwise noted)
  For the nine-month period ended
September 30,
2Q-2003 3Q-2003 3Q-2002 Income statement data 2003 2002
10,408  11,314  8,388  Sales of products and services 31,300  24,693 
7,387  8,218  5,939  Net operating revenues 22,648  16,682 
160  (199) (733) Financial income (expense), net 117  (1,122)
1,459  1,897  752  Net income 5,665  2,238 
      Basic and diluted earnings per common and 
      preferred share 
1.33 1.73 0.69   Before effect of change in accounting principle 4.53  2.06 
1.33 1.73 0.69    After effect of change in accounting principle 5.17  2.06 
  
   Other data
47.5  50.3  55.0  Gross margin (%) (1) 51.2  51.3 
19.8  23.1  12.7  Net margin (%) (2) 25.0  13.4 
46  43  52  Net debt/(Net debt + Stockholders’ equity) (%)(3) 43  52 
66  67  70  Debt to equity ratio (%)(4) 67  70 
  
   Financial and Economic Indicators
26.03  28.41  26.95  Brent crude (US$/bbl) 28.65  24.38 
   Average Commercial Selling Rate for U.S. Dollars
2.9814  2.9324  3.1233    (R$/U.S.$) 3.1334  2.6712 
   Period-end Commercial Selling Rate for U.S. 
2.8720  2.9234  3.8949    Dollars (R$/U.S.$) 2.9234  3.8949 

(1)

Gross margin is calculated as net operating revenues less cost of sales divided by net operating revenues.

(2)

Net margin is calculated as net income divided by net operating revenues.

(3)

Net debt includes short-term debt, long-term debt, capital lease obligations and project financings, less cash and cash equivalents and Junior Notes in the amount of U.S.$ 298 million.

(4)

Debt to equity ratio is calculated as current liabilities plus long-term liabilities divided by the sum of total liabilities and total stockholders’ equity.



U.S. $ million
Balance sheet data 09.30.2003 12.31.2002 Percent Change (9.30.2003 versus 12.31.2002) 09.30.2002
Total assets 48,360  32,018  51.0  28,787 
Total debt (1) 19,659  14,680  33.9  13,311 
   Current 3,284  1,986  65.4  2,114 
   Long-term 16,375  12,694  29.0  11,197 
Net debt(2) 12,237  11,229  9.0  9,549 
Stockholders’ equity (3) 16,077  9,301  72.9  8,708 
Total capitalization (3) (4) 35,736  23,981  49.0  22,019 

(1)

Total debt includes short-term debt, long-term debt, capital lease obligations and project financings.

(2)

Net debt includes short-term debt, long-term debt, capital lease obligations and project financings, less cash and cash equivalents and Junior Notes in the amount of U.S.$ 298 million.

(3)

Stockholders’ equity includes unrecognized losses in the amount of U.S.$ 1,645 million at September 30, 2003, U.S.$ 1,361 million for the fiscal year ended December 31, 2002 and U.S.$ 1,112 million at September 30, 2002, in each case related to “Amounts not recognized as net periodic pension cost”.

(4)

Total capitalization means stockholders’ equity plus total debt

OPERATING HIGHLIGHTS
        For the nine-month period ended September 30,
2Q-2003 3Q-2003 3Q-2002   2003 2002
      Average daily crude oil and gas production
1,775  1,727  1,560            Crude oil and NGLs (Mbpd) (1) 1,708  1,550 
1,512  1,562  1,526                      Brazil 1,549  1,515 
263  165  34                      International 159  35 
2,226  2,046  1,638            Natural gas (Mmcfpd) (2) 1,992  1,668 
1,452  1,524  1,494                      Brazil 1,488  1,542 
774  522  144                      International 504  126 
      Crude oil and NGL average sales price (U.S. dollars per bbl)
25.21 26.16 25.40                     Brazil 27.09 22.13
23.39 22.19 25.65                     International 23.77 22.81
      Natural gas average sales price (U.S. dollars per Mcf)
1.81 1.87 1.10           Brazil 1.75 1.28
1.03 1.07 1.17           International 1.31 1.27
      Lifting costs (U.S. dollars per boe)
                Crude oil and natural gas - Brazil
8.17 8.69 6.99                     Including government take (3) 8.44 6.89
3.45 3.61 2.78                     Excluding government take (3) 3.30 3.04
1.90 2.43 1.81           Crude oil and natural gas - International 2.36 1.92
      Refining costs (U.S. dollars per boe)
1.11 1.07 0.84           Brazil 1.05 0.95
1.10 1.12 0.87           International 1.09 0.95
      Refining and marketing operations (Mbpd)
2,085  2,085  2,022       Primary Processed Installed Capacity 2,085  2,022 
                Brazil
1,956  1,956  1,931                      Installed capacity 1,956  1,931 
1,605  1,674  1,650                      Primary throughput 1,651  1,645 
82% 84% 85%                     Utilization 83% 84%
                International
129  129  91                      Installed capacity 129  91 
115  96  59                      Primary throughput 92  56 
89% 75% 79%                     Utilization 73% 68%
82  80  80  Domestic crude oil as % of total feedstock processed 81 80
      Imports (Mbpd)
269  360  364            Crude oil imports 322  335 
127  125  225            Oil product imports 121  213 
95  91  56            Import of gas, alcohol and others 86  62 
      Exports (Mbpd)
203  242  273            Crude oil exports 223  240 
231 
 214 
 218 
           Oil product exports 224 
 214 
57  120  154             Net imports 82  156 
      Sales Volume (thousand bpd)
1,478  1,542  1,615            Oil Products 1,500  1,600 
27  39  41            Alcohol and Others 32  34 
174 
 194 
 157 
           Natural Gas 172 
 148 
1,679  1,775  1,813              Total 1,704  1,782 
413  440  446            Distribution 427  456 
(380) 
 (385)
 (410) 
           Inter-company sales (382)
 (418)
1,712  1,830  1,849            Total domestic market 1,749  1,820 
590  591  630            Exports 594  600 
102 
 219 
 27 
           International sales 229 
 45 
692 
 810 
 657 
             Total international market 823 
 645 
2,404 
 2,640 
 2,506 
             Total 2,572 
 2,465 

(1)

Includes production from shale oil reserves.

(2)

Does not include liquified natural gas. Includes reinjected gas.

(3)

Government take includes royalties, special government participation and rental of areas.

ANALYSIS OF OPERATING HIGHLIGHTS

Exploration and Production

Domestic crude oil and natural gas production increased 2.2% to 1,549 thousand barrels per day for the nine-month period ended September 30, 2003, as compared to 1,515 thousand barrels per day for the nine-month period ended September 30, 2002, largely due to the start-up of new wells in the Marlim and Espadarte (ESPF) fields and installation of the production system in the Marlim Sul field. The start-up of FPSO Brazil in the Roncador field in December 2002, and the start-up of production in the Jubarte field in October 2002 and the Coral field in February 2003, also contributed to increased production in the nine-month period ended September 30, 2003.

International crude oil and NGL production increased to 159 thousand barrels per day for the nine-month period ended September 30, 2003, as compared to 35 thousand barrels per day for the nine-month period ended September 30, 2002, principally due to the inclusion of production from Petrolera Santa Fe, PELSA and PEPSA in Argentina, Ecuador and Venezuela into our production results, as well as increased production in Bolivia resulting from increased demand for natural gas in that country. Part of this increase was offset by the reduced production in mature fields in Angola, Colombia and the United States.

Lifting Costs

Our lifting costs in Brazil, excluding government take, increased 8.6% to U.S.$ 3.30 per barrel of oil equivalent in the nine-month period ended September 30, 2003, from U.S.$ 3.04 per barrel of oil equivalent in the nine-month period ended September 30, 2002. This increase was primarily due to higher expenses associated with technical services for maintenance activities on oil flow lines, equipment, and installations that support production, as well as increased transport expenses associated with the Marlim, Albacora, Enchova, Namorado, Garoupa, Corvina and Cherne fields.

Our lifting costs in Brazil, including government take, increased 22.5% to U.S.$ 8.44 per barrel of oil equivalent for the nine-month period ended September 30, 2003, from U.S.$ 6.89 per barrel of oil equivalent for the nine-month period ended September 30, 2002, due to the new special participation charge assessed to the greater volume of production from the Marlim Sul field, the inclusion of the Canto do Amaro and Roncador fields as fields subject to the special participation tax and to the increase in domestic reference prices for domestic crude oil.

Our international lifting costs increased 22.9% to U.S.$ 2.36 per barrel of oil equivalent for the nine-month period ended September 30, 2003, as compared to U.S.$ 1.92 per barrel of oil equivalent for the nine-month period ended September 30, 2002. This increase was primarily due to the incorporation of the higher unit lifting costs of Petrolera Santa Fe, PELSA and PEPSA, as well as the increased expenses in relation to the start of production of the San Antonio block in Bolivia. This increase was partially offset by the decrease in maintenance expenses at the Arauca field, and the reduced consumption of natural gas and diesel oil at the Upia field, both in Colombia.

Refining costs

Domestic unit refining costs increased 10.5% to U.S.$ 1.05 per barrel of oil equivalent for the nine-month period ended September 30, 2003, as compared to U.S.$ 0.95 per barrel of oil equivalent for the nine-month period ended September 30, 2002, principally due to the higher costs of chemical products and catalyzers.

International unit refining costs increased 14.7% to U.S.$ 1.09 per barrel of oil equivalent for the nine-month period ended September 30, 2003, as compared to U.S.$ 0.95 per barrel of oil equivalent for the nine-month period ended September 30, 2002. This increase was primarily due to the incorporation of the higher refining unit costs of PELSA and PEPSA in Argentina, as well as increased expenses related to maintenance and operation expenses of EG3, our Argentine subsidiary that focuses on downstream distribution.

ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations for the nine-month period ended September 30, 2003
compared to the nine-month period ended September 30, 2002

The comparison between our results of operations for the nine-month period ended September 30, 2003 and the nine-month period ended September 30, 2002, has been significantly affected by the 17.3% rise in the average Real/U.S. dollar exchange rate in the nine-month period ended September 30, 2003 as compared to the average Real/U.S. dollar exchange rate in the nine-month period ended September 30, 2002. For ease, we refer to this change in the average exchange rate as the “17.3% decrease in the value of the Real against the U.S. dollar in the nine-month period ended September 30, 2003, as compared to the nine-month period ended September 30, 2002.”

Revenues

Net operating revenues increased 35.8% to U.S.$ 22,648 million for the nine-month period ended September 30, 2003, as compared to U.S.$ 16,682 million for the nine-month period ended September 30, 2002. This increase was primarily attributable to our ability to increase prices of certain oil products in the Brazilian market to achieve greater parity with the increased prices of such oil products in the international markets (the average price of Brent crude oil, an international benchmark oil, increased 17.5% from U.S. $ 24.38 during the nine-month period ended September 30, 2002 to U.S. $ 28.65 during the nine-month period ended September 30, 2003). The increase in net operating revenues was also attributable, to a lesser extent, to an increase in sales volume outside Brazil (international sales), which includes sales conducted by PEPSA and PELSA. These increases were partially offset by a 3.9% decrease in sales volume in the domestic market, primarily due to a decrease in Brazilian consumer demand.

Consolidated sales of products and services increased 26.8% to U.S.$ 31,300 million for the nine-month period ended September 30, 2003, as compared to U.S.$ 24,693 million for the nine-month period ended September 30, 2002, primarily as a result of the increase in the price of certain oil products in the international markets and the increase in sales volume outside Brazil (international sales).

Included in sales of products and services are the following amounts which we collected on behalf of the Brazilian federal or state governments:

Cost of sales

Cost of sales for the nine-month period ended September 30, 2003 increased 36.0% to U.S.$ 11,058 million, as compared to U.S.$ 8,131 million for the nine-month period ended September 30, 2002. This increase was principally a result of:

These increases were partially offset by:

Depreciation, depletion and amortization

We calculate depreciation, depletion and amortization relating to exploration and production assets on the basis of the units of production method. Depreciation, depletion and amortization expenses decreased 13.5% to U.S.$ 1,322 million for the nine-month period ended September 30, 2003, as compared to U.S.$ 1,528 million for the nine-month period ended September 30, 2002. This decrease was primarily attributable to the 17.3% decrease in the value of the Real against the U.S. dollar in the nine-month period ended September 30, 2003, as compared to the nine-month period ended September 30, 2002, as well as to the inclusion in our financial statements of approximately U.S.$ 132 million of abandonment costs under the line item “exploration, including exploratory dry holes”. The decrease in depreciation, depletion and amortization, was partially offset by an increase of depreciation, depletion and amortization expenses of approximately U.S.$ 88 million, related to PEPSA and PELSA.

Exploration, including exploratory dry holes

Exploration costs, including exploratory dry holes increased 3.3% to U.S. $ 311 million for the nine-month period ended September 30, 2003 as compared to U.S.$ 301 million for the nine-month period ended September 30, 2002. This increase was primarily attributable to the increase of approximately U.S.$ 35 million in dry holes expenses and U.S.$ 24 million in abandonment costs in the nine-month period ended September 30, 2003. These costs and expenses had been recorded under the line item “depreciation, depletion and amortization” in 2002. The increase in exploration costs, including exploratory dry holes, was partially offset by the effect of the 17.3% decrease in the value of the Real against the U.S. dollar for the nine-month period ended September 30, 2003, as compared to the nine-month period ended September 30, 2002.

Selling, general and administrative expenses

Selling, general and administrative expenses increased 3.3% to U.S.$ 1,422 million for the nine-month period ended September 30, 2003, as compared to U.S.$ 1,376 million for the nine-month period ended September 30, 2002.

Research and development expenses

Research and development expenses increased 33.0% to U.S.$ 137 million for the nine-month period ended September 30, 2003, as compared to U.S.$ 103 million for the nine-month period ended September 30, 2002. This increase was primarily related to our additional investments in programs for environmental safety and deepwater and refining technologies of approximately U.S.$ 49 million, and was partially offset by the effect of the 17.3% decrease in the value of the Real against the U.S. dollar in the nine-month period ended September 30, 2003, as compared to the nine-month period ended September 30, 2002.

Equity in results of non-consolidated companies

Equity in results of non-consolidated companies increased to a gain of U.S.$ 103 million for the nine-month period ended September 30, 2003, as compared to a loss of U.S.$ 9 million for the nine-month period ended September 30, 2002. This increase was primarily attributable to a gain of U.S.$ 46 million for the nine-month period ended September 30, 2003, as compared to a loss of U.S.$ 25 million for the nine-month period ended September 30, 2002 related to the financial results of our equity investments in Compañia Mega, an Argentine company that is engaged in natural gas activities, and was adversely affected by the devaluation of the Argentine Peso against the U.S. dollar in the nine-month period ended September 30, 2002. The increase in equity in results of non-consolidated companies was also attributable to a gain of U.S.$ 51 million during the nine-month period ended September 30, 2003 from our investments in natural gas distribution and petrochemical companies, as compared to a gain of U.S.$ 15 million for the nine-month period ended September 30, 2002.

Financial income

We derive financial income from several sources, including:

Financial income decreased 33.7% to U.S.$ 606 million for the nine-month period ended September 30, 2003, as compared to U.S.$ 914 million for the nine-month period ended September 30, 2002. This decrease was primarily attributable to a reduction in financial interest income from short-term investments, which declined 74.1% to U.S.$ 180 million for the nine-month period ended September 30, 2003, as compared to U.S.$ 695 million for the nine-month period ended September 30, 2002. The reduction in financial income was primarily attributable to the decrease in the value of the Real against the U.S. dollar in the nine-month period ended September 30, 2003, as compared to the nine-month period ended September 30, 2002. This decrease was partially offset by an increase of financial income of approximately U.S.$ 20 million recognized in connection with the consolidation of PEPSA and PELSA.

Financial expense

Financial expense increased 97.3% to U.S.$ 1,030 million for the nine-month period ended September 30, 2003, as compared to U.S.$ 522 million for the nine-month period ended September 30, 2002. This increase was primarily attributable to our additional debt and an increase of approximately U.S.$ 90 million in financial expenses recognized in connection with the consolidation of PEPSA and PELSA.

Monetary and exchange variation on monetary assets and liabilities, net

Monetary and exchange variation on monetary assets and liabilities, net generated a gain of U.S.$ 541 million for the nine-month period ended September 30, 2003, as compared to a loss of U.S.$ 1,514 million for the nine-month period ended September 30, 2002. Approximately 90% of our indebtedness was denominated in foreign currencies during each of the nine-month periods ended September 30, 2003 and September 30, 2002. The increase in monetary and exchange variation on monetary assets and liabilities, net was primarily attributable to the effect of a 17.3% appreciation of the Real against the U.S. dollar during the nine-month period ended September 30, 2003, as compared to a 67.9% depreciation of the Real against the U.S. dollar during the nine-month period ended September 30, 2002.

Employee benefit expense

Employee benefit expense consists of financial costs relating to pension and other post-retirement benefits. Our employee benefit expense increased 13.3% to U.S.$ 391 million for the nine-month period ended September 30, 2003, as compared to U.S.$ 345 million for the nine-month period ended September 30, 2002. This rise in costs was attributable to an increase of U.S.$ 98 million from the annual actuarial calculation of the pension plan liability. The increase was partially offset by the effect of the 17.3% decrease in the value of the Real against the U.S. dollar in the nine-month period ended September 30, 2003, as compared to the nine-month period ended September 30, 2002.

Other taxes

Other taxes, consisting of miscellaneous value-added, transaction and sales taxes, decreased 29.3% to U.S.$ 224 million for the nine-month period ended September 30, 2003, as compared to U.S.$ 317 million for the nine-month period ended September 30, 2002. This decrease was primarily attributable to the 17.3% decrease in the value of the Real against the U.S. dollar in the nine-month period ended September 30, 2003, as compared to the nine-month period ended September 30, 2002, and the decrease of U.S.$ 90 million in the PASEP/COFINS taxes payable in respect of foreign exchange gains on assets, resulting from transactions with affiliates with assets denominated in foreign currencies.

Other expenses, net

Other expenses, net are primarily composed of gains and losses recorded on sales of fixed assets, general advertising and marketing expenses and certain other nonrecurring charges. Other expenses, net for the nine-month period ended September 30, 2003 increased to U.S.$ 756 million, as compared to an expense of U.S.$ 236 million for the nine-month period ended September 30, 2002. The most significant charges for the nine-month period ended September 30, 2003 were:

The most significant nonrecurring charges for the nine-month period ended September 30, 2002 were:

Income tax (expense) benefit

Income before income taxes, minority interest and accounting changes increased from U.S.$ 3,214 million for the nine-month period ended September 30, 2002, to U.S.$ 7,220 million for the nine-month period ended September 30, 2003. As a result, we recorded an income tax expense of U.S.$ 2,014 million for the nine-month period ended September 30, 2003, a 49.2% increase from an expense of U.S.$ 1,350 million for the nine-month period ended September 30, 2002. The increase in income tax expense was not proportional to the increase in income before taxes because of the benefits generated from the interest on stockholders’ equity in the amount of U.S.$ 357 million and the effect of the change in valuation allowance for the nine-month period ended September 30, 2003, which was approximately U.S.$ 510 million higher than in the same period in 2002.

The reconciliation between the tax calculated based upon statutory tax rates to income tax expense and effective rates is discussed in Note 5 to our unaudited consolidated financial statements as of September 30, 2003.

Cumulative effect of change in accounting principle

In the first quarter of 2003, we generated a gain of U.S.$ 697 million (net of U.S.$ 359 million of taxes) resulting from the adoption of SFAS No. 143 – Accounting for Asset Retirement Obligations. The adjustment was due to the difference in the method of accruing site restoration costs under SFAS 143, as compared with the method required by SFAS 19 – Financial Accounting and Reporting by Oil and Gas Producing Companies. Under SFAS 19, we had accrued upstream site restoration costs ratably over the productive lives of the assets. Under SFAS 143, we record the fair value of asset retirement obligations as liabilities on a discounted basis when they are incurred, which is typically at the time the related assets are installed. The income adjustment described above resulted from reversing the higher liability accumulated under SFAS 19 in order to adjust it to a lower present value amount resulting from transition to SFAS 143. Please see Note 3 to our unaudited consolidated financial statements as of September 30, 2003.

THE PETROLEUM AND ALCOHOL ACCOUNT

The Petroleum and Alcohol Account - Receivable from the Federal Government has been used to accumulate the impact on us of the federal government's regulatory policies for the Brazilian oil and gas industry.

According to legislation applicable to the Petroleum and Alcohol Account until December 31, 2001, we had the right to offset amounts owed to the federal government relating to the regulatory policies of the Brazilian oil and gas industry against the receivable that increased and decreased the Petroleum and Alcohol Account.

On June 30, 1998, the federal government issued National Treasury Bonds - Series H in our name, which were placed with a federal depositary to support the balance of this account. On June 27, 2003, the National Treasury Department Secretary issued Administrative Instruction 348, authorizing the cancellation of 138,791 NTN-H, expired on June 30, 2003 and held in guarantee of payment of an eventual negative balance in the Petroleum and Alcohol Account and the issue of new 138,791 NTN-H, with the same terms but expiring on June 30, 2004. The value of the outstanding bonds at September 30, 2003 was U.S.$ 58 million.

The federal government certified the balance of the Petroleum and Alcohol Account as of June 30, 1998. The changes in the Petroleum and Alcohol Account in the period from July 1, 1998 to December 20, 2002 are subject to audits by the National Petroleum Agency - ANP, and the results of the audit will be the basis for the settlement of the account with the federal government. The settlement of accounts with the federal government should have been completed by December 31, 2002, according to the provisions of Law No. 10453 of May 13, 2002, amended by Decree No. 4491 of November 29, 2002. On June 26, 2003, Provisional Measure 123, Article 11, which was converted into Law n° 10742 of October 6, 2003, extended the term of settlement of accounts involving reciprocal debts and credits between us and the federal government to June 30, 2004, and in so doing, automatically extended the term for certification of the outstanding balance in the Petroleum and Alcohol Account.

As a result of the deregulation of the Brazilian oil and gas market and applicable legislation, effective January 2, 2002, the Petroleum and Alcohol Account is no longer used to reimburse expenses related to the supply of oil products and alcohol to us and third parties.

The balance of the Petroleum and Alcohol Account at September 30, 2003 represents a credit to us against the federal government in the amount of U.S.$ 234 million, an increase of 28.6% or U.S.$ 52 million when compared with the U.S.$182 million balance at December 31, 2002.

The following summarizes the changes in the Petroleum and Alcohol Account for the nine-month period ended September 30, 2003:

  U.S.$ million
  September 30, 2003
Beginning balance 182 
Reimbursements to third parties 5 
Translation Gain 47 
Ending balance 234 

TAX ASSESSMENT – INTERNAL REVENUE SERVICE OF RIO DE JANEIRO

The Internal Revenue Service of Rio de Janeiro based on Law No. 9,537/97, Article 2, considers that drilling and production platforms cannot be classified as sea-going vessels and therefore should not be chartered but leased. Based on this interpretation, overseas remittances for servicing chartering agreements would be subject to withholding tax at the rate of 15% or 25%.

The Internal Revenue Service filed two tax assessments against us in connection with the withholding tax on foreign remittances (IRRF) of payments related to the charter of vessels of movable platform types for the years 1998 and 1999 through 2002.

On February 17, 2003, the Internal Revenue Service served us with a tax assessment notice amounting to R$ 93 million (U.S.$ 32 million) and covering disputed taxes for 1998. On March 20, 2003, we filed an appeal, but received an unfavorable ruling from the Internal Revenue Service. We recently filed an appeal to this decision with the highest-level administrative court competent to adjudicate the matter.

On June 27, 2003, the Internal Revenue Service served us with another tax assessment notice amounting to R$ 3,064 million (U.S. $ 1,066 million) and covering the period from 1999 to 2002.

We disagree with the Internal Revenue Service’s interpretation as to charter contracts, given that the Federal Supreme Court has already ruled that with respect to the IPI (Federal VAT) tax, offshore platforms are to be classified as sea-going vessels. Additionally, the 1994 and 1999 Income Tax Regulations support the “non-taxation” (RIR/1994) and the “zero tax rate” (RIR/1999) for the remittances in question.

On July 28, 2003, we appealed the June 27th tax assessment, and have yet to receive a response from the Internal Revenue Service.

ACQUISITION OF AN INTEREST IN PETROBRAS ENERGIA PARTICIPACIONES S.A.– PEPSA
(FORMERLY KNOWN AS PEREZ COMPANC S.A.) AND PETROLERA ENTRE LOMAS S.A. – PELSA
(FORMERLY KNOWN AS PETROLERA PEREZ COMPANC S.A.)

On October 17, 2002, we signed the Final Share Acquisition Agreement with the Perez Companc family and the Fundación Perez Companc, completing the acquisition of a controlling interest of Perez Companc S.A. ( currently known as Petrobras Energia Participaciones S.A – PEPSA) , and Petrolera Perez Companc S.A. ( currently known as Petrolera Entre Lomas S.A - PELSA). In October 2002, in accordance with Argentine legislation, the necessary documentation was submitted to the national antitrust agency (CNDC - Comisión Nacional de Defensa de la Competencia) in order to obtain approval for the transaction.

On May 13, 2003, the Argentine Antitrust Committee (Comisión Nacional de Defensa de la Competencia), an agency reporting to the Argentine Secretariat of Competition, Deregulation and Consumer Protection (Secretaría de la Competencia, la Deregulación y la Defensa del Consumidor), approved the purchase of 58.62% of the capital stock of PEPSA and 39.67% of the capital stock of PELSA capital stock by PETROBRAS Participações S.L., a company controlled by PETROBRAS. As a result of the purchase of a 39.67% interest in the capital stock of PELSA, in conjunction with the acquisition of 58.62% of PEPSA’s interest in the capital stock of PELSA, we have a controlling interest in PELSA equal to 50.73% and thus have consolidated the entity.

The acquisition was consummated principally to expand our operations into geographical markets where we had little activity. Through the acquisition of PEPSA and PELSA, we were able to gain immediate access to the Argentine market and capitalize on favorable brand recognition. The goodwill of U.S.$183 million generated by the transaction is attributed principally to downstream activities.

The purchase price paid for PEPSA and PELSA was based on an economic valuation model of expected future earnings of those companies, which considered relevant factors including the potential effects of the economic situation of Argentina. We paid U.S.$ 689 million in cash and U.S.$ 338 million in bonds to the Perez-Companc family for our interest in PEPSA and PELSA.

The acquisitions of PEPSA and PELSA were recorded using the purchase method of accounting and the balance sheets of PEPSA and PELSA were included in our consolidated financial statements, beginning on May 13, 2003. The statements of income of PEPSA and PELSA were included in our consolidated financial statements beginning on June 1, 2003. The purchase price for the PEPSA and PELSA acquisitions was allocated based on the fair market value of the assets acquired and the liabilities assumed as of the acquisition date as determined by independent appraisers.

The fair value of the net assets of PEPSA and PELSA was based on undiscounted future cash flow models of PEPSA and PELSA.

PEPSA operates principally in the areas of oil field exploration and production, refining, transport and commercialization, electricity generation, transmission and distribution, and petrochemicals. Its activities are primarily conducted in Argentina, Bolívia, Brazil, Ecuador, Peru and Venezuela. PELSA operates primarily in the oil and gas exploration and production industry in Argentina.

The following unaudited pro forma summary financial information presents the consolidated results of operations as if the acquisition of PEPSA and PELSA had occurred at the beginning of the periods presented:

(i) Consolidated Income Statements data for the nine-month period ended September 30,
  2003
2002
  As reported
Pro Forma (unaudited)
As reported
Pro Forma (unaudited)
Net operating revenues 22,648  23,195  16,682  17,503 
Costs and expenses (14,277) (14,649) (11,439) (12,026)
Financial expenses, net 117  (64) (1,122) (1,743)
Others (1,268) (1,237) (907) (892)
Income tax expense (2,014) (2,023) (1,350) (1,288)
Minority interest (238) (250) 374  489 
Cumulative effect of change in accounting principles, net of taxes 697  700 
Net income for the period 5,665  5,672  2,238  2,043 
Basic and diluted earnings per share 5.17  5.17  2.06  1.88 

(ii) Domestic and international reserves of crude oil and natural gas as of December 31, 2002:

  Crude Oil
(millions of barrels) 		Natural Gas
(billions of cubic feet)
  As reported Pro forma As reported Pro forma
Net proved developed reserves at December 31, 2002 4,007.6 4,331.8 5,936.4 6,700.4
Net undeveloped reserves at December 31, 2002 4,947.3 5,217.0 3,536.4 4,085.6
Total 8,954.9 9,548.8 9,472.8 10,786.0

BUSINESS SEGMENTS

NET INCOME BY BUSINESS SEGMENT U.S. $ million
For the nine-month period ended
September 30,
  2003 2002
Exploration and Production 4,715  3,048 
Supply 1,343  542 
Distribution 87  56 
Gas and Energy (214) (213)
International (1) 162  (7)
Corporate (228) (917)
Eliminations (200)
 (271)
Net income 5,665 
 2,238 

(1)

As of September 30, 2003, the international business segment includes the Argentine operations of Petrolera Santa Fe (acquired in October 2002), PEPSA and PELSA (both acquired in May, 2003).

Segment Information

The comparison between our results of operations for the nine-month period ended September 30, 2003 and the nine-month period ended September 30, 2002, has been significantly affected by the 17.3% rise in the average Real/U.S. dollar exchange rate in the nine-month period ended September 30, 2003 as compared to the average Real/U.S. dollar exchange rate in the nine-month period ended September 30, 2002.

Exploration and Production

Consolidated net income for our exploration and production segment increased 54.7% to U.S.$ 4,715 million for the nine-month period ended September 30, 2003, as compared to U.S.$ 3,048 million for the nine-month period ended September 30, 2002. This increase was primarily attributable to:

These effects were partially offset by a U.S.$ 995 million increase in cost of sales, primarily composed of:

Supply

Consolidated net income for our supply segment increased to U.S.$ 1,343 million for the nine-month period ended September 30, 2003, as compared to U.S.$ 542 million for the nine-month period ended September 30, 2002.

This increase was primarily attributable to an increase of U.S.$ 4,701 million in net operating revenues. This increase in net operating revenues was primarily due to our ability to increase prices of certain oil products in the Brazilian market to achieve greater parity with the increased prices of such oil products in the international markets.

This increase was partially offset by the increase of U.S.$ 3,604 million in cost of sales, mainly due to the increase in import prices of crude oil and oil products and increases in prices of products transferred from other segments, notwithstanding the fact that the volume of sales in the Brazilian market decreased 3.9% as a result of a decrease in Brazilian consumer demand.

Gas and Energy

Our Gas and Energy segment registered a net loss of U.S$ 214 million for the nine-month period ended September 30, 2003, as compared to a net loss of U.S.$ 213 million for the nine-month period ended September 30, 2002. This increase in net loss was primarily attributable to:

This increase in net loss was partially offset by:

Distribution

Consolidated net income for our distribution segment increased 55.4% to U.S$ 87 million for the nine-month period ended September 30, 2003, as compared to U.S$ 56 million for the nine-month period ended September 30, 2002. This increase was primarily attributable to a U.S.$ 1,007 million increase in net operating revenues as a result of the increase of oil products sales prices to refineries (we increased these sales prices in order to maintain our gross margin), notwithstanding the 6.4% decrease of volume of oil products sold in the nine-month period ended September 30, 2003, as compared to the volume sold in the nine-month period ended September 30, 2002 and the decrease in our market share in the Brazilian oil products market from 32.6% in the nine-month period ended September 30, 2002, to 31.3% in the nine-month period ended September 30, 2003.

This increase in consolidated net income was partially offset by the increase of U.S$ 976 million in cost of sales, reflecting the increase of oil products prices to refineries.

International

Consolidated net income for our international segment increased to U.S.$ 162 million for the nine-month period ended September 30, 2003, as compared to a net loss of U.S.$ 7 million for the nine-month period ended September 30, 2002. This increase was primarily attributable to:

This increase was partially offset by a U.S.$ 377 million increase in cost of sales, a U.S.$ 103 million increase in depreciation, depletion and amortization, a U.S.$ 72 million increase in selling, general and administrative expenses and a U.S.$ 89 million increase in debt expense net, which were mainly attributable to the increased operations of our Argentine subsidiaries.

Corporate

Consolidated loss for the units that make up our corporate segment decreased 75.1% to a net loss of U.S.$ 228 million during the nine-month period ended September 30, 2003, as compared to a net loss of U.S.$ 917 million during the nine-month period ended September 30, 2002. This decrease was primarily attributable to the reduction of U.S.$ 746 million in debt expenses net, primarily attributable to the effect of the 17.3% appreciation of the Real against the U.S. dollar during the nine-month period ended September 30, 2003, as compared to a 67.9% depreciation of the Real against the U.S. dollar during the nine-month period ended September 30, 2002.

Liquidity and Capital Resources

Capital expenditures

        In the nine-month period ended September 30, 2003, we continued to prioritize capital expenditures for the development of crude oil and natural gas production projects. Total consolidated capital expenditures increased 15.1% from U.S.$3,574 million in the first nine months of 2002 to U.S.$4,114 million in the first nine months of 2003, primarily due to increased expenditures on our exploration and production activities and improvements in our refinery facilities. Of the capital expenditures incurred during the first nine months of 2003, U.S.$2,293 million (55.7%) were directed to domestic exploration and production activities, which includes our exploration and production segment and our project financings.

        The following table sets forth our consolidated capital expenditures (including project financings and investment in thermoelectric power plants) for each of our business segments for the first nine months of 2003 and 2002:

Activities
U.S. $ millions
Nine-month period ended
September 30,
2003 2002
• Exploration and Production 2,293 2,239
• Supply 1,060 667
• Distribution 79 129
• Gas and Energy 254 281
• International 313 162
• Corporate 115
 96
Total capital expenditures 4,114
 3,574

        Our capital expenditures during the first nine months of 2003 were primarily directed towards increasing our production capabilities in the Campos Basin, modernizing our refineries, expanding our pipeline transportation and distribution systems and, to a lesser extent, investing in energy and gas related activities, such as investments in natural and thermoelectric power plants.

Financing

        We fund our investments and working capital with internally generated funds, short-term debt, long-term debt, project financings, and sale and lease back agreements. In our opinion, our working capital is sufficient for our present requirements.

Financing Strategy

        The objective of our financing strategy is to help us achieve the targets set forth in our Strategic Plan. We aim to increase the average life of our debt portfolio and reduce our cost of capital through a variety of medium and long-term financing arrangements, including supplier financing, project financing, bank financing, securitizations and the issuances of debt and equity securities.

Our Indebtedness

Government Regulation

        The Ministry of Planning, Budget and Management controls the total amount of medium and long-term debt that we are allowed to incur through the annual budget approval process (Plano de Dispêndio Global, or PDG). Before issuing medium and long-term debt, Petrobras and its Brazilian subsidiaries must also obtain the approval of the National Treasury shortly before issuance.

        In accordance with Senate Resolution Nº 96/89 the level of our borrowings is subject to an annual maximum amount, exclusive of certain permitted commercial obligations, based on stockholders’ equity, debt service expense and other factors as of the prior year and subject to certain ongoing quarterly adjustments. For 2003, the maximum level was initially set at U.S.$932 million. The maximum level was set at U.S.$824 million for 2002, U.S.$1,211 million for 2001 and U.S.$1,072 million for 2000.

        All of the foreign currency denominated debt of Petrobras and its Brazilian subsidiaries requires registration with the Central Bank. The issuance of debt by our international subsidiaries, however, is not subject to registration with the Central Bank or approval by the National Treasury. In addition, all issuances of medium and long-term notes and debentures require the approval of our board of directors. Borrowings that exceed the approved budget amount for any year also require approval from the Brazilian Senate.

        Our total debt (including short-term debt, long-term debt, capital lease obligations and project financings) increased 33.9% to U.S.$19,659 million during the first nine months of 2003, as compared to U.S.$14,680 million at December 31, 2002. During the first nine months of 2003, our short-term debt (including current portions of long-term debt obligations, capital lease obligations and current portions of project financings) increased 65.4% to U.S.$3,284 million as compared to U.S.$1,986 million at December 31, 2002.

        Our net debt totaled U.S.$12,237 million at September 30, 2003, a 9.0% increase from net debt of U.S.$11,229 million at December 31, 2002, primarily due to the inclusion of PEPSA’s and PELSA’s net debt of U.S.$1,801 million in our net debt totals and our issuance of U.S.$1,900 million in long-term debt in the international capital markets during the nine-month period ended September 30, 2003. These increases were partially offset by the increase in cash and cash equivalent as a result of the increase in net cash provided by operating activities.

      Short-Term Debt

        Our outstanding short-term debt serves mainly to support our imports of crude oil and oil products, and is provided almost completely by international banks and under our commercial paper program. During the first nine months of 2003, our short-term debt (excluding current portions of long-term obligations) increased to U.S.$1,566 million as compared to U.S.$671 million at December 31, 2002. This increase was due to the inclusion of PEPSA’s short term debt in our consolidated balance sheets and our increased use of short-term credit facilities. Our short-term debt is denominated principally in U.S. dollars.

      Long-Term Debt

        Our total outstanding consolidated long-term debt consists primarily of the issuance of securities in the international capital markets and debentures in the domestic capital markets and amounts outstanding under facilities guaranteed by export credit agencies and multilateral agencies, as well as financing from the Banco Nacional de Desenvolvimento Econômico e Social (the National Bank for Economic and Social Development, or BNDES) and other financial institutions. Outstanding long-term debt, plus the current portion of our long-term debt, totaled U.S.$ 11,593 million at the end of the nine-month period ended September 30, 2003, as compared to U.S.$ 7,714 million at December 31, 2002. Included in these figures at September 30, 2003 are the following international debt issues:

Notes Principal Amount
4.10% Notes due 2003(1)     ¥ 30,000 million    
9.00% Notes due 2004(2)     EUR 91 million    
10.00% Notes due 2006     U.S.$250 million    
6.625% Step Down Notes due 2007(2)     EUR 134 million    
9.125% Notes due 2007(3)     U.S.$500 million    
9.875% Notes due 2008(3)     U.S.$450 million    
6.750% Senior Trust Certificates due 2010(4)     U.S.$95 million    
Floating Rate Senior Trust Certificates due 2010(4)     U.S.$55 million    
9.750% Notes due 2011(3)     U.S.$600 million    
6.600% Senior Trust Certificates due 2011(4)     U.S.$300 million    
Floating Rate Senior Trust Certificates due 2013(4)     U.S.$300 million    
4.750% Senior Exchangeable Notes due 2007(5)     U.S.$338 million    
Global Step-up Notes due 2008(6)     U.S.$400 million    
9.125% Global Notes due 2013(7)     U.S.$750 million    
3.748% Senior Trust Certificates due 2013 (4)     U.S.$ 200 million    
6.436% Senior Trust Certificates due 2015 (4)     U.S.$ 550 million    
_________________
(1)

Japanese yen; U.S.$1.00 = ¥ 114.43 at September 30, 2003.
(2)

Euro; U.S.$1.00 = EUR 1.1656 at September 30, 2003.

(3)

Issued by PIFCo to finance oil trading activities, with support from us through a standby purchase agreement and with insurance against 18 months of inconvertibility and transfer risk for interest payments.

(4)

Issued in connection with our exports prepayment program.

(5)

Issued by PIFCo on October 17, 2002 in connection with our acquisition of PEPSA.

(6)

The Global Step-up Notes bear interest from March 31, 2003 at a rate of 9,00 % per year unit April 1, 2006 and at rate of 12,375% per year thereafter, with interest payable semi-annually, and were issued by PIFCo to finance oil trading activities , with support from us through a standby purchase agreement..

(7)

Issued by PIFCo to finance oil trading activities, with support from us through a standby purchase agreement.

        On March 31, 2003, we issued U.S.$400 million of 9.00% Global Step-Up Notes due 2008. These notes bear interest from March 31, 2003 at the rate of 9.00% per year until April 1, 2006 and at a rate of 12.375% thereafter. This transaction represented our first issuance under our U.S.$8 billion universal shelf registration statement filed with the SEC in July 2002. On May 21, 2003, Petrobras Finance Ltd., a subsidiary of PIFCo, received U.S.$550 million in 6.436% Senior Trust Certificates due 2015, and U.S.$200 million in 3.748% Senior Trust Certificates due 2013 in connection with our exports prepayment program. On July 2, 2003, PIFCo issued Global Notes in an aggregate principal amount of U.S.$500 million due July 2013. The notes will bear interest at the rate of 9.125% per annum, payable semiannually. On September 18, 2003, PIFCo issued an additional U.S.$250 million in Global Notes, which form a single fungible series with its U.S.$500 million Global Notes due July 2013.

        In addition to issuing foreign currency denominated debt in the international capital markets, we have historically issued Real denominated debentures in the local capital markets. These debentures are floating-rate obligations, and the coupon is based on an index plus a fixed spread. We did not issue any Real denominated debentures in 2003. In the year ending December 31, 2002, we issued R$1,525 million (U.S.$432 million) in Real-denominated debentures.

Risk Management Activities

      Commodity Price Risk

        We are exposed to commodity price risks as a result of the fluctuation of crude oil and oil product prices. Our commodity risk management activities primarily consist of futures contracts traded on stock exchanges and options and swaps entered into with major financial institutions. The futures contracts provide economic hedges to anticipated crude oil purchases and sales, generally forecast to occur within a 30 to 360 day period, and reduce our exposure to volatile commodity prices.

        Our exposure on these contracts is limited to the difference between contract value and market value on the volumes hedged. Crude future contracts are marked to market and related gains and losses are recognized currently into earnings, irrespective of when physical crude sales occur. During the nine-month period ended September 30, 2003, we carried out economic hedging activities on 51.2% of our total traded volume (imports and exports), as compared to 39.6% in the same period of 2002. The open positions on the futures market, compared to spot market value, resulted in a loss of U.S.$ 0.6 million during the nine-month period ended September 30, 2003 and a gain of U.S.$ 8 million during the nine-month period ended September 30, 2002.

   Exchange Rate Risk

        The exchange rate risk to which we are exposed is limited to the balance sheet and derives principally from the incidence of non-Real denominated obligations in our debt portfolio. In the event of a devaluation of the Real against the foreign currency in which our debt is denominated, we will incur a monetary loss with respect to such debt. Because our oil product prices are based on international prices, however, a considerable part of our operating revenue is linked to the U.S. dollar, while certain of our operating expenses are denominated in Reais.

Interest Rate Risk Management

        Our interest rate risk is a function of our long-term debt and, to a lesser extent, short-term debt. Our foreign currency floating rate debt is principally subject to fluctuations in LIBOR and our floating rate debt denominated in Reais is principally subject to fluctuations in the Brazilian long-term interest rate (TJLP), as fixed by the Brazilian Central Bank. We currently do not utilize derivative financial instruments to manage our exposure to fluctuations in interest rates. However, we have been studying various forms of derivatives to reduce exposure to interest rate fluctuations and may use these financial instruments in the future.

Risk Management Activity at PEPSA

        PEPSA also uses derivative instruments such as options, swaps and others, mainly to mitigate the impact of changes in crude oil prices, interest rates and future exchange rates. Such derivative instruments are designed to mitigate specific exposures, and are assessed periodically to assure high correlation of the derivative instrument to the risk exposure identified and to assure the derivative is highly effective in offsetting changes in cash flows inherent in the covered risk. PEPSA qualifies for hedge accounting treatment for its crude oil derivative instruments and its interest rate swap derivative instruments.

Project Finance and Off-Balance Sheet Arrangements

      Project Finance

        Since 1997, we have utilized project financings to provide capital for our large exploration and production and related projects. Our arrangements with respect to these projects are accounted for as capital leases and are on-balance sheet, as a component of property, plant and equipment, and the related debt obligations are accounted for under the line item “Project Financings”. Under the contractual arrangements, we are responsible for completing the development of the oil and gas fields, operating the fields, paying all operating expenses relating to the projects and remitting a portion of the net proceeds generated from the fields to fund the special purpose companies’ debt and return on equity payments. At the end of each financing project, we have the option to purchase the leased or transferred assets from the special purpose company.

        Many of our capital expenditures during the first nine months of 2003 were made in connection with exploration and development projects in the Campos Basin, a number of which are being financed through project financings. Below are our material project finance expenditures by project for the nine-month period ended September 30, 2003, compared to the nine-month period ended September 30, 2002:

For the Nine-Month Period Ended September 30,
2003 2002
Field Capital Expenditures Capital Expenditures
(in millions of U.S. dollars)
Albacora $ - $ 33
Cabiúnas $ 19 $ 16
Espadarte/Voador/Marimba $ 16 $ 76
Marlim $ 73 $ 58
Others $ 24 $ 8
Total $132 $191

      Off Balance Sheet Arrangements

        As noted above, all of our project financings are on-balance sheet. As of September 30, 2003, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Our Cash Flow

        Net cash provided by operating activities was U.S.$ 6,241 million in the first nine months of 2003, as compared to U.S.$3,645 million in the first nine months of 2002. This increase was due primarily to a 35.8% increase in net operating revenue.

        Net cash provided by financing activities amounted to U.S.$ 921 million for the first nine months of 2003, as compared to U.S.$ 1.335 million in net cash used in the same period of 2002. This increase was due primarily to net issuances of short and long-term debt, which was partially offset by an increase in our repayments of short and long-term debt.

Income Statement
(Unaudited)
(in millions of U.S. dollars, except for share and per share data)

  Nine-month period ended
September 30,
1Q-2003 2Q-2003 2Q-2002   2003 2002
 
10,408  11,314  8,388  Sales of products and services
Less:		 31,300  24,693 
(1,639) (1,629) (1,291)     Value-added and other taxes on sales and services (4,655) (3,887)
(1,382) (1,467) (1,158)     CIDE (3,997) (4,124)
 
7,387  8,218  5,939  Net operating revenues 22,648  16,682 
 
(3,880) (4,086) (2,675)     Cost of sales (11,058) (8,131)
(345) (564) (687)     Depreciation, depletion and amortization (1,322) (1,528)
(134) (110) (92)     Exploration, including exploratory dry holes (311) (301)
(27)         Impairment (27)  
(444) (518) (433)     Selling, general and administrative expenses (1,422) (1,376)
(46) (46) (32)     Research and development expenses (137) (103)
 
(4,876) (5,324) (3,919)         Total costs and expenses (14,277) (11,439)
 
91  1  33      Equity in results of non-consolidated companies 103  (9)
(14) 393  240      Financial income 606  914 
(304) (474) (75)     Financial expense (1,030) (522)
          Monetary and exchange variation on monetary  
478  (118) (898)         assets and liabilities, net 541  (1,514)
(146) (129) (83)     Employee benefit expense (391) (345)
(79) (78) (139)     Other taxes (224) (317)
(284) (176) (199)     Other expenses, net (756) (236)
 
(258) (581) (1,121)   (1,151) (2,029)
      Income before income taxes and minority
2,253  2,313  899          interests and accounting change 7,220  3,214 
 
      Income tax expense:
(596) (741) (354)     Current (2,253) (1,139)
(65) 371  (73)     Deferred 239  (211)
 
(661) (370) (427)          Total income tax expense (2,014) (1,350)
 
(133) (46) 280  Minority interest in results of consolidated subsidiaries (238) 374 
 
1,459  1,897  752  Net income before accounting change effect 4,968  2,238 
 
      Cumulative effect of accounting change, net of income tax 697  
 
1,459  1,897  752  Net income for the period 5,665  2,238 
 
      Weighted average number of shares outstanding
634,168,418  634,168,418  634,168,418      Common/ADS 634,168,418  634,168,418 
462,369,507  462,369,507  451,935,669      Preferred/ADS 462,369,507  451,935,669 
 
      Basic and diluted earnings per share
          Common/ADS and Preferred/ADS
1.33  1.73  0.69          Before effect of change in accounting principle 4.53  2.06 
1.33  1.73  0.69          After effect of change in accounting principle 5.17  2.06 
 

Selected Balance Sheet Data
(in millions of U.S. dollars, except for share data)

  As of September 30,2003 As of December 31,2002
 
  (Unaudited)
Assets
Current assets
    Cash and cash equivalents 7,124  3,301 
    Accounts receivable, net 2,698  2,267 
    Inventories 3,272  2,540 
    Other current assets 2,624  2,089 
 
        Total current assets 15,718  10,197 
 
Property, plant and equipment, net 28,044  18,224 
 
Investments in non-consolidated companies and other investments 1,098  334 
 
Other assets
    Petroleum and Alcohol Account – Receivable from Federal
        Government 234  182 
    Government securities 243  176 
    Goodwill on PEPSA and PELSA 183 
    Unrecognized pension obligation 19  61 
    Advances to suppliers 481  450 
    Investment in PEPSA and PELSA    1,073 
    Others 2,340  1,321 
 
        Total other assets 3,500  3,263 
 
    Total assets 48,360  32,018 
 
 
Liabilities and stockholders' equity
Current liabilities
    Trade accounts payable 1,884  1,702 
    Short-term debt 1,566  671 
    Current portion of long-term debt 838  727 
    Current portion of project financings 563  239 
    Capital lease obligations 317  349 
    Other current liabilities 5,117  3,257 
 
        Total current liabilities 10,285  6,945 
 
Long-term liabilities
    Employees postretirement benefits 3,409  2,423 
    Project financings 4,037  3,800 
    Long-term debt 10,755  6,987 
    Capital lease obligations 1,583  1,907 
    Other liabilities 1,872  791 
 
        Total long-term liabilities 21,656  15,908 
 
Minority interest 342  (136)
 
Stockholders' equity
    Shares authorized and issued:
    Preferred stock –2003 - 462,369,507 (2002 –451,935,669 shares) 2,973  2,459 
    Common stock – 2003 and 2002 - 634,168,418 shares 4,289  3,761 
    Reserves and others 8,815  3,081 
 
        Total stockholders' equity 16,077  9,301 
 
    Total liabilities and stockholders’ equity 48,360  32,018 
 

Statement of Cash Flows Data
(Unaudited)
(in millions of U.S. dollars)

  Nine-month period ended
September 30,
2Q-2003 3Q-2003 3Q-2002   2003 2002
 
      Cash flows from operating activities    
1,459  1,897  752     Net income for the period 5,665  2,238 
         Adjustments to reconcile net income to net cash provided by
          operating activities
414  599  602        Depreciation, depletion and amortization 1,330  1,624 
111  83  58        Loss on property, plant and equipment 228  190 
(428) 93  1,045        Foreign exchange and monetary loss (243) 1,845 
             Cumulative effect of accounting change, net of income tax (697)
161  (326) (267)       Others (43) (186)
 
         Decrease (increase) in assets
133  133  41        Accounts receivable, net 55  (652)
            Petroleum and Alcohol Account - Receivable from Federal
(3) (3) (32)         Government (13) (89)
285  (14) (688)       Inventories (95) (1,348)
489  199  (536)       Advances to suppliers 598  (819)
(9) (315) (291)       Others (482) (693)
 
(299) 176  325     Increase (decrease) in liabilities
      Trade accounts payable		 (218) 489 
(755) 134  (136)       Taxes payable 135  174 
(14) (215) 461        Other liabilities 21  872 
 
1,544  2,441  1,334  Net cash provided by operating activities 6,241  3,645 
 
 
Cash flows from investing activities
(1,657) (1,582) (1,195)    Additions to property, plant and equipment (4,114) (3,574)
231          Effect on cash from merger with subsidiaries and affiliates 231
126  (17) (26)    Investments (54) (145)
(169) 15  (32)    Others (183) (49)
 
(1,469) (1.584) (1,253) Net cash used in investing activities (4,120) (3,768)
 
 
392  715  529  Cash flows from financing activities 921  (1,335)
 
 
467  1.572  610  Increase (decrease) in cash and cash equivalents 3,042  (1,458)
 
631  (47) (1,304) Effect of exchange rate changes on cash and cash equivalents 781  (2,290)
4,501  5,599  4,306  Cash and cash equivalents at beginning of period 3,301  7,360 
 
5,599  7,124  3,612  Cash and cash equivalents at the end of period 7,124  3,612 
 

Income Statement by Segment

  Nine-month period ended September 30, 2003
U.S.$ million
E&P SUPPLY GAS
&
ENERGY 		INTERN. DISTRIB. CORPOR. ELIMIN. TOTAL
STATEMENT OF INCOME                
 
Net operating revenues to third parties 1,722  12,818  858  1,481  5,769       22,648 
Inter-segment net operating revenues 10,164  4,933  171  122  101    (15,491)   
 
Net operating revenues 11,886  17,751  1,029  1,603  5,870    (15,491) 22,648 
             
Cost of sales (4,269) (14,915) (755) (960) (5,342)   15,183  (11,058)
Depreciation, depletion and amortization (776) (280) (52) (178) (21) (15)    (1,322)
Exploration, including dry holes (323)       (15)         (338)
Selling, general and administrative expenses (103) (531) (58) (138) (290) (361) 59  (1,422)
Research and development expenses (66) (30) (8)       (33)    (137)
 
Cost and expenses (5,537) (15,756) (873) (1,291) (5,653) (409) 15,242  (14,277)
 
Results of non-consolidated companies   18  54  32    (1)   103 
Debt expenses, net (228) 149  (41) (45) (56) 380  (42) 117 
Employee benefit expense   (1)     (13) (377)   (391)
Other taxes   (18) (3) (11) (36) (156)   (224)
Other expenses, net (119) (106) (358) (16) 24  (181)   (756)
 
  (347) 42  (348) (40) (81) (335) (42) (1,151)
 
Income before income taxes and minority
interest and accounting change 6,002  2,037  (192) 272  136  (744) (291) 7,220 
 
Income tax benefits (expense) (1,984) (671) 161  (79) (48) 516  91  (2,014)
Minority interest    (23) (183) (31) (1)      (238)
 
Income before accounting change 4,018  1,343  (214) 162  87  (228) (200) 4,968 
 
Cumulative effect of accounting change, net of income tax 697              697 
 
Net income (loss) 4,715  1,343  (214) 162  87  (228) (200) 5,665 
 

  Nine-month period ended September 30, 2003
U.S.$ million
E&P SUPPLY GAS
&
ENERGY 		INTERN. DISTRIB. CORPOR. ELIMIN. TOTAL
STATEMENT OF INCOME                
 
Net operating revenues to third parties 1,617  9,037  527  710  4,791      16,682
Inter-segment net operating revenues 7,989  4,013  131  73  72    (12,278)  
Net operating revenues 9,606  13,050  658  783  4,863    (12,278) 16,682
 
Cost of sales (3,274) (11,311) (453) (583) (4,366)   11,856 (8,131)
Depreciation, depletion and amortization (1,019) (279) (88) (75) (52) (15)   (1,528)
Exploration, including dry holes (261)     (40)       (301)
Selling, general and administrative expenses (86) (575) (42) (66) (308) (299)    (1,376)
Research and development expenses (49) (29) (4)       (21)    (103)
Cost and expenses (4,689) (12,194) (587) (764) (4,726) (335) 11,856  (11,439)
 
Results of non-consolidated companies   9 7 (25)       (9)
Debt expenses, net (339) (78) (401) 44  18  (366)   (1,122)
Employee benefit expense           (345)   (345)
Other taxes   (14) (7) (7) (26) (263)   (317)
Other expenses, net (15) 72  (169) 17  (16) (142) 17  (236)
Income before income taxes and minority interest 4,563  845  (499) 48  113  (1,451) (405) 3,214 
 
Income tax benefits (expense) (1,515) (300) (114) (52) (37) 534  134  (1,350)
Minority interest   (3) 400 (3) (20)     374
Net income 3,048  542  (213) (7) 56  (917) (271) 2,238 

Other Expenses, Net By Segment

  Nine-month period ended September 30, 2003
U.S.$ million
E&P SUPPLY GAS
&
ENERGY 		INTERN. DISTRIB. CORPOR. ELIMIN. TOTAL
Provisions losses on financial exposure-Thermoplant      (205)             (205)
Institution Relations and Culture Projects   (2)          (73)    (75)
Unscheduled stoppages – plant and equipment (104) (49)                (153)
Losses as a result of Legal Proceedings (8) (33)          (35)    (76)
Adjustment to market value of turbines for the thermoelectric plants      (114)             (114)
INSS Contingencies (52) (2)          (1)   (55)
Dividends   9                 9 
Others 45  (29) (39) (16) 24  (72)    (87)
  (119) (106) (358) (16) 24  (181)    (756)

  Nine-month period ended September 30, 2003
U.S.$ million
E&P SUPPLY GAS
&
ENERGY 		INTERN. DISTRIB. CORPOR. ELIMIN. TOTAL
Contractual Contingencies with Thermoplants     (151)         (151)
Institution Relations and Culture Projects           (72)   (72)
Unscheduled stoppages – plant and equipment (49) (33)           (82)
Dividends   6            6 
Losses as a result of Legal Proceedings (15) (4)       (19)   (38)
Result of hedge operations with oil & oil by-products   4            4 
Others 49  99  (18) 17  (16) (51) 17  97 
  (15) 72  (169) 17  (16) (142) 17  (236)

Selected Balance Sheet Data by Segment

  Nine-month period ended September 30, 2003
U.S.$ million
E&P SUPPLY GAS
&
ENERGY 		INTERN. DISTRIB. CORPOR. ELIMIN. TOTAL
 
Current assets 1,016  5,574  475  1,678  1,175  8,473  (2,673) 15,718 
Cash and cash equivalents 2  468  149  486  18  6,001    7,124 
Other currents assets 1,014  5,106  326  1,192  1,157  2,472  (2,673) 8,594 
 
Property, plant and equipment, net 15,824  4,536  2,764  4,170  419  355  (24) 28,044 
Investments in non-consolidated companies and other investments 7  366  135  488  22  80     1,098 
Non-current assets 771  252  1,457  303  195  3,711  (3,189) 3,500 
Petroleum and Alcohol Account             234     234 
Government securities held-to-maturity             243     243 
Other assets 771  252  1,457  303  195  3,234  (3,189) 3,023 
Total assets 17,618  10,728  4,831  6,639  1,811  12,619  (5,886) 48,360 

Selected Data for International Segment

  Nine-month period ended September 30, 2003
U.S.$ million
INTERNATIONAL
E&P SUPPLY GAS
&
ENERGY 		DISTRIB. CORPOR. ELIMIN. TOTAL
INTERNATIONAL              
ASSETS 4,278  1.076  581  150  2,596  (2,042) 6,639 
STATEMENT OF INCOME
 
Net Operating Revenues 671  1,090  107  448  9  (722) 1.603 
Net operating revenues to third parties 335  590  105  442  9     1.481 
Inter-segment net operating revenues 336  500  2  6     (722) 122 
Net income 160  37  29  7  (75) 4  162 

  Year ended December 31, 2002
U.S.$ million
E&P SUPPLY GAS
&
ENERGY 		INTERN. DISTRIB. CORPOR. ELIMIN. TOTAL
 
Current assets 1,181  4,323  819  736  973  3,124  (959) 10,197 
Cash and cash equivalents 1  509  16  211  59  2,505     3,301 
Other current assets 1,180  3,814  803  525  914  619  (959) 6,896 
 
Investments in non-consolidated companies and other investments 7  168  70  11  16  62     334 
Property, plant and equipment, net 11,611  3,186  1,881  1,024  296  226     18,224 
Non current assets 385  211  556  1,092  141  1,932  (1,054) 3,263 
Petroleum and Alcohol Account            182     182 
Government securities            176     176 
Other assets 385  211  556  1,092  141  1,574  (1,054) 2,905 
Total assets 13,184  7,888  3,326  2,863  1,426  5,344  (2,013) 32,018 

  U.S.$ million
INTERNATIONAL
E&P SUPPLY GAS
&
ENERGY 		DISTRIB. CORPOR. ELIMIN. TOTAL
INTERNATIONAL              
 
ASSETS (As of December 31, 2002) 1,638  349  39  160  1,479  (802) 2,863 
STATEMENT OF INCOME
(First semester of 2002)
 
Net Operating Revenues 128  432  15  189     (279) 485 
Net operating revenues to third parties 38  205  15  189      447 
Inter-segment net operating revenues 90  227         (279)  38 
Net income 16  14  (24) (35)   (29)

SUBSEQUENT EVENTS

Award of Contract for Exploration and Development Services in Mexico

As part of our strategy to expand our international operations, we bid for, and were awarded, a contract for the provision of exploration and development services in the Cuervito block in the Burgos Basin, in northeastern Mexico.

We will provide such services as part of a consortium. We are the operator under the consortium agreement and own a 45% interest, Japan’s Teikoku, owns a 40% interest, and Mexico’s Diavaz, owns a 15% interest.

The contract is one of the Multiple4 Services Contracts which are being offered by Pemex Exploración y Producción through an international call for tender for development and production of natural gas reserves. It is expected that U.S.$ 260 million will be invested in 15 years in connection with these contracts.

The Cuervito block, located in the central part of the Burgos Basin, southwest of Reynosa city, has an area of 231 km. Six fields have already being discovered, with the greatest production coming from the Cuervito and Pamorana fields.

Issuance of Notes by Petrobras Energia S.A. (PESA)

On October 31, 2003, PESA, a wholly owned subsidiary of PEPSA, issued US$100 million in Notes – Series R maturing in 10 years, with interest payable semiannually and a 9.5% annual yield.

The issue is part of a financing program designed to improve PESA’s financial profile through the refinancing of short-term debt and marked the successful return of PESA to the international capital markets.

Increase in the interest in TERMORIO S.A.

On October 30, 2003, our Board of Directors approved the acquisition of the 7% interest held by PRS Engenharia Ltda in Termorio S.A., for the amount of U.S.$ 0.46 million, thereby increasing to 50% our interest in the capital of Termorio S.A. .




This press release contains statements that constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are necessarily dependent on assumptions, data or methods that may be incorrect or imprecise and that may be incapable of being realized. Prospective investors are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The Company does not undertake, and specifically disclaims, any obligation to update any forward-looking statements, which speak only as of the date made.







CONSOLIDATED FINANCIAL INFORMATION

PETRÓLEO BRASILEIRO S.A. -
PETROBRAS AND SUBSIDIARIES

September 30, 2003 and 2002, with
Independent Accountants’ Report

PETRÓLEO BRASILEIRO S.A. - PETROBRAS AND SUBSIDIARIES

Consolidated FINANCIAL INFORMATION


Contents

Independent Accountants’ Review Report 1
 
Consolidated Balance Sheets 3
Consolidated Statements of Income 5
Consolidated Statements of Cash Flows 7
Consolidated Statements of Changes in Stockholders' Equity 9
Notes to Consolidated Financial Information 12
1 Basis of Financial Statement Preparation 12
2 Recently Issued Accounting Pronouncements 12
3 Accounting change 15
4 Derivative Instruments, Hedging and Risk Management Activities 16
5 Income Taxes 18
6 Inventories 19
7 Receivable from Federal Government 20
8 Investments in non-consolidated companies and other investments 22
9 Property, plant and equipment 23
10 Financings 23
11 Project Financings 27
12 Capital Leases 28
13 Pension Plan 29
14 Stockholders’ Equity 30
15 Basic and Diluted Earnings per Share 31
16 Acquisition of an interest in Petrobras Energia Participaciones S.A. – PEPSA - (formerly known as Perez Companc S.A.) and Petrolera Entre Lomas S.A. - PELSA (formerly known as Petrolera Perez Companc S.A) 32
17 Segment Information 34
18 Commitments and Contingencies 42
19 Subsequent Events 47

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

To the Board of Directors and Stockholders of
Petróleo Brasileiro S.A. – PETROBRAS:

1. We have reviewed the accompanying unaudited consolidated balance sheet of Petróleo Brasileiro S.A. - PETROBRAS and its subsidiaries at September 30, 2003 and the related unaudited consolidated statements of income, cash flows and changes in stockholders' equity for the nine-month period then ended. These financial statements are the responsibility of the Company's management. The unaudited consolidated balance sheet of Petróleo Brasileiro S.A. - PETROBRAS and its subsidiaries at September 30, 2002 (not presented herein) and the related unaudited consolidated statements of income, cash flows and changes in stockholders' equity for the nine-month period then ended were reviewed by other independent accountants whose report (dated November 7, 2002) stated that they were not aware of any material modifications that should be made to those statements for them to be in conformity with accounting principles generally accepted in the United States of America.

2. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

3. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements as of September 30, 2003 and for the nine-month period then ended, for them to be in conformity with accounting principles generally accepted in the United States of America.

4. The consolidated balance sheet of Petróleo Brasileiro S.A. - PETROBRAS and its subsidiaries as of December 31, 2002, and the related consolidated statements of income, cash flows and changes in stockholders' equity for the year then ended (not presented herein), were previously audited by other auditors in accordance with auditing standards generally accepted in the United States of America and in their report dated February 13, 2003, they expressed an unqualified opinion on those consolidated financial statements.

5. As from January 1, 2003 the Company adopted SFAS No. 143 - Accounting for Asset Retirement Obligations, see Note 3.

November 13, 2003

ERNST & YOUNG
Auditores Independentes S/S

Paulo José Machado
Partner

PETRÓLEO BRASILEIRO S.A. – PETROBRAS AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
September 30, 2003 and December 31, 2002
Expressed in Millions of United States Dollars

  September 30, 2003 December 31, 2002
 
Assets (Unaudited)
Current assets
Cash and cash equivalents 7,124 3,301
Accounts receivable, net 2,698 2,267
Inventories (Note 6) 3,272 2,540
Deferred income tax (Note 5) 484 135
Recoverable taxes 985 672
Advances to suppliers 378 794
Other current assets 777 488
 
15,718 10,197
 
Property, plant and equipment, net 28,044 18,224
 
Investments in non-consolidated companies and other investments 1,098 334
 
Other assets
Accounts receivable, net 308 188
Advances to suppliers 481 450
Petroleum and Alcohol Account – Receivable from Federal Government (Note 7) 234 182
Government securities 243 176
Marketable securities 326 208
Unrecognized pension obligation 19 61
Restricted deposits for legal proceedings and guarantees (Note 18) 541 290
Receivables from non-consolidated companies 189 181
Recoverable taxes 293 261
Goodwill in PEPSA and PELSA (Note 16) 183 -
Investment in PEPSA and PELSA - 1,073
Other assets 683 193
 
  3,500 3,263
 
Total assets 48,360 32,018
 

Liabilities and stockholders’ equity September 30, 2003 December 31, 2002
 
  (Unaudited)
Current liabilities
Trade accounts payable 1,884 1,702
Income tax 226 119
Taxes payable, other than income taxes 2,137 1,682
Short-term debt (Note 10) 1,566 671
Current portion of long-term debt (Note 10) 838 727
Current portion of project financings (Note 11) 563 239
Capital lease obligations (Note 12) 317 349
Employee postretirement benefits 104 89
Payroll and related charges 479 283
Dividends and interest on capital payable 1,125 307
Accrued interest 170 120
Advances from customers 199 119
Ventures under consortium agreements 246 106
Other payables and accruals 431 432
 
10,285 6,945
 
Long-term liabilities
Employees postretirement benefits 3,409 2,423
Project financings (Note 11) 4,037 3,800
Long-term debt (Note 10) 10,755 6,987
Capital lease obligations (Note 12) 1,583 1,907
Deferred income taxes (Note 5) 1,039 123
Contingencies (Note 18) 290 368
Provision for abandonment of wells 258 -
Other liabilities 285 300
 
  21,656  15,908 
 
Minority interest 342  (136)
 
Commitments and contingencies (Note 15)
Stockholders’ equity
Shares authorized and issued (Note 12)
Preferred stock - 2003 - 462,369,507 shares (2002 - 451,935,669 shares) 2,973 2,459
Common stock - 2003 and 2002 - 634,168,418 shares 4,289 3,761
Capital reserve 111 89
Accumulated other comprehensive income
Cumulative translation adjustments (14,500) (17,306)
Amounts not recognized as net periodic pension cost (1,645) (1,361)
Unrealized gains (losses) on available-for-sale securities 82 (11)
Retained earnings : Appropriated 5,690 5,585
                                   Unappropriated 19,077 16,085
 
16,077 9,301
Total liabilities and stockholders’ equity 48,360 32,018
 

The accompanying notes are an integral part of this interim consolidated financial information.

PETRÓLEO BRASILEIRO S.A. – PETROBRAS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
September 30, 2003 and 2002
Expressed in Millions of United States Dollars (except number of shares and earnings per share) (Unaudited)

  Nine-month period
Ended September 30
 
  2003 2002
 
Sales of products and services 31,300 24,693
Less:
Value-added and other taxes on sales and services (4,655) (3,887)
CIDE (Note 7) (3,997) (4,124)
 
Net operating revenues 22,648 16,682
 
Cost of sales (11,058) (8,131)
Depreciation, depletion and amortization (1,322) (1,528)
Exploration, including exploratory dry holes (311) (301)
Selling, general and administrative expenses (1,422) (1,376)
Impairment (27) - 
Research and development expenses (137) (103)
 
Total costs and expenses (14,277) (11,439)
 
Equity in results of non-consolidated companies 103 (9)
Financial income 606 914
Financial expense (1,030) (522)
Monetary and exchange variation on monetary assets and liabilities, net 541 (1,514)
Employee benefit expense (391) (345)
Other taxes (224) (317)
Other expenses, net (756) (236)
 
  (1,151) (2,029)
 
Income before income taxes and minority interest and accounting change 7,220  3,214 
 


  Nine-month period
Ended September 30
 
  2003 2002
 
Income tax expense
Current (2,253) (1,139)
Deferred 239 (211)
 
  (2,014) (1,350)
 
Minority interest in results of consolidated subsidiaries (238) 374
 
Income before effect of change in accounting principle 4,968 2,238
 
Cumulative effect of change in accounting principle, net of taxes 697 -
 
Net income for the period 5,665 2,238
 
Net income applicable to each class of shares
Common/ ADS 3,276 1,307
Preferred/ADS 2,389 931
 
Net income for the period 5,665 2,238
 
Basic and diluted earnings per share (Note 15)
Common/ADS and Preferred/ADS
Before effect of change in accounting principle 4.53 2.06
After effect of change in accounting principle 5.17 2.06
 
Weighted average number of shares outstanding
Common/ADS 634,168,418 634,168,418
Preferred/ADS 462,369,507 451,935,669
 

The accompanying notes are an integral part of this interim consolidated financial information.

PETRÓLEO BRASILEIRO S.A. – PETROBRAS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
September 30, 2003 and 2002
Expressed in Millions of United States Dollars (Unaudited)

  Nine-month period
Ended September 30
 
  2003 2002
 
Cash flows from operating activities
Net income for the period 5,665 2,238
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, depletion and amortization 1,330 1,624
Loss on property, plant and equipment 228 190
Minority interest in income of subsidiaries 238 (376)
Deferred income taxes (239) 211
Foreign exchange and monetary loss (243) 1,845
Cumulative effect of change in accounting principle, net of taxes (697) -
Equity in the results of non-consolidated companies and others (42) (21)
 
Decrease (increase) in assets
Accounts receivable, net 55 (652)
Petroleum and Alcohol Account (13) (89)
Interest receivable on government securities (139) 6
Inventories (95) (1,348)
Advances to suppliers 598 (819)
Others (343) (699)
 
Increase (decrease) in liabilities
Trade accounts payable (218) 489
Payroll and related charges 128 (29)
Taxes payable 135 174
Employee postretirement benefits, net of unrecognized
pension obligation 336 687
Contingencies (150) (10)
Other liabilities (293) 224
 
Net cash provided by operating activities 6,241 3,645
 


  Nine-month period
Ended September 30
 
  2003 2002
 
Cash flows from investing activities
Additions to property, plant and equipment (4,114) (3,574)
Effect on cash from merger with subsidiaries and affiliates 231 -
Investments (54) (145)
Others (183) (49)
 
Net cash used in investing activities (4,120) (3,768)
 
Cash flows from financing activities
Short-term debt, net issuances and repayments 627 (396)
Proceeds from issuance of long-term debt 3,021 1,052
Principal payments on long-term debt (1,085) (387)
Project financing payments (123) (335)
Payment of finance lease obligations (645) (133)
Dividends and interest on capital paid (874) (1,136)
 
Net cash provided by (used) in financing activities 921 (1,335)
 
Increase (decrease) in cash and cash equivalents 3,042 (1,458)
Effect of exchange rate changes on cash and cash equivalents 781 (2,290)
Cash and cash equivalents at beginning of period 3,301 7,360
 
Cash and cash equivalents at end of period 7,124 3,612
 

The accompanying notes are an integral part of this interim consolidated financial information.

PETRÓLEO BRASILEIRO S.A. – PETROBRAS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
September 30, 2003 and 2002
Expressed in Millions of United States Dollars (except number of shares and per-share amounts) (Unaudited)

  Nine-month period
Ended September 30
 
  2003 2002
 
Preferred stock (Note 14)    
Balance at January 1 2,459 1,882
Capital increase with issue of preferred shares 130 -
Capital increase with undistributed earnings reserve 384 577
 
Balance at September 30 2,973 2,459
 
Common stock (Note 14)
Balance at January 1 3,761 2,952
Capital increase with undistributed earnings reserve 528 809
 
Balance at September 30 4,289 3,761
 
Capital reserve – fiscal incentive
Balance at January 1 89 128
Transfer from (to) unappropriated retained earnings 22 (49)
 
Balance at September 30 111 79
 
Accumulated other comprehensive income
 
Cumulative translation adjustments
Balance at January 1 (17,307) (11,854)
Change in the period 2,807 (6,517)
 
Balance at September 30 (14,500) (18,371)
 
Amounts not recognized as net periodic pension cost
Balance at January 1 (1,361) (1,867)
(Increase)Decrease in additional minimum liability (430) 1,126
Tax effect on above 146 (371)
 
Balance at September 30 (1,645) (1,112)
 


  Nine-month period
Ended September 30
 
  2003 2002
 
Unrecognized gains (losses) on available-for-sale securities    
Balance at January 1 (11) 13
Unrealized gains 140 (38)
Tax effect on above (47) 13
 
Balance at September 30 82 (12)
 
Appropriated retained earnings
Legal reserve
Balance at January 1 643 768
Transfer from (to) unappropriated retained earnings 134 (311)
 
Balance at September 30 777 457
 
Undistributed earnings reserve
Balance at January 1 4,778 5,886
Capital increase (911) (1,386)
Transfer from (to) unappropriated retained earnings 847 (2,106)
 
Balance at September 30 4,714 2,394
 


  Nine-month period ended September 30
 
  2003 2002
 
Statutory reserve    
Balance at January 1 164 215
Transfer from (to) unappropriated retained earnings 35 (87)
 
Balance at September 30 199 128
 
Total appropriated retained earnings 5,690 2,979
 
Unappropriated retained earnings
 
Balance at January 1 16,085 15,124
Net income for the period 5,665 2,238
Dividends (per share: 2003 – U.S.$ 1.49 to common and preferred
shares; 2002 – U.S.$ 0.91 to common and preferred shares) (1,635) (989)
Appropriation to fiscal incentive reserve (22) (5)
Appropriation (to) from reserves (1,016) 2,557
 
Balance at September 30 19,077 18,925
 
Total stockholders' equity 16,077 8,708
 
Comprehensive income (loss) is comprised as follows:
 
Net income for the period 5,665 2,238
Cumulative translation adjustments 2,807 (6,517)
Amounts not recognized as net periodic pension cost (284) 755
Unrealized gain on available-for-sale securities 92 (25)
 
Total comprehensive income (loss) 8,280 (3,549)
 

PETRÓLEO BRASILEIRO S.A. – PETROBRAS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL INFORMATION
Expressed in Millions of United States Dollars
(except when specifically indicated)

1. Basis of Financial Statement Preparation

The accompanying unaudited consolidated financial statements of Petróleo Brasileiro S.A. - PETROBRAS (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and the rules and regulations of the Securities and Exchange Commission (SEC). Although certain information normally included in annual financial statements prepared in accordance with U.S. GAAP has been condensed or omitted, management believes that the disclosures are adequate to make the information presented not misleading. These unaudited consolidated financial statements and the accompanying notes should be read in conjunction with the consolidated financial statements for the year ended December 31, 2002 and the notes thereto.

The consolidated financial statements as of September 30, 2003 and for the nine-month period ended September 30, of 2003 and 2002, included in this report, are unaudited. However, in management's opinion, such consolidated financial statements reflect all normal recurring adjustments that are necessary for a fair presentation. The results for the interim periods are not necessarily indicative of trends or of results to be expected for the full year ending December 31, 2003.

Pursuant to Rule 436 (c) under the Securities Act of 1933 (the “Act”), this is not a “report” and should not be considered a part of any registration statement prepared or certified within the meanings of Sections 7 and 11 of the Act and therefore, the independent accountant’s liability under section 11 does not extend to the information included herein.

2. Recently Issued Accounting Pronouncements

The Financial Accounting Standards Board (FASB) has recently issued Interpretation No. 46 (FIN 46) - Consolidation of Variable Interest Entities in January 2003. The Emerging Issues Task Force (EITF) has recently issued (i) EITF 01-08 “Determining Whether an Arrangement Contains a Lease”, and (ii) EITF 02-6, “Classification in the Statement of Cash Flows of Payments made to Settle and Asset Retirement Obligation within the Scope of FASB 143.” Additionally, EITF 03-08 respective to certain retroactive insurance contracts and claims-made insurance policies is in discussion.

FIN 46 provides guidance on when certain entities should be consolidated or the interests in those entities disclosed by enterprises that do not control them through a majority voting interest. Under FIN 46, entities are required to be consolidated by an enterprise that has a controlling financial interest in such entities when equity investors of that enterprise have significant capital risk, the obligation to absorb the majority of expected losses, or the right to receive the majority of expected returns from such entities. Entities identified with these characteristics are called variable interest entities and the interest that enterprises have in these entities are called variable interests. These interests may derive from certain guarantees, leases, loans or other arrangements that result in risks and rewards to the enterprise with the controlling financing interest in such entities, irrespective of such enterprises’ voting interest in such entities.

The interpretation requires that if a business enterprise has a controlling financial interest in a variable entity, the assets, liabilities and results of the activities of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. This interpretation applies immediately to variable interest entities created after January 31, 2003. For variable interest entities created before February 1, 2003, FIN 46 must be adopted in the first reporting period ending after December 15, 2003.

The Company will adopt FIN 46 in its December 31, 2003 annual financial statements. There is a reasonable possibility that certain project financing arrangements in which the Company has an interest, together with certain thermoelectric project contracts, may be variable interest entities. A significant portion of the Company’s share of commitments and debt obligations, as well as fixed asset contributions, are already included in the consolidated financial statements as these transactions qualify as capital leases. Adoption of FIN 46 is not expected to have a significant impact on the Company´s financial condition, results of operation and cash flows. See also discussion at Note 18, for maximum exposures related to thermoelectric plants, a number of which may be subject to consolidation under the rules of FIN 46.

EITF 01-08 “Determining Whether an Arrangement Contains a Lease,” is applicable to arrangements entered into or modified in the first reporting period (annual or interim) beginning after May 28, 2003. This EITF expands former guidance respective to determination of whether an arrangement contains a lease that is within the scope of FASB Statement No. 13, Accounting for Leases, and offers specific guidance related to transportation and other energy contracts that may qualify as leases. The guidance in Issue 01-8 is based on whether the arrangement conveys to the purchaser the right to use a specific asset and provides criteria for when the definition of “right to use” is met Adoption of this EITF did not have a significant impact on the Company’s accounting for its energy and transportation contracts.

EITF 02-6, “Classification in the Statement of Cash Flows of Payments made to Settle and Asset Retirement Obligation within the Scope of FASB 143”, determined that a cash payment made to settle an asset retirement obligation should be classified in the statement of cash flows as an operating activity. Petrobras has adopted the presentation outlined in EITF 02-6, with immaterial changes to prior classification of such costs as investment activities.

EITF Issue 86-12, “Accounting by Insureds for Claims-Made Insurance Policies”, EITF Issue 03-3, “Accounting for Claims-Made Insurance Policies by the Insured Entity”, and EITF Abstracts Topic D-79, “Accounting for Retroactive Insurance Contracts Purchased by Entities Other than Insurance Enterprises”, address various aspects of the accounting for retroactive insurance contracts and claims-made insurance policies by the insured entity. EITF Issue 03-8 is in discussion and has the purpose to codify the guidance set forth in the aforementioned pronouncements. The Company is monitoring EITF Issue 03-08, but has not yet assessed the impact of such literature on its accounting for certain retroactive insurance contracts and claims-made insurance policies.

3. Accounting change

As of January 1, 2003, PETROBRAS adopted SFAS No. 143 - Accounting for Asset Retirement Obligations ("SFAS 143"). The primary impact of SFAS 143 is to change the method of accruing for upstream site restoration costs. These costs were previously accrued ratably over the productive lives of the assets in accordance with SFAS No. 19 - Financial Accounting and Reporting by Oil and Gas Producing Companies ("SFAS 19"). At the end of 2002, the cumulative amount accrued under SFAS 19 was U.S.$ 1,166. This provision for abandonment was recognized as a component of accumulated depreciation, depletion and amortization as of December 31, 2002, with no separate provision for abandonment liability being disclosed on the face of the financial statements. Under SFAS 143, the fair value of asset retirement obligations are recorded as liabilities on a discounted basis when they are incurred, which is typically at the time the related assets are installed. Amounts recorded for the related assets will be increased by the amount of these obligations and depreciated over the related useful lives of such assets. Over time, the amounts recognized as liabilities will be accreted for the change in their present value until the related assets are retired or sold.

The cumulative adjustment for the change in accounting principle reported in the first quarter of 2003 was an after-tax income of U.S.$ 697 (net of U.S.$ 359 deferred income tax effects). The effect of this accounting change on the balance sheet, was a U.S.$ 1,056 reduction to the abandonment provision, and a U.S.$ 359 increase in deferred income tax liabilities. Additionally, the change in accounting principle resulted in a U.S.$ 16 increase to property, plant and equipment at original asset acquisition date, with accumulated depreciation through January 1, 2003 of U.S.$9 on proved developed properties. Further, on January 1, 2003, Petrobras established an abandonment liability with respect to proved undeveloped reserves in the amount of U.S.$ 44.

This adjustment is due to the difference in the method of accruing site restoration costs under SFAS 143 compared with the method required by SFAS 19. Under SFAS 19, site restoration costs are accrued on a unit-of-production basis of accounting as the oil and gas are produced. The SFAS 19 method matches the accruals with the revenues generated from production and results in most of the costs being accrued in early field life, when production is at the highest level. Because SFAS 143 requires accretion of the liability as a result of the passage of time using an effective interest method of allocation, a significant portion of costs will be accrued towards the end of field life, when production is at the lowest level. The cumulative income adjustment described above results from reversing the higher liability accumulated under SFAS 19 in order to adjust it to the lower present value amount resulting from transition to SFAS 143. This amount being reversed in transition, which was previously charged to operating earnings under SFAS 19, will again be charged to earnings under SFAS 143 in future years.

4. Derivative Instruments, Hedging and Risk Management Activities

The Company is exposed to a number of market risks arising from the normal course of business. Such market risks principally involve the possibility that changes in interest rates, currency exchange rates or commodity prices will adversely affect the value of the Company's financial assets and liabilities or future cash flows and earnings. The Company maintains an overall risk management policy that is developed under the direction of the Company's executive officers.

The Company may use derivative and non-derivative instruments to implement its overall risk management strategy. However, by using derivative instruments, the Company exposes itself to credit and market risk. Credit risk is the failure of a counterparty to perform under the terms of the derivative contract. Market risk is the adverse effect on the value of a financial instrument that results from a favorable change in interest rates, currency exchange rates, or commodity prices. The Company addresses credit risk by restricting the counterparties to such derivative financial instruments to major financial institutions. Market risk is managed by the Company's executive officers. The Company does not hold or issue financial instruments for trading purposes.

a) Foreign Currency Risk Management

The Company’s foreign currency risk management strategy may involve the use of derivative instruments to protect against foreign exchange rate volatility, which may impair the value of certain of the Company’s obligations. The Company currently uses zero cost foreign exchange collars to implement this strategy.

During 2000, the Company entered into three zero cost foreign exchange collars to reduce its exposure to variations between the U.S. Dollar and the Japanese Yen, and between the U.S. Dollar and EURO relative to long-term debt denominated in foreign currencies with a notional amount of approximately U.S.$ 470. The Company does not use hedge accounting for these derivative instruments. These collars establish a ceiling and a floor for the associated exchange rates. If the exchange rate falls below the defined floor, the counterparties will pay to the Company the difference between the actual rate and the floor rate on the notional amount. Conversely, if the exchange rate increases above the defined ceiling, the Company will pay to the counterparties the difference between the actual rate and the ceiling rate on the notional amount. The contracts expire upon the maturity date of each note.

As of December 31, 2002, the Company had a fair value obligation of U.S.$ 80 associated with its EURO and Japanese Yen zero cost collar contracts. The Yen zero cost collar contracts were settled on September 8, 2003, with a cash payment of U.S.$. 68. As of September 30, 2003 the Company had a fair value asset of U.S.$ 10 associated with its Euro zero cost collar contracts.

b) Commodity Price Risk Management

The Company is exposed to commodity price risks as a result of the fluctuation of crude oil and oil product prices. The Company’s commodity risk management activities primarily consist of futures contracts traded on stock exchanges and options and swaps entered into with major financial institutions. The futures contracts provide economic hedges to anticipated crude oil purchases and sales, generally forecast to occur within a 30 to 360 day period, and reduce the Company’s exposure to volatile commodity prices.

The Company's exposure on these contracts is limited to the difference between contract value and market value on the volumes hedged. Crude future contracts are marked to market and related gains and losses are recognized currently into earnings, irrespective of when physical crude sales occur. During the nine-month periods ended September 30, 2003 and 2002, the Company carried out economic hedging activities on 51.2% and 39.6%, respectively, of its total traded volume (imports and exports). The open positions on the futures market, compared to spot market value, resulted in a loss of U.S.$ 0.6 and gain of U.S.$ 8 during the nine-month period ended September 30, 2003 and 2002, respectively.

c) Interest Rate Risk Management

The Company’s interest rate risk is a function of the Company’s long-term debt and, to a lesser extent, short-term debt. The Company’s foreign currency floating rate debt is principally subject to fluctuations in LIBOR and the Company’s floating rate debt denominated in Reais is principally subject to fluctuations in the Brazilian long-term interest rate (TJLP), as fixed by the Brazilian Central Bank. The Company currently does not utilize derivative financial instruments to manage its exposure to fluctuations in interest rates. However, the Company has been studying various forms of derivatives to reduce exposure to interest rate fluctuations and may use these financial instruments in the future.

d) Risk Management Activity at PEPSA

PEPSA also uses derivative instruments such as options, swaps and others, mainly to mitigate the impact of changes in crude oil prices, interest rates and future exchange rates. Such derivative instruments are designed to mitigate specific exposures, and are assessed periodically to assure high correlation of the derivative instrument to the risk exposure identified and to assure the derivative is highly effective in offsetting changes in cash flows inherent in the covered risk. PEPSA qualifies for hedge accounting treatment for its crude oil derivative instruments and its interest rate swap derivative instruments.

5. Income Taxes

Income taxes in Brazil comprise federal income tax and social contribution, which is an additional federal income tax. The statutorily enacted tax rates applicable for the nine-month periods ended September 30, 2003 and 2002, are 25% for federal income tax and 9% for social contribution, respectively, which represent an aggregate rate of 34%.

Substantially all of the Company’s taxable income is generated in Brazil and is therefore subject to the Brazilian statutory tax rate. The following table reconciles the tax calculated based upon statutory tax rates to the income tax expense recorded in this consolidated financial information.

  Nine-month period ended
September 30,
 
  2003 2002
 
Income before income taxes and minority interest and accounting changes 7,220 3,214
 
Tax expense at statutory rates (2,455) (1,093)
Adjustments to derive effective tax rate:
Non-deductible postretirement health-benefits (77) (56)
Change in valuation allowance 174 (336)
Tax benefit on interest on stockholders’ equity 357 138
Income taxes regarding abandonment liabilities
adjustments related to the year ended December 31, 2002 (61) -
Others 48 (3)
 
Income tax expense per consolidated
statement of income (2,014) (1,350)
 

6. Inventories

  September 30, 2003 December 31, 2002
 
Products    
Oil products 1,105 982
Fuel alcohol 77 86
 
  1,182 1,068
Raw materials, mainly crude oil 1,238 990
Materials and supplies 813 482
Others 39 -
 
3,272 2,540
 

7. Receivable from Federal Government

a) Background

The Petroleum and Alcohol Account - Receivable from the Federal Government (the Petroleum and Alcohol Account) was used to accumulate the impact of the Federal Government's regulation policies for the Brazilian oil and gas industry on the Company. The Petroleum and Alcohol Account accrues financial income on its outstanding balance at the Referential Rate Index - TR, which was 3.95 % for the nine-month period ended September 30, 2003 and 1.91% for the nine-month period ended September 30, 2002.

As provided in the applicable regulations, the Petroleum and Alcohol Account is a legal, valid and binding receivable from the Federal Government and collectibility of the receivable is not subject to future operations. The applicable regulations also provide that the Company has the right to offset amounts owed to the Federal Government relating to the regulation policies of the Brazilian oil and gas industry against the receivable. These increases and decreases in the Petroleum and Alcohol Account have been recognized in accordance with applicable law when the underlying transaction occurred.

According to specific legislation, until December 31, 2001, the Specific Parcel Price-PPE was presented as an adjustment to sales of basic oil products (gasoline, diesel oil and LPG). The amount of PPE for any period increased or decreased the balance of the Petroleum and Alcohol Account.

After December 31, 2001 the expenses related to alcohol programs, approved by the Interministerial Council for Sugar and Alcohol are supported by a portion of the financial resources derived from collection of the CIDE, as stipulated in Law No. 10453 of May 13, 2002.

b) Deregulation of the Brazilian fuel market

In accordance with the Petroleum Law and subsequent legislation, the fuel market in Brazil was deregulated in its entirety as of January 1, 2002. Therefore, as of that date, the Petroleum and Alcohol account would no longer be used to reimburse expenses in connection with the Federal Government’s regulation of the price of oil products and fuel alcohol. Accordingly, the Petroleum and Alcohol account will only include changes in amounts with triggering events having occurred before December 31, 2001, in accordance with Law No. 10453, of May 13, 2002, and ANP regulations.

c) Changes in the Petroleum and Alcohol Account

The following summarizes the changes in the Petroleum and Alcohol Account for the nine-month period ended September 30, 2003:

  Nine-month
period ended
September 30, 2003
 
Opening balance 182
 
Reimbursements to third parties: subsidies paid to fuel alcohol producers 5
 
Translation gain 47
 
Ending balance 234
 

d) Certification by the Federal Government

The Federal Government certified the balance of the Petroleum and Alcohol Account as of June 30, 1998.

The changes in the Petroleum and Alcohol Account in the period July 1, 1998 to December 20, 2002 are subject to audits by the ANP. The results of the audit will be the basis for the settlement of the account with the Federal Government.

The settlement of the account with the Federal Government should have been completed by December 31, 2002, according to the provisions of Law No. 10453 of May 13, 2002, amended by Decree No. 4491 of November 29, 2002. On June 26, 2003 Provisional Measure 123, article 11, which was converted to Law nº 10742 dated October 6, 2003, extended the term of settlement of accounts involving reciprocal debits and credits between Petrobras and the Federal Government to June 30, 2004, and in so doing, automatically extending the term for certification of the outstanding balance in the Petroleum and Alcohol Account.

After completion of the audit, the amount of the notes used to guarantee the debit balance in existence on June 30, 2004, or of the securitized credits, will be adjusted to the new amount calculated, as established in Provisional Measure No. 2181-45 of August 24, 2001.

e) National Treasury Bonds Series H (NTN-H)

On June 30, 1998, the Company and the Federal Government reached an agreement whereby the Federal Government issued National Treasury Bonds - H (NTN-H) into a federal depositary on behalf of the Company to support the balance of the Petroleum and Alcohol account. On June 27, 2003, the National Treasury Secretary issued Administrative Instruction 348, authorizing the cancellation of 138,791 NTN-H, which expired on June 30, 2003 and were held in guarantee of payment of an eventual negative balance in the Petroleum and Alcohol Account and the issue of new 138,791 NTN-H, with the same terms as the cancelled bonds but expiring on June 30, 2004. The value of the outstanding bonds at September 30, 2003 was U.S.$ 58, at which time the balance of the Petroleum and Alcohol Account was U.S.$ 234. The legal, valid, and binding nature of the account is not affected by any difference between the balance of the account and the value of the outstanding bonds.

The Brazilian Government, upon the Company’s consent, can effect the cancellation of all or a portion of the bonds’ outstanding balance. The NTN-H will mature on June 30, 2004 and currently Petrobras has no other rights on those bonds; withdrawal or transfers are not allowed.

8. Investments in non-consolidated companies and other investments

The investment balance at September 30, 2003 has increased significantly from that of December 31, 2002, principally as the result of the acquisition of PEPSA, as discussed in Note 16, and the consolidation of PEPSA investments. The PEPSA consolidation included a number of non-consolidated companies, with principal balances being related to Distrillic Inversora S.A, Oleoduto de Crudos Pesados Ltd and Inversora Mata. S.A.

9. Property, plant and equipment

The property, plant and equipment account at September 30, 2003 and December 31, 2002, respectively, includes U.S.$ 726 and U.S.$ 289 of assets under construction that are intended to be sold to third parties. These assets include thermoelectric plants, natural gas pipelines and other oil and gas projects. The Company intends to sell or transfer all or a portion of these assets to investors under structured financing deals, either retaining an interest or leasing the assets back under capital leases. Additionally, the property, plant and equipment account at September 30, 2003 and December 31, 2002, respectively, includes U.S.$ 929 and U.S.$ 653 of assets under agreements with investors.

10. Financings

a) Short-term debt

The Company's short-term borrowings are principally sourced from commercial banks and include import and export financing denominated in United States dollars, as follows:

  September 30, December 31,
  2003 
2002 
Import - oil and equipment 1,089  286 
Working capital 477 
385 
  1,566 
671 

b) Long-term debt

  September 30, December 31,
  2003 
2002 
Foreign currency
Notes 4,942  2,234 
Financial institutions 2,536  2,240 
Sale of future receivables 1,778  900 
Credits 695  876 
Senior exchangeable notes 339 
338 
  10,290 
6,588 
Local currency
Debentures 648  500 
National Economic and Social Development
Bank - BNDES (related party) 380  403 
Debentures (related party) 237  188 
Others 38 
35 
  1,303 
1,126 
  11,593  7,714 
Current portion of long-term debt (838)
(727)
  10,755 
6,987 
  September 30, December 31,
  2003 
2002 
Currencies
United States dollars 9,415  5,522 
Japanese Yen 559  764 
EURO 315  297 
Others 1 
5 
  10,290 
6,588 

The long-term portion at September 30, 2003 becomes due in the following years:

2004 638 
2005 929 
2006 1,516 
2007 1,555 
2008 1,591 
2009 and thereafter 4,526 
  10,755 

Interest rates on long-term debt were as follows:

  September 30, December 31,
  2003 
2002 
Foreign currency
6% or less 4,112  3,080 
Over 6% to 8% 2,070  1,220 
Over 8% to 10% 4,107  2,287 
Over 10% to 15% 1 
1 
  10,290 
6,588 
Local currency
6% or less 655  235 
Over 6% to 8% -  390 
Over 10% to 15% 648 
501 
  1,303 
1,126 
  11,593 
7,714 

On March 31, 2003, the Company issued Global Step-up Notes in an aggregate principal amount of U.S.$ 400 due April 2008. The notes will bear interest from March 31, 2003 at a rate of 9.00% per annum until April 1, 2006 and at a rate of 12.375% per annum thereafter, with interest payable semiannually. The Company used the proceeds from this issuance principally to repay trade-related debt.

In May 2003, the PF Export Trust issued to the Company additional U.S.$ 750 in Senior Trust Certificates and U.S.$ 150 in Junior Trust Certificates. The Senior Trust Certificates consist of Series 2003-A of U.S.$ 550 bearing annual interest of 6.436% and due June 2015 and Series 2003-B of U.S.$ 200 bearing annual interest due of 3.748% due in June 2013. The Junior Trust Certificates were issued with complementary terms as the new Senior Trust Certificates as they form a 20% guarantee to the senior trust certificates and expire ratably. These two new issuances complement the initial structured finance export prepayment program commenced in December 2001.

On July 2, 2003, the Company issued Global Notes in an aggregate principal amount of U.S.$ 500 due July 2013. The notes will bear interest at the rate of 9.125% per annum, payable semiannually. On September 18, 2003, the Company issued an additional U.S.$ 250 in Global Notes, which form a single fungible series with the Company's U.S.$ 500 Global Notes due July 2013. The Company used the proceeds from these issuances principally to repay trade-related debt and inter-company loans.

11. Project Financings

Since 1997, the Company has utilized project financing to provide capital for the continued development of the Company’s exploration and production and related projects.

The Company’s arrangements with respect to these projects are considered leasing transactions for accounting purposes. The Company’s responsibility under these contracts is to complete the development of the oil and gas fields, operate the fields, pay for all operating expenses related to the projects and remit a portion of the net proceeds generated from the fields to fund the special purpose companies’ debt and return on equity payments. At the conclusion of the term of each financing project, the Company will have the option to purchase the leased or transferred assets from the consolidated special purpose company. Because the Company had commenced development or construction activities on each of these projects prior to completing the financing arrangement, and because of the Company’s continuing involvement in these projects, the Company continues to reflect the assets related to the projects as a component of property, plant and equipment and the related obligation as a component of project financing.

The following summarizes the liabilities and the name of the fields where the projects were in progress at September 30, 2003 and December 31, 2002:

  September 30, December 31,
  2003 
2002 
Barracuda/Caratinga 1,793  1,481 
Cabiúnas 834  673 
Marlim 791  635 
Espadarte/Voador/Marimbá (EVM) 451  575 
Nova Marlim 568  508 
Albacora 93  123 
Pargo, Carapeba, Garoupa and Cherne (PCGC) 37  44 
PDET On shore 1  - 
Nova Transportadora do Sudeste 24  - 
Nova Transportadora do Nordeste 8 
- 
  4,600  4,039 
Current portion of project financings (563)
(239)
  4,037 
3,800 

At September 30, 2003, the long-term portion of project financings becomes due in the following years:

2004 272 
2005 1,101 
2006 808 
2007 544 
2008 544 
2009 and thereafter 768 
  4,037 

As of September 30, 2003 the amounts of commitments assumed arising from structured projects that will be reflected in future financial statements are presented as follows:

Barracuda/Caratinga 723 
Cabiúnas 194 
Nova Transportadora do Sudeste 452 
Nova Transportadora do Nordeste 576 
  1,945 

12. Capital Leases

The Company leases certain offshore platforms, vessels and thermoelectric plants, which are accounted for as capital leases. At September 30, 2003, these assets had a net book value of U.S.$ 2,701 (U.S.$ 2,499 at December 31, 2002).

The following is a schedule by year of the future minimum lease payments at September 30, 2003:

2003, for the period October 1 to December 31, 2003 87 
2004 382 
2005 353 
2006 306 
2007 290 
2008 278 
2009 and thereafter 625 
 
Estimated future lease payments 2,321 
 
Less amount representing interest at 6.2% to 12.0% annual (415)
Less amount representing executory costs (6)
Present value of minimum lease payments 1,900 
 
Less current portion (317)
 
Long-term portion 1,583 

13. Pension Plan

The determination of the expense and liability relating to the Company’s pension plan involves the use of actuarial assumptions. These include estimates of future mortality, withdrawal, changes in compensation and discount rate to reflect the time value of money as well as the rate of return on plan assets. These assumptions are reviewed at least annually and may differ materially from actual results due to changing market and economic conditions, regulatory events, judicial rulings, higher or lower withdrawal rates or longer or shorter life spans of participants.

The Company, and its actuarial consultants are currently reviewing the basis for estimating the assumed discount rate in light of the recent development of a secondary bond market in Brazil for high-grade long-term government securities. As insufficient evidence was available at December 31, 2002 to support a change, the Company chose not to change the discount rate assumptions. In the event the rate of return offered by these securities (nominal rate of 15.6% at December 31, 2002) is deemed to be consistent with the requirements of SFAS No. 87, and subsequent interpretations for measurement of defined benefit obligations, the Company may adopt different assumptions in the future, which may have a significant impact on the amount of pension liability and expense.

14. Stockholders’ Equity

The Company’s subscribed and fully paid-in capital at September 30, 2003 consisted of 634,168,418 common shares and 462,369,507 preferred shares and, at December 31, 2002, consisted of 634,168,418 common shares and 451,935,669 preferred shares.

On January 29, 2003, the Board of Directors of the Company, approved the issuance of 9,866,828 preferred shares of the Company in connection with the public offer by the Company to acquire publicly traded shares of Petrobras Distribuidora - BR, at an issue price of U.S.$ 12.76 per share, under the terms of the capital increase approved during the meeting of the Board of Directors of the Company held on November 7, 2002.

The Extraordinary Shareholders’ Meeting, held jointly with the Shareholders’ General Meeting on March 27, 2003, approved an increase in the Company’s capital by capitalizing revenue reserves accrued during previous years, to the amount of US$ 912, without issuing new shares, in accordance with Art. 169, paragraph 1 of Law No. 6404/76.

On May 9, 2003, the Board of Directors of the Company approved the issue of 567,010 preferred shares of the Company in connection with the public offer by the Company to acquire publicly traded shares of Petrobras Distribuidora - BR, at an issue price of U.S.$ 15.65 per share.

The dividends related to the fiscal year ended December 31, 2002, in the amount of U.S.$ 510 (excluding the portion of interest on stockholders’ equity which was made available to shareholders on January 13, 2003), was made available to shareholders on May 5, 2003.

On November 13, 2003, the PETROBRAS Board of Directors approved the distribution of remuneration to stockholders in the form of interest on capital amounting to R$ 3,290 million (U.S.$ 1,125), in accordance with article 8 and 9, of the Company's bylaws, article 9 of Law No. 9249/95 and Decrees 2673/98 and 3381/00. This provision for interest on capital resulted in an income tax benefit in the amount of U.S.$ 357.

This remuneration will be made available to stockholders by February 13, 2004, based on the stockholdings on November 25, 2003, corresponding to R$ 3.00 (U.S.$ 1.03) per common and preferred share, and will be deducted from the dividend calculated on adjusted net income for the 2003 financial year.

15. Basic and Diluted Earnings per Share

Basic and diluted earnings per share amounts have been calculated as follows:

  Nine-month period ended
  September 30,
  2003 
2002 
Income before effect of change in accounting principle 4,968  2,238 
Cumulative effect of change in accounting principle,net of taxes 697 
- 
Net income for the period 5,665  2,238 
Less priority preferred share dividends (228) (70)
Less common shares dividends, up to the priority preferred shares dividends on a per-share basis (313) (97)
 
Remaining net income to be equally allocated to common and preferred shares 5,124  2,071 
 
Weighted average number of shares outstanding
Common/ADS 634,168,418  634,168,418 
Preferred/ADS 462,369,507 
451,935,669 
Basic and diluted earnings per share
Common and Preferred
Before effect of change in accounting principle 4.53  2.06 
After effect of change in accounting principle 5.17  2.06 

16. Acquisition of an interest in Petrobras Energia Participaciones S.A. – PEPSA - (formerly known as Perez Companc S.A.) and Petrolera Entre Lomas S.A. - PELSA (formerly known as Petrolera Perez Companc S.A).

On October 17, 2002, the Company signed the Final Share Acquisition Agreement with the Perez Companc family and the Fundación Perez Companc, completing the acquisition of a controlling interest of Perez Companc S.A. (currently known as Petrobras Energia Participaciones S.A – PEPSA), and Petrolera Perez Companc S.A. (currently known as Petrolera Entre Lomas S.A. - PELSA). In October 2002, in accordance with Argentine legislation, the necessary documentation was submitted to the Argentine antitrust agency (CNDC - Comisión Nacional de Defensa de la Competencia) in order to obtain approval for the transaction.

On May 13, 2003, the Argentine Antitrust Committee (Comisión Nacional de Defensa de la Competencia), an agency reporting to the Argentine Secretariat of Competition, Deregulation and Consumer Protection (Secretaria de la Competencia, la Deregulación y la Defensa del Consumidor), approved the purchase of 58.62% of the capital stock of PEPSA and 39.67% of the capital stock of PELSA capital stock by PETROBRAS Participações S.L., a company controlled by PETROBRAS. As a result of the purchase of a 39.67% interest in the capital stock of PELSA, together with the purchase of 58.62% of PEPSA’s interest in the capital stock of PELSA, the Company has a controlling interest in PELSA equal to 50.73% and thus has consolidated the entity.

The purchase price to be paid for PEPSA and PELSA was based on an economic valuation model of expected future earnings of those companies, which considered relevant factors, including the potential effects of the economic situation of Argentina. The Company paid U.S.$689 in cash and U.S.$338 in bonds to the Perez Companc family for the shares of PEPSA and PELSA.

The acquisition was consummated principally to expand PETROBRAS operations into geographical markets where the Company had little activity. Through the acquisition of PEPSA and PELSA, PETROBRAS was able to gain immediate access to the Argentine market and brand recognition. The goodwill of U.S.$183 generated by the transaction is attributed principally to downstream activities.

The acquisition of PEPSA and PELSA were recorded using the purchase method of accounting and the financial statements of PEPSA and PELSA were included in the consolidated PETROBRAS financial statements, beginning on May 13, 2003. The purchase price for PEPSA and PELSA was allocated based on the fair market value of the assets acquired and the liabilities assumed as of the acquisition date as determined by independent appraisers.

PEPSA operates principally in the areas of oil field exploration and production, refining, transport and commercialization, electricity generation, transmission and distribution, and petrochemicals. Its activities are primarily based in Argentina, but PEPSA also operates in Bolivia, Brazil, Ecuador, Peru and Venezuela. PELSA operates primarily in the oil and gas exploration and production industry in Argentina.

The following unaudited pro forma summary financial information presents the consolidated results of operations as if the acquisition of PEPSA and PELSA had occurred at the beginning of the periods presented.

(i) Consolidated Income Statements data for the nine month period ended September 30,

  2003
2002
  As reported
Pro forma (unaudited)
As reported
Pro forma (unaudited)
Net operation revenues 22,648  23,195  16,682  17,503 
Costs and expenses (14,277) (14,649) (11,439) (12,026)
Financial expenses, net 117  (64) (1,122) (1,743)
Others (1,268) (1,237) (907) (892)
Income tax expense (2,014) (2,023) (1,350) (1,288)
Minority interest (238) (250) 374  489 
Cumulative effect of change in accounting
principles, net of taxes 697  700  -  - 
Net income for the period 5,665  5,672  2,238  2,043 
Basic and diluted earnings per share 5.17  5.17  2.06  1.88 

17. Segment Information

The following presents the Company's assets by segment:

Nine-month period ended September 30, 2003
  Exploration and Production
Supply
Gas and
Energy
International (see separate disclosure)
Distribution
Corporate
Eliminations
Total
Current assets 1,016 
5,574 
475 
1,678 
1,175 
8,473 
(2,673)
15,718 
Cash and cash equivalents 2  468  149  486  18  6,001  -  7,124 
Other current assets 1,014  5,106  326  1,192  1,157  2,472  (2,673) 8,594 
Investments in non-consolidated companies
and other investments 		7 
366 
135 
488 
22 
80 
- 
1,098 
Property, plant and equipment, net 15,824 
4,536 
2,764 
4,170 
419 
355 
(24)
28,044 
Non current assets 771 
252 
1,457 
303 
195 
3,711 
(3,189)
3,500 
Petroleum and Alcohol Account -  -  -  -  -  234  -  234 
Government securities -  -  -  -  -  243  -  243 
Other assets 771 
252 
1,457 
303 
195 
3,234 
(3,189)
3,023 
Total assets
17,618 
10,728 
4,831 
6,639 
1,811 
12,619 
(5,886)
48,360 


Nine-month period ended September 30, 2003
International
  Exploration and Production
Supply
Gas and
Energy
 Distribution
Corporate
Eliminations
Total
Current assets 688 
405 
135 
79 
820 
(449)
1,678 
Cash and cash equivalents 105  20  2  7  352  -  486 
Other current assets 583  385  133  72  468  (449) 1,192 
Investments in non-consolidated companies
and other investments 		130 
95 
238 
2 
23 
- 
488 
Property, plant and equipment, net 3,297 
564 
207 
55 
47 
- 
4,170 
Non current assets 163 
12 
1 
14 
1,706 
(1,593)
303 
Petroleum and Alcohol Account
Government securities
Other assets 163 
12 
1 
14 
1,706 
(1,593)
303 
Total assets 4,278 
1,076 
581 
150 
2,596 
(2,042)
6,639 


  Year ended December 31, 2002
  Exploration and Production Supply Gas and Energy International (see separate disclosure) Distribution Corporate Eliminations Total
Current assets 1,181  4,323  819  736  973  3,124  (959) 10,197 
Cash and cash equivalents 1  509  16  211  59  2,505  - 3,301 
Other current assets 1,180  3,814  803  525  914  619  (959) 6,896 
 
Investments in non-consolidated companies and other investments 7  168  70  11  16  62  - 334 
Property, plant and equipment, net 11,611  3,186  1,881  1,024  296  226  - 18,224 
Non current assets 385  211  556  1,092  141  1,932  (1,054) 3,263 
Petroleum and Alcohol Account - - - - - 182  - 182 
Government securities - - - - - 176  - 176 
Other assets 385  211  556  1,092  141  1,574  (1,054) 2,905 
Total assets 13,184  7,888  3,326  2,863  1,426  5,344  (2,013) 32,018 

  Year ended December 31, 2002
  International
  Exploration and Production Supply Gas and Energy Distribution Corporate Eliminations Total
Current assets 374  215  37  109  201  (200) 736 
Cash and cash equivalents 90  16  - 35  70  - 211 
Other current assets 284  199  37  74  131  (200) 525 
 
Investments in non-consolidated companies and other investments 9  - - 2  - - 11 
Property, plant and equipment, net 835  126  11  49  3  - 1,024 
Non current assets 420  8  (9) - 1,275  (602) 1,092 
Petroleum and Alcohol Account - - - - - - -
Government securities - - - - - - -
Other assets 420  8  (9) - 1,275  (602) 1,092 
Total assets 1,638  349  39  160  1,479  (802) 2,863 


Revenues and net income by segment are as follows:

  Nine-month period ended September 30, 2003
  Exploration and Production Supply Gas and Energy International (see separate disclosure) Distribution Corporate Eliminations Total
Net operating revenues to third parties 1,722  12,818  858  1,481  5,769      22,648 
Inter-segment net operating revenues 10,164  4,933  171  122  101    (15,491)
Net operating revenues 11,886  17,751  1,029  1,603  5,870    (15,491) 22,648 
 
Cost of sales (4,269) (14,915) (755) (960) (5,342)   15,183  (11,058)
Depreciation, depletion and amortization (776) (280) (52) (178) (21) (15)   (1,322)
Exploration, including exploratory dry holes (323)     (15)       (338)
Selling, general and administrative expenses (103) (531) (58) (138) (290) (361) 59  (1,422)
Research and development expenses (66) (30) (8)     (33)   (137)
Costs and expenses (5,537) (15,756) (873) (1,291) (5,653) (409) 15,242  (14,277)
 
Equity in results of non-consolidated companies   18  54  32    (1)   103 
Financial income (expenses), net (228) 149  (41) (45) (56) 380  (42) 117 
Employee benefit expense   (1)     (13) (377)   (391)
Other taxes   (18) (3) (11) (36) (156)   (224)
Other expenses, net (119) (106) (358) (16) 24  (181)   (756)
Income (loss) before income taxes and minority interest and accounting change 6,002  2,037  (192) 272  136  (744) (291) 7,220 
 
Income tax benefits (expense) (1,984) (671) 161  (79) (48) 516  91  (2,014)
 
Minority interest   (23) (183) (31) (1)     (238)
Income before effect of change in accounting principle 4,018  1,343  (214) 162  87  (228) (200) 4,968 
Cumulative effect of change in accounting principle, net of taxes 697  697 
Net income (loss) 4,715  1,343  (214) 162  87  (228) (200) 5,665 


  Nine-month period ended September 30, 2003
  International
  Exploration and Production Supply Gas and Energy Distribution Corporate Eliminations Total
Net operating revenues to third parties 335  590  105  442  9  -  1,481 
Inter-segment net operating revenues 336  500  2  6  -  (722) 122 
Net operating revenues 671  1,090  107  448  9  (722) 1,603 
 
Cost of sales (191) (1,001) (71) (414) (9) 726  (960)
Depreciation, depletion and amortization (139) (31) (4) (2) (2) -  (178)
Exploration, including exploratory dry holes (15) -  -  -  -  -  (15)
Selling, general and administrative expenses (42) (20) (1) (21) (54) -  (138)
Costs and expenses (387) (1,052) (76) (437) (65) 726  (1,291)
 
Equity in results of non-consolidated companies 1  1  (2) -  32  -  32 
Financial income (expenses), net (40) (5) (1) -  1  -  (45)
Other taxes (2) (4) -  (4) (1) -  (11)
Other expenses, net (27) 6  2  2  1  -  (16)
Income (loss) before income taxes and minority interest 216  36  30  9  (23) 4  272 
 
Income tax benefits (expense) (57) -  -  (1) (21) -  (79)
 
Minority interest 1  1  (1) (1) (31) -  (31)
Net income (loss) 160  37  29  7  (75) 4  162 


  Nine-month period ended September 30, 2003
  Exploration and Production Supply Gas and Energy International (see separate disclosure) Distribution Corporate Eliminations Total
Net operating revenues to third parties 1,617  9,037  527  710  4,791  -  -  16,682 
Inter-segment net operating revenues 7,989  4,013  131  73  72  -  (12,278) - 
Net operating revenues 9,606  13,050  658  783  4,863  -  (12,278) 16,682 
 
Cost of sales (3,274) (11,311) (453) (583) (4,366) -  11,856  (8,131)
Depreciation, depletion and amortization (1,019) (279) (88) (75) (52) (15) -  (1,528)
Exploration, including exploratory dry holes (261) -  -  (40) -  -  -  (301)
Selling, general and administrative expenses (86) (575) (42) (66) (308) (299) -  (1,376)
Research and development expenses (49) (29) (4) -  -  (21) -  (103)
Costs and expenses (4,689) (12,194) (587) (764) (4,726) (335) 11,856  (11,439)
 
Equity in results of non-consolidated companies -  9  7  (25) -  -  -  (9)
Financial income (expenses), net (339) (78) (401) 44  18  (366) -  (1,122)
Employee benefit expense -  -  -  -  -  (345) -  (345)
Other taxes -  (14) (7) (7) (26) (263) -  (317)
Other expenses, net (15) 72  (169) 17  (16) (142) 17  (236)
Income (loss) before income taxes and minority interest 4,563  845  (499) 48  113  (1,451) (405) 3,214 
 
Income tax benefits (expense) (1,515) (300) (114) (52) (37) 534  134  (1,350)
 
Minority interest -  (3) 400  (3) (20) -  -  374 
Net income (loss) 3,048  542  (213) (7) 56  (917) (271) 2,238 


  Nine-month period ended September 30, 2002
  International
  Exploration and Production Supply Gas and Energy Distribution Corporate Eliminations Total
Net operating revenues to third parties 59  368  25  258  -  -  710 
Inter-segment net operating revenues 150  300  -  22  -  (399) 73 
Net operating revenues 209  668  25  280  -  (399) 783 
 
Cost of sales (56) (603) (20) (303) -  399  (583)
Depreciation, depletion and amortization (63) (9) -  (3) -  -  (75)
Exploration, including exploratory dry holes (40) -  -  -  -  -  (40)
Selling, general and administrative expenses (22) (7) (1) (17) (19) -  (66)
Costs and expenses (181) (619) (21) (323) (19) 399  (764)
 
Equity in results of non-consolidated companies -  -  -  -  (25) -  (25)
Financial income (expenses), net 5  (8) (4) -  51  -  44 
Other taxes -  (1)  -  -  -  -  (1)
Other expenses, net 7  (1) (1) (6) 12  -  11 
  12  (10) (5) (6) 38  -  29 
Income (loss) before income taxes and Minority interest 40  39  (1) (49) 19  -  48 
 
Income tax benefits (expense) (35) (13) -  17  (21) -  (52)
 
Minority interest (1) (2) -  -  -  -  (3)
Net income (loss) 4  24  (1) (32) (2) -  (7)


Capital expenditures incurred by segment for the nine-month periods ended September 30, 2003 and 2002 were as follows:

  Nine-month period ended September 30,
  2003  2002 
Exploration and production 2,293  2,239 
Supply 1,060  667 
Gas and energy 254  281 
International
Exploration and production 280  155 
Supply 6  5 
Distribution 14  - 
Gas and energy 13  2 
Distribution 79  129 
Corporate 115  96 
  4,114  3,574 

18. Commitments and Contingencies

PETROBRAS is subject to a number of commitments and contingencies arising in the normal course of its business. Additionally, the operations and earnings of the Company have been, and may be in the future, affected from time to time in varying degrees by political developments and laws and regulations, such as the Federal Government's continuing role as the controlling shareholder of the Company, the status of the Brazilian economy, forced divestiture of assets, tax increases and retroactive tax claims, and environmental regulations. The likelihood of such occurrences and their overall effect upon the Company are not predictable.

a) Litigation

The Company is a defendant in numerous legal actions arising in the normal course of its business. Based on the advice of its internal legal counsel and management’s best judgment, the Company has recorded accruals in amounts sufficient to provide for losses that are considered probable and reasonably estimable. The following presents these accruals by the nature of the claim:

  September 30, 2003 December 31, 2002
Labor claims 18  13 
Tax claims 16  13 
Civil claims 54  24 
  88  50 
Contractual contingencies - thermoelectric plants 71  205 
Contingencies for joint liability 191  113 
Other contingencies 11  - 
Total 361  368 
Current Contingencies (71) - 
Long-term Contingencies 290  368 

As of September 30, 2003 and December 31, 2002, in accordance with Brazilian law, the Company had paid U.S.$ 541 and U.S.$ 290, respectively, into federal depositories to provide collateral for these and other claims until they are settled. These amounts are reflected in the balance sheet as restricted deposits for legal proceedings and guarantees.

The Company is a party to several contracts related to the acquisition and upgrade of production Platform P-36, which was lost in its entirety in 2001. Pursuant to those contracts, the Company had an obligation to pay the insurance proceeds to a Security Agent for distribution according to specified clauses established in the contracts. The Company contends that it is entitled to the insurance proceeds under the contractual arrangements, and other parties contend that they are also entitled to such proceeds. The issue is subject to international proceedings in a British court. Pending determination of the issue by the international court, the Company committed to deposit cash collateral in the amount of U.S.$ 175, in order to facilitate the issuance of a guarantee by a Security Agent, for the payment of creditors. At September 30, 2003, this amount was included in the balance sheet as restricted deposits for legal proceedings and guarantees.

b) Commitments undertaken by the energy segment

The Company has commitments for the purchase of energy, supply of gas and reimbursement of operating expenses with thermoelectric plants in connection with the Brazilian Government’s Thermoelectric Priority Energy Program, summarized as follows:

(i) Thermoelectric Power Plants of the Merchant type

The Company has a commitment to make contingent payments for the Macaé Merchant, Eletrobolt and Termoceará thermoelectric power plants, for the purpose of reimbursing operating expenses, taxes and the opportunity cost on capital invested if the revenues earned on the sales of energy from these plants are insufficient to cover such costs and expenses. On September 30, 2003, the maximum commitment was approximately U.S.$ 1,539 for the period from 2003 to 2008.

(ii) Thermoelectric Power Plants with energy purchase commitments

In addition the Company has a commitment to supply natural gas for the production of energy at the Termorio, Termobahia, UEG Araucária, FAFEN Energia, Ibiritermo and Nova Piratininga thermoelectric power plants, and to purchase part or all the energy generated by these plants at a price that remunerates invested capital. As of September 30, 2003, the maximum commitment was approximately U.S.$ 1,984 for the period from 2003 to 2025.

Employing a discount rate of 12% per annum, the net present value of the maximum financial exposure as of September 30, 2003 of the energy segment is approximately U.S.$ 1,745

(iii) Contingent financial exposure

As a result of these commitments and based on available information and assumptions with regard to expected actual cash outflow exposures and status of in process contract negotiations to sell energy, the Company's Board of Directors approved the recognition of a provision for thermoelectric financial exposure contingencies amounting to U.S.$ 205 for the fiscal year ended December 31, 2002.

On May 7, 2003, the Executive Board authorized an increase in the above-mentioned accounting provision in the first quarter of 2003, as a result of the fact that planned levels of the expected sales of energy available through the Power Purchase Agreements (PPA’s) in 2003 together with expected levels of technical dispatch from the thermal plants were not realized. The balance of this provision as of September 30, 2003, after deducting the losses incurred in the nine-month period ended on September 30, 2003 was U.S.$ 71 which was recorded as other current liabilities. It is management’s opinion that this provision is sufficient for the 2003 financial year to cover possible losses from the Company’s investments in thermoelectric power plants and related contingency payments. Management has not accrued a loss for financial exposures on thermoelectric contracts for periods subsequent to 2003, as market conditions are too uncertain to allow reasonable estimation of an accrual.

c) Tax Assessments – Internal Revenue Service of Rio de Janeiro

The Internal Revenue Service of Rio de Janeiro filed two Tax Assessments against the Company in connection with Withholding Tax (IRRF) on foreign remittances of payments related to charter of vessels of movable platform types for the years 1998 and 1999 through 2002.

The Internal Revenue Service, based on Law No. 9,537/97, Article 2, considers that drilling and production platforms cannot be classified as sea-going vessels and therefore should not be chartered but leased. Based on this interpretation, overseas remittances for servicing chartering agreements would be subject to withholding tax at the rate of 15% or 25%.

On June 27, 2003, the Internal Revenue Service served a tax assessment notice on the Company amounting to R$ 3,064 million (U.S.$1,066) covering the period from 1999 to 2002. Using the same arguments, on February 17, 2003, another tax assessment notice had already been issued for R$ 93 million (U.S. $ 32) with respect to 1998, against which, on March 20, 2003, the Company filed an appeal.

The Company disagrees with the Internal Revenue Service’s interpretation as to charter contracts, given that the Federal Supreme Court has already ruled that, in the context of its judgment with respect to the IPI (Federal VAT) tax, offshore platforms are to be classified as sea-going vessels. Additionally, the 1994 and 1999 Income Tax Regulations support the “non-taxation” (RIR/1994) and the “zero tax rate” (RIR/1999) for the remittances in question.

On July 28, 2003, the Company filed an appeal against this most recent tax assessment. No provision has been recorded respective to this claim as the Company believes the claim is without merit.

d) Notification from the INSS – Join liability

The Company received various tax assessments related to social security amounts payable as a result of irregularities in presentation of documentation required by the INSS, to eliminate its joint liability in contracting civil construction and other services, stipulated in paragraphs 5 and 6 of article 219 and paragraphs 2 and 3 of article 220 of Decree 3048/99.

The Company made a provision for this contingency in the amount of U.S.$ 105 at December 31, 2002, as it considers the chance of success in a defense filed against the INSS to be remote. On September 29, 2003, PETROBRAS received additional INSS tax assessments related to the joint liability for irregularities in presentation of contractors’ documentation related to periods subsequent to past notifications. At September 30, 2002, the balance of contingencies associated with this joint liability was U.S.$191.

Internally, procedures were revised to improve the inspection of contracts and require the presentation of documents, as stipulated in the legislation, to substantiate the payment of INSS amounts due by contractors. PETROBRAS continues to analyze each tax assessment received in order to recover amounts, as permitted through administrative processes of the INSS.

e) Environmental matters

The Company is subject to various environmental laws and regulations. These laws regulate the discharge of oil, gas or other materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of such materials at various sites.

During 2000 the Company implemented an environmental excellence and operational safety program - PEGASO – (Programa de Excelência em Gestão Ambiental e Segurança Operacional). Scheduled to be concluded in December 2003, the Company made expenditures of approximately U.S.$ 2.1 billion from 2000 to September 30, 2003 under this program.

During the nine-month period ended September 30, 2003 and 2002 the Company made expenditures of approximately U.S.$ 515 and U.S.$ 497 respectively, under this program, including U.S.$ 169 and U.S.$ 166 through the Programa de Integridade de Dutos (Pipeline Integrity Program) through which it conducts inspections of, and improvements to, the Company’s pipelines.

19. Subsequent Events

a) Tender for services of development and exploration in Mexico

Pursuant to its strategy to expand international operations, on October 2003 PETROBRAS won the bid for the provision of services relating to the development and exploration of the Cuervito block in the Burgos Basin, in northeastern Mexico.

PETROBRAS was awarded a contract as part of a consortium in which it participates as operator. The Company has a 45% share and partners with Japan’s Teikoku and Mexico’s Diavaz,, who have 40% and 15% interests, respectively.

The Multiple Services Contracts are being offered by Pemex Exploración y Producción through an international Call for Tender for development and production of natural gas reserves. The contracts envision investments of up to US$260 million over 15 years.

The Cuervito block, located in the central part of the Burgos Basin, southwest of Reynosa city, has an area of 231 square kilometers. Six fields have already been discovered in this area, with the main production coming from the Cuervito and Pamorana fields.

b) Increase in the Interest in Termorio S.A.

On October 30, 2003, the Board of Directors of PETROBRAS approved the acquisition, by PETROBRAS, of a 7.0% stake in Termorio S.A. held by PRS Engenharia Ltda in Termorio S.A., for the amount of U.S.$ .05, thereby increasing to 50% the Company’s ownership in Termorio S.A.

c) Funding by PESA

On October 31, 2003, Petrobras Energía S.A. – PESA, a subsidiary of PETROBRAS in Argentina, issued U.S.$100 in Notes – Series R maturing in 10 years, with interest payable semiannually and a 9.5% annual yield.

The issue is part of a financing program and consolidates PESA’s financial profile through the long-term refinancing of short-term liabilities and represents a major milestone for PESA as it indicates a return of Petrobras Energía to international capital markets.

d) Change in the corporate name of Petrobras Energia Ltda.

On November 6, 2003, the Executive Board of PETROBRAS approved the change in the corporate name of its Brazilian subsidiary responsible for the commercialization of electric power from Petrobras Energia Ltda. to Petrobras Comercializadora de Energia Ltda. This change is aimed at avoiding possible misunderstandings with regard to transactions carried out by Petrobras Energia Participaciones S/A, which operates in Argentina.

 

 
SIGNATURE
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 25, 2003

 
PETRÓLEO BRASILEIRO S.A--PETROBRAS
By:
/S/  José Sergio Gabrielli de Azevedo
 
José Sergio Gabrielli de Azevedo
Chief Financial Officer and Investor Relations Director
 

 

 
FORWARD-LOOKING STATEMENTS

This press release may contain forward-looking statements. These statements are statements that are not historical facts, and are based on management's current view and estimates offuture economic circumstances, industry conditions, company performance and financial results. The words "anticipates", "believes", "estimates", "expects", "plans" and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Such statements reflect the current views of management and are subject to a number of risks and uncertainties. There is no guarantee that the expected events, trends or results will actually occur. The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.