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ANNUAL REPORT
PROFILE
  Petrobras is a publicly listed company that operates on
   an integrated basis in the following segments of the oil,
       gas and power sector: exploration and production,
               refining, commercialization, transportation,
       petrochemicals, distribution of oil products, natural
   gas, biofuels and electricity. Founded in 1953, Petrobras
   is now the world’s sixth largest oil company, by market
       value, according to the consulting firm PFC Energy.
      Leader in the Brazilian oil sector, Petrobras has been
 expanding its operations, in order to become one of the
   world’s top five integrated energy companies by 2020.

                         MISSION           VISION FOR 2020
   To operate in a safe and profitable       Petrobras will be one of
      manner in the energy sector in       the five largest integrated
   Brazil and abroad, showing social       energy companies in the
   and environmental responsibility         world and the preferred
and providing products and services               choice among our
    that meet clients’ needs and that                   stakeholders.
    contribute to the development of
     Brazil and the other countries in             VISION ATTRIBUTES
                                          Our activities will be notable for:
       which the company operates.
                                         > A strong international presence
                                                     > Setting a worldwide
                                                    benchmark in biofuels
                                           > Excellence in our operations,
                                                    management, human
                                               resources and technology
                                                              > Profitability
                                                 > Setting a benchmark in
                                                social and environmental
                                                             responsibility
                                            > Commitment to sustainable
                                                          development
HIGHLIGHTS
OPERATIONAL SUMMARY                                                                                                                                          2006                                    2007
Proven Reserves – SPE criteria – (billions of barrels of oil equivalent – boe)                                                                                15.0                                       15.0
    Oil and condensate (billion barrels)                                                                                                                      12.3                                       12.4
    Natural gas (billion boe)                                                                                                                                   2.7                                        2.6
Average daily production (thousand boe)                                                                                                                      2,298                                   2,300
    Oil and NGL (thousands of barrels per day - bpd)                                                                                                         1,920                                   1,918
    Natural gas (thousand boed)                                                                                                                                378                                         382
Producing wells                                                                                                                                          14,025                                     14,194
Drilling rigs                                                                                                                                                       63                                      70
Producing platforms                                                                                                                                            103                                         109
Pipelines (km)                                                                                                                                           23,144                                     23,142
Shipping fleet                                                                                                                                                      51                                      55
Terminals                                                                                                                                                           44                                      46
Refineries                                                                                                                                                          16                                      15
    Nominal installed capacity (thousand bpd)                                                                                                                2,227                                   2,167
    Average throughput (thousand bpd)                                                                                                                        1,872                                   1,965
    Average production of oil products (thousand bpd)                                                                                                        1,892                                   2,046
Electricity
    Number of thermoelectric plants                                                                                                                                 11                                      16
    Installed capacity (MW)                                                                                                                                  4,126                                   6,183
FINANCIAL SUMMARY (R$ MILLION)                                                                                                                               2006                                    2007
Gross operating revenue                                                                                                                                205,403                                  218,254
Net operating revenue                                                                                                                                  158,239                                  170,578
Operating income                                                                                                                                         42,237                                     40,591
Net income                                                                                                                                               25,919                                     21,512
EBITDA                                                                                                                                                   50,864                                     50,275
Net debt                                                                                                                                                 18,776                                     26,670
Investment                                                                                                                                               33,686                                     45,285
Gross margin                                                                                                                                                  40%                                        39%
Operating margin                                                                                                                                              27%                                        24%
Net margin                                                                                                                                                    16%                                        13%
More information at www.petrobras.com/annualreport



PRODUCTION OF OIL AND NATURAL GAS                                                                      PROVEN RESERVES OF OIL AND NATURAL GAS
(THOUSAND BOED)                                                                                        (SPE CRITERIA – BILLION BOE)
                                                                                     2,300




                                                                                                                                                                                             15.0
                                                                                                                                                                              15.0
                                                                                                                                   14.9




                                                                                                                                                      14.9
                                                                   2,298




                                                                                                           14.5
                                          2,217
      2,036




                        2,020




                                                                                                                                          2.8




                                                                                                                                                             2.6




                                                                                                                                                                                     2.7




                                                                                                                                                                                                    2.6
                                                                                                                   2.9
                                                                            378




                                                                                               382
                                                   370
               335




                                 359




                                                                                               1,918
                                                                            1,920
                                                   1,847
                                 1,661
               1,701




                                                                                                                                                                                                    12.4
                                                                                                                                                             12.3




                                                                                                                                                                                     12.3
                                                                                                                   11.6




                                                                                                                                          12.1




    2003               2004              2005                  2006                 2007                  2003                    2004            2005                    2006              2007

               Oil                                   Natural gas                                                   Oil                                        Natural gas




CONSOLIDATED NET INCOME                                                                                MARKET CAPITALIZATION VS NET EQUITY
(R$ MILLION)                                                                                           (R$ BILLION)
                                                                   25,919




                                                                                                                     Market capitalization
                                          23,725




                                                                                                                                                                                                    430
                                                                                      21,512




                                                                                                                     Net equity
      17,795




                        16,887




                                                                                                                                                                         230
                                                                                                                                                      174
                                                                                                                                   112
                                                                                                              87                                                         98
                                                                                                                                                                                                   114
                                                                                                                              62                 79
                                                                                                         49
     2003              2004              2005                  2006                 2007                      2003                 2004               2005                2006              2007
Contents
                                  Message from the CEO      02
                                           Pre-salt layer   04

             Business Management & Results                  06
                                     Oil market analysis    08
                        Business strategy & performance     09
                              Stock market performance      14
                                  Corporate governance      18
                                      Risk management       22
                                              Financing     24
                                      Human resources       26

                                Business Areas              30
                               Exploration & production     32
                           Refining & commercialization      37
                             Petrochemicals & fertilizers   40
                                         Transportation     42
                                            Distribution    45
                                             Natural gas    46
                                              Electricity   49
                                     Renewable energy       50

                    International Operations                52
                                International operations    54
                                          New business      57
                                 Business development       59

                            Intangible Assets               62
                                       Intangible assets    64
                                   Technological capital    66
                                  Organizational capital    68
                                         Human capital      69
                                    Relationship capital    71

     Social and Environmental Responsibility                74
                             Social responsibility policy   76
                        Health, safety & the environment    78
                                            Sponsorship     83

                                         Administration     86
                                               Glossary     88
                                      Conversion Table      91
Oil and natural gas production
          in Brazil has grown. Our additions
        to reserves have far outstripped the
production rate, and yet in December we set
    a new daily production record: 2 million
 and 238 barrels, a volume only achieved by
                 eight companies worldwide
                         JOSÉ SERGIO GABRIELLI DE AZEVEDO, Petrobras CEO
Message
from the CEO
    The principal highlight of 2007 was the discovery of
        princ                                                   Brazil increased by 0.4%, in relation to that of 2006, to
    huge reserves in ultra-deep waters of the Tupi area,        2,065 million boe/day. At the same time, new reserves
    estim
    estimated at between 5 and 8 billion barrels of light       were declared at a much faster pace, as confirmed by
    oil. The area is located 320 kilometers off the coast of
         T                                                      the Reserve Replacement Index of 123.6%. As a result,
        st
    the state of Rio de Janeiro, within the Santos Basin, and   the ratio of Reserves/Production (R/P) reached 19.6
    the find is under a layer of salt that is two kilometers     years. On December 25th, we set a new daily produc-
    in thickness. This discovery will put Petrobras among       tion record: 2,000,238 barrels, a volume only attained
    the world’s leading holders of oil reserves and provide     by eight companies in the world. This was made pos-
    our shareholders with the prospect of further excellent     sible by the operational start-up of five platforms in
    results well into the future.                               2007, which added a further 590,000 barrels of oil a
        This ground-breaking find — such depths had              day (bpd) to the Company’s installed capacity.
    previously never been explored commercially —                   The Company’s operational performance in
    underscores our traditional technological excel-            the Brazilian and international markets, along with
    lence and opens up a new exploration horizon for the        external factors, such as rising oil prices, has boosted
    Company and for Brazil, which could now join the            the share price, both at the Bovespa, where it is the
    select group of oil exporting countries. The potential      most heavily traded stock, and in New York, where
    of the pre-salt layer was confirmed in January 2008,         its American Depositary Receipts (ADRs) are traded.
    with the identification of a large deposit of natural        Petrobras’ common and preferred stock appreciated
    gas and condensate in the Santos Basin.                     in 2007 by 92.7% and 77.5%, respectively, compared
        There is much to celebrate, even before the Tupi        to 43.6% for the Ibovespa. In the New York market,
    area starts producing. Oil and natural gas production in    the Company’s ADRs were up by more than 100%.


2                                                                                                   MESSAGE FROM THE CEO
Petrobras closed 2007 with a record market capital-        our projects aimed at ensuring supplies, with invest-
ization of R$ 430 billion, making it Latin America’s       ments in expanding the transportation network and
most valuable company.                                     in LNG terminals. In 2007, Petrobras delivered to
    We have expanded the volume of oil refined and          the Brazilian market an average daily volume of 49
the output of oil products at our refineries, reaching      million m3 of natural gas. We also established new
the figures of 1,779,000 bpd of oil and 1,795,000 bpd       milestones in electricity generation, reaching a peak
of oil products. We have invested in new plants and        of 2,900 MW in November and attaining a daily aver-
in making technological improvements at the exist-         age of 1,006 MW.
ing refineries, to convert the heavier oils into higher         We have expanded our shipping fleet, while at the
value-added products. And we have extended the             same time giving a significant boost to the Brazilian
leadership of the Petrobras network of service sta-        shipbuilding industry, placing orders for 23 tankers,
tions in Brazil. The Company’s market share in Brazil      worth R$ 2.3 billion, with domestic shipyards.
is up to 34% now.                                              Our international presence was strengthened by
    We have managed to increase our sales, both            the acquisition of assets abroad that absorbed 14.5%
in the domestic market (+3.6%) and in our markets          of the total investments made by the Company dur-
abroad (+10.7%). The increased sales volume and            ing the year. One of the highlights was our entry into
higher international oil prices pushed the Company’s       the Asian refining segment, with the acquisition of
gross revenue to R$ 218.3 billion, up 6.3% in relation     a refinery in Okinawa, Japan, along with a terminal
to that of the previous year. Net revenue rose by 7.8%,    that will enable the distribution of biofuels and oil
to R$ 170.6 billion. The increased costs that have had     products to Asian markets.
to be absorbed by the entire industry have affected the         The Company’s most important assets – its
results, meaning that Petrobras’ net income, of R$ 21.5    people and know-how – received special attention
billion, was 17% lower than that of the previous year.     in 2007. We invested R$ 131 million in our research
In the financial area, we retained the strategy of man-     center – Cenpes, which signed 62 new agreements
aging the liability side, with old debt being paid off in   with 28 institutions. New educational and training
advance or replaced by new debt at a lower cost.           programs were implemented, in order to further
    The total investment in 2007 was the highest in        develop the skills and knowledge of the workforce.
the Company’s history, amounting to R$ 45.3 billion,       We also invested R$ 4.3 billion in HSE (Health, Safety
an increase of 34.4% in comparison with the figure          & the Environment) projects aligned with the cor-
for 2006. Around 75% of the R$ 38.71 billion in bud-       porate guidelines, to protect the employees, local
geted spending on its projects was paid to domestic        communities and fixed assets, as well as to reduce
suppliers, for the acquisition of materials, equip-        operational risks that could affect the Company’s
ment and services, thereby helping to invigorate the       operations and results.
Brazilian economy.                                             Further progress was made in implement-
    The improved business outlook made it neces-           ing the new policy regarding social responsibility,
sary to review the Company’s investment plan. The          according to the guidelines set out in the revised
revised Business Plan 2008-2012 now provides for           Strategic Plan 2020, thereby enhancing the planning,
investments totalling US$ 112.4 billion, 29% more          monitoring and appraisal of the Company’s social
than the previous figure.                                   investments.
    In 2007, Petrobras once more became a major                The results for 2007 bear witness to Petrobras’
investor in Brazilian petrochemicals, though the           determination to seize its business opportunities
investments marked a change in the Company‘s strat-        and stay ahead of market trends. The Company’s
egy towards that sector and gave Petrobras a cen-          performance continues to be based on the three fea-
tral role in the consolidation of the Brazilian petro-     tures that sustain its corporate strategy: Integrated
chemical sector. The highlights were the takeovers         Growth, Profitability and Social and Environmental
of Suzano Petroquímica and the Ipiranga Group, in          Responsibility.
association with other Brazilian groups.
    During a year that saw natural gas increase its        José Sergio Gabrielli de Azevedo
share in the Brazilian energy matrix, we accelerated       Petrobras CEO


WWW.PETROBRAS.COM   |   ANNUAL REPORT 2007                                                                          3
Pre-salt layer
Evaluation of the oil-bearing potential of the pre-salt geological strata of basins located in the south and southeast of Brazil indicates volumes
of oil and gas that, if confirmed, will significantly raise the country’s and Petrobras’ reserves, putting them among the select group of countries
and companies with major oil reserves. Tupi, the first area to be assessed, has recoverable volumes estimated to be between 5 billion and 8
billion barrels, which would make it the largest oil field in the world to be discovered since the year 2000. Estimates suggest that Tupi could
raise Petrobras’ proven reserves by more than 50%.
        Petrobras had to overcome a number of technological challenges in order to reach these reservoirs. The salt layer is about 2 thousand
meters thick and the wells penetrate over 7 thousand meters below sea level, in ultra-deep waters. At its research center, Petrobras developed
a new version of its Basin Simulator, to provide even more precise geological information, including data on the rock below the salt layer,
interpretation of which is hindered by distortions caused by the salt. For cement lining the wells, a new process has been developed that is
adapted to deal with the greater corrosiveness and instability of the salt.




1. Location: Brazil


                                                                                                        2. Size: 800 km
                                                                                                                             The pre-salt layer is
                                                                                                                             approximately 800 kilometers
                                                                                                                             long by 200 kilometers wide,
                                                                                                                             running along the southern and
                                                                                            30
                                                                                               0               0   km        southeastern coastline of Brazil,
                                                                                                   km
                                                                                                            80               from Santa Catarina all the way
                                                                                                                             up to Espírito Santo and including
                                                                                                                             the Santos, Campos and Espírito
                                                                                                                             Santo basins.




                                                                                                                              November
                                                                                                                              Conclusion of
                                                                                                                              analyses for
                         2006




                                                                                                                                                              2008
2005




                                                                                                                              a second well
                                                                     2007




                                                                                            June                              drilled in
                                                                            March           Reservoir                         Tupi block
       August                                                               Reservoir       containing                        BM-S-11                                January
       First                                                                containing      light oil                         indicate          December             Reservoir
       indications              July            October                     light oil       discovered in    September        recoverable       Reservoir            containing
       of oil in the            Reservoir       Announcement                discovered in   the pre-salt     Reservoir        volumes of        containing           natural
       pre-salt layer,          containing      of test results             the pre-salt    section of       containing       between 5         light oil            gas and
       in the Santos            light oil       for the first well          section of      the Campos       light oil        billion and 8     discovered           condensate
       Basin’s                  discovered      drilled in                  the Campos      Basin’s          discovered in    billion barrels   in Caramba           discovered in
       Parati block             in Tupi block   Tupi block                  Basin’s         Pirambu          Carioca block    of oil and        block                Júpiter block
       BM-S-10                  BM-S-11         BM-S-11                     Caxaréu field   field            BM-S-9           natural gas       BM-S-21              BM-S-24
4. Geological layers



    Oil quality                                                                                                                                0 meters          Ocean

    The greater part of Petrobras’ existing reserves
    comprises heavy oils. The pre-salt reservoirs,                                                                                             1.000
    containing light hydrocarbons — 30º API oil,                                                                                                                 Post-salt layer
    natural gas and condensate —, could alter the
    profile of the Company’s reserves, reducing the                                                                                            2.000

    need to import light oils and natural gas.
                                                                                                                                                                 Salt layer
                                                                                                                                               3.000




                                                                                                                                               4.000

                                                                                                                                                                 Pre-salt layer

                                                                                                                                               5.000


                                                                                                                     Vitória

                                                                                                                                               6.000




                                                                                                5. Block Consortia
São Paulo                                                    Rio de Janeiro                      CONSORTIA FOR THE SANTOS BASIN PRE-SALT BLOCKS
                                                                                                 BLOCK     NAME                PARTNERS
                                                                                                 BM-S-8    Bem-te-Vi           Petrobras (66%), Shell (20%), Petrogal (14%)
                                                                                                 BM-S-9    Carioca             Petrobras (45%), British Gas (30%), Repsol (25%)
    3. Exploration                                                                               BM-S10    Parati              Petrobras (65%), British Gas (25%), Partex (10%)

       blocks                                                                                    BM-S-11
                                                                                                 BM-S-17
                                                                                                           Tupi                Petrobras (65%), British Gas (25%), Petrogal (10%)
                                                                                                                               Petrobras (100%)
                                                                                                 BM-S-21   Caramba             Petrobras (80%), Petrogal (20%)
                                                 BM–S–10                                         BM-S-22                       Esso (40%), Amerada (40%), Petrobras (20%)
                                                   Parati
                                                                         BM–S–42
                           BM–S–52
                                                                                                 BM-S-24   Júpiter             Petrobras (80%), Petrogal (20%)
                         Corcovado                                                               BM-S-42                       Petrobras (100%)
                                                                                   Iara
                               BM–S–50                                                           BM-S-50                       Petrobras (60%), British Gas (20%), Repsol (20%)
                                                                                                 BM-S-52   Corcovado           Petrobras (60%), British Gas (40%)
               BM–S–9
               Carioca                                                              BM–S–24
                             BM–S–8                                                 Júpiter
                           Bem-te-Vi
                                                                    BM–S–11
                                BM–S–21                             Tupi
                               Caramba
                                                            Guará
            BM–S–17
                                           BM–S–22                                        Santos Basin                             Campos Basin


       Tested wells       Untested wells
Relatorio anual 2007 ing
Business
Management
and Results
Petrobras invested the sum of R$ 45.3 billion during 2007 and closed the year with
a 6.3% increase in total sales. This good performance and the prospects created
by promising discoveries of oil and gas in the Santos Basin were recognized
by investors and the market. The Company’s shares and ADRs enjoyed record
appreciation, the Petrobras Bovespa shareholder base grew by 14%, and important
institutions rewarded the Company’s good practices in Corporate Governance
and Human Resources by means of certification and awards.
OIL MARKET ANALYSIS




                High prices
                and supply
               uncertainties
    The year 2
             2007 saw a sharp increase in international oil        trend was briefly interrupted in August, with the end
    prices, reversing the downward trend towards the end
    price                                                          of the Atlantic hurricane season and of the holiday
    of 2006. The price of Brent at the end of 2007 was 56%
       20                                                          season in Europe and the United States. On the other
    higher than at the beginning of the year. The average
    highe                                                          hand, the U.S. real-estate crisis and economic slow-
    price for the year was US$ 72.82 a barrel, US$ 7.42            down, in the fourth quarter, have not had a significant
    higher than that of 2006, and prices were even more            impact on the oil market.
    volatile than in the previous year.                                In 2006, specialists had stated that the world
        Unlike 2006, there was an excess of demand,                economy would not hold up with oil prices at close to
    allied to declining stocks, which inevitably led to ris-       US$ 100 a barrel and that such a level would, of itself,
    ing prices. What is more, geopolitical instability in key      be capable of forcing a market correction. In 2007,
    areas, like the nuclear issue in Iran, guerrilla activity in   we saw a very different picture: the tolerance for high
    Nigeria and tension on the Turkey–Iraq border, cre-            prices is much greater than imagined.
    ated uncertainty with regard to supplies.
        Not even the production increase by OPEC
    (Organization of Petroleum Exporting Countries),
    from the second half of the year, was sufficient to alle-
    viate the imbalance between supply and demand.
        A mild start to the winter in the northern hemi-
    sphere reduced some of the demand pressure at the
    beginning of the year, but a drop in temperatures in
    February led to rising prices once more. This upward


8                                                                                          BUSINESS MANAGEMENT AND RESULTS
BUSINESS STRATEGY AND PERFORMANCE




Aggressive
growth targets
“We will become one of the five largest integrated          1,182,000 m3/year by 2015. Ethanol exports are to
energy companies in the world and the preferred
       compani                                              start at 500,000 m3 in 2008 and grow by 45.5% a year,
choice among our stakeholders”. That is the new
             o                                              to a total of 4,750,000 m3 by 2012.
Vision of the Petrobras Strategic Plan 2020, approved
              Pet                                               The projects provide for a 65% domestic pro-
by the Board o Directors along with the Business
             of                                             duction content, which will generate an average of
Plan 2008-2012.                                             US$ 12.6 billion a year in investment in local supply.
    The 2008-2012 plan envisages investments                Around 917,000 new direct and indirect jobs will be
amounting to US$ 112.4 billion, of which US$ 97.4           created in Brazil.
billion will be invested in Brazil. Of the US$ 15 billion
earmarked for investment abroad, 79% will go into
Latin America, the United States and western Africa.        NEW STRUCTURE
    The Business Plan continues to set aggressive           The Strategic Plan introduces two structural changes.
targets for growth, both in Brazil and abroad. Oil and      The first is the division into business segments,
natural gas production should reach 3.49 million bar-       instead of business areas. Petrobras will focus its
rels of oil equivalent per day (boed) by 2012, of which     activities on six segments: Exploration & Production
3.06 million boed will be produced in Brazil.               (E&P), Downstream (Refining, Transportation and
    Of this total investment, US$ 1.5 billion has been      Commercialization), Petrochemicals, Distribution,
set aside for biofuels, with 46% of this channeled          Gas & Power and Biofuels. International investment,
into ethanol pipelines and 29% into biodiesel. The          which was previously under an independent area,
corporate target is to put 329,000     m3/year   of biod-   has been distributed among the relevant business
iesel onto the market in 2008 and raise the figure to        segments. The second change is in relation to the


WWW.PETROBRAS.COM   |   ANNUAL REPORT 2007                                                                           9
BUSINESS STRATEGY AND PERFORMANCE

                                         management’s latest challenges, focused on capital         sideration the Company’s commitment to the sus-
                                         discipline, human resources, social responsibility,        tainable development of the countries and markets
                                         climate change and technology.                             in which it operates, based on the features: Integrated
                                             The Petrobras Vision for 2020 and the growth           Growth, Profitability and Social and Environmental
                                         targets of the Business Plan 2008-2012 take into con-      Responsibility.




                       Corporate Strategy


                                                              Commitment to sustainable development


                                                                                                                      Social and Environmental
                                  Integrated Growth                              Profitability                              Responsibility




                                   Expand our operations in targeted oil, oil product, petrochemical, gas & power, biofuel and distribution
                                           markets, becoming an integrated energy Company that is a worldwide benchmark
  Corporate Strategy




                         Increase oil and            Expand our                  Develop and                Expand our              Operate globally in
                          gas production             integrated               lead the Brazilian           petrochemical            commercialization
                          and reserves in           involvement              natural gas market             activities in              and logistics
                           a sustainable             in refining,             and operate in an           Brazil and other              support for
                         manner, and be          commercialization,          integrated manner            South American             biofuels, leading
                        recognized for the          logistics and               in the gas and               countries,             domestic biodiesel
                        excellence of E&P           distribution,            electricity markets,         integrated with             production and
                            operations             focused on the             with the focus on           Petrobras’ other             augmenting
                                                   Atlantic region              South America               businesses               our share of the
                                                                                                                                     ethanol business




                                               Excellence, in our operations, management, human resources and technology
Business
segment




                            E&P               Downstream              Distribution          Gas & Power            Petrochemicals             Biofuels
                                                (RTC)




10                                                                                                                         BUSINESS MANAGEMENT AND RESULTS
RECORD LEVEL OF INVESTMENT                                 by 3.1%, compared to 2006, to an average of 236,000
AND OPERATIONAL                                            boed. The reasons for this were the reviewing of the
IMPROVEMENTS                                               contracts with Venezuela and the natural decline of
With the investment of R$ 45.3 billion in 2007 – 34.4%     fully developed fields in Angola. However, the produc-
more than in the previous year —, Petrobras made           tion start-up at the Cottonwood field, in the USA, and
significant progress towards fulfilling the targets of the   increased output of gas in Bolivia, to meet Bolivian and
Strategic Plan 2020. Of that total, 46% was directed       Argentinean demand, helped to balance the produc-
into the area of Exploration & Production, especially      tion level abroad.
into production development. The Downstream area               According to Society of Petroleum Engineers
received 23.3%, with priority being given to the expan-    (SPE) criteria, the Company’s proven reserves of oil,
sion, conversion and quality of refining, to enhance the    condensate and natural gas, as at December 31, 2007,
value of the oil products and gas derivatives produced     were at 15.01 billion boe, a 0.1% (13 million boe)
by the Company. The resources utilized for acquisi-        dip from the level at the end of the previous year. Of
tions in the petrochemical sector helped the efforts        that total, 92.7% is located in Brazilian territory and
to consolidate the sector, building companies with a       7.3% lies abroad. For every barrel of oil equivalent
global reach and high level of competitiveness.            produced in Brazil in 2007, 0.98 boe was added to
    The International area received 14.5% of the           the reserves, yielding a Reserve Replacement Index
investment total, which was mainly used to build an        (IRR) of 98.4%. The reserves/production (R/P) ratio
FPSO (Floating Production, Storage and Off-loading          was at 18.9 years.
unit) in Nigeria and two ultra-deep water drilling ves-        The average processed throughput at the Brazilian
sels, and to develop production and exploration in         refineries was up by 1.9% in relation to the previous
Turkey, Angola, Iran and Libya. To the Gas & Power         year’s figure, as a result of two new conversion units
area was allocated 10.6% of the investment, which          coming on-stream at Refap in 2006. The share of
was channeled mainly into expanding the gas pipe-          Brazilian oil in the total processed throughput (78.1%)
line network.                                              was down by 1.4 p.p. in comparison with the previ-
    Oil and natural gas production in Brazil reached       ous year. Nevertheless, the total volume processed
2.06 million boed, an increase of 0.5% in relation to      remained practically stable, at 1,389,000 bpd (2006
the 2006 level, largely due to five new platforms com-      – 1,388,000 bpd). The reason for this was the need
ing on-line and increased production from four units       to use a higher proportion of less acid imported oil in
that started up in 2006. Another four platforms that       the processing of domestic oil with a high acid con-
are expected to go into operation in 2008 will raise the   tent, the processing of which is more profitable for
installed capacity by a further 520,000 boed.              the Company.
    The average lifting cost for domestic oil, with-
out including the government’s take, rose by 4.9%          INCREASED REVENUE
in comparison with that of the previous year, from         The pricing policy, adopted in 2006 and retained for
R$ 14.19/boe to R$ 14.88/boe, due to increased             2007, is to refrain from immediately passing on to the
spending on services, materials and personnel, as          consumer all the volatility of the international prices.
the industry heated up.                                    The average price of oil products in the domestic market
    The production of oil and gas outside Brazil fell      was R$ 151.05 a barrel, up 0.4% in comparison with the




Petrobras’ investments amounted to
                     reais in 2007
45.3 billion
WWW.PETROBRAS.COM   |   ANNUAL REPORT 2007                                                                            11
ESTRATÉGIA E DESEMPENHO EMPRESARIAL




                      2006 average. The prices of fuel oil and aviation fuel   on the respective figures for 2006. In the domestic
                      followed the world market fluctuations.                   market, the net revenue increased by R$ 3.3 billion
                          Petrobras’ total sales, including natural gas,       (+3.6%), mainly due to a 5.5% increase in diesel fuel
                      exports and sales abroad, came to 3.24 million boed,     revenue and a 2.5% rise in that from LPG, as a result
                      an increase of 6.3% over the figure for 2006 (3.05       of increased sales volumes.
                      million boed). The volume of sales in the domes-             The net revenue from exports rose by R$ 2.4
                      tic market, not including electricity, rose by 3.8% in   billion, with increased revenue from exports of oil
        6.3%          2007, mainly driven by oil product sales, which were     (+8.8%) and oil products (+11.6%), notably gasoline
       increase in    up by 2.8%, influenced by the country’s GDP growth,       (+35%) and diesel fuel (+52%). The revenue from sales
        total sales   increased production levels and enlargement of the       abroad was up by R$ 5.3 billion, due to the expansion
                      planted area for grains and sugar cane.                  of the Company’s trading operations and the inclusion

       218.3              Sales of natural gas in the domestic market rose
                      by 1.8%, due to a 6% rise in (non-thermoelectric)
                                                                               of the Pasadena refinery’s operations and those of the
                                                                               distributors in Paraguay, Uruguay and Colombia that
     billion          gas sales to distributors in São Paulo (state) and       were acquired from Shell, which more than offset the
     reais in gross   the south of Brazil. There was a notable increase in     fall in revenues from Venezuela and Bolivia.
        operating     electricity sales, which were up by 12.5%, resulting         The operating profit was R$ 40.6 billion, 3.9%
          revenue     from short term market opportunities and exports         lower than that of 2006. The main reasons for this
                      to Argentina.                                            were a 10% increase in COGS (Cost of Products and

        21.5              The higher oil and oil product prices in the world
                      market, together with the 3.8% increase in the domes-
                                                                               Services Sold) – the benchmark price of Brent oil rose
                                                                               11.3% – allied to increased imports of light oils and of
     billion          tic sales volume and a 5.6% increase in the sales vol-   oil products in order to meet the demand profile of
       reais in net   ume abroad, lifted the consolidated gross operating      the domestic market. A 21.5% increase in operating
          income      revenue to R$ 218.3 billion, while the net operat-       expenses, featuring a R$ 1.1 billion injection of funds
                      ing revenue was R$ 170.6 billion, 6.3% and 7.8% up       due to the renegotiation of the terms of the employee


12                                                                                                     BUSINESS MANAGEMENT AND RESULTS
ESTRATÉGIA E DESEMPENHO EMPRESARIAL




                                                                                                                      The P-50, one of Petrobras’
                                                                                                                      giant platforms, operating
                                                                                                                            in the Campos Basin




supplementary pension scheme – the Petros Plan, also       a 34.6% rise in long-term assets, partially offset by a
had a significant impact on the profit.                      20.6% drop in current assets, arising from a lower cash
    As a result, the EBITDA was down 1.2% from the         balance and reduced financial investments. On the
previous year’s level, at R$ 50.3 billion. The return      liabilities side, the net equity was up by 16.7%, due to
on capital employed (Roce) was 18% - five percent-          a 24.2% increase in reserves. Current liabilities were
age points lower than the figure for 2006 – since the       down by 2.1%, largely as a result of a 32.1% reduction
increase in the capital employed is not yet being          in financing.
reflected in the profits, because of the long period to          The Company held to its commitment towards
maturity that is typical of oil industry projects.         excellence in Social and Environmental Responsibility.
    In 2007, the net financial result was a R$ 3.9 bil-     Despite the substantial increase in its operations, the
lion expense. In 2006, the result was also negative,       volume of oil and oil products spilled was 386 m3, just
to the tune of R$ 1.3 billion. This outcome was influ-      a small increase over the 2006 figure, of 293 m3. This
enced by the appreciation of the local currency (real)     volume is significantly lower than the maximum toler-
and an increase in the dollar credit balance, represent-   able limit, of 739 m3. The Frequency Rate of Injuries
ing financial investments abroad and transactions          resulting in Time Off work (TFCA), which includes
between Petrobras and its subsidiaries abroad. This        outsourced workers as well as employees, remained
impact was partially offset by a reduction in financial      stable, easing from 0.77 in 2006 to 0.76 in 2007.
expenses, due to measures adopted to restructure
the Company’s debt profile. The upshot of all this
was a net profit of R$ 21.5 billion, 17.0% lower than
that of 2006.
    Petrobras’ total assets amounted to R$ 231.2 bil-
lion, an increase of 9.8% in relation to the figure for
2006, as a result of a 22.6% increase in fixed assets and


WWW.PETROBRAS.COM   |   ANNUAL REPORT 2007                                                                                                      13
STOCK MARKET PERFORMANCE




         Record return
           to investors
     The prices of Petrobras’ shares and American Deposi-
         price
                                                                COMPARISON OF ANNUAL YIELDS:
     tary Receipts (ADRs) tended to follow the oil price
          R                                                     PETROBRAS AND IBOVESPA
     incre
     increase, yielding a higher return than the Brazilian
     and U.S. stock market indices. At the São Paulo                       Stock appreciation (Petrobras common stock)

     stock exchange (Bovespa), the Company’s com-                          Dividend

     mon (PETR3) and preferred stock (PETR4) rose by                       Ibovespa*

     92.7% and 77.5%, respectively, whereas the Ibovespa        99.0%
     recorded a nominal increase of 43.6%. At the New York
                                                                                                                                          83.9%

     stock exchange (NYSE), the Dow Jones index rose by
                                                                                                                                                  6.4%
                                                                  78.4%




     6.4% in the year, while the Company’s ADRs appreci-
                                                                          13.7%




     ated by more than 100%.
                                                                                                        58.6%




          The good financial and operational results, the ris-
                                                                                                                5.4%




     ing international oil prices and the new discoveries of                                                                              47.2%
                                                                                                                         40.9%




     oil and natural gas all made a decisive contribution to
                                                                                           34.9%




                                                                                                                                 7.1%




     the excellent performance of the Company’s shares in                                              30.7%
                                                                                       7.7%




     2007. The market capitalization of Petrobras reached                                                               37.8%
                                                                                  18.6%
     the historic high of R$ 430 billion, 86.6% more than at
                                                                                                                                                  77.5%
                                                                          64.7%




                                                                                                                                 33.8%
                                                                                                                53.2%
                                                                                             27.2%




     the end of 2006. In dollar terms, it came to US$ 243
                                                                 2003                 2004             2005             2006             2007
     billion, an increase of 125.2%.
         The Company’s preferred shares were the most
                                                                (*) Including dividends, for the purpose of comparison
     heavily traded stocks at the Bovespa, in 2007, with an


14                                                                                                   BUSINESS MANAGEMENT AND RESULTS
BOVESPA TRADING VOLUME
                                                                                                  REAL ACCUMULATED CHANGE
(DAILY AVERAGE — R$ MILLION)




                                                                                                                                      840.8%
           Petrobras preferred stock




                                                                                        575
           Petrobras common stock                                                                                                                                                                    Ibovespa

                                                                                                                                                                               Petrobras preferred stock

                                                                                                                                                                               Petrobras common stock




                                                                                                                                                                                481.5%
                                                                                                                                                                      457.0%
                                                                                                                    445.1%
                                                                   283




                                                                                                                                                           314.3%
                                                 132




                                                                                                          144.9%
                                                                             106
                             100




                                                                                                                                                                                                                          78.6%
                                                                                                                                                                                                                 64.5%
           64




                                                            54




                                                                                                                                                                                                        33.1%
                      31




                                          31
  20




  2003                 2004                2005             2006              2007                                10 Years                                          5 Years                                     1 Year


                                                                                                    Inflation adjusted using the IGP—DI index




 COMPARISON OF ANNUAL YIELDS:                                                                       TRADING VOLUME AT THE NYSE
 PBR AND AMEX OIL                                                                                   (2007 DAILY AVERAGE — US$ MILLION)
                                                                                                          739.8




               Stock appreciation (PBR)

               Dividend
                                                                                                                                  631.9
                                                                               131.4%




               Amex Oil Index*
                                                                                                                                                 575.0
                                                                                         7.6%
  111.5%




                                                                                                                                                                     430.9
           15.8%




                                            85.2%




                                                                                                                                                                                            366.3
                                                    6.0%




                                                                                                                                                                                                                         326.8
                                                                                                                                                                                                       327.3




                                                                                                                                                                                                                                   281.5
                                                             50.5%




                                                                                                                                                                                                                                                  231.9


                                                                                                                                                                                                                                                             201.0
                               43.6%




                                                                     6.0%




                                                                                                                                                                                                                                                                         164.8




                                            39.5%
                           7.5%




                                                                               34.1%
  30.2%
                                                            22.8%
                   31.5%
                                                                                         123.8%
                                                                     44.5%
                                                    79.2%
           95.7%




                                 36.1%




                                                                                                                                                                                                                     (series L)
                                                                                                  CVRD*




                                                                                                                         Petrobras*




                                                                                                                                                  CVRD
                                                                                                                                               (common
                                                                                                                                                  stock)

                                                                                                                                                               Petrobras
                                                                                                                                                               (common
                                                                                                                                                                  stock)


                                                                                                                                                                                    Nokia




                                                                                                                                                                                                    America
                                                                                                                                                                                                     Movil*



                                                                                                                                                                                                                      America
                                                                                                                                                                                                                         Movil



                                                                                                                                                                                                                                  BP




                                                                                                                                                                                                                                           BHP Billiton



                                                                                                                                                                                                                                                          Petrobras
                                                                                                                                                                                                                                                          (preferred
                                                                                                                                                                                                                                                              stock)


                                                                                                                                                                                                                                                                           CVRD
                                                                                                                                                                                                                                                                       (preferred
                                                                                                                                                                                                                                                                           stock)




 2003                 2004                2005              2006             2007




 (*) Including dividends, for the purpose of comparison                                            (*) Sum of all the Company’s ADR programs




WWW.PETROBRAS.COM                   |    ANNUAL REPORT 2007                                                                                                                                                                                                                  15
STOCK MARKET PERFORMANCE




The Bovespa
trading floor in
session




            The gross dividend paid out per common and
     preferred share was               higher than in the
                        10.57%              previous year




16                                             BUSINESS MANAGEMENT AND RESULTS
average daily turnover of R$ 575 million, an increase of    end of 2007. This is an approximate figure, as there is
103% compared to 2006. The common shares traded at          no obligation on the part of those with title to ADRs in
an average daily volume of R$ 106 million, 94% more         the U.S. market to identify themselves.
than the turnover in the previous year. Petrobras stock         Adding together the Bovespa shareholder base,
had a share of over 16% in the Ibovespa hypothetical        the holders of ADRs, those who have a stake in invest-
portfolio, during the period September to December,         ment funds devoted to Petrobras shares and those
more than any other company in the index.                   who have invested their FGTS (service indemnity
    The appreciation of the local currency (real)           fund) resources in Petrobras stocks, the total number
against the U.S. dollar (+17%), together with the           of investors at the end of 2007 exceeded 694,000.
Company’s strong performance, also boosted the                  This is a reflection of investors’ confidence in the
ADRs traded at the NYSE. The price of ADRs linked           Company’s future results and its commitment to both
to the Company’s preferred stock (PBRA) rose by             profitability and social and environmental respon-
107.5%, while those linked to the common stock (PBR)        sibility. It is also evidence of the market’s positive
increased by 123.8%. This appreciation was substan-         assessment of Petrobras’ administrative transparency,
tially greater than the increase not only in the Dow        corporate governance practices and operational and
Jones index, but also of the S&P500 (3.5%) and the          financial results, as well as its good relations with all
Amex Oil Index, the oil industry benchmark, which           its stakeholders.
rose by 31.3%.
    The average NYSE trading volume of ADRs                    PETROBRAS’ BOVESPA
linked to Petrobras common stock (PBR) was US$                 SHAREHOLDER BASE
                                                               (EXCLUDING PETROBRAS FGTS AND INVESTMENT FUNDS)
431 million, and for those linked to the preferred stock
(PBRA), the average was US$ 201 million, making the
Company’s ADRs the second most heavily traded ADR
                                                                                             lit (Sep/0   5):
in the U.S. market.                                                             the stock sp
                                                                 + 48.1 % since           s
                                                                              shareholder
                                                                 61,990 new




                                                                                                                             190,952
EXPANDED SHAREHOLDER BASE
                                                                                                                 167,580




During 2007, Petrobras paid out to its shareholders
                                                                                       140,060




gross dividends of R$ 1.8313 per common (ON) or
                                                                  128,962




preferred (PN) share, in relation to the fiscal year 2006.
This represents an increase of 10.57% in comparison
with the previous year’s dividend.
    The number of Petrobras shareholders in the
Bovespa market grew by 23,372 in 2007, bringing the
total to 190,952. In percentage terms, the total was
up by 14% in comparison with the figure at the end of
2006. Since the stock split in 2005, there has been an
increase of more than 48%, representing 61,990 new
shareholders. It is estimated that the number of hold-
                                                                Aug/05               Dec/05                     Dec/06     Dec/07
ers of the Company’s ADRs was at least 82,300 at the




WWW.PETROBRAS.COM     |   ANNUAL REPORT 2007                                                                                           17
CORPORATE GOVERNANCE




         Controls are
           awarded
         certification
     without proviso
     Petrobra
     Petrobras and its subsidiary Petrobras International             The Company is proceeding with its corporate
     Finance Company (PIFCo) were awarded, without pro-
              C                                                   governance training program, targeting executives
           thei
     viso, their first Certification of Internal Controls over      and staff whose work involves relations with other
     C
     Consolidated Financial Reporting, in relation to the fiscal   companies in the Petrobras system. The aim of the
     y
     year 2006. This certification meets the Sarbanes-Oxley        program is to promote awareness of the importance
     Law (SOX) legal requirements for companies whose             of this issue and to divulge the best practices adopted
     shares or securities are registered in the U.S. market.      in Brazil and abroad.
         In Brazil, Petrobras is subject to the rules of the          In further evidence of the importance attached
     Brazilian Securities Commission (CVM) and the São            to good corporate governance practices, in 2007, the
     Paulo stock exchange (Bovespa). Internationally,             Company linked its Corporate Governance Commission
     the Company complies with the regulations of the             to the Committee for Analysis of the Organization and
     Securities and Exchange Commission (SEC) and the             Management, an executive management body.
     New York Stock Exchange (NYSE), in the U.S.A.; of
     the Madrid stock exchange’s Latin America Securities         INTERNAL CONTROLS
     Market (Latibex), in Spain; and of the Buenos Aires          The Certification of the Internal Controls of Petrobras
     stock exchange and the National Securities Commission        and PIFCo, for the 2006 fiscal year, was filed in 2007.
     (CNV), in Argentina.                                         The consolidated financial reporting of the most impor-
         The Company is studying the possibility of formal        tant affiliated companies was tested and evaluated.
     adhesion to the Bovespa corporate governance Level           This process was planned and carried through by the
     1. It has been meeting the requirements ever since the       General Management of Internal Controls body, under
     by-laws were revised, in 2002.                               the supervision of the Committee for the Management


18                                                                                        BUSINESS MANAGEMENT AND RESULTS
NON-VOTING CAPITAL
 PREFERRED STOCK




   15.5%         36.5%            14.1%               33.9%
                                                                                17 thousand
   BNDESPar      Level 3
                 ADRs
                 and Rule 144-A
                                  Foreign investors
                                  (CMN Resolution
                                  nº 2,689)
                                                      Other
                                                      individuals and
                                                      legal entities
                                                                              controls were evaluated under
                                                                              the certification process
 VOTING CAPITAL
 COMMON STOCK




   55.7%            1.9%                  27.4%                   4.0%                    3.2%                7.8%
   Federal          BNDESPar              Level 3                 FMP-FGTS                Foreign investors   Other
   government                             ADRs                    Petrobras               (CMN Resolution     individuals and
                                                                                          nº 2,689)           legal entities




 CAPITAL STOCK




   32.2%             7.6%                  15.9%                   15.4%                   2.3%               7.8%                18.8%
   Federal           BNDESPar              ADRs                    ADRs                    FMP-FGTS           Foreign investors   Other
   government                              (Common stock)          (Preferred stock)       Petrobras          (CMN Resolution     individuals and
                                                                                                              nº 2,689)           legal entities




of Internal Controls and monitored by the Petrobras                           hierarchical levels, needs to confirm his or her agree-
Board of Directors’ Audit Committee.                                          ment with the results of the evaluations and testing of
    The 2006 certification involved the evaluation                            the controls under his or her responsibility.
of some 17,000 internal controls. Following a risk                                     As well as compliance with the legal requirements,
assessment procedure, approximately 3,500 controls                            the Company’s annual certification process makes a
were then tested. The outside auditors also conducted                         valuable contribution to the continual refinement of
their own tests, fully independent of the Company’s                           the corporate governance mechanisms, the reviewing
management, and based on their examinations, the                              of policies, guidelines, codes and by-laws, the stan-
internal controls were certified without proviso by the                        dardization of processes, rules and procedures, and
independent auditors.                                                         the broadening of IT governance.
    For the 2007 certification, the General Management                                  The principal lasting improvements made by the
of Internal Controls assisted the administration in trans-                    Company in the area of internal controls embrace
forming the SOX into a routine process, fully integrated                      the integrated management of the controls at the
within the Company’s corporate culture. In addition                           organizational and process level, the ongoing analy-
to the organization-wide controls, the administration                         sis and review of the process risk monitoring, the
successfully completed the self-assessment of 3,200                           gradual extension of the essential controls to all the
controls in relation to accounting, outsourced services,                      Company’s units, and the development of ongoing
taxation and information technology (IT) procedures,                          programs to instruct the administration in the con-
the testing of which, by the internal and outside audi-                       cepts and standard tools for the charting and assess-
tors, is nearing completion. Before the certification is                       ment of risks and controls, with the support of the
filed, each manager with control responsibilities, at all                      Petrobras University.


WWW.PETROBRAS.COM    |   ANNUAL REPORT 2007                                                                                                         19
CORPORATE GOVERNANCE




Corporate governance structure
Petrobras’ corporate governance structure comprises the Board of Directors and its advisory committees, the Executive Board,
the Fiscal Council, Internal Auditing, the Ombudsman, the Business Committee and the Management Committees.


Board of Directors                                                           Ombudsman
An independent collegial body with powers and responsibilities laid          The office of the Ombudsman, which is directly linked to the Board
down in the law and in the Company’s by-laws, whose main duties are          of Directors, plans, guides, coordinates and evaluates activities aimed
to define the Company’s strategic guidelines and supervise the actions       at gathering the opinions, suggestions, criticism, complaints and ac-
of the Executive Board. The board has nine members, elected at a             cusations of interested parties having some form of relationship with
General Meeting of the Shareholders for a term of one year, with the         the Company, and arranges for investigations to be carried out and
possibility of reelection. Seven of the board members represent the          appropriate steps to be taken. In compliance with the requirements
controlling shareholder; one represents the minority shareholders of         of the Sarbanes-Oxley Law, this office must also serve as a channel
common stock; and one represents the preferred shareholders.                 for receiving and handling accusations regarding accounting, internal
                                                                             control and auditing issues, including confidential and anonymous
Executive Board                                                              tip-offs from employees.
The Executive Board runs the business, in line with the mission, objec-
tives, strategies and guidelines defined by the Board of Directors. The      Board Advisory Committees
Executive Board comprises a CEO and six directors chosen by the              There are three Advisory Committees: for Auditing; the Environment;
Board of Directors to serve a term of three years, with the possibility      and Remuneration and Succession. Their members are also mem-
of reelection. They may be removed from their posts at any time. Only        bers of the Board of Directors and they assist that Board in fulfilling
the CEO is also a member of the Board of Directors, but he or she may        its responsibilities in regard to the senior guidance and direction of
not preside over that body.                                                  the Company.
                                                                             Audit Committee – In full compliance with the requirements of the
Fiscal Council                                                               Sarbanes-Oxley Law, this committee comprises three independent
A permanent body, independent of the Company’s management, as                members of the Board of Directors and its chairperson needs to be
laid down in the Brazilian Corporate Legislation, the Fiscal Council com-    a financial specialist – in accordance with SEC definitions. The com-
prises five members, serving a term of one year, with the possibility        mittee’s function is to analyze questions regarding the integrity of
of reelection. One of the members represents the minority sharehold-         the Company’s US GAAP financial reports and the effectiveness of its
ers; another represents the preferred shareholders; and three act on         internal controls, as well as supervising Petrobras’ outside and internal
behalf of the federal government – one of them being appointed by            auditors.
the Finance Minister, as the representative of the National Treasury. It
is incumbent on the Fiscal Council to represent the shareholders in a        Business Committee
supervisory capacity, monitoring the actions of the Company’s man-           This committee is a forum for integration, seeking to align business
agement and verifying the compliance with their legal and statutory          development, management of the Company and the guidelines of
obligations, as well as defending the interests of the Company and its       the Strategic Plan, in support of the senior management’s decision
shareholders.                                                                making process.


Auditing                                                                     Management Committees
The Internal Auditors plan and conduct the internal auditing procedures      These are forums for delving deeper into issues that are to be pre-
of the Petrobras system. They also assist the senior management in at-       sented to the Business Committee, with which they liaise. Such integra-
taining the objectives defined in the Strategic Plan, through a systematic   tion also exists between the Management Committees themselves and
and disciplined approach to evaluating and improving the effectiveness        in their relations with the Board Advisory Committees.
of the Company’s risk management, control and corporate governance                The Company has the following Management Committees:
processes. In 2006, the testing of the internal controls, specifically       Exploration & Production; Downstream; Gas & Power; Human Re-
aimed at obtaining the certification required under the Sarbanes-Oxley       sources; Health, Safety & the Environment; Organization and Man-
Law, was included among the activities of the internal auditors.             agement Analysis; Information Technology; Internal Controls; Risk;
     The Company also has outside auditors, appointed by the Board           Petrobras Technology; Social and Environmental Responsibility; and
of Directors, who are restricted as to the consulting services they may      Marketing & Brands.
provide. It is mandatory that the outside auditors be changed every
five years, on a rotation basis.




20                                                                                                                     BUSINESS MANAGEMENT AND RESULTS
Petrobras Organizational Structure

     The Petrobras organization model, approved by the Board of Directors in October 2000, is constantly being refined. Changes in the Company’s
     organizational structure in 2007 led to the adoption of a new organizational and administrative model at certain units. Examples of this are
     the broadened scope of operations at the Exploration & Production business unit in the Solimões Basin, the creation of temporary organi-
     zational structures for the implementation of large-scale undertakings, and the transferring of telecommunications activities to the Services
     area. Approval was granted for the structural reorganization of business units abroad, linked to the International business area.




                                                                             FISCAL
                                                                            COUNCIL
                                                              BOARD OF
                                                              DIRECTORS




                                                Ombudsman                                   Internal Auditing




                                                                           EXECUTIVE
                                                                             BOARD
                                                                  CEO

                                                                                                                              Management
     Business Strategy &                                                                                                      Systems
           Performance                                                                                                        Development


                    New                                                                                                       Legal Area
                Business


                 Human                               CEO’s                                General                             Institutional
               Resources                             Office                               Secretary                           Communication




                                                       Exploration                                       International
  Financial Area                Gas & Power            & Production           Downstream                                          Services
                                                                                                         Area
                                                       (Upstream)

                                                                                                                                  Health, Safety &
  Corporate Finance             Corporate Section      Corporate Section      Corporate Section          Corporate Area           the Environment


  Financial                     Natural Gas            Production                                        Business Technical
  Planning & Risk               Logistics & Equity                            Logistics                                           Materials
                                                       Engineering                                       Support
  Management                    Stakes

                                                                                                                                  Research &
                                Energy Operations                                                        Business
  Finance                                              Services               Refining                                            Development
                                & Equity Stakes                                                          Development              (Cenpes)


  Accounting                    Energy                 Exploration            Petrochemicals &           Southern Cone            Engineering
                                Development                                   Fertilizers                Region


                                                                                                         Americas, Africa         Information
  Taxation                      Marketing & Sales      North–Northeast        Marketing & Sales                                   Technology & Tele-
                                                                                                         & Eurasia
                                                                                                                                  communications


  Investor Relations                                   South–Southeast                                                            Shared
                                                                                                                                  Services




WWW.PETROBRAS.COM      |   ANNUAL REPORT 2007                                                                                                        21
RISK MANAGEMENT




           Management
           aligned to the
           Business Plan
     By the very nature of its activities, Petrobras is exposed
            ve                                                    to six months), involving futures contracts, swaps
     to marke risks, such as variations in the prices of
        market                                                    and options and utilizing control methodologies in
     oil and oil products, in interest rates (domestic and
             o                                                    accordance with specific risk management guide-
     internatio
     international) and in currency exchange rates. The           lines, in order to safeguard the results of its physical
     manage
     management of this risk is aligned with the corporate        operations.
     goals and targets, to ensure the sustainable growth of
     the Company.
         In seeking a suitable balance between its targets for    CREDIT RISK
     growth and return on investment, on the one hand, and        Petrobras consolidated the centralization of its
     its level of exposure to risk, on the other, every possi-    control of customer credit and extended this initia-
     bility is analyzed by the Risk Management Committee,         tive to the customers of its subsidiaries, Petrobras
     comprising executives from the Company’s corporate           International Finance Company (PIFCo), Petrobras
     and business areas. This brings an integrated percep-        Finance Limited (PFL) and Petrobras Singapore
     tion of the issues and makes it easier for the Executive     Private Limited (PSPL). This measure ensures that
     Board and the Board of Directors to take the appropri-       the risk exposure in Brazil and foreign markets is kept
     ate decisions.                                               to a suitable level.
         In its management of the market risks in relation            The policy and procedures for conceding credit
     to oil and oil products, through regular and system-         were refined in 2007, so as to safeguard the Company’s
     atic evaluation of the consolidated net exposure to          competitiveness in the markets where it operates and
     price risk, the Company limits its operations using          in new markets that are opening up, especially in Asia,
     derivatives to specific short term transactions (up          thereby underpinning sustainable sales growth.


22                                                                                        BUSINESS MANAGEMENT AND RESULTS
Relatorio anual 2007 ing
Relatorio anual 2007 ing
Relatorio anual 2007 ing
Relatorio anual 2007 ing
Relatorio anual 2007 ing
Relatorio anual 2007 ing
Relatorio anual 2007 ing
Relatorio anual 2007 ing
Relatorio anual 2007 ing
Relatorio anual 2007 ing
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Relatorio anual 2007 ing

  • 2. PROFILE Petrobras is a publicly listed company that operates on an integrated basis in the following segments of the oil, gas and power sector: exploration and production, refining, commercialization, transportation, petrochemicals, distribution of oil products, natural gas, biofuels and electricity. Founded in 1953, Petrobras is now the world’s sixth largest oil company, by market value, according to the consulting firm PFC Energy. Leader in the Brazilian oil sector, Petrobras has been expanding its operations, in order to become one of the world’s top five integrated energy companies by 2020. MISSION VISION FOR 2020 To operate in a safe and profitable Petrobras will be one of manner in the energy sector in the five largest integrated Brazil and abroad, showing social energy companies in the and environmental responsibility world and the preferred and providing products and services choice among our that meet clients’ needs and that stakeholders. contribute to the development of Brazil and the other countries in VISION ATTRIBUTES Our activities will be notable for: which the company operates. > A strong international presence > Setting a worldwide benchmark in biofuels > Excellence in our operations, management, human resources and technology > Profitability > Setting a benchmark in social and environmental responsibility > Commitment to sustainable development
  • 3. HIGHLIGHTS OPERATIONAL SUMMARY 2006 2007 Proven Reserves – SPE criteria – (billions of barrels of oil equivalent – boe) 15.0 15.0 Oil and condensate (billion barrels) 12.3 12.4 Natural gas (billion boe) 2.7 2.6 Average daily production (thousand boe) 2,298 2,300 Oil and NGL (thousands of barrels per day - bpd) 1,920 1,918 Natural gas (thousand boed) 378 382 Producing wells 14,025 14,194 Drilling rigs 63 70 Producing platforms 103 109 Pipelines (km) 23,144 23,142 Shipping fleet 51 55 Terminals 44 46 Refineries 16 15 Nominal installed capacity (thousand bpd) 2,227 2,167 Average throughput (thousand bpd) 1,872 1,965 Average production of oil products (thousand bpd) 1,892 2,046 Electricity Number of thermoelectric plants 11 16 Installed capacity (MW) 4,126 6,183 FINANCIAL SUMMARY (R$ MILLION) 2006 2007 Gross operating revenue 205,403 218,254 Net operating revenue 158,239 170,578 Operating income 42,237 40,591 Net income 25,919 21,512 EBITDA 50,864 50,275 Net debt 18,776 26,670 Investment 33,686 45,285 Gross margin 40% 39% Operating margin 27% 24% Net margin 16% 13% More information at www.petrobras.com/annualreport PRODUCTION OF OIL AND NATURAL GAS PROVEN RESERVES OF OIL AND NATURAL GAS (THOUSAND BOED) (SPE CRITERIA – BILLION BOE) 2,300 15.0 15.0 14.9 14.9 2,298 14.5 2,217 2,036 2,020 2.8 2.6 2.7 2.6 2.9 378 382 370 335 359 1,918 1,920 1,847 1,661 1,701 12.4 12.3 12.3 11.6 12.1 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 Oil Natural gas Oil Natural gas CONSOLIDATED NET INCOME MARKET CAPITALIZATION VS NET EQUITY (R$ MILLION) (R$ BILLION) 25,919 Market capitalization 23,725 430 21,512 Net equity 17,795 16,887 230 174 112 87 98 114 62 79 49 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
  • 4. Contents Message from the CEO 02 Pre-salt layer 04 Business Management & Results 06 Oil market analysis 08 Business strategy & performance 09 Stock market performance 14 Corporate governance 18 Risk management 22 Financing 24 Human resources 26 Business Areas 30 Exploration & production 32 Refining & commercialization 37 Petrochemicals & fertilizers 40 Transportation 42 Distribution 45 Natural gas 46 Electricity 49 Renewable energy 50 International Operations 52 International operations 54 New business 57 Business development 59 Intangible Assets 62 Intangible assets 64 Technological capital 66 Organizational capital 68 Human capital 69 Relationship capital 71 Social and Environmental Responsibility 74 Social responsibility policy 76 Health, safety & the environment 78 Sponsorship 83 Administration 86 Glossary 88 Conversion Table 91
  • 5. Oil and natural gas production in Brazil has grown. Our additions to reserves have far outstripped the production rate, and yet in December we set a new daily production record: 2 million and 238 barrels, a volume only achieved by eight companies worldwide JOSÉ SERGIO GABRIELLI DE AZEVEDO, Petrobras CEO
  • 6. Message from the CEO The principal highlight of 2007 was the discovery of princ Brazil increased by 0.4%, in relation to that of 2006, to huge reserves in ultra-deep waters of the Tupi area, 2,065 million boe/day. At the same time, new reserves estim estimated at between 5 and 8 billion barrels of light were declared at a much faster pace, as confirmed by oil. The area is located 320 kilometers off the coast of T the Reserve Replacement Index of 123.6%. As a result, st the state of Rio de Janeiro, within the Santos Basin, and the ratio of Reserves/Production (R/P) reached 19.6 the find is under a layer of salt that is two kilometers years. On December 25th, we set a new daily produc- in thickness. This discovery will put Petrobras among tion record: 2,000,238 barrels, a volume only attained the world’s leading holders of oil reserves and provide by eight companies in the world. This was made pos- our shareholders with the prospect of further excellent sible by the operational start-up of five platforms in results well into the future. 2007, which added a further 590,000 barrels of oil a This ground-breaking find — such depths had day (bpd) to the Company’s installed capacity. previously never been explored commercially — The Company’s operational performance in underscores our traditional technological excel- the Brazilian and international markets, along with lence and opens up a new exploration horizon for the external factors, such as rising oil prices, has boosted Company and for Brazil, which could now join the the share price, both at the Bovespa, where it is the select group of oil exporting countries. The potential most heavily traded stock, and in New York, where of the pre-salt layer was confirmed in January 2008, its American Depositary Receipts (ADRs) are traded. with the identification of a large deposit of natural Petrobras’ common and preferred stock appreciated gas and condensate in the Santos Basin. in 2007 by 92.7% and 77.5%, respectively, compared There is much to celebrate, even before the Tupi to 43.6% for the Ibovespa. In the New York market, area starts producing. Oil and natural gas production in the Company’s ADRs were up by more than 100%. 2 MESSAGE FROM THE CEO
  • 7. Petrobras closed 2007 with a record market capital- our projects aimed at ensuring supplies, with invest- ization of R$ 430 billion, making it Latin America’s ments in expanding the transportation network and most valuable company. in LNG terminals. In 2007, Petrobras delivered to We have expanded the volume of oil refined and the Brazilian market an average daily volume of 49 the output of oil products at our refineries, reaching million m3 of natural gas. We also established new the figures of 1,779,000 bpd of oil and 1,795,000 bpd milestones in electricity generation, reaching a peak of oil products. We have invested in new plants and of 2,900 MW in November and attaining a daily aver- in making technological improvements at the exist- age of 1,006 MW. ing refineries, to convert the heavier oils into higher We have expanded our shipping fleet, while at the value-added products. And we have extended the same time giving a significant boost to the Brazilian leadership of the Petrobras network of service sta- shipbuilding industry, placing orders for 23 tankers, tions in Brazil. The Company’s market share in Brazil worth R$ 2.3 billion, with domestic shipyards. is up to 34% now. Our international presence was strengthened by We have managed to increase our sales, both the acquisition of assets abroad that absorbed 14.5% in the domestic market (+3.6%) and in our markets of the total investments made by the Company dur- abroad (+10.7%). The increased sales volume and ing the year. One of the highlights was our entry into higher international oil prices pushed the Company’s the Asian refining segment, with the acquisition of gross revenue to R$ 218.3 billion, up 6.3% in relation a refinery in Okinawa, Japan, along with a terminal to that of the previous year. Net revenue rose by 7.8%, that will enable the distribution of biofuels and oil to R$ 170.6 billion. The increased costs that have had products to Asian markets. to be absorbed by the entire industry have affected the The Company’s most important assets – its results, meaning that Petrobras’ net income, of R$ 21.5 people and know-how – received special attention billion, was 17% lower than that of the previous year. in 2007. We invested R$ 131 million in our research In the financial area, we retained the strategy of man- center – Cenpes, which signed 62 new agreements aging the liability side, with old debt being paid off in with 28 institutions. New educational and training advance or replaced by new debt at a lower cost. programs were implemented, in order to further The total investment in 2007 was the highest in develop the skills and knowledge of the workforce. the Company’s history, amounting to R$ 45.3 billion, We also invested R$ 4.3 billion in HSE (Health, Safety an increase of 34.4% in comparison with the figure & the Environment) projects aligned with the cor- for 2006. Around 75% of the R$ 38.71 billion in bud- porate guidelines, to protect the employees, local geted spending on its projects was paid to domestic communities and fixed assets, as well as to reduce suppliers, for the acquisition of materials, equip- operational risks that could affect the Company’s ment and services, thereby helping to invigorate the operations and results. Brazilian economy. Further progress was made in implement- The improved business outlook made it neces- ing the new policy regarding social responsibility, sary to review the Company’s investment plan. The according to the guidelines set out in the revised revised Business Plan 2008-2012 now provides for Strategic Plan 2020, thereby enhancing the planning, investments totalling US$ 112.4 billion, 29% more monitoring and appraisal of the Company’s social than the previous figure. investments. In 2007, Petrobras once more became a major The results for 2007 bear witness to Petrobras’ investor in Brazilian petrochemicals, though the determination to seize its business opportunities investments marked a change in the Company‘s strat- and stay ahead of market trends. The Company’s egy towards that sector and gave Petrobras a cen- performance continues to be based on the three fea- tral role in the consolidation of the Brazilian petro- tures that sustain its corporate strategy: Integrated chemical sector. The highlights were the takeovers Growth, Profitability and Social and Environmental of Suzano Petroquímica and the Ipiranga Group, in Responsibility. association with other Brazilian groups. During a year that saw natural gas increase its José Sergio Gabrielli de Azevedo share in the Brazilian energy matrix, we accelerated Petrobras CEO WWW.PETROBRAS.COM | ANNUAL REPORT 2007 3
  • 8. Pre-salt layer Evaluation of the oil-bearing potential of the pre-salt geological strata of basins located in the south and southeast of Brazil indicates volumes of oil and gas that, if confirmed, will significantly raise the country’s and Petrobras’ reserves, putting them among the select group of countries and companies with major oil reserves. Tupi, the first area to be assessed, has recoverable volumes estimated to be between 5 billion and 8 billion barrels, which would make it the largest oil field in the world to be discovered since the year 2000. Estimates suggest that Tupi could raise Petrobras’ proven reserves by more than 50%. Petrobras had to overcome a number of technological challenges in order to reach these reservoirs. The salt layer is about 2 thousand meters thick and the wells penetrate over 7 thousand meters below sea level, in ultra-deep waters. At its research center, Petrobras developed a new version of its Basin Simulator, to provide even more precise geological information, including data on the rock below the salt layer, interpretation of which is hindered by distortions caused by the salt. For cement lining the wells, a new process has been developed that is adapted to deal with the greater corrosiveness and instability of the salt. 1. Location: Brazil 2. Size: 800 km The pre-salt layer is approximately 800 kilometers long by 200 kilometers wide, running along the southern and 30 0 0 km southeastern coastline of Brazil, km 80 from Santa Catarina all the way up to Espírito Santo and including the Santos, Campos and Espírito Santo basins. November Conclusion of analyses for 2006 2008 2005 a second well 2007 June drilled in March Reservoir Tupi block August Reservoir containing BM-S-11 January First containing light oil indicate December Reservoir indications July October light oil discovered in September recoverable Reservoir containing of oil in the Reservoir Announcement discovered in the pre-salt Reservoir volumes of containing natural pre-salt layer, containing of test results the pre-salt section of containing between 5 light oil gas and in the Santos light oil for the first well section of the Campos light oil billion and 8 discovered condensate Basin’s discovered drilled in the Campos Basin’s discovered in billion barrels in Caramba discovered in Parati block in Tupi block Tupi block Basin’s Pirambu Carioca block of oil and block Júpiter block BM-S-10 BM-S-11 BM-S-11 Caxaréu field field BM-S-9 natural gas BM-S-21 BM-S-24
  • 9. 4. Geological layers Oil quality 0 meters Ocean The greater part of Petrobras’ existing reserves comprises heavy oils. The pre-salt reservoirs, 1.000 containing light hydrocarbons — 30º API oil, Post-salt layer natural gas and condensate —, could alter the profile of the Company’s reserves, reducing the 2.000 need to import light oils and natural gas. Salt layer 3.000 4.000 Pre-salt layer 5.000 Vitória 6.000 5. Block Consortia São Paulo Rio de Janeiro CONSORTIA FOR THE SANTOS BASIN PRE-SALT BLOCKS BLOCK NAME PARTNERS BM-S-8 Bem-te-Vi Petrobras (66%), Shell (20%), Petrogal (14%) BM-S-9 Carioca Petrobras (45%), British Gas (30%), Repsol (25%) 3. Exploration BM-S10 Parati Petrobras (65%), British Gas (25%), Partex (10%) blocks BM-S-11 BM-S-17 Tupi Petrobras (65%), British Gas (25%), Petrogal (10%) Petrobras (100%) BM-S-21 Caramba Petrobras (80%), Petrogal (20%) BM–S–10 BM-S-22 Esso (40%), Amerada (40%), Petrobras (20%) Parati BM–S–42 BM–S–52 BM-S-24 Júpiter Petrobras (80%), Petrogal (20%) Corcovado BM-S-42 Petrobras (100%) Iara BM–S–50 BM-S-50 Petrobras (60%), British Gas (20%), Repsol (20%) BM-S-52 Corcovado Petrobras (60%), British Gas (40%) BM–S–9 Carioca BM–S–24 BM–S–8 Júpiter Bem-te-Vi BM–S–11 BM–S–21 Tupi Caramba Guará BM–S–17 BM–S–22 Santos Basin Campos Basin Tested wells Untested wells
  • 11. Business Management and Results Petrobras invested the sum of R$ 45.3 billion during 2007 and closed the year with a 6.3% increase in total sales. This good performance and the prospects created by promising discoveries of oil and gas in the Santos Basin were recognized by investors and the market. The Company’s shares and ADRs enjoyed record appreciation, the Petrobras Bovespa shareholder base grew by 14%, and important institutions rewarded the Company’s good practices in Corporate Governance and Human Resources by means of certification and awards.
  • 12. OIL MARKET ANALYSIS High prices and supply uncertainties The year 2 2007 saw a sharp increase in international oil trend was briefly interrupted in August, with the end prices, reversing the downward trend towards the end price of the Atlantic hurricane season and of the holiday of 2006. The price of Brent at the end of 2007 was 56% 20 season in Europe and the United States. On the other higher than at the beginning of the year. The average highe hand, the U.S. real-estate crisis and economic slow- price for the year was US$ 72.82 a barrel, US$ 7.42 down, in the fourth quarter, have not had a significant higher than that of 2006, and prices were even more impact on the oil market. volatile than in the previous year. In 2006, specialists had stated that the world Unlike 2006, there was an excess of demand, economy would not hold up with oil prices at close to allied to declining stocks, which inevitably led to ris- US$ 100 a barrel and that such a level would, of itself, ing prices. What is more, geopolitical instability in key be capable of forcing a market correction. In 2007, areas, like the nuclear issue in Iran, guerrilla activity in we saw a very different picture: the tolerance for high Nigeria and tension on the Turkey–Iraq border, cre- prices is much greater than imagined. ated uncertainty with regard to supplies. Not even the production increase by OPEC (Organization of Petroleum Exporting Countries), from the second half of the year, was sufficient to alle- viate the imbalance between supply and demand. A mild start to the winter in the northern hemi- sphere reduced some of the demand pressure at the beginning of the year, but a drop in temperatures in February led to rising prices once more. This upward 8 BUSINESS MANAGEMENT AND RESULTS
