UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

ANNUAL REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

for the fiscal year ended December 31, 2010

________________

Securities registered or to be registered pursuant to Section 12(b) of the Act:

* Not for trading, but only in connection with the registration of American Depositary Shares pursuant to the requirements of the New York Stock Exchange.

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

TITLE OF EACH CLASS:

9.750% Senior Notes due 2011, issued by PifCo

9.125% Global Notes due 2013, issued by PifCo

7.75% Global Notes due 2014, issued by PifCo

8.375% Global Notes due 2018, issued by PifCo

The number of outstanding shares of each class of stock of Petrobras and PifCo as of December 31, 2010 was:

7,442,454,142 Petrobras Common Shares, without par value 

5,602,042,788 Petrobras Preferred Shares, without par value

300,050,000 PifCo Common Shares, at par value U.S.$1 per share

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

Yes R  No £ 

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

Yes £  No R 

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

Yes R  No £ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes R  [Petrobras] No £ 

FORWARD-LOOKING STATEMENTS

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

•         our marketing and expansion strategy;

Our forward-looking statements are not guarantees of future performance and are subject to assumptions that may prove incorrect and to risks and uncertainties that are difficult to predict. Our actual results could differ materially from those expressed or forecast in any forward-looking statements as a result of a variety of factors. These factors include, among other things:

•         our ability to obtain financing;

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•         international and Brazilian political, economic and social developments;

For additional information on factors that could cause our actual results to differ from expectations reflected in forward-looking statements, please see “Risk Factors” in this annual report.

All forward-looking statements attributed to us or a person acting on our behalf are qualified in their entirety by this cautionary statement.  We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events or for any other reason.

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

This is the annual report of both Petróleo Brasileiro S.A.—Petrobras (Petrobras) and its direct wholly owned Cayman Islands subsidiary, Petrobras International Finance Company (PifCo).  PifCo’s operations, which consist principally of purchases and sales of crude oil and oil products, are described in further detail below.

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

GLOSSARY OF PETROLEUM INDUSTRY TERMS

Unless the context indicates otherwise, the following terms have the meanings shown below:

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CONVERSION TABLE

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ABBREVIATIONS

PRESENTATION OF FINANCIAL INFORMATION

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

Petrobras

The audited consolidated financial statements of Petrobras and our consolidated subsidiaries as of December 31, 2010 and 2009, and for each of the three years in the period ended December 31, 2010, and the accompanying notes, contained in this annual report have been presented in U.S. dollars and prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP.  See Item 5. “Operating and Financial Review and Prospects” and Note 2(a) to our audited consolidated financial statements.  U.S. GAAP differs in certain respects from International Financial Reporting Standards (IFRS), as issued by the International Financial Reporting Standards Board (IASB) and applied by Petrobras in its statutory financial statements prepared in accordance with Brazilian Corporate Law and regulations promulgated by the Brazilian Securities and Exchange Commission (CVM).  Brazilian Corporate Law was amended in 2007 to permit accounting practices adopted in Brazil (Brazilian GAAP) to converge with IFRS.  We have prepared our consolidated financial statements, in reais, in accordance with IFRS beginning with the three-month period ended March 31, 2010.  We are currently evaluating the possibility of discontinuing U.S. GAAP reporting and adopting IFRS as issued by the IASB as the basis for the audited consolidated financial statements contained in our annual report on Form 20-F for the year ended December 31, 2011.

Our functional currency is the Brazilian real.  As described more fully in Note 2(a) to our audited consolidated financial statements, the U.S. dollar amounts as of the dates and for the periods presented in our audited consolidated financial statements have been recalculated or translated from the real amounts in accordance with the criteria set forth in Accounting Standard Codification – ASC Topic 830 – Foreign Currency Matters.  U.S. dollar amounts presented in this annual report have been translated from reais at the period-end exchange rate for balance sheet items and the average exchange rate prevailing during the period for income statement and cash flow items.

Unless the context otherwise indicates:

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

PifCo

PifCo’s functional currency is the U.S. dollar.  Substantially all of PifCo’s sales are made in U.S. dollars and all of its debt is denominated in U.S. dollars.  Accordingly, PifCo’s audited consolidated financial statements as of December 31, 2010 and 2009, and for each of the three years in the period ended December 31, 2010, and the accompanying notes contained in this annual report have been presented in U.S. dollars and prepared in accordance with U.S. GAAP and include PifCo’s wholly owned subsidiaries: Petrobras Europe Limited (PEL), Petrobras Finance Limited (PFL), Bear Insurance Company Limited (BEAR) and Petrobras Singapore Private Limited (PSPL).

RECENT DEVELOPMENTS

Global Offering of Shares

On September 29, 2010, we issued 2,293,907,960 common shares, including common shares in the form of American Depositary Shares (ADSs), and 1,788,515,136 preferred shares, including preferred shares in the form of ADSs, in a global public offering consisting of a registered offering in Brazil and an international offering, which included a registered offering in the United States. On October 1, 2010, we issued an additional 75,198,838 common shares (including common shares in the form of ADSs) and 112,798,256 preferred shares (including preferred shares in the form of ADSs) pursuant to the exercise of the underwriters’ over-allotment option. The aggregate proceeds of the global offering to us, after underwriting discounts and commissions and including the exercise of the underwriters’ over-allotment option, was approximately U.S.$70 billion. We applied the net proceeds from the global offering to pay the initial purchase price under the Assignment Agreement described below and to continue to develop all of our business segments in accordance with Petrobras’ 2010-2014 Business Plan.

Assignment Agreement (Cessão Onerosa) 

On September 3, 2010, we entered into an agreement with the Brazilian federal government (the Assignment Agreement), under which the government assigned to us the right to conduct activities for the exploration and production of oil, natural gas and other fluid hydrocarbons in specified pre-salt areas, subject to a maximum production of five billion barrels of oil equivalent. For further information on the Assignment Agreement, see Item 10. “Material contracts—Petrobras—Assignment Agreement.”

PRESENTATION OF INFORMATION CONCERNING RESERVES

Petrobras continues to utilize the SEC rules for estimating and disclosing oil and gas reserve quantities included in this annual report.  In accordance with these rules, adopted by Petrobras at year-end 2009, the year-end 2010 and 2009 reserve volumes have been estimated using the average prices calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period include non-traditional reserves, such as synthetic oil and gas.  Year-end 2008 reserve volumes were estimated using year-end prices.  In addition, the amended rules also adopted a reliable technology definition that permits reserves to be added based on field-tested technologies.  The adoption of the SEC’s rules for estimating and disclosing oil and gas reