UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

ANNUAL REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission File Number 1-15106		Commission File Number: 333-14168
PETRÓLEO BRASILEIRO S.A. – PETROBRAS		Petrobras International Finance Company
(Exact name of registrant as specified in its charter)		(Exact name of registrant as specified in its charter)
Brazilian Petroleum Corporation — PETROBRAS
(Translation of registrant’s name into English)
The Federative Republic of Brazil		Cayman Island
(Jurisdiction of incorporation or organization)		(Jurisdiction of incorporation or organization)

		Harbour Place
		103 South Church Street, 4th floor
Avenida República do Chile, 65		P.O. Box 1034GT — BWI
20031-912 – Rio de Janeiro – RJ		George Town, Grand Cayman
Brazil		Cayman Islands
(Address of principal executive offices)		(Address of principal executive offices)

Title of each class:		Name of each exchange on which registered:
PETROBRAS Common Shares, without par value*
PETROBRAS American Depositary Shares (as evidenced by		New York Stock Exchange
American Depositary Receipts), each representing
4 Common Shares
PETROBRAS Preferred Shares, without par value*
PETROBRAS American Depositary Shares (as evidenced by		New York Stock Exchange
American Depositary Receipts), each representing
4 Preferred Shares

*

Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.

Title of each class:
PIFCo U.S.$500,000,000 9.125% Senior Notes due 2007
PIFCo U.S.$450,000,000 9.875% Senior Notes due 2008
PIFCo U.S.$400,000,000 9.00% Global Step-Up Notes due 2008
PIFCo U.S.$600,000,000 9.750% Senior Notes due 2011
PIFCo U.S.$750,000,000 9.125% Global Notes due 2013
PIFCo U.S.$750,000,000 8.375% Global Notes due 2018
PIFCo U.S.$600,000,000 7.75% Global Notes due 2014

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock
as of the close of the period covered by this Annual Report:
At December 31, 2005, there were outstanding:
2,536,673,672 PETROBRAS Common Shares, without par value

1,849,478,028 PETROBRAS Preferred Shares, without par value

50,000 PIFCo Common Shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.

Yes þ No o

If this report is an annual or transitional report, indicate by check mark if the registrant is not required to file reports pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ [Petrobras]		Accelerated filer o		Non-accelerated filer þ [PIFCo]

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o Item 18 þ

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

 

 

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS					4
CERTAIN TERMS AND CONVENTIONS					5
PRESENTATION OF FINANCIAL INFORMATION					5
		Petrobras			5
		PIFCo			6
PRESENTATION OF INFORMATION CONCERNING RESERVES					6
ITEM 1.		IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS			7
ITEM 2.		OFFER STATISTICS AND EXPECTED TIMETABLE			7
ITEM 3.		KEY INFORMATION			7
		Selected Financial Data			7
		Exchange Rates			13
		Risk Factors			14
		Risks Relating to Our Operations			14
		Risks Relating to PIFCo			19
		Risks Relating to the Relationship between us and the Brazilian Government			20
		Risks Relating to Brazil			20
ITEM 4.		INFORMATION ON THE COMPANY			25
		History and Development of Petrobras			25
		Our Competitive Strengths			27
		Overview by Business Segment			31
		Exploration, Development and Production			31
		Refining, Transportation and Marketing			44
		Distribution			55
		Natural Gas and Power			58
		International			65
		PIFCo			76
		Organizational Structure			80
		Property, Plants and Equipment			81
		Regulation of the Oil and Gas Industry in Brazil			82
		Health, Safety and Environmental Initiatives			88
		Competition			90
		Insurance			91
ITEM 5.		OPERATING AND FINANCIAL REVIEW AND PROSPECTS			92
		Management’s Discussion and Analysis of Petrobras’ Financial Condition and Results of Operations			92
		Overview			92
		Sales Volumes and Prices			93
		Effect of Taxes on our Income			95
		Financial Income and Expense			96
		Inflation and Exchange Rate Variation			96
		Results of Operations			98
		Business Segments			108
		Management’s Discussion and Analysis of PIFCo’s Financial Condition and Results of Operations			110
		Overview			110
		Purchases and Sales of Crude Oil and Oil Products			110
		Results of Operations			111
		Liquidity and Capital Resources			112
		Critical Accounting Policies and Estimates			121
		Impact of New Accounting Standards			124
		Research and Development			126
		Trend Information			127
ITEM 6.		DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES			128
		Directors and Senior Management			128
		Compensation			136
		Indemnification of Officers and Directors			136

		Share Ownership			136
		Fiscal Council			137
		Audit Committee			137
		PIFCo			138
		Employees and Labor Relations			138
ITEM 7.		MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS			140
		Major Shareholders			140
		Petrobras Related Party Transactions			141
		PIFCo Related Party Transactions			142
ITEM 8.		FINANCIAL INFORMATION			145
		Petrobras Consolidated Statements and Other Financial Information			145
		PIFCo Consolidated Statements and Other Financial Information			145
		Legal Proceedings			145
		Dividend Distribution			150
ITEM 9.		THE OFFER AND LISTING			151
		Petrobras			151
		PIFCo			157
ITEM 10.		ADDITIONAL INFORMATION			157
		Memorandum and Articles of Incorporation of Petrobras			157
		Restrictions on Non-Brazilian Holders			165
		Transfer of Control			165
		Disclosure of Shareholder Ownership			165
		Memorandum and Articles of Association of PIFCo			165
		Material Contracts			169
		Exchange Controls			170
		Taxation relating to our ADSs and common and preferred shares			171
		Taxation relating to PIFCo’s notes			178
		Documents on Display			181
		PIFCo Senior Notes			182
		PIFCo Global Notes			184
		Sale of Future Receivables			186
ITEM 11.		QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK			189
		Petrobras			189
		PIFCo			195
ITEM 12.		DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES			196
ITEM 13.		DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES			196
ITEM 14.		MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS			196
ITEM 15.		CONTROLS AND PROCEDURES			196
ITEM 16A.		AUDIT COMMITTEE FINANCIAL EXPERT			197
ITEM 16B.		CODE OF ETHICS			197
ITEM 16C.		PRINCIPAL ACCOUNTANT FEES AND SERVICES			197
		Principal Accountant Fees			197
		Audit and Non-Audit Fees			197
		Audit Committee Approval Policies and Procedures			198
ITEM 16D.		EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES			198
ITEM 16E.		PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS			198
ITEM 17.		FINANCIAL STATEMENTS			198
ITEM 18.		FINANCIAL STATEMENTS			198
EX-8.1: LIST OF SUBSIDIARIES
EX-10.1: CONSENT LETTER OF DEGOLYER AND MACNAUGHTON
EX-12.1: PETROBRAS' CERTIFICATIONS
EX-12.2: PIFCO'S CERTIFICATIONS
EX-13.1: PETROBRAS' CERTIFICATIONS
EX-13.2: PIFCO'S CERTIFICATIONS

FORWARD-LOOKING STATEMENTS

     Many statements made in this annual report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are not based on historical facts and are not assurances of future results. Many of the forward-looking statements contained in this annual report may be identified by the use of forward-looking words, such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimate” and “potential,” among others. We have made forward-looking statements that address, among other things, our:

	•		regional marketing and expansion strategy;
	•		drilling and other exploration activities;
	•		import and export activities;
	•		projected and targeted capital expenditures and other costs, commitments and revenues;
	•		liquidity; and
	•		development of additional revenue sources.

     Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. These factors include:

	•		general economic and business conditions, including crude oil and other commodity prices, refining margins and prevailing exchange rates;
	•		international and Brazilian political, economic and social developments;
	•		our ability to find, acquire or gain access to additional reserves and to successfully develop our current ones;
	•		uncertainties inherent in making estimates of our reserves;
	•		our ability to obtain financing;
	•		competition;
	•		technical difficulties in the operation of our equipment and the provision of our services;
	•		changes in, or failure to comply with, governmental regulations;
	•		receipt of governmental approvals and licenses;
	•		military operations, terrorist acts, wars or embargoes;
	•		the cost and availability of adequate insurance coverage; and
	•		other factors discussed below under “Risk Factors.”

     These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially from those expressed or forecast in any forward-looking statements as a result of a variety of factors, including those in “Risk Factors.”

     All forward-looking statements are expressly qualified in their entirety by this cautionary statement, and you should not place reliance on any forward-looking statement contained in this annual report.

     The crude oil and natural gas reserve data presented or described in this annual report are only estimates and our actual production, revenues and expenditures with respect to our reserves may materially differ from these estimates.

     Unless the context otherwise requires, the terms “Petrobras”, “we”, “us”, and “our” refer to Petróleo Brasileiro S.A.-Petrobras and its consolidated subsidiaries and special purpose companies, including Petrobras International Finance Company. The term “PIFCo” refers to Petrobras International Finance Company and its subsidiaries.

CERTAIN TERMS AND CONVENTIONS

     A glossary of petroleum industry terms, a table of abbreviations and a conversion table are presented beginning on page 204.

PRESENTATION OF FINANCIAL INFORMATION

     In this annual report, references to “real,” “reais” or “R$” are to Brazilian reais and references to “U.S. dollars” or “U.S.$” are to United States dollars. Certain figures included in this annual report have been subject to rounding adjustments; accordingly, figures shown as totals in certain tables may not be an exact arithmetic aggregation of the figures that precede them.

Petrobras

     The audited consolidated financial statements of Petrobras and our consolidated subsidiaries as of December 31, 2005 and 2004, and for each of the three years in the period ended December 31, 2005, and the accompanying notes, contained in this annual report have been presented in U.S. dollars and prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. See Item 5. “Operating and Financial Review and Prospects” and Note 2(a) to our audited consolidated financial statements. We also publish financial statements in Brazil in reais in accordance with the accounting principles required by Law No. 6404/76, as amended, or Brazilian Corporation Law and the regulations promulgated by the Comissão de Valores Mobiliários (Brazilian Securities Commission, or the CVM), or Brazilian GAAP, which differs in significant respects from U.S. GAAP.

     We are required by Brazilian Corporation Law to change auditors every five years and to select auditors through a bidding process authorized by the Board of Directors. From June 2003 through December 31, 2005, Ernst & Young Auditores Independentes S/S served as our independent auditors and audited our financial statements for each of the years ended December 31, 2005, 2004 and 2003. PricewaterhouseCoopers Auditores Independentes audited our financial statements for each of the years ended December 31, 2002 and 2001. As of January 1, 2006, we hired KPMG Auditores Independentes to serve as our independent auditors.

     Our functional currency is the Brazilian real. As described more fully in Note 2(a) to our audited consolidated financial statements, the U.S. dollar amounts as of the dates and for the periods presented in our audited consolidated financial statements have been remeasured or translated from the real amounts in accordance with the criteria set forth in Statement of Financial Accounting Standards No. 52 of the U.S. Financial Accounting Standards Board, or SFAS 52. U.S. dollar amounts presented in this annual report have been translated from reais at the period-end exchange rate for balance sheet items and the average exchange rate prevailing during the period for income statement and cash flow items.

Unless the context otherwise indicates,

•

historical data contained in this annual report that were not derived from the consolidated financial statements have been translated from reais on a similar basis;

	•		forward-looking amounts, including estimated future capital expenditures, have all been based on our 2005-2015 Strategic Plan and 2006-2010 Business Plan and have been projected on a constant basis and have been translated from reais in 2006 at an estimated average exchange rate of R$3.01 to U.S.$1.00, and future calculations involving an assumed price of crude oil have been calculated using a Brent crude oil price of U.S.$45.00 per barrel for 2006, and U.S.$30.00 per barrel for 2007 and U.S.$25.00 per barrel for 2008 and thereafter, adjusted for our quality and location differences, unless otherwise stated; and
	•		estimated future capital expenditures are based on the most recently budgeted amounts, which may not have been adjusted to reflect all factors that could affect such amounts.

     We signed a final agreement for the acquisition of Petrobras Energía Participaciones S.A., or PEPSA, and Petrolera Entre Lomas S.A., or PELSA, in October 2002 and the acquisition was approved by Argentine government agencies in May 2003. Our results of operations for 2002 do not include PEPSA and PELSA’s results and our results of operations for 2003 only include PEPSA and PELSA’s results from June through December of 2003. We acquired Liquigás Distribuidora S.A. (formerly Sophia do Brasil S.A. and Agip do Brasil S.A.) in August 2004. Our results of operations for 2004 only include Liquigás Distribuidora’s results from August to December of 2004. See Note 20 to our audited consolidated financial statements for further information about these acquisitions.

     We adopted FIN 46 in our financial statements for the year ended December 31, 2003. Our interest in certain project finance special purpose entities and gas-fired power plants were consolidated on a line-by-line basis in the income statement beginning as of January 1, 2004. Although this consolidation affected each line of the income statement, it did not have a significant impact on our net income.

PIFCo

     PIFCo’s functional currency is the U.S. dollar. Substantially all of PIFCo’s sales are made in U.S. dollars and all of its debt is denominated in U.S. dollars. Accordingly, PIFCo’s audited consolidated financial statements as of December 31, 2005 and 2004, and for each of the three years in the period ended December 31, 2005, and the accompanying notes contained in this annual report have been presented in U.S. dollars and prepared in accordance with U.S. GAAP and include PIFCo’s wholly-owned subsidiaries: Petrobras Europe Limited, Petrobras Finance Limited and Bear Insurance Company Limited – BEAR

PRESENTATION OF INFORMATION CONCERNING RESERVES

     The estimates of our proved reserves of crude oil and natural gas as of December 31, 2005, included in this annual report have been calculated according to the technical definitions required by the U.S. Securities and Exchange Commission, or the SEC. DeGolyer and MacNaughton provided estimates of most of our net domestic reserves as of December 31, 2005. All reserve estimates involve some degree of uncertainty. See Item 3. “Key Information—Risk Factors—Risks Relating to Our Operations” for a description of the risks relating to our reserves and our reserve estimates.

     We also file oil and gas reserve estimates with governmental authorities in most of the countries in which we operate. On January 16, 2006, we filed reserve estimates for Brazil with the Agência Nacional de Petróleo (the National Petroleum Agency, or the ANP), in accordance with Brazilian rules and regulations, totaling 11.36 billion barrels of crude oil and NGLs and 11,206.57 billion cubic feet of natural gas. The reserve estimates we filed with the ANP and those provided herein differ by approximately 25%. This difference is due to (1) the ANP requirement that we estimate proved reserves through the technical abandonment of production wells, as opposed to limiting reserve estimates to the life of our concession contracts as required by Rule 4-10 of Regulation S-X and (2) different technical criteria for booking proved reserves, including the use of 3-D seismic data to establish proved reserves in Brazil.

     We also file reserve estimates from our international operations with various governmental agencies under the guidelines of the Society of Petroleum Engineers, or SPE. The aggregate reserve estimates from our international operations, under SPE guidelines, amounted to 0.96 billion barrels of crude oil and NGLs and 4,355 billion cubic feet of natural gas, which differs by approximately 40 percent from reserve estimates provided herein because the SPE’s different technical guidelines allow for (1) the booking of reserves in Bolivia beyond the life of certain gas sale contracts and (2) the booking of reserves in Nigeria based on 3-D seismic data and certain oil recovery techniques, such as fluid injection, without the performance of pilot project tests.

     Bolivia and Venezuela announced certain nationalization measures, which we expect will have the effect of reducing our oil and gas reserves in these countries. As a result, the information concerning reserves in Bolivia and Venezuela as provided herein may change. See Item 3. “Key Information—Risk Factors—Risks Relating to Our Operations¾ The recent nationalization measures taken by the Bolivian and Venezuelan governments may have an adverse effect on our results of operations and financial condition.”

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

     Not applicable.

ITEM 3. KEY INFORMATION

Selected Financial Data

Petrobras

     The following table sets forth our selected consolidated financial data, presented in U.S. dollars and prepared in accordance with U.S. GAAP. The data for each of the five years in the period ended December 31, 2005 have been derived from our audited consolidated financial statements, which were audited by Ernst & Young Auditores Independentes S/S for each of the years ended December 31, 2005, 2004 and 2003 and by PricewaterhouseCoopers Auditores Independentes for each of the years ended December 31, 2002 and 2001. The information below should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements and the accompanying notes and Item 5. “Operating and Financial Review and Prospects.”

BALANCE SHEET DATA

		As of December 31,
		2005				2004				2003				2002				2001
						(in millions of U.S. dollars)
Assets
Current assets:
Cash and cash equivalents		$	9,871			$	6,856			$	8,344			$	3,301			$	7,360
Accounts receivable, net			6,184				4,285				2,905				2,267				2,759
Inventories			5,305				4,904				2,947				2,540				2,399
Recoverable taxes			2,087				1,475				917				672				664
Advances to suppliers			652				422				504				794				483
Other current assets			1,679				1,484				1,817				748				661
Total current assets			25,778				19,426				17,434				10,322				14,326
Property, plant and equipment, net			45,920				37,020				30,805				18,224				19,179
Investments in non-consolidated companies and other investments			1,810				1,862				1,173				334				499
Other assets:
Accounts receivables, net			607				411				528				369				476
Advances to suppliers			489				580				416				450				403
Petroleum and Alcohol Account-Receivable from the Brazilian government(1)			329				282				239				182				81
Government securities			364				326				283				176				665
Unrecognized pension obligation			—				—				—				61				187
Restricted deposits for legal proceedings and guarantees			775				699				543				290				337
Recoverable taxes			639				536				467				156				164
Investments PEPSA and PELSA			—				—				—				1,073				—
Goodwill			237				211				183				—				—
Prepaid expenses			246				271				190				100				78
Marketable securities			129				313				806				208				212
Fair value asset of gas hedge			547				635				—				—				—
Others			755				510				545				209				257
Total other assets			5,117				4,774				4,200				3,274				2,860
Total assets		$	78,625			$	63,082			$	53,612			$	32,154			$	36,864
Liabilities and Shareholders’ equity
Current liabilities:
Trade accounts payable		$	3,838			$	3,284			$	2,261			$	1,702			$	1,783
Taxes payable			3,423				2,569				2,305				1,801				2,145
Short-term debt			950				547				1,329				671				1,101
Current portion of long-term debt			1,428				1,199				1,145				727				940
Current portion of project financings			2,413				1,313				842				239				680
Current portion of capital lease obligations			239				266				378				349				298
Dividends and interest on capital payable			3,068				1,900				1,955				307				93
Payroll and related charges			918				618				581				283				333
Advances from customers			609				290				258				119				26
Employees’ postretirement benefits obligations — Pension			206				166				160				89				117
Other current liabilities			1,063				1,176				823				976				528
Total current liabilities			18,155				13,328				12,037				7,263				8,044
Long-term liabilities:
Long-term debt			11,503				12,145				11,888				6,987				5,908
Project financings			3,629				4,399				5,066				3,800				3,153
Employees’ postretirement benefits obligations — Pension			3,627				2,915				1,895				1,363				1,971
Employees’ postretirement benefits obligation — Health Care			3,004				2,137				1,580				1,060				1,409
Capital lease obligations			1,015				1,069				1,242				1,907				1,930
Deferred income tax			2,159				1,558				1,122				259				717
Gas-fired power liabilities			—				1,095				1,142				—				—
Deferred Purchase Incentive			144				153				—				—				—
Provision for abandonment of wells			842				403				396				—				—
Other liabilities			556				497				541				350				406
Total long-term liabilities			26,479				26,371				24,872				15,726				15,494
Minority interest			1,074				877				367				(136	)			79

		As of December 31,
		2005				2004				2003				2002				2001
						(in millions of U.S. dollars)
Shareholders’ equity
Shares authorized and issued:
Preferred share			4,772				4,772				2,973				2,459				1,882
Common share			6,929				6,929				4,289				3,761				2,952
Capital reserve and other comprehensive income			21,216				10,805				9,074				3,081				8,413
Total Shareholders’ equity			32,917				22,506				16,336				9,301				13,247
Total liabilities and Shareholders’ equity		$	78,625			$	63,082			$	53,612			$	32,154			$	36,864

INCOME STATEMENT DATA

		For the Year Ended December 31,
		2005				2004 (11)				2003 (11)				2002(11)				2001(11)
		(in millions of U.S. dollars, except for share and per share data)
Sales of products and services		$	74,065			$	51,954			$	42,690			$	32,987			$	34,145
Value-added and other taxes on sales and services			(14,694	)			(10,906	)			(9,527	)			(7,739	)			(8,627	)
CIDE(1)			(3,047	)			(2,620	)			(2,249	)			(2,636	)			—
Specific parcel price — PPE(2)			—				—				—				—				(969	)
Net operating revenues		$	56,324				38,428				30,914				22,612				24,549
Cost of sales(3)			29,828				21,279				15,533				11,506				12,807
Depreciation, depletion and amortization(4)(12)			2,926				2,481				1,785				1,930				1,729
Exploration, including exploratory dry holes(4)(5)			1,009				613				512				435				404
Selling, general and administrative expenses			4,474				2,901				2,091				1,741				1,751
Other operating expense(6)			1,137				572				597				222				277
Total costs and expenses			39,374				27,846				20,518				15,834				16,968
Financial income			710				956				634				1,142				1,375
Financial expense			(1,189	)			(1,733	)			(1,247	)			(774	)			(808	)
Monetary and exchange variation on monetary assets and liabilities, net			248				450				509				(2,068	)			(915	)
Employee benefit expense			(994	)			(650	)			(595	)			(451	)			(594	)
Other non-operating income (expense), net(7)			(1,133	)			(670	)			(924	)			(1,395	)			(1,847	)
Income before income taxes, minority interest, extraordinary item and accounting change			14,592				8,935				8,773				3,232				4,792
Income tax (expense) benefit:
Current			(4,223	)			(2,114	)			(2,599	)			(1,269	)			(1,196	)
Deferred			(218	)			(117	)			(64	)			116				(193	)
Total income tax expense			(4,441	)			(2,231	)			(2,663	)			(1,153	)			(1,389	)
Minority interests in results of consolidated subsidiaries			35				(514	)			(248	)			232				88
Income before extraordinary item and effect of change in accounting principle			10,186				6,190				5,862				2,311				3,491
Extraordinary gain net of tax			158				—				—				—				—
Cumulative effect of change in accounting principle, net of taxes(4)			—				—				697				—				—
Net income for the year		$	10,344			$	6,190			$	6,559			$	2,311			$	3,491
Weighted average number of shares Outstanding:(8)
Common(8)			2,536,673,672				2,536,673,672				2,536,673,672				2,536,673,672				2,536,673,672
Preferred(8)			1,849,478,028				1,849,478,028				1,849,478,028				1,807,742,676				1,807,742,676
Basic and diluted earnings per share:(8)(9)
Common and Preferred Shares(8)(9)		$	2.36			$	1.41			$	1.50			$	0.53			$	0.80
Common and Preferred ADS(8)(9)		$	9.44			$	5.64			$	6.00			$	2.12			$	3.20
Cash dividends per(8)(10):
Common and Preferred shares(8)(10)		$	0.68			$	0.42			$	0.37			$	0.29			$	0.42
Common and Preferred ADS(8)(10)		$	2.72			$	1.68			$	1.48			$	1.16			$	1.68

PIFCo

     The following table sets forth PIFCo’s selected consolidated financial data, presented in U.S. dollars and prepared in accordance with U.S. GAAP. The data for each of the five years in the period ended December 31, 2005 have been derived from PIFCo’s audited consolidated financial statements, which were audited by Ernst & Young Auditores Independentes S/S for each of the years ended December 31, 2005, 2004 and 2003 and by PricewaterhouseCoopers Auditores Independentes for each of the years ended December 31, 2002 and 2001. The information below should be read in conjunction with, and is qualified in its entirety by reference to, PIFCo’s audited consolidated financial statements and the accompanying notes and Item 5. “Operating and Financial Review and Prospects.”

		For the Year Ended December 31,
		2005				2004				2003				2002				2001
						(in millions of U.S. dollars)
Income Statement Data:
Sales of crude oil and oil products and Services:
Related Parties		$	13,974.4			$	10,118.4			$	5,543.0			$	5,375.5			$	5,860.6
Others			3,161.7				2,237.2				1,432.5				1,014.7				399.9
Lease income(1)			—				—				—				36.1				10.7
		$	17,136.1			$	12,355.6			$	6,975.5			$	6,426.3			$	6,271.2
Operating Expenses:
Cost of sales
Related Parties			(7,780.3	)			(4,391.3	)			(2,851.4	)			(2,409.0	)			(1,648.1	)
Others			(9,203.0	)			(7,844.7	)			(4,068.7	)			(3,962.5	)			(4,604.9	)
Lease expense(1)			—				—				—				(24.0	)			(10.5	)
Selling, general and Administrative expenses
Related parties			(158.1	)			(98.7	)			(17.1	)			—				—
Others			(7.6	)			(1.1	)			(1.5	)			(1.2	)			(0.1	)
			(17,149.0	)			(12,335.8	)			(6,938.7	)			(6,396.7	)			(6,263.6	)
Operating income (loss)			(12.9	)			19.8				36.8				29.6				7.6
Financial income(2)
Related Parties			765.5				568.6				401.7				201.9				155.4
Others			218.5				110.2				41.2				17.7				3.4
Total			984.0				678.8				442.9				219.6				158.8
Financial expense(3)
Related Parties			(409.8	)			(169.0	)			(111.9	)			(61.3	)			(67.4	)
Others			(589.1	)			(592.2	)			(370.8	)			(253.4	)			(119.7	)
Total			(998.9	)			(761.2	)			(482.7	)			(314.7	)			(187.1	)
Other income, net
Related Parties			—				(0.5	)			—				—				—
Others			—				4.0				—				—				0.4
Net loss		$	(27.8	)		$	(59.1	)		$	(3.0	)		$	(65.5	)		$	(20.3	)
Balance Sheet Data (end of period):
Cash and cash equivalents		$	230.7			$	1,107.3				664.2				260.6				48.6
Trade accounts receivable
Related parties			8,681.1				7,788.1				5,064.5				4,837.1				2,583.7
Others			212.7				153.6				109.4				57.1				44.7
Notes receivable
Related parties			3,909.3				1,936.9				1,726.4				1,631.6				283.0
Export Prepayment
Related parties			943.9				1,414.7				1,479.4				751.2				751.2
Marketable Securities			2,248.6				1,864.8				615.8				96.3				—
Total assets			16,748.9				14,670.2				10,196.6				8,697.3				4,277.8
Trade accounts payable
Related parties			950.7				562.1				271.0				292.0				288.1
Other			616.1				568.1				349.0				281.1				231.0
Notes payable
Related parties			8,080.3				6,435.0				2,442.8				3,688.2				334.6
Short-term financing and current portion of long-term debt			891.1				680.9				1,076.4				367.5				990.4
Long-term debt(4)			5,908.4				6,151.8				5,825.3				3,850.4				2,335.0
Total stockholders’ equity			8.0				35.7				94.8				43.9				49.4
Total liabilities and stockholders’ equity			16,748.9				14,670.2				10,196.6				8,697.3				4,277.8

Exchange Rates

     All foreign exchange transactions are now carried out in a single foreign exchange market. Prior to March 14, 2005, there were two principal foreign exchange markets in Brazil, the commercial rate exchange market and the floating rate exchange market. Most trade and financial transactions were carried out on the commercial rate exchange market, including the purchase or sale of our shares or the payment of dividends with respect to our shares to shareholders outside Brazil. Transactions not carried out on the commercial rate exchange market were generally carried out on the floating rate exchange market.

     Foreign currencies may only be purchased through Brazilian financial institutions authorized to operate in such market and are subject to registration with the Central Bank electronic system. Foreign exchange rates are freely negotiated, but may be influenced by Central Bank intervention. The Central Bank of Brazil allows the real/U.S. dollar exchange rate to float freely, and it has intervened occasionally to control unstable movements in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to let the real float freely or will intervene in the exchange rate market through a currency band system or otherwise.

     The real depreciated 52.3% in 2002 against the U.S. dollar, before appreciating 18.2% in 2003 and continuing to appreciate 8.1% in 2004 and 11.8% in 2005. As of June 21, 2006, the real has appreciated to R$2.238 per U.S.$1.00, representing an appreciation of approximately 4.4% in 2006 year-to-date The real may depreciate or appreciate substantially in the future. “—Risk Factors—Risks Relating to Brazil.”

     The following table provides information on the selling exchange rate, expressed in reais per U.S. dollar (R$/U.S.$), for the periods indicated. The table uses the commercial selling rate prior to March 14, 2005

		For the Year Ended December 31, (R$ /U.S.$)
		High				Low				Average (1)				Period End
Year ended December 31,
2005			2.762				2.163				2.435				2.341
2004			3.205				2.654				2.926				2.654
2003			3.662				2.822				3.075				2.889
2002			3.955				2.271				2.924				3.533
2001			2.835				1.935				2.352				2.320
Month
November 2005			2.252				2.163				2.211				2.207
December 2005			2.374				2.180				2.286				2.341
January 2006			2.346				2.212				2.273				2.216
February 2006			2.222				2.118				2.159				2.136
March 2006			2.224				2.107				2.148				2.172
April 2006			2.172				2.089				2.131				2.089
May 2006			2.059				2.371				2.170				2.301
June 2006 (through June 21)			2.302				2.238				2.262				2.238

     Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or serious reasons to foresee such an imbalance, temporary restrictions on remittances from Brazil may be imposed by the Brazilian government. These types of measures may be taken by the Brazilian government in the future,

including measures relating to remittances related to our preferred or common shares or American Depositary Shares, or ADSs. See “Risk Factors-Risks Relating to Brazil.”

Risk Factors

Risks Relating to Our Operations

Substantial or extended declines in the prices of crude oil and oil products may have a material adverse effect on our income.

     The major part of our revenue is derived from sales of crude oil and oil products. We do not, and will not, have control over the factors affecting international prices for crude oil and oil products. The average prices of Brent crude, an international benchmark oil, were approximately U.S.$ 54.38 per barrel for 2005, U.S.$38.21 per barrel for 2004 and U.S.$28.84 per barrel for 2003. Changes in crude oil prices typically result in changes in prices for oil products.

     Historically, international prices for crude oil and oil products have fluctuated widely as a result of many factors. These factors include:

	•		global and regional economic and political developments in crude oil producing regions, particularly in the Middle East;
	•		the ability of the Organization of Petroleum Exporting Countries (OPEC) and other crude oil producing nations to set and maintain crude oil production levels and prices;
	•		global and regional supply and demand for crude oil and oil products;
	•		competition from other energy sources;
	•		domestic and foreign government regulations;
	•		weather conditions; and
	•		global conflicts and acts of terrorism.

     Volatility and uncertainty in international prices for crude oil and oil products may continue. Substantial or extended declines in international crude oil prices may have a material adverse effect on our business, results of operations and financial condition, and the value of our proved reserves. In addition, significant decreases in the price of crude oil may cause us to reduce or alter the timing of our capital expenditures, and this could adversely affect our production forecasts in the medium term and our reserve estimates in the future.

Our ability to achieve our growth objectives depends on our ability to discover additional reserves and successfully develop them, and failure to do so could prevent us from achieving our long-term goals for growth in production.

     Our ability to achieve our growth objectives is highly dependent upon our ability to discover additional reserves, as well as to successfully develop our current reserves. In addition, our exploration activities expose us to the inherent risks of drilling, including the risk that we will not discover commercially productive crude oil or natural gas reserves. The costs of drilling wells are often uncertain, and numerous factors beyond our control (such as unexpected drilling conditions, equipment failures or accidents and shortages or delays in the availability of drilling rigs and the delivery of equipment) may cause drilling operations to be curtailed, delayed or cancelled. These risks are heightened when we drill in deep water (between 300 and 1,500 meters water depth) and ultra deep water (more than 1,500 meters). Deep water drilling represented approximately 36% of the exploratory wells we drilled in 2005, a higher proportion than for many other oil and gas producers.

     Unless we conduct successful exploration and development activities or acquire properties containing proved reserves, or both, our proved reserves will decline as reserves are extracted. If we fail to gain access to additional reserves we may not achieve our long-term goals for production growth and our results of operations and financial condition may be adversely affected.

Our crude oil and natural gas reserve estimates involve some degree of uncertainty, which could adversely affect our ability to generate income.

     The proved crude oil and natural gas reserves set forth in this annual report are our estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable from known reservoirs under existing economic and operating conditions (i.e., prices and costs as of the date the estimate is made). Our proved developed crude oil and natural gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. There are uncertainties in estimating quantities of proved reserves related to prevailing crude oil and natural gas prices applicable to our production, which may lead us to make revisions to our reserve estimates. Downward revisions in our reserve estimates could lead to lower future production, which could have an adverse effect on our results of operations and financial condition.

We are subject to numerous environmental and health regulations that have become more stringent in the recent past and may result in increased liabilities and increased capital expenditures.

     Our activities are subject to a wide variety of federal, state and local laws, regulations and permit requirements relating to the protection of human health and the environment, both in Brazil and in other jurisdictions in which we operate. In Brazil, we could be exposed to administrative and criminal sanctions, including warnings, fines and closure orders, for non-compliance with these environmental regulations, which, among other things, limit or prohibit emissions or spills of toxic substances produced in connection with our operations. In 2005, we experienced spills totaling 71,141 gallons of crude oil, as compared to 140,000 gallons in 2004 and 73,000 gallons in 2003. As a result of certain of these spills, we were fined by various state and federal environmental agencies, named the defendant in several civil and criminal suits and remain subject to several investigations and potential civil and criminal liabilities. See Item 8. “Financial Information—Legal Proceedings.” Waste disposal and emissions regulations may require us to clean up or retrofit our facilities at substantial cost and could result in substantial liabilities. The Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis (Brazilian Institute of the Environment and Renewable Natural Resources, or IBAMA) routinely inspects our oil platforms in the Campos Basin, and may impose fines, restrictions on operations or other sanctions in connection with its inspections. In addition, we are subject to environmental laws that require us to incur significant costs to remedy any damage that a project may cause to the environment (environmental compensation). These additional costs may have a negative impact on the profitability of the projects we intend to implement or may make such projects economically unfeasible.

     As environmental regulations become more stringent, it is probable that our capital expenditures for compliance with environmental regulations and to effect improvements in our health, safety and environmental practices will increase substantially in the future. Because our capital expenditures are subject to approval by the Brazilian government, increased expenditures to comply with environmental regulations could result in reductions in other strategic investments. Any such reduction may have a material adverse effect on our results of operations or financial condition.

We may incur losses and spend time and money defending pending litigation and arbitration.

     We are currently a party to numerous legal proceedings relating to civil, administrative, environmental, labor and tax claims filed against us. These claims involve substantial amounts of money and other remedies. Several individual disputes account for a significant part of the total amount of claims against us. For example, on the grounds that drilling and production platforms may not be classified as sea-going vessels, the Brazilian Revenue Service asserted that overseas remittances for charter payments should be reclassified as lease payment and subject to a withholding tax of 25%. They have filed two tax assessments against us in the aggregate amount of R$3,157 million (approximately U.S.$1,098 million). See Item 8. “Financial Information—Legal Proceedings.”

     We may also be subject to labor litigation in connection with recent changes in Brazilian laws relating to retirement benefits affecting our employees.

     In the event that claims involving a material amount and for which we have no provisions were to be decided against us, or in the event that the losses estimated turn out to be significantly higher than the provisions made, the aggregate cost of unfavorable decisions could have a material adverse effect on our financial condition and results of operations. Additionally, our management may be required to direct its time and attention to defending these claims, which could preclude them from focusing on our core business. Depending on the outcome, certain litigation could result in restrictions on our operations and have a material adverse effect on certain of our businesses.

If the State of Rio de Janeiro enforces a law imposing ICMS on oil upstream activities, our results of operations and financial condition may be adversely affected.

     In June 2003, the State of Rio de Janeiro enacted a law, referred to as “Noel Law,” imposing ICMS on upstream activities. The constitutionality of the Noel Law is currently being challenged in the Brazilian Supreme Court (Supremo Tribunal Federal, or STF) and although the law is technically in force, the government of the State of Rio de Janeiro has not yet enforced it. Currently, the ICMS for fuels derived from oil is assessed at the point of sale but not at the wellhead level. If the State of Rio de Janeiro enforces the Noel Law, it is unlikely (depending on the grounds of the Supreme Court’s decision) that the other states would allow us to use the tax imposed at the wellhead level in Rio de Janeiro as a credit to offset the tax imposed at the sale level. Therefore, we would have to pay ICMS at both levels. We estimate that the amount of ICMS that we would be required to pay to the State of Rio de Janeiro could increase by approximately R$8.51 billion (U.S.$3.52 billion) per year. This increase could have a material adverse effect on our results of operations and financial condition.

Our participation in the domestic power market has generated losses and may not become profitable.

     Consistent with the global trend of other major oil and gas companies and to secure demand for our natural gas, we participate in the domestic power market. Despite a number of incentives introduced by the Brazilian government to promote the development of gas-fired power plants, development of such plants has been slow due to the market structure and regulation of the power industry, among other things. We have invested, alone or with other investors, in fourteen (twelve in operation and two under construction or development) of the 39 gas-fired power generation plants. Demand for energy produced by our gas-fired power plants has been lower than we expected mainly as a result of good hydrological conditions in the last years that increased the supply and lowered the prices of energy from hydroelectric power plants. The main risks associated with our gas-fired power business are:

	•		Physical demand for our installed capacity, which is influenced by the current and expected market prices of natural gas;
	•		The potential mismatch between contracted price indexation for energy to be sold by gas-fired power companies and the cost of natural gas or other substitute fuel supply; and
	•		The dependence on construction of pipelines and other infrastructure to transport and produce natural gas and the commitment to purchase firm quantities of natural gas to satisfy the requirement of the new regulatory model for power generation in order to sell under long term energy contracts.

As a result of the foregoing, our participation in the domestic power market has generated losses and may not become profitable.

We may not be able to obtain financing for all of our planned investments, and failure to do so could adversely affect our operating results and financial condition.

     The Brazilian government maintains control over our budget and establishes limits on our investments and long-term debt. As a state-controlled entity, we must submit our proposed annual budgets to the Ministry of Planning, Budget and Management, the Ministry of Mines and Energy, and the Brazilian Congress for approval. If we cannot obtain financing that does not require Brazilian government approval, such as structured financings, we may not be free to make all the investments we envision, including those we have agreed to make to expand and develop our crude oil and natural gas fields. If we are unable to make these investments, our operating results and financial condition may be adversely affected.

Currency fluctuations could have a material adverse effect on our financial condition and results of operations, because most of our revenues are in reais and a large portion of our liabilities are in foreign currencies.

     The principal market for our products is Brazil, and over the last three fiscal years over 78% of our revenues have been denominated in reais. A substantial portion of our indebtedness and some of our operating expenses and capital expenditures are, and are expected to continue to be, denominated in or indexed to U.S. dollars and other foreign currencies. In addition, during 2005 we imported U.S.$8.1 billion of crude oil and oil products, the prices of which were all denominated in U.S. dollars.

     The real depreciated 52.3% in 2002 against the U.S. dollar before appreciating 18.2%, 8.1% and 11.8% against the U.S. dollar in 2003, 2004 and 2005, respectively. As of June 21, 2006, the exchange rate of the real to the U.S. dollar was R$2.238 per U.S.$1.00, representing an appreciation of approximately 4.4% in 2006 year-to-date. The value of the real in relation to the U.S. dollar may continue to fluctuate and may include a significant depreciation of the real against the U.S. dollar as occurred in 2002. Any future substantial depreciation of the real may adversely affect our operating cash flows and our ability to meet our foreign currency-denominated obligations.

We are exposed to increases in prevailing market interest rates, which leaves us vulnerable to increased financing expenses.

     As of December 31, 2005, approximately 52.5% of our total indebtedness consisted of floating rate debt. We have not entered into derivative contracts or made other arrangements to hedge against interest rate risk. Accordingly, if market interest rates (principally LIBOR) rise, our financing expenses will increase, which could have an adverse effect on our results of operations and financial condition.

We are not insured against business interruption for our Brazilian operations and most of our assets are not insured against war and terrorism.

     We do not maintain coverage for business interruption for our Brazilian operations. If, for instance, our workers were to strike, the resulting work stoppages could have an adverse effect on us, as we do not carry insurance for losses incurred as a result of business interruptions of any nature, including business interruptions caused by labor action. In addition, we do not insure most of our assets against war and terrorism. A terrorist attack or an operational incident causing an interruption of our business could therefore have a material adverse effect on our financial condition or results of operations.

We are subject to substantial risks relating to our international operations, in particular in Latin America and the Middle East.

     We operate in a number of different countries, particularly in Latin America, West Africa and the Middle East that can be politically, economically and socially unstable. The results of operations and financial condition of our subsidiaries in these countries may be adversely affected by fluctuations in their local economies, political instability and governmental actions relating to the economy, including:

•

the imposition of exchange or price controls;

	•		the imposition of restrictions on hydrocarbon exports;
	•		the depreciation of local currencies;
	•		the nationalization of oil and gas reserves; or
	•		increases in export tax / income tax rates for crude oil and oil products.

     If one or more of the risks described above were to materialize we may not achieve our strategic objectives in these countries or in our international operations as a whole, which may result in a material adverse effect on our results of operations and financial condition.

     Of the countries outside of Brazil in which we operate, Argentina is the most significant, representing approximately 40% of our total international crude oil and natural gas production and 28% of our international proved crude oil and natural gas reserves at December 31, 2005. In response to the Argentine crisis, the Argentine government has made a number of changes in the regulatory structure of the electricity and gas sectors and has fixed export tax rates for crude oil, natural gas and oil products. We also have significant operations in Bolivia and Venezuela that represented, respectively, approximately 21% and 18% of our total international production in barrels of oil equivalent and 27% and 22% of our international proved crude oil and natural gas reserves at December 31, 2005. Both Bolivia and Venezuela have recently announced certain nationalization measures that may generate material losses to us. At present, there is much uncertainty in the political, economic and social situations, generally in these two countries. See Item 3. “Key Information—Risk Factors—Risks Relating to Our Operations— The recent nationalization measures taken by the Bolivian and Venezuelan governments may have an adverse effect on our results of operations and financial condition” for a description of the risks associated with these nationalization measures. Deterioration of the situation in Argentina, Bolivia or Venezuela may have an adverse effect on our results of operations and financial condition.

The recent nationalization measures taken by the Bolivian and Venezuelan governments may have an adverse effect on our results of operations and financial condition.

     The Bolivian and Venezuelan governments have recently increased their participation in their respective domestic oil and gas industries, which may generate material losses to us.

     Our consolidated interests related to Bolivia include two refineries, oil and gas reserves, which represented approximately 2.7% of our total reserves at December 31, 2005 and our interest in the Bolivia-Brazil gas pipeline (GTB). We also hold a long-term gas supply agreement, or the GSA, for the purchase of natural gas from the Bolivian state oil company, Yacimientos Petrolíferos Fiscales Bolivianos —YPFB. We have been operating in Bolivia since 1996. As of December 31, 2005, the book value of Bolivia assets were U.S.$990million. On May 1, 2006, the Bolivian government announced that it would nationalize several industries in the country, including the oil and gas industry. As a result, our interest in the two refineries and the oil and gas reserves in Bolivia will be reduced. We have 180 days to comply with the terms and conditions of the nationalization, and it is uncertain if and how we will be compensated for our losses. In 2005, the natural gas we imported from Bolivia represented approximately 53% of our total natural gas sales. We supply this natural gas to the Brazilian market, including local distribution companies and gas-fired power plants in which we have an interest.

     Our interests in Venezuela include oil and gas reserves, which represented approximately 2.3% of our total reserves at December 31, 2005. In April 2005, the Venezuelan Energy and Oil Ministry instructed PDVSA to review thirty-two operating agreements signed by PDVSA with oil companies from 1992 through 1997. In addition, PDVSA was instructed to take measures in order to convert all effective operating agreements into state-controlled companies in order to grant the Venezuelan government, through PDVSA, more than 50% ownership of each field, including agreements with our affiliates in connection with the areas of Oritupano Leona, La Concepcion, Acema and Mata. As a result, as of December 31, 2005, we recorded an impairment charge in order to adjust the book value of our Venezuelan assets in the amount of U.S.$134 million. In March 31, 2006, we, Petróleos de Venezuela S.A. (PDVSA) and Corporación Venezolana del Petróleo S.A. (CVP), entered into memorandums of understanding (MOUs) in order to effect the migration of the operating agreements to partially state-owned companies (“mixed

companies”), whereby the interest of PDVSA in each mixed company will be 60%. The economic effects of the migration are effective since April 1, 2006. See Item 4. “Information on the Company—International—Venezuelan Operations.”

     As a result of the foregoing, we currently cannot estimate the degree to which these nationalization measures will affect us, and believe they may have a material adverse effect on our results of operations and financial condition.

Risks Relating to PIFCo

PIFCo may not earn enough money from its own operations to meet its debt obligations.

     PIFCo is a direct wholly-owned subsidiary of Petrobras incorporated in the Cayman Islands as an exempted company with limited liability. Accordingly, PIFCo’s financial position and results of operations are largely affected by our decisions, as its parent company. PIFCo has limited operations consisting principally of the purchase of crude oil and oil products from third parties and the resale of those products to us, with financing for such operations provided by us as well as third-party credit providers. PIFCo also buys and sells crude oil and oil products from and to us, third parties and affiliates on a limited basis. PIFCo’s ability to pay interest, principal and other amounts due on its outstanding and future debt obligations will depend upon a number of factors, including:

	•		our financial condition and results of operations;
	•		the extent to which we continue to use PIFCo’s services for market purchases of crude oil and oil products;
	•		our willingness to continue to make loans to PIFCo and provide PIFCo with other types of financial support;
	•		PIFCo’s ability to access financing sources, including the international capital markets and third-party credit facilities; and
	•		PIFCo’s ability to transfer its financing costs to us.

     In the event of a material adverse change in our financial condition or results of operations or in our financial support of PIFCo, PIFCo may not have sufficient funds to repay all amounts due on its indebtedness. See “Risks Relating to Our Operations “ for a more detailed description of certain risks that may have a material adverse impact on our financial condition or results of operations and therefore affect PIFCo’s ability to meet its debt obligations.

If Brazilian law restricts us from paying PIFCo in U.S. dollars, PIFCo may have insufficient U.S. dollar funds to make payments on its debt obligations.

     PIFCo obtains substantially all of its funds from our payments in U.S. dollars for crude oil that we purchase from PIFCo. In order to remit U.S. dollars to PIFCo, we must comply with Brazilian foreign exchange control regulations, including preparing specified documentation to be able to obtain U.S. dollar funds for payment to PIFCo. If Brazilian law were to impose additional restrictions, limitations or prohibitions on our ability to convert reais into U.S. dollars, PIFCo may not have sufficient U.S. dollar funds available to make payment on its debt obligations. Such restrictions could also have a material adverse effect on the Brazilian economy or our business, financial condition and results of operations.

PIFCo may be limited in its ability to pass on its financing costs.

     PIFCo is principally engaged in the purchase of crude oil and oil products for sale to Petrobras, as described above. PIFCo regularly incurs indebtedness related to such purchases and/or obtain financing from us or

third-party creditors. At December 31, 2005, approximately 20% of PIFCo’s indebtedness was floating-rate debt denominated in U.S. dollars. All such indebtedness has the benefit of our standby purchase obligation or other support. PIFCo has historically passed on its financing costs to us by selling crude oil and oil products to us at a premium to compensate for its financing costs. Although we intend to continue this practice in the future, we cannot assure you that we will. PIFCo’s inability to transfer its financing costs to us could have a material adverse effect on PIFCo’s business and on its ability to meet its debt obligations in the long term.

Risks Relating to the Relationship between us and the Brazilian Government

The Brazilian government, as our controlling shareholder, may cause us to pursue certain macroeconomic and social objectives that may have an adverse effect on our results of operations and financial condition.

     The Brazilian government, as our controlling shareholder, has pursued, and may pursue in the future, certain of its macroeconomic and social objectives through us. Brazilian law requires the Brazilian government to own a majority of our voting stock, and so long as it does, the Brazilian government will have the power to elect a majority of the members of our board of directors and, through them, a majority of the executive officers who are responsible for our day-to-day management. As a result, we may engage in activities that give preference to the objectives of the Brazilian government rather than to our own economic and business objectives. In particular, we continue to assist the Brazilian government to ensure that the supply of crude oil and oil products in Brazil meets Brazilian consumption requirements. Accordingly, we may make investments, incur costs and engage in sales on terms that may have an adverse effect on our results of operations and financial condition.

If the Brazilian government reinstates controls over the prices we can charge for crude oil and oil products, such price controls could affect our financial condition and results of operations.

     In the past, the Brazilian government set prices for crude oil and oil products in Brazil, often below prices prevailing in the world oil markets. These prices involved elements of cross-subsidy among different oil products sold in various regions in Brazil. The cumulative impact of this price regulation system on us is recorded as an asset on our balance sheet under the line item “Petroleum and Alcohol Account—Receivable from the Brazilian government.” The balance of the account at December 31, 2005 was U.S.$329 million. All price controls for crude oil and oil products ended on January 2, 2002, however, the Brazilian government could decide to reinstate price controls in the future as a result of market instability or other conditions. If this were to occur, our financial condition and results of operations could be adversely affected.

We do not own any of the crude oil and natural gas reserves in Brazil.

     A guaranteed source of crude oil and natural gas reserves is essential to an oil and gas company’s sustained production and generation of income. Under Brazilian law, the Brazilian government owns all crude oil and natural gas reserves in Brazil and the concessionaire owns the oil and gas it produces. We possess the exclusive right to develop our reserves pursuant to concession agreements awarded to us by the Brazilian government and we own the goods we produce under the concession agreements, but if the Brazilian government were to restrict or prevent us from exploiting these crude oil and natural gas reserves, our ability to generate income would be adversely affected.

Risks Relating to Brazil

The Brazilian government has historically exercised, and continues to exercise, significant influence over the Brazilian economy. Brazilian political and economic conditions have a direct impact on our business and may have a material adverse effect on our results of operations and financial condition.

     The Brazilian government’s economic policies may have important effects on Brazilian companies, including us, and on market conditions and prices of Brazilian securities. Our financial condition and results of operations may be adversely affected by the following factors and the Brazilian government’s response to these factors:

	•		devaluations and other exchange rate movements;
	•		inflation;
	•		exchange control policies;
	•		social instability;
	•		price instability;
	•		energy shortages;
	•		interest rates;
	•		liquidity of domestic capital and lending markets;
	•		tax policy; and
	•		other political, diplomatic, social and economic developments in or affecting Brazil.

Political instability may adversely affect our results of operations and the price of our securities.

     The performance of the Brazilian economy has historically been influenced by the domestic political scenario. Political crises have, in the past, affected the confidence of investors and of the general public and resulted in economic slowdowns, adversely affecting the market price of the shares of publicly-listed companies.

     The Brazilian Congress is currently conducting investigations on, among other matters, allegations related to contributions to political campaigns that were unaccounted for or not publicly disclosed, including contributions made to various important members of the current federal administration. Such allegations have resulted in the replacement of key ministers and occupied most of Congress’ agenda. In addition, some allegations implicated other companies controlled by the Brazilian government. If these investigations were to impact the confidence of the general public and/or of investors, or result in an economic slowdown in Brazil, our results of operations and the price of our shares could be adversely affected.

     Additionally, presidential elections in Brazil will take place in 2006 and we cannot assure you that the next administration will maintain the economic policies that were adopted by the current administration. The uncertainties relating to the election may impact the confidence of the general public and of investors and the price of our securities may be adversely affected.

Inflation and government measures to curb inflation may contribute significantly to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets and, consequently, may adversely affect the market value of our securities and financial condition.

     Our principal market is Brazil, which has, in the past, periodically experienced extremely high rates of inflation. Inflation, along with governmental measures to combat inflation and public speculation about possible future measures, has had significant negative effects on the Brazilian economy. The annual rates of inflation, as measured by the National Wide Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo, or IPCA), have decreased from 2,477.15% in 1993 to 916.46% in 1994 and to 5.97% in 2000. The same index increased to 9.30% in 2003, before decreasing to 7.60% in 2004 and to 5.69% in 2005. Considering the historically high rates of inflation, Brazil may experience higher levels of inflation in the future. The lower levels of inflation experienced since 1995 may not continue. Future governmental actions, including actions to adjust the value of the real, could trigger increases in inflation, which may adversely affect our financial condition.

Access to international capital markets for Brazilian companies is influenced by the perception of risk in Brazil and other emerging economies, which may hurt our ability to finance our operations and the trading values of our securities.

     International investors generally consider Brazil to be an emerging market. As a result, economic and market conditions in other emerging market countries, especially those in Latin America, influence the market for securities issued by Brazilian companies. As a result of economic problems in various emerging market countries in recent years (such as the Asian financial crisis of 1997, the Russian financial crisis in 1998 and the Argentine financial crisis that began in 2001), investors have viewed investments in emerging markets with heightened caution. These crises produced a significant outflow of U.S. dollars from Brazil, causing Brazilian companies to face higher costs for raising funds, both domestically and abroad, and impeding access to international capital markets. Increased volatility in securities markets in Latin American and in other emerging market countries may have a negative impact on the trading value of our securities. We cannot assure you that international capital markets will remain open to Brazilian companies or that prevailing interest rates in these markets will be advantageous to us.

Risks Relating to our Equity and Debt Securities

The Brazilian securities markets are smaller, more volatile and less liquid than the major U.S. and European securities markets and therefore you may have greater difficulty selling the common or preferred shares underlying our ADSs

     The Brazilian securities markets are smaller, more volatile and less liquid than the major securities markets in the United States and other jurisdictions, and are not as highly regulated or supervised. The relatively small capitalization and liquidity of the Brazilian equity markets may substantially limit your ability to sell the common or preferred shares underlying our ADSs at the price and time you desire. These markets may also be substantially affected by economic circumstances unique to Brazil, such as currency devaluations.

The market for PIFCo’s notes may not be liquid.

     PIFCo’s notes are not listed on any securities exchange and are not quoted through an automated quotation system. We can make no assurance as to the liquidity of or trading markets for PIFCo’s notes. We cannot guarantee that the holders of PIFCo’s notes will be able to sell their notes in the future. If a market for PIFCo’s notes does not develop, holders of PIFCo’s notes may not be able to resell the notes for an extended period of time, if at all.

You may be unable to exercise preemptive rights with respect to the common or preferred shares underlying the ADSs.

     Holders of ADSs that are residents of the United States may not be able to exercise the preemptive rights relating to the common or preferred shares underlying our ADSs unless a registration statement under the U.S. Securities Act of 1933 is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the common or preferred shares relating to these preemptive rights, and therefore we may not file any such registration statement. If a registration statement is not filed and an exemption from registration does not exist, Citibank N.A., as depositary, will attempt to sell the preemptive rights, and you will be entitled to receive the proceeds of the sale. However, the preemptive rights will expire if the depositary cannot sell them. For a more complete description of preemptive rights with respect to the common or preferred shares, see Item 10. “Additional Information—Memorandum and Articles of Association of Petrobras—Preemptive Rights.”

You may not be able to sell your ADSs at the time or the price you desire because an active or liquid market for our ADSs may not be sustained.

     Our preferred ADSs have been listed on the New York Stock Exchange since February 21, 2001, while our common ADSs have been listed on the New York Stock Exchange since August 7, 2000. We cannot predict whether an active liquid public trading market for our ADSs will be sustained on the New York Stock Exchange, where they are currently traded. Active, liquid trading markets generally result in lower price volatility and more efficient

execution of buy and sell orders for investors. Liquidity of a securities market is often a function of the volume of the underlying shares that are publicly held by unrelated parties. We do not anticipate that a public market for our common or preferred shares will develop in the United States.

Restrictions on the movement of capital out of Brazil may impair your ability to receive dividends and distributions on, and the proceeds of any sale of, the common or preferred shares underlying the ADSs and may impact our ability to service certain debt obligations, including standby purchase agreements we have entered into in support of PIFCo’s notes.

     The Brazilian government may impose temporary restrictions on the conversion of Brazilian currency into foreign currencies and on the remittance to foreign investors of proceeds from their investments in Brazil. Brazilian law permits the Brazilian government to impose these restrictions whenever there is a serious imbalance in Brazil’s balance of payments or there are reasons to foresee a serious imbalance.

     The Brazilian government imposed remittance restrictions for approximately six months in 1990. Similar restrictions, if imposed, could impair or prevent the conversion of dividends, distributions, or the proceeds from any sale of common or preferred shares from reais into U.S. dollars and the remittance of the U.S. dollars abroad. The Brazilian government could decide to take similar measures in the future. In such a case, the depositary for the ADSs will hold the reais it cannot convert for the account of the ADS holders who have not been paid. The depositary will not invest the reais and will not be liable for the interest.

     Additionally, if the Brazilian government were to impose restrictions on our ability to convert reais into U.S. dollars, we would not be able to make payment on our dollar-denominated debt obligations. For example, any such restrictions could prevent us from making funds available to PIFCo, for payment of its debt obligations, certain of which are supported by us through standby purchase agreements.

If you exchange your ADSs for common or preferred shares, you risk losing the ability to remit foreign currency abroad and forfeiting Brazilian tax advantages .

     The Brazilian custodian for our common or preferred shares underlying our ADSs must obtain a certificate of registration from the Central Bank of Brazil to be entitled to remit U.S. dollars abroad for payments of dividends and other distributions relating to our preferred and common shares or upon the disposition of the common or preferred shares. If you decide to exchange your ADSs for the underlying common or preferred shares, you will be entitled to continue to rely, for five Brazilian business days from the date of exchange, on the custodian’s certificate of registration. After that period, you may not be able to obtain and remit U.S. dollars abroad upon the disposition of the common or preferred shares, or distributions relating to the common or preferred shares, unless you obtain your own certificate of registration or register under Resolution No. 2,689, of January 26, 2000, of the Conselho Monetário Nacional (National Monetary Council), which entitles registered foreign investors to buy and sell on the São Paulo Stock Exchange. In addition, if you do not obtain a certificate of registration or register under Resolution No. 2,689, you may be subject to less favorable tax treatment on gains with respect to the common or preferred shares.

     If you attempt to obtain your own certificate of registration, you may incur expenses or suffer delays in the application process, which could delay your ability to receive dividends or distributions relating to the common or preferred shares or the return of your capital in a timely manner. The custodian’s certificate of registration or any foreign capital registration obtained by you may be affected by future legislative or regulatory changes and we cannot assure you that additional restrictions applicable to you, the disposition of the underlying common or preferred shares or the repatriation of the proceeds from disposition will not be imposed in the future.

You may face difficulties in protecting your interests as a shareholder because we are subject to different corporate rules and regulations as a Brazilian company and because holders of our common shares, preferred shares and ADSs have fewer and less well-defined shareholders’ rights than those traditionally enjoyed by United States shareholders.

     Our corporate affairs are governed by our bylaws and the Brazilian Corporation Law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, such as the States of Delaware or New York, or in other jurisdictions outside Brazil. In addition, your rights as an ADS holder, which are derivative of the rights of holders of our common or preferred shares, as the case may be, to protect your interests against actions by our board of directors may be fewer and less well-defined under Brazilian Corporation Law than those under the laws of other jurisdictions.

     Although insider trading and price manipulation are considered crimes under Brazilian law, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or markets in some other jurisdictions. In addition, rules and policies against self-dealing and the preservation of shareholder interests may be less well-defined and enforced in Brazil than in the United States, putting holders of our common shares, preferred shares and ADSs at a potential disadvantage. Corporate disclosure may be less complete or informative than what may be expected of a U.S. public company.

     We are a state-controlled company organized under the laws of Brazil and all of our directors and officers reside in Brazil. Substantially all of our assets and those of our directors and officers are located in Brazil. As a result, it may not be possible for you to effect service of process upon us or our directors and officers within the United States or other jurisdictions outside Brazil or to enforce against us or our directors and officers judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain requirements are met, you may face greater difficulties in protecting your interest in actions against us or our directors and officers than would shareholders of a corporation incorporated in a state or other jurisdiction of the United States.

Preferred shares and the ADSs representing preferred shares generally do not give you voting rights.

     A portion of our ADSs represents our preferred shares. Under Brazilian law and our bylaws, holders of preferred shares generally do not have the right to vote in meetings of our stockholders. This means, among other things, that holders of ADSs representing preferred shares are not entitled to vote on important corporate transactions or decisions. See Item 10. “Additional Information—Memorandum and Articles of Incorporation of Petrobras—Voting Rights” for a discussion of the limited voting rights of our preferred shares.

Enforcement of our obligations under the standby purchase agreement might take longer than expected.

     We have entered into standby purchase agreements in support of PIFCo’s obligations under its notes and indentures. Our obligation to purchase from the PIFCo noteholders any unpaid amounts of principal, interest and other amounts due under the PIFCo notes and the indenture applies, subject to certain limitations, irrespective of whether any such amounts are due at maturity of the PIFCo notes or otherwise. See “Additional Information—PIFCo Senior Notes—Standby Purchase Agreements” and “Additional Information—PIFCo Global Notes—Standby Purchase Agreements.”

     We have been advised by our counsel that the enforcement of the standby purchase agreement in Brazil against us, if necessary, will occur under a form of judicial process that, while similar, has certain procedural differences from those applicable to enforcement of a guarantee and, as a result, the enforcement of the standby purchase agreement may take longer than would otherwise be the case with a guarantee.

We may not be able to pay our obligations under the standby purchase agreement in U.S. Dollars.

     Payments by us to PIFCo for the import of oil, the expected source of PIFCo’s cash resources to pay its obligations under the PIFCo notes, will not require approval by or registration with the Central Bank of Brazil. There may be other regulatory requirements that we will need to comply with in order to make funds available to

PIFCo. If we are required to make payments under the standby purchase agreement, Central Bank of Brazil approval will be necessary. Any approval from the Central Bank of Brazil may only be requested when such payment is to be remitted abroad by us, and will be granted by the Central Bank of Brazil on a case-by-case basis. It is not certain that any such approvals will be obtainable at a future date. In case the PIFCo noteholders receive payments in reais corresponding to the equivalent U.S. Dollar amounts due under PIFCo’s notes, it may not be possible to convert these amounts into U.S. Dollars. We will not need any prior or subsequent approval from the Central Bank of Brazil to use funds we hold abroad to comply with our obligations under the standby purchase agreement.

We would be required to pay judgments of Brazilian courts enforcing our obligations under the standby purchase agreement only in reais.

     If proceedings were brought in Brazil seeking to enforce our obligations in respect of the standby purchase agreement, we would be required to discharge our obligations only in reais. Under the Brazilian exchange control limitations, an obligation to pay amounts denominated in a currency other than reais, which is payable in Brazil pursuant to a decision of a Brazilian court, may be satisfied in reais at the rate of exchange, as determined by the Central Bank of Brazil, in effect on the date of payment.

A finding that we are subject to U.S. bankruptcy laws and that the standby purchase agreement executed by us was a fraudulent conveyance could result in PIFCo noteholders losing their legal claim against us.

     PIFCo’s obligation to make payments on the PIFCo notes is supported by our obligation under the standby purchase agreement to make payments on PIFCo’s behalf. We have been advised by our external U.S. counsel that the standby purchase agreement is valid and enforceable in accordance with the laws of the State of New York and the United States. In addition, we have been advised by our general counsel that the laws of Brazil do not prevent the standby purchase agreement from being valid, binding and enforceable against us in accordance with its terms. In the event that U.S. federal fraudulent conveyance or similar laws are applied to the standby purchase agreement, and we, at the time we entered into the standby purchase agreement:

	•		were or are insolvent or rendered insolvent by reason of our entry into the standby purchase agreement;
	•		were or are engaged in business or transactions for which the assets remaining with us constituted unreasonably small capital; or
	•		intended to incur or incurred, or believed or believes that we would incur, debts beyond our ability to pay such debts as they mature; and
	•		in each case, intended to receive or received less than reasonably equivalent value or fair consideration therefor,

then our obligations under the standby purchase agreement could be avoided, or claims with respect to the standby purchase agreement could be subordinated to the claims of other creditors. Among other things, a legal challenge to the standby purchase agreement on fraudulent conveyance grounds may focus on the benefits, if any, realized by us as a result of PIFCo’s issuance of these notes. To the extent that the standby purchase agreement is held to be a fraudulent conveyance or unenforceable for any other reason, the holders of the PIFCo notes would not have a claim against us under the standby purchase agreement and will solely have a claim against PIFCo. We cannot assure you that, after providing for all prior claims, there will be sufficient assets to satisfy the claims of the PIFCo noteholders relating to any avoided portion of the standby purchase agreement.