  • 13. BUSINESS STRATEGY AND PERFORMANCE Aggressive growth targets “We will become one of the five largest integrated 1,182,000 m3/year by 2015. Ethanol exports are to energy companies in the world and the preferred compani start at 500,000 m3 in 2008 and grow by 45.5% a year, choice among our stakeholders”. That is the new o to a total of 4,750,000 m3 by 2012. Vision of the Petrobras Strategic Plan 2020, approved Pet The projects provide for a 65% domestic pro- by the Board o Directors along with the Business of duction content, which will generate an average of Plan 2008-2012. US$ 12.6 billion a year in investment in local supply. The 2008-2012 plan envisages investments Around 917,000 new direct and indirect jobs will be amounting to US$ 112.4 billion, of which US$ 97.4 created in Brazil. billion will be invested in Brazil. Of the US$ 15 billion earmarked for investment abroad, 79% will go into Latin America, the United States and western Africa. NEW STRUCTURE The Business Plan continues to set aggressive The Strategic Plan introduces two structural changes. targets for growth, both in Brazil and abroad. Oil and The first is the division into business segments, natural gas production should reach 3.49 million bar- instead of business areas. Petrobras will focus its rels of oil equivalent per day (boed) by 2012, of which activities on six segments: Exploration & Production 3.06 million boed will be produced in Brazil. (E&P), Downstream (Refining, Transportation and Of this total investment, US$ 1.5 billion has been Commercialization), Petrochemicals, Distribution, set aside for biofuels, with 46% of this channeled Gas & Power and Biofuels. International investment, into ethanol pipelines and 29% into biodiesel. The which was previously under an independent area, corporate target is to put 329,000 m3/year of biod- has been distributed among the relevant business iesel onto the market in 2008 and raise the figure to segments. The second change is in relation to the WWW.PETROBRAS.COM | ANNUAL REPORT 2007 9
  • 14. BUSINESS STRATEGY AND PERFORMANCE management’s latest challenges, focused on capital sideration the Company’s commitment to the sus- discipline, human resources, social responsibility, tainable development of the countries and markets climate change and technology. in which it operates, based on the features: Integrated The Petrobras Vision for 2020 and the growth Growth, Profitability and Social and Environmental targets of the Business Plan 2008-2012 take into con- Responsibility. Corporate Strategy Commitment to sustainable development Social and Environmental Integrated Growth Profitability Responsibility Expand our operations in targeted oil, oil product, petrochemical, gas & power, biofuel and distribution markets, becoming an integrated energy Company that is a worldwide benchmark Corporate Strategy Increase oil and Expand our Develop and Expand our Operate globally in gas production integrated lead the Brazilian petrochemical commercialization and reserves in involvement natural gas market activities in and logistics a sustainable in refining, and operate in an Brazil and other support for manner, and be commercialization, integrated manner South American biofuels, leading recognized for the logistics and in the gas and countries, domestic biodiesel excellence of E&P distribution, electricity markets, integrated with production and operations focused on the with the focus on Petrobras’ other augmenting Atlantic region South America businesses our share of the ethanol business Excellence, in our operations, management, human resources and technology Business segment E&P Downstream Distribution Gas & Power Petrochemicals Biofuels (RTC) 10 BUSINESS MANAGEMENT AND RESULTS
  • 15. RECORD LEVEL OF INVESTMENT by 3.1%, compared to 2006, to an average of 236,000 AND OPERATIONAL boed. The reasons for this were the reviewing of the IMPROVEMENTS contracts with Venezuela and the natural decline of With the investment of R$ 45.3 billion in 2007 – 34.4% fully developed fields in Angola. However, the produc- more than in the previous year —, Petrobras made tion start-up at the Cottonwood field, in the USA, and significant progress towards fulfilling the targets of the increased output of gas in Bolivia, to meet Bolivian and Strategic Plan 2020. Of that total, 46% was directed Argentinean demand, helped to balance the produc- into the area of Exploration & Production, especially tion level abroad. into production development. The Downstream area According to Society of Petroleum Engineers received 23.3%, with priority being given to the expan- (SPE) criteria, the Company’s proven reserves of oil, sion, conversion and quality of refining, to enhance the condensate and natural gas, as at December 31, 2007, value of the oil products and gas derivatives produced were at 15.01 billion boe, a 0.1% (13 million boe) by the Company. The resources utilized for acquisi- dip from the level at the end of the previous year. Of tions in the petrochemical sector helped the efforts that total, 92.7% is located in Brazilian territory and to consolidate the sector, building companies with a 7.3% lies abroad. For every barrel of oil equivalent global reach and high level of competitiveness. produced in Brazil in 2007, 0.98 boe was added to The International area received 14.5% of the the reserves, yielding a Reserve Replacement Index investment total, which was mainly used to build an (IRR) of 98.4%. The reserves/production (R/P) ratio FPSO (Floating Production, Storage and Off-loading was at 18.9 years. unit) in Nigeria and two ultra-deep water drilling ves- The average processed throughput at the Brazilian sels, and to develop production and exploration in refineries was up by 1.9% in relation to the previous Turkey, Angola, Iran and Libya. To the Gas & Power year’s figure, as a result of two new conversion units area was allocated 10.6% of the investment, which coming on-stream at Refap in 2006. The share of was channeled mainly into expanding the gas pipe- Brazilian oil in the total processed throughput (78.1%) line network. was down by 1.4 p.p. in comparison with the previ- Oil and natural gas production in Brazil reached ous year. Nevertheless, the total volume processed 2.06 million boed, an increase of 0.5% in relation to remained practically stable, at 1,389,000 bpd (2006 the 2006 level, largely due to five new platforms com- – 1,388,000 bpd). The reason for this was the need ing on-line and increased production from four units to use a higher proportion of less acid imported oil in that started up in 2006. Another four platforms that the processing of domestic oil with a high acid con- are expected to go into operation in 2008 will raise the tent, the processing of which is more profitable for installed capacity by a further 520,000 boed. the Company. The average lifting cost for domestic oil, with- out including the government’s take, rose by 4.9% INCREASED REVENUE in comparison with that of the previous year, from The pricing policy, adopted in 2006 and retained for R$ 14.19/boe to R$ 14.88/boe, due to increased 2007, is to refrain from immediately passing on to the spending on services, materials and personnel, as consumer all the volatility of the international prices. the industry heated up. The average price of oil products in the domestic market The production of oil and gas outside Brazil fell was R$ 151.05 a barrel, up 0.4% in comparison with the Petrobras’ investments amounted to reais in 2007 45.3 billion WWW.PETROBRAS.COM | ANNUAL REPORT 2007 11
  • 16. ESTRATÉGIA E DESEMPENHO EMPRESARIAL 2006 average. The prices of fuel oil and aviation fuel on the respective figures for 2006. In the domestic followed the world market fluctuations. market, the net revenue increased by R$ 3.3 billion Petrobras’ total sales, including natural gas, (+3.6%), mainly due to a 5.5% increase in diesel fuel exports and sales abroad, came to 3.24 million boed, revenue and a 2.5% rise in that from LPG, as a result an increase of 6.3% over the figure for 2006 (3.05 of increased sales volumes. million boed). The volume of sales in the domes- The net revenue from exports rose by R$ 2.4 tic market, not including electricity, rose by 3.8% in billion, with increased revenue from exports of oil 6.3% 2007, mainly driven by oil product sales, which were (+8.8%) and oil products (+11.6%), notably gasoline increase in up by 2.8%, influenced by the country’s GDP growth, (+35%) and diesel fuel (+52%). The revenue from sales total sales increased production levels and enlargement of the abroad was up by R$ 5.3 billion, due to the expansion planted area for grains and sugar cane. of the Company’s trading operations and the inclusion 218.3 Sales of natural gas in the domestic market rose by 1.8%, due to a 6% rise in (non-thermoelectric) of the Pasadena refinery’s operations and those of the distributors in Paraguay, Uruguay and Colombia that billion gas sales to distributors in São Paulo (state) and were acquired from Shell, which more than offset the reais in gross the south of Brazil. There was a notable increase in fall in revenues from Venezuela and Bolivia. operating electricity sales, which were up by 12.5%, resulting The operating profit was R$ 40.6 billion, 3.9% revenue from short term market opportunities and exports lower than that of 2006. The main reasons for this to Argentina. were a 10% increase in COGS (Cost of Products and 21.5 The higher oil and oil product prices in the world market, together with the 3.8% increase in the domes- Services Sold) – the benchmark price of Brent oil rose 11.3% – allied to increased imports of light oils and of billion tic sales volume and a 5.6% increase in the sales vol- oil products in order to meet the demand profile of reais in net ume abroad, lifted the consolidated gross operating the domestic market. A 21.5% increase in operating income revenue to R$ 218.3 billion, while the net operat- expenses, featuring a R$ 1.1 billion injection of funds ing revenue was R$ 170.6 billion, 6.3% and 7.8% up due to the renegotiation of the terms of the employee 12 BUSINESS MANAGEMENT AND RESULTS
  • 17. ESTRATÉGIA E DESEMPENHO EMPRESARIAL The P-50, one of Petrobras’ giant platforms, operating in the Campos Basin supplementary pension scheme – the Petros Plan, also a 34.6% rise in long-term assets, partially offset by a had a significant impact on the profit. 20.6% drop in current assets, arising from a lower cash As a result, the EBITDA was down 1.2% from the balance and reduced financial investments. On the previous year’s level, at R$ 50.3 billion. The return liabilities side, the net equity was up by 16.7%, due to on capital employed (Roce) was 18% - five percent- a 24.2% increase in reserves. Current liabilities were age points lower than the figure for 2006 – since the down by 2.1%, largely as a result of a 32.1% reduction increase in the capital employed is not yet being in financing. reflected in the profits, because of the long period to The Company held to its commitment towards maturity that is typical of oil industry projects. excellence in Social and Environmental Responsibility. In 2007, the net financial result was a R$ 3.9 bil- Despite the substantial increase in its operations, the lion expense. In 2006, the result was also negative, volume of oil and oil products spilled was 386 m3, just to the tune of R$ 1.3 billion. This outcome was influ- a small increase over the 2006 figure, of 293 m3. This enced by the appreciation of the local currency (real) volume is significantly lower than the maximum toler- and an increase in the dollar credit balance, represent- able limit, of 739 m3. The Frequency Rate of Injuries ing financial investments abroad and transactions resulting in Time Off work (TFCA), which includes between Petrobras and its subsidiaries abroad. This outsourced workers as well as employees, remained impact was partially offset by a reduction in financial stable, easing from 0.77 in 2006 to 0.76 in 2007. expenses, due to measures adopted to restructure the Company’s debt profile. The upshot of all this was a net profit of R$ 21.5 billion, 17.0% lower than that of 2006. Petrobras’ total assets amounted to R$ 231.2 bil- lion, an increase of 9.8% in relation to the figure for 2006, as a result of a 22.6% increase in fixed assets and WWW.PETROBRAS.COM | ANNUAL REPORT 2007 13
  • 18. STOCK MARKET PERFORMANCE Record return to investors The prices of Petrobras’ shares and American Deposi- price COMPARISON OF ANNUAL YIELDS: tary Receipts (ADRs) tended to follow the oil price R PETROBRAS AND IBOVESPA incre increase, yielding a higher return than the Brazilian and U.S. stock market indices. At the São Paulo Stock appreciation (Petrobras common stock) stock exchange (Bovespa), the Company’s com- Dividend mon (PETR3) and preferred stock (PETR4) rose by Ibovespa* 92.7% and 77.5%, respectively, whereas the Ibovespa 99.0% recorded a nominal increase of 43.6%. At the New York 83.9% stock exchange (NYSE), the Dow Jones index rose by 6.4% 78.4% 6.4% in the year, while the Company’s ADRs appreci- 13.7% ated by more than 100%. 58.6% The good financial and operational results, the ris- 5.4% ing international oil prices and the new discoveries of 47.2% 40.9% oil and natural gas all made a decisive contribution to 34.9% 7.1% the excellent performance of the Company’s shares in 30.7% 7.7% 2007. The market capitalization of Petrobras reached 37.8% 18.6% the historic high of R$ 430 billion, 86.6% more than at 77.5% 64.7% 33.8% 53.2% 27.2% the end of 2006. In dollar terms, it came to US$ 243 2003 2004 2005 2006 2007 billion, an increase of 125.2%. The Company’s preferred shares were the most (*) Including dividends, for the purpose of comparison heavily traded stocks at the Bovespa, in 2007, with an 14 BUSINESS MANAGEMENT AND RESULTS
  • 19. BOVESPA TRADING VOLUME REAL ACCUMULATED CHANGE (DAILY AVERAGE — R$ MILLION) 840.8% Petrobras preferred stock 575 Petrobras common stock Ibovespa Petrobras preferred stock Petrobras common stock 481.5% 457.0% 445.1% 283 314.3% 132 144.9% 106 100 78.6% 64.5% 64 54 33.1% 31 31 20 2003 2004 2005 2006 2007 10 Years 5 Years 1 Year Inflation adjusted using the IGP—DI index COMPARISON OF ANNUAL YIELDS: TRADING VOLUME AT THE NYSE PBR AND AMEX OIL (2007 DAILY AVERAGE — US$ MILLION) 739.8 Stock appreciation (PBR) Dividend 631.9 131.4% Amex Oil Index* 575.0 7.6% 111.5% 430.9 15.8% 85.2% 366.3 6.0% 326.8 327.3 281.5 50.5% 231.9 201.0 43.6% 6.0% 164.8 39.5% 7.5% 34.1% 30.2% 22.8% 31.5% 123.8% 44.5% 79.2% 95.7% 36.1% (series L) CVRD* Petrobras* CVRD (common stock) Petrobras (common stock) Nokia America Movil* America Movil BP BHP Billiton Petrobras (preferred stock) CVRD (preferred stock) 2003 2004 2005 2006 2007 (*) Including dividends, for the purpose of comparison (*) Sum of all the Company’s ADR programs WWW.PETROBRAS.COM | ANNUAL REPORT 2007 15
  • 20. STOCK MARKET PERFORMANCE The Bovespa trading floor in session The gross dividend paid out per common and preferred share was higher than in the 10.57% previous year 16 BUSINESS MANAGEMENT AND RESULTS
  • 21. average daily turnover of R$ 575 million, an increase of end of 2007. This is an approximate figure, as there is 103% compared to 2006. The common shares traded at no obligation on the part of those with title to ADRs in an average daily volume of R$ 106 million, 94% more the U.S. market to identify themselves. than the turnover in the previous year. Petrobras stock Adding together the Bovespa shareholder base, had a share of over 16% in the Ibovespa hypothetical the holders of ADRs, those who have a stake in invest- portfolio, during the period September to December, ment funds devoted to Petrobras shares and those more than any other company in the index. who have invested their FGTS (service indemnity The appreciation of the local currency (real) fund) resources in Petrobras stocks, the total number against the U.S. dollar (+17%), together with the of investors at the end of 2007 exceeded 694,000. Company’s strong performance, also boosted the This is a reflection of investors’ confidence in the ADRs traded at the NYSE. The price of ADRs linked Company’s future results and its commitment to both to the Company’s preferred stock (PBRA) rose by profitability and social and environmental respon- 107.5%, while those linked to the common stock (PBR) sibility. It is also evidence of the market’s positive increased by 123.8%. This appreciation was substan- assessment of Petrobras’ administrative transparency, tially greater than the increase not only in the Dow corporate governance practices and operational and Jones index, but also of the S&P500 (3.5%) and the financial results, as well as its good relations with all Amex Oil Index, the oil industry benchmark, which its stakeholders. rose by 31.3%. The average NYSE trading volume of ADRs PETROBRAS’ BOVESPA linked to Petrobras common stock (PBR) was US$ SHAREHOLDER BASE (EXCLUDING PETROBRAS FGTS AND INVESTMENT FUNDS) 431 million, and for those linked to the preferred stock (PBRA), the average was US$ 201 million, making the Company’s ADRs the second most heavily traded ADR lit (Sep/0 5): in the U.S. market. the stock sp + 48.1 % since s shareholder 61,990 new 190,952 EXPANDED SHAREHOLDER BASE 167,580 During 2007, Petrobras paid out to its shareholders 140,060 gross dividends of R$ 1.8313 per common (ON) or 128,962 preferred (PN) share, in relation to the fiscal year 2006. This represents an increase of 10.57% in comparison with the previous year’s dividend. The number of Petrobras shareholders in the Bovespa market grew by 23,372 in 2007, bringing the total to 190,952. In percentage terms, the total was up by 14% in comparison with the figure at the end of 2006. Since the stock split in 2005, there has been an increase of more than 48%, representing 61,990 new shareholders. It is estimated that the number of hold- Aug/05 Dec/05 Dec/06 Dec/07 ers of the Company’s ADRs was at least 82,300 at the WWW.PETROBRAS.COM | ANNUAL REPORT 2007 17
  • 22. CORPORATE GOVERNANCE Controls are awarded certification without proviso Petrobra Petrobras and its subsidiary Petrobras International The Company is proceeding with its corporate Finance Company (PIFCo) were awarded, without pro- C governance training program, targeting executives thei viso, their first Certification of Internal Controls over and staff whose work involves relations with other C Consolidated Financial Reporting, in relation to the fiscal companies in the Petrobras system. The aim of the y year 2006. This certification meets the Sarbanes-Oxley program is to promote awareness of the importance Law (SOX) legal requirements for companies whose of this issue and to divulge the best practices adopted shares or securities are registered in the U.S. market. in Brazil and abroad. In Brazil, Petrobras is subject to the rules of the In further evidence of the importance attached Brazilian Securities Commission (CVM) and the São to good corporate governance practices, in 2007, the Paulo stock exchange (Bovespa). Internationally, Company linked its Corporate Governance Commission the Company complies with the regulations of the to the Committee for Analysis of the Organization and Securities and Exchange Commission (SEC) and the Management, an executive management body. New York Stock Exchange (NYSE), in the U.S.A.; of the Madrid stock exchange’s Latin America Securities INTERNAL CONTROLS Market (Latibex), in Spain; and of the Buenos Aires The Certification of the Internal Controls of Petrobras stock exchange and the National Securities Commission and PIFCo, for the 2006 fiscal year, was filed in 2007. (CNV), in Argentina. The consolidated financial reporting of the most impor- The Company is studying the possibility of formal tant affiliated companies was tested and evaluated. adhesion to the Bovespa corporate governance Level This process was planned and carried through by the 1. It has been meeting the requirements ever since the General Management of Internal Controls body, under by-laws were revised, in 2002. the supervision of the Committee for the Management 18 BUSINESS MANAGEMENT AND RESULTS
  • 23. NON-VOTING CAPITAL PREFERRED STOCK 15.5% 36.5% 14.1% 33.9% 17 thousand BNDESPar Level 3 ADRs and Rule 144-A Foreign investors (CMN Resolution nº 2,689) Other individuals and legal entities controls were evaluated under the certification process VOTING CAPITAL COMMON STOCK 55.7% 1.9% 27.4% 4.0% 3.2% 7.8% Federal BNDESPar Level 3 FMP-FGTS Foreign investors Other government ADRs Petrobras (CMN Resolution individuals and nº 2,689) legal entities CAPITAL STOCK 32.2% 7.6% 15.9% 15.4% 2.3% 7.8% 18.8% Federal BNDESPar ADRs ADRs FMP-FGTS Foreign investors Other government (Common stock) (Preferred stock) Petrobras (CMN Resolution individuals and nº 2,689) legal entities of Internal Controls and monitored by the Petrobras hierarchical levels, needs to confirm his or her agree- Board of Directors’ Audit Committee. ment with the results of the evaluations and testing of The 2006 certification involved the evaluation the controls under his or her responsibility. of some 17,000 internal controls. Following a risk As well as compliance with the legal requirements, assessment procedure, approximately 3,500 controls the Company’s annual certification process makes a were then tested. The outside auditors also conducted valuable contribution to the continual refinement of their own tests, fully independent of the Company’s the corporate governance mechanisms, the reviewing management, and based on their examinations, the of policies, guidelines, codes and by-laws, the stan- internal controls were certified without proviso by the dardization of processes, rules and procedures, and independent auditors. the broadening of IT governance. For the 2007 certification, the General Management The principal lasting improvements made by the of Internal Controls assisted the administration in trans- Company in the area of internal controls embrace forming the SOX into a routine process, fully integrated the integrated management of the controls at the within the Company’s corporate culture. In addition organizational and process level, the ongoing analy- to the organization-wide controls, the administration sis and review of the process risk monitoring, the successfully completed the self-assessment of 3,200 gradual extension of the essential controls to all the controls in relation to accounting, outsourced services, Company’s units, and the development of ongoing taxation and information technology (IT) procedures, programs to instruct the administration in the con- the testing of which, by the internal and outside audi- cepts and standard tools for the charting and assess- tors, is nearing completion. Before the certification is ment of risks and controls, with the support of the filed, each manager with control responsibilities, at all Petrobras University. WWW.PETROBRAS.COM | ANNUAL REPORT 2007 19
  • 24. CORPORATE GOVERNANCE Corporate governance structure Petrobras’ corporate governance structure comprises the Board of Directors and its advisory committees, the Executive Board, the Fiscal Council, Internal Auditing, the Ombudsman, the Business Committee and the Management Committees. Board of Directors Ombudsman An independent collegial body with powers and responsibilities laid The office of the Ombudsman, which is directly linked to the Board down in the law and in the Company’s by-laws, whose main duties are of Directors, plans, guides, coordinates and evaluates activities aimed to define the Company’s strategic guidelines and supervise the actions at gathering the opinions, suggestions, criticism, complaints and ac- of the Executive Board. The board has nine members, elected at a cusations of interested parties having some form of relationship with General Meeting of the Shareholders for a term of one year, with the the Company, and arranges for investigations to be carried out and possibility of reelection. Seven of the board members represent the appropriate steps to be taken. In compliance with the requirements controlling shareholder; one represents the minority shareholders of of the Sarbanes-Oxley Law, this office must also serve as a channel common stock; and one represents the preferred shareholders. for receiving and handling accusations regarding accounting, internal control and auditing issues, including confidential and anonymous Executive Board tip-offs from employees. The Executive Board runs the business, in line with the mission, objec- tives, strategies and guidelines defined by the Board of Directors. The Board Advisory Committees Executive Board comprises a CEO and six directors chosen by the There are three Advisory Committees: for Auditing; the Environment; Board of Directors to serve a term of three years, with the possibility and Remuneration and Succession. Their members are also mem- of reelection. They may be removed from their posts at any time. Only bers of the Board of Directors and they assist that Board in fulfilling the CEO is also a member of the Board of Directors, but he or she may its responsibilities in regard to the senior guidance and direction of not preside over that body. the Company. Audit Committee – In full compliance with the requirements of the Fiscal Council Sarbanes-Oxley Law, this committee comprises three independent A permanent body, independent of the Company’s management, as members of the Board of Directors and its chairperson needs to be laid down in the Brazilian Corporate Legislation, the Fiscal Council com- a financial specialist – in accordance with SEC definitions. The com- prises five members, serving a term of one year, with the possibility mittee’s function is to analyze questions regarding the integrity of of reelection. One of the members represents the minority sharehold- the Company’s US GAAP financial reports and the effectiveness of its ers; another represents the preferred shareholders; and three act on internal controls, as well as supervising Petrobras’ outside and internal behalf of the federal government – one of them being appointed by auditors. the Finance Minister, as the representative of the National Treasury. It is incumbent on the Fiscal Council to represent the shareholders in a Business Committee supervisory capacity, monitoring the actions of the Company’s man- This committee is a forum for integration, seeking to align business agement and verifying the compliance with their legal and statutory development, management of the Company and the guidelines of obligations, as well as defending the interests of the Company and its the Strategic Plan, in support of the senior management’s decision shareholders. making process. Auditing Management Committees The Internal Auditors plan and conduct the internal auditing procedures These are forums for delving deeper into issues that are to be pre- of the Petrobras system. They also assist the senior management in at- sented to the Business Committee, with which they liaise. Such integra- taining the objectives defined in the Strategic Plan, through a systematic tion also exists between the Management Committees themselves and and disciplined approach to evaluating and improving the effectiveness in their relations with the Board Advisory Committees. of the Company’s risk management, control and corporate governance The Company has the following Management Committees: processes. In 2006, the testing of the internal controls, specifically Exploration & Production; Downstream; Gas & Power; Human Re- aimed at obtaining the certification required under the Sarbanes-Oxley sources; Health, Safety & the Environment; Organization and Man- Law, was included among the activities of the internal auditors. agement Analysis; Information Technology; Internal Controls; Risk; The Company also has outside auditors, appointed by the Board Petrobras Technology; Social and Environmental Responsibility; and of Directors, who are restricted as to the consulting services they may Marketing & Brands. provide. It is mandatory that the outside auditors be changed every five years, on a rotation basis. 20 BUSINESS MANAGEMENT AND RESULTS
  • 25. Petrobras Organizational Structure The Petrobras organization model, approved by the Board of Directors in October 2000, is constantly being refined. Changes in the Company’s organizational structure in 2007 led to the adoption of a new organizational and administrative model at certain units. Examples of this are the broadened scope of operations at the Exploration & Production business unit in the Solimões Basin, the creation of temporary organi- zational structures for the implementation of large-scale undertakings, and the transferring of telecommunications activities to the Services area. Approval was granted for the structural reorganization of business units abroad, linked to the International business area. FISCAL COUNCIL BOARD OF DIRECTORS Ombudsman Internal Auditing EXECUTIVE BOARD CEO Management Business Strategy & Systems Performance Development New Legal Area Business Human CEO’s General Institutional Resources Office Secretary Communication Exploration International Financial Area Gas & Power & Production Downstream Services Area (Upstream) Health, Safety & Corporate Finance Corporate Section Corporate Section Corporate Section Corporate Area the Environment Financial Natural Gas Production Business Technical Planning & Risk Logistics & Equity Logistics Materials Engineering Support Management Stakes Research & Energy Operations Business Finance Services Refining Development & Equity Stakes Development (Cenpes) Accounting Energy Exploration Petrochemicals & Southern Cone Engineering Development Fertilizers Region Americas, Africa Information Taxation Marketing & Sales North–Northeast Marketing & Sales Technology & Tele- & Eurasia communications Investor Relations South–Southeast Shared Services WWW.PETROBRAS.COM | ANNUAL REPORT 2007 21
  • 26. RISK MANAGEMENT Management aligned to the Business Plan By the very nature of its activities, Petrobras is exposed ve to six months), involving futures contracts, swaps to marke risks, such as variations in the prices of market and options and utilizing control methodologies in oil and oil products, in interest rates (domestic and o accordance with specific risk management guide- internatio international) and in currency exchange rates. The lines, in order to safeguard the results of its physical manage management of this risk is aligned with the corporate operations. goals and targets, to ensure the sustainable growth of the Company. In seeking a suitable balance between its targets for CREDIT RISK growth and return on investment, on the one hand, and Petrobras consolidated the centralization of its its level of exposure to risk, on the other, every possi- control of customer credit and extended this initia- bility is analyzed by the Risk Management Committee, tive to the customers of its subsidiaries, Petrobras comprising executives from the Company’s corporate International Finance Company (PIFCo), Petrobras and business areas. This brings an integrated percep- Finance Limited (PFL) and Petrobras Singapore tion of the issues and makes it easier for the Executive Private Limited (PSPL). This measure ensures that Board and the Board of Directors to take the appropri- the risk exposure in Brazil and foreign markets is kept ate decisions. to a suitable level. In its management of the market risks in relation The policy and procedures for conceding credit to oil and oil products, through regular and system- were refined in 2007, so as to safeguard the Company’s atic evaluation of the consolidated net exposure to competitiveness in the markets where it operates and price risk, the Company limits its operations using in new markets that are opening up, especially in Asia, derivatives to specific short term transactions (up thereby underpinning sustainable sales growth. 22 BUSINESS MANAGEMENT AND RESULTS