ITEM 4. INFORMATION ON THE COMPANY

History and Development of Petrobras

     We are a state-controlled company created pursuant to Law No. 2,004 (effective as of October 3, 1953). A state-controlled company is a Brazilian corporation created by special law, of which a majority of the voting capital must be owned by the Brazilian federal government, a state or a municipality. We are controlled by the Brazilian

federal government, but our common and preferred shares are also publicly traded. Our principal executive office is located at Avenida República do Chile, 65, 20031-912 — Rio de Janeiro — RJ, Brazil and our telephone number is (55-21) 3224-4477.

     We were incorporated in 1953 and began operations in Brazil in 1954 as a wholly-owned government enterprise responsible for all hydrocarbon activities in Brazil. Since our foundation, our legal name has been Petróleo Brasileiro S.A.—Petrobras. From that time until 1995, we had a government-granted monopoly for all crude oil and natural gas production and refining activities in Brazil. On November 9, 1995, the Brazilian Constitution was amended to authorize the Brazilian government to contract with any state or privately owned company to carry out the activities related to the upstream and downstream segments of the Brazilian oil and gas sector. This amendment made possible the end of our legal monopoly in 1988.

     The crude oil and natural gas industry in Brazil has experienced significant reforms since the enactment of Law No. 9,478, or the Oil Law, on August 6, 1997, which established competition in Brazilian markets for crude oil, oil products and natural gas . Effective January 2, 2002, the Brazilian government deregulated prices for crude oil and oil products. See “—Regulation of the Oil and Gas Industry in Brazil—Price Regulation.” The gradual transformation of the oil and gas industry since 1997 has led to increased participation by international companies in Brazil across all segments of our business, both as our competitors and partners.

     Based upon our 2005 consolidated revenues, we are the largest corporation in Brazil and one of the largest oil and gas companies in Latin America. In 2005, we had sales of products and services of U.S.$74,065 million, net operating revenues of U.S.$56,324 million and net income of U.S.$10,344 million.

     We engage in a broad range of oil and gas activities, which cover the following segments of our operations:

	•		Exploration and Production — Our exploration and production segment encompasses exploration, development and production activities in Brazil.
	•		Refining, Transportation and Marketing — Our refining, transportation and marketing segment encompasses refining, logistics, transportation and the purchase of crude oil, as well as the purchase and sale of oil products and fuel alcohol. Additionally, this segment includes the petrochemical and fertilizers division, which includes domestic petrochemical companies and our two domestic fertilizer plants.
	•		Distribution — Our distribution segment encompasses oil product and fuel alcohol distribution activities conducted by our majority owned subsidiary, Petrobras Distribuidora S.A. — BR in Brazil.
	•		Natural Gas and Power — Our natural gas and power segment encompasses the purchase, sale and transportation of natural gas produced in or imported into Brazil. Additionally, this segment includes our domestic electric energy commercialization activities as well as investments in domestic natural gas transportation companies, state owned natural gas distributors and gas-fired power plants.
	•		International — Our international segment encompasses international activities conducted in the following countries: Argentina, Angola, Bolivia, Colombia, Ecuador, Equatorial Guinea, Iran, Libya, Mexico, Nigeria, Paraguay, Peru, the United States, Tanzania,Turkey, Uruguay and Venezuela), which include Exploration and Production, Supply, Refining, Petrochemical, Fertilizers, Distribution and Gas and Energy.,
	•		Corporate — Our corporate segment includes those activities not attributable to other segments, including corporate financial management and overhead related with central administration.

     As a foreign private issuer, we are exempt from many of the corporate governance standards the New York Stock Exchange, or NYSE, applies to U.S. domestic issuers listed on the NYSE. In accordance with Section 303A.11 of the NYSE Listed Company Manual, we have posted a summary of significant differences between the NYSE standards and our corporate governance practice on our website, www.petrobras.com.br.

Recent developments relating to compliance with the Sarbanes-Oxley Act

     Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form 20-F for the fiscal year ending December 31, 2006, we will be required to furnish a report by our management on our internal control over financial reporting. This report will contain, among other matters, an assessment of the effectiveness of our internal controls over financial reporting as of the end of the fiscal year, including a statement as to whether or not our internal controls over financial reporting are effective. This assessment must include disclosure of any material weakness in our internal control over financial reporting identified by management.

     The report will also contain a statement that our auditors have issued a certification report on management’s assessment of such internal controls. Deloitte, Touche Tohmatsu has assisted our management in conducting a preliminary assessment and evaluation of our internal controls.. To comply with this requirement, we are creating a system of internal controls over financial reporting through the Integrated Program for Internal Control Systems and Valuation Methodology, known as “PRISMA”. PRISMA is a program that focuses on constantly reviewing our financial statements and information contained in our consolidated financial reports. In addition, the program follows orientations from the Public Company Accounting Oversight Board (PCAOB) and from the Committee of Sponsoring Organizations of the Treadway Commission (COSO), for the development of better internal control practices, as well as from Control Objectives for Information and Related Technology (COBIT), as it relates to information technology.

     Phases 1 and 2 of the PRISMA have already been implemented and we are currently implementing phase 3 of the program.

Competitive Strengths

     We have a number of key strengths, including:

	•		dominant market position in the production, refining and transportation of crude oil and oil products in Brazil;
	•		strong reserve base;
	•		deepwater technological expertise;
	•		cost efficiencies created by large scale operations combined with vertical integration among business segments;
	•		strong position in Brazil’s growing natural gas markets; and
	•		success in attracting international partners in all activities.

Dominant market position in the production, refining and transportation of crude oil and oil products in Brazil

     Our legacy as Brazil’s former sole supplier of crude oil and oil products has provided us with a fully developed operational infrastructure throughout Brazil and a large proved reserve base. Our long history, resources and established presence in Brazil permit us to compete effectively with other market participants and new entrants now that the Brazilian oil and gas industry has been deregulated. We operate all major development fields in Brazil and substantially all of the country’s refining capacity. Our average domestic daily production of crude oil and NGLs increased 12.8% in 2005, decreased 3.1% in 2004 and increased 2.7% in 2003.

Strong reserve base

     As of December 31, 2005, we had estimated proved developed and undeveloped crude oil and natural gas reserves of approximately 11.77 billion barrels of oil equivalent in Brazil and abroad. In addition, we have a

substantial base of exploration acreage both in Brazil and abroad, which we are exploring by ourselves and with industry partners in order to continue to increase our reserves.

     As of December 31, 2005, our worldwide proved reserves to production ratio was 15.4 years.

     The majority of our reserves, including recent discoveries, are located in deep-water areas that generally require additional planning, more comprehensive evaluation and added lead time to begin production when compared to onshore production. In accordance with our Business Plan for the period from 2006 to 2010, we have been investing the necessary capital to build the offshore platforms needed to monetize these reserves. Although our proved reserve life is higher than the industry average, the additional planning required to bring deep-water areas into production also means that our percentage of proved undeveloped reserves may be higher than the industry average.

     We believe that our proved reserves will provide us with significant opportunities for sustaining and increasing production growth.

Deepwater technological expertise

     While developing Brazil’s offshore basins over the past 36 years, we have gained expertise in deepwater drilling, development and production techniques and technologies. We are currently in the process of developing technology to permit production from wells at water depths of up to 9,842 feet (3,000 meters).

     Our deepwater development and production expertise has allowed us to achieve high production volumes and relatively low lifting costs (excluding royalties, special government participation and rental of areas, which we refer to as “government take”). Our aggregate average lifting cost for crude oil and natural gas products in Brazil for 2005, excluding government take, increased to U.S.$5.73 per barrel of oil equivalent, as compared to U.S.$4.28 per barrel of oil equivalent for 2004. Including government take, our lifting costs increased to U.S.$14.65 per barrel of oil equivalent for 2005, as compared to U.S.$10.72 per barrel of oil equivalent for 2004.

Cost efficiencies created by large-scale operations combined with vertical integration among business segments

     As the dominant integrated crude oil and natural gas company in Brazil, we can be cost efficient as a result of:

	•		the location of over 80% of our proved reserves in large, contiguous and highly productive fields in the offshore Campos Basin, which allows for the concentration of our operational infrastructure, thereby reducing our total costs of exploration, development and production;
	•		the location of most of our refining capacity in the Southeast region, directly adjacent to the Campos Basin and situated within the country’s most heavily populated and industrialized markets; and
	•		the relative balance between our current production of 1,684 Mbpd, our refining throughput of 1,726 Mbpd and the Brazilian market total demand for hydrocarbon products of 1,800 Mbpd as of December 2005.

     We believe that these cost efficiencies created by our integration, our existing infrastructure and our balance allow us to compete effectively with other Brazilian producers and importers of oil products into the Brazilian market.

Strong position in Brazil’s growing natural gas markets

     We participate in most aspects of the Brazilian natural gas market. At present, the ability to meet the potential demand for natural gas is limited, due to constraints in gas supply and to a distribution infrastructure that is still under development. The prices we realize for natural gas, which depend on the costs of other energy sources it can replace, are approximately half of the current market price in the United States, where demand is more

developed. The demand for natural gas in Brazil increased 11% in 2005. Although we cannot be certain that natural gas demand will continue to grow at annual rates similar to previous years, we expect continued growth as significant investments in gas transportation pipelines begin operating.

          Because of the diversity of our natural gas operations, we believe that we are well positioned to take advantage of the opportunity to meet potentially growing energy needs in Brazil through the use of natural gas. We intend to do so through our:

	•		increasing production of non-associated natural gas, and natural gas associated with our domestic crude oil production, combined with the necessary investments to process such gas from recent discoveries of non-associated gas reserves, mainly in the Santos Basin offshore in Brazil;
	•		planned investments in expansion of the natural gas transportation network throughout Brazil;
	•		increased participation in the natural gas distribution market through investments in 19 of the 25 natural gas distribution companies in Brazil;
	•		investments in gas-fired power plants, which serve as sources of demand for our natural gas; and
	•		seeking greater operational flexibility in our sources to improve our energy demand management.

Success in attracting international partners in all our activities

          As a result of our experience, expertise and extensive infrastructure network in Brazil, we have attracted partners in our exploration, development, refining and power activities such as Repsol-YPF, ExxonMobil, Shell, British Petroleum, Chevron-Texaco and Total. Partnering with other companies allows us to share risks, capital commitments and technology in our continuing development and expansion.

          We may face significant risks in our ability to take full advantage of these competitive strengths. See Item 3. “Key Information—Risk Factors.”

Strategy

     We intend to continue to expand our oil and gas exploration and production activities and pursue strategic investments within and outside of Brazil to further develop our business. We seek to evolve from a dominant integrated oil and gas company in Brazil into an energy industry leader in Latin America and a significant international energy company. In line with our Strategic Plan and to further these goals, we intend to:

	•		consolidate and increase competitive advantages in the Brazilian and South American oil and oil products market;
	•		selectively expand international activities in an integrated manner with the Company’s business;
	•		develop and lead the domestic natural gas market and act in an integrated manner in the gas and power market in the Southern Cone;
	•		selectively expand our activities in the domestic and Southern Cone petrochemicals market; and
	•		selectively perform in the renewable energy market.

Consolidate and increase competitive advantages in the Brazilian and South American oil and oil products market

          Our 2006-2010 Business Plan contemplates capital expenditures of approximately U.S.$28 billion in exploration and development activities in Brazil. Through these investments, we plan to implement 17 big scope

projects, among others, aimed at increasing production to 2.3 million bpd by 2010. Our 2006-2010 Business Plan contemplates capital expenditures of approximately U.S.$7.1 billion in exploration and development activities outside of Brazil. These investments will be primarily exploration and development activities in South America. Our other areas of focus will be the Gulf of Mexico and West Africa. At December 2005, we had exploration, development and production rights in 54 million gross and 35 million net acres (220,000 gross and 141,000 net square kilometers) outside Brazil.

     At the same time that we seek to expand production, we intend to increase proved reserves, focused on deepwater exploration in Brazil. Our goal is to maintain a ratio of 15.4 years of reserves to production sustainable in the long-term. We have net exploration, development and production rights in 35.3 million acres (142,691 square kilometers) in Brazil. We expect to continue to participate selectively with major regional and international oil and gas companies in bidding for new concessions and in developing large offshore fields.

     Our domestic production in 2005 supplied approximately 80% of the crude oil feedstock for our refinery operations in Brazil, as compared to 76% in 2004 and 80% in 2003. We expect an increasing percentage of the crude oil feedstock to be supplied by our relatively lower cost domestic production, as our overall domestic production increases. Because our domestic refining capacity constitutes 98.5% of the Brazilian refining capacity, we supply almost all of the refined product needs of third-party wholesalers, exporters and petrochemical companies, in addition to satisfying our internal consumption requirements with respect to wholesale marketing operations and petrochemical feedstock.

•

Our refineries were originally designed to process light imported crude oil, whereas our current reserves and production increasingly consist of heavier crude oil. We are in the process of improving and adapting our refineries to better process our domestic production of heavier crude oil.

Selectively expand international activities in an integrated manner with the Company’s business.

     In the near term, we expect to expand internationally by using our existing asset base or participating in selective partnerships in core activities where we have a competitive advantage. We consider our core activities to be integrated oil and gas operations throughout South America and deepwater exploration and development off the U.S. Gulf Coast, Colombia and West Africa. We also have exploration interests in Angola, Argentina, Bolivia, Colombia, Ecuador, Peru, Nigeria, Equatorial Guinea, Iran, the Gulf of Mexico, Tanzania, Turkey and Libya.

Develop and lead the domestic natural gas market and act in an integrated manner in the gas and power market in the Southern Cone

     Through our participation in all segments of the natural gas market, both in Brazil and abroad, we seek to meet domestic natural gas demand. We intend to continue to expand our participation in the natural gas market by:

	•		developing the natural gas industry on an integrated manner with other areas of our Company in the production chain and consumption; and
	•		taking advantage of growing opportunities in the power industry in an integrated manner with other natural gas market areas in which our Company already operates.

     As a result of our investments and the growing importance of natural gas as a cleaner energy alternative, we anticipate that the proportion of revenues and assets represented by natural gas operations will increase, leading to a greater impact of these activities on our results of operations.

Selectively expand our activities in the domestic and Southern Cone petrochemicals market

     We intend to expand activities in the petrochemical and fertilizer markets by seeking strategic partnerships and creating synergies with existing business. Our 2006-2010 Business Plan contemplates investments of approximately U.S.$2.0 billion in petrochemical business. Such investment will be aimed at increasing production of our basic petrochemicals, including polyolefins (polyethylene and polypropylene), acrylic acid and terephtalic acid. We believe that the growth of petrochemical activities will generate synergies with refining activities and we intend to take benefit of the expected growth in the petrochemical market in Brazil. We also intend to build a basic petrochemical complex that will integrate refinery units and petrochemical facilities to produce petrochemical raw materials such as ethylene, propylene, aromatics and its petrochemical derivatives, such as polyethylene and polypropylene. The total estimated aggregate investment for the construction of this petrochemical complex is approximately U.S.$6.5 billion and it is expected that it will begin operating in 2012.

Selectively perform in the renewable energy market

     We intend to develop some renewable energy alternatives in Brazil. Our priorities for investments in renewable sources of energy are:

	•		bio-diesel production and H-bio;
	•		wind power generation;
	•		biomass energy; and
	•		photo voltaic.

Overview by Business Segment

Exploration, Development and Production

Summary and Strategy

     Our exploration and production segment includes exploration, development and production activities in Brazil. We began domestic production in 1954 and international production in 1972. As of December 31, 2005, our estimated net proved crude oil and natural gas reserves in Brazil were approximately 10.58 billion barrels of oil equivalent. Crude oil represented 85% and natural gas represented 15% of these reserves. Our proved reserves are located principally in the Campos Basin.

     During 2005, our average daily domestic production was 1,684 Mbpd of crude oil and NGLs and 1.643 billion cubic feet of natural gas per day. Our aggregate average lifting costs for crude oil and natural gas in 2005 were U.S.$5.73 per barrel of oil equivalent in Brazil (excluding government take).

     We conduct exploration, development and production activities in Brazil through concession contracts. Under the terms of the Oil Law, in 1998 we were granted the concession rights to areas where we were already producing or could demonstrate we could explore or develop within a certain time frame. We refer to these concessions as Round zero. In a number of concessions, we have joint ventures with foreign partners to explore and develop the concessions. In conjunction with the majority of these arrangements, we received a carried interest for capital expenditures made during the exploration phase, with our partners incurring all capital expenditures until the development of a commercial discovery commences.

     At December 31, 2005, we held 418 areas, representing 35.3 million net acres (142,691 square kilometers). We currently have joint venture agreements for exploration and production in Brazil with 26 foreign and domestic companies. We are also active in exploration and production activities outside Brazil. For a full description of our international activities, see "—International—Exploration and Production.” In addition, we have added to our

exploration acreage through our participation in bidding rounds that have been conducted annually by the ANP since 1999.

     Our main strategies in exploration, development and production in Brazil are to increase production and reserves by:

	•		strengthening our expertise in deep and ultra-deep waters;
	•		focusing on profitable opportunities on-shore and in shallow water fields;
	•		implementing new practices and new technologies in areas with high exploitation degree in order to optimize recovery factor;
	•		developing exploratory efforts in new frontiers in order to assure a sustainable reserve/production ratio.

Principal Domestic Oil and Gas Producing Regions

     Our annual daily production in Brazil has generally grown over the years. In 1970, we produced 164 Mbpd of crude oil, condensate and natural gas liquids in Brazil. We increased production to 181 Mbpd in 1980, 654 Mbpd in 1990, 1,271 Mbpd in 2000 and 1,684 Mbpd in 2005. In describing our oil and gas producing regions, reservoirs refer to underground formations containing producible oil or gas. Fields are areas that contain one or more reservoirs. Blocks are sections of a sedimentary basin where we carry out oil and gas exploration and production activities under concession contracts.

     Our main domestic oil and gas producing regions are:

Campos Basin

     The Campos Basin is the largest oil and gas producing region, and covers approximately 28.4 million acres (115 thousand square kilometers). Since exploration activities in this area began in 1968, over 45 hydrocarbon reservoirs have been discovered in this region in a 7.5 thousand square kilometers concession area, including eight large oil fields in deepwater and ultra deepwater. In terms of proved hydrocarbon reserves and annual production, the Campos Basin is the largest oil basin in Brazil and one of the most prolific oil and gas areas in South America. Annual crude oil production volume in the region increased steadily for the past ten years until 2004, when oil production in the Campos Basin decreased to 1,204 Mbpd from 1,252 Mbpd in 2003. In 2005, oil production in the Campos Basin increased to 1,405 Mbpd. The Campos Basin’s oil production accounted for approximately 83% of Brazilian oil production in 2005.

     At December 31, 2005, we produced crude oil from 36 fields in the Campos Basin and its proved crude oil reserves were 7.89 billion barrels, representing 81% of our total proved crude oil reserves. In 2005, the crude oil we produced in the Campos Basin had an average API gravity of 23.5 and an average water cut of 1%. We currently have 26 floating production systems, 13 fixed platforms and 5,226 kilometers of pipeline and flexible pipes operating in 45 fields at water depths of 262 to 6,188 feet (80 to 1,886 meters) in the Campos Basin.

Espírito Santo Basin

     We have made several discoveries of light oil and natural gas in the Espírito Santo Basin. We currently have exploration rights to 23 blocks in this Basin, 12 onshore and 11 offshore, with an exploration acreage of 10.4 thousand square kilometers. During 2005, we produced 42.7 Mboe per day of oil and natural gas in the Espírito Santo Basin (25.7 Mboe onshore and 17.1 Mboe offshore). On February 21, 2006, we began gas production in the Basin’s Peroá Field.

Santos Basin

     The Santos Basin represents one of the most promising exploration areas. In January of 2006, we approved the Master Plan for Development of Natural Gas and Oil Production in the Santos Basin, with a base of exploration and production in the city of Santos, in the state of São Paulo. We currently have exploration rights to 26 blocks in the Santos Basin, with an exploration acreage of 40.7 thousand square kilometers (as compared to 13.7 thousand square kilometers under concession in the Campos Basin). Current production of oil and natural gas is 10.87 Mboe per day in the Coral and Merluza fields. We have drilled the first exploratory well in the ultra-deep waters of the Basin and have found evidence of oil.

Properties

     The following table sets forth our developed and undeveloped gross and net acreage by oil region and associated crude oil and natural gas production:

																		Average				Average
																		Oil and				Oil and
																		Natural Gas				Natural Gas
																		Production for				Production for
																		the Year				the Year
		Production Acreage as pf																Ended				Ended
		December 31.,2005																December 31,				December 31,
		Developed								Undeveloped								2005(1)(4)				2004(1)(4)
		Gross(2)				Net(2)				Gross(2)				Net(2)
						(in acres)												(boe per day) (3)
Brazil(1)
Offshore
Campos Basin			1,714,851				1,681,740				138,374				99,580				1,530,147				1,311,208
Other offshore			320,979				281,196				329,874				291,327				64,510				68,909
Total offshore			2,035,830				1,962,936				468,248				390,907				1,594,657				1,380,117
Onshore			1,045,466				1,045,466				131,949				131,950				363,203				377,603
Total Brazil			3,081,296				3,008,402				600,197				522,857				1,957,860				1,757,720
International
Onshore			4,225,975				2,584,034				2,967,718				1,871,834				245,828				247,122
Offshore			123,825				36,381				642,109				81,778				12,909				15,516
Total International			4,349,800				2,620,415				3,609,827				1,953,612				258,737				262,638
Total			7,431,096				5,628,817				4,210,024				2,476,469				2,216,597				2,020,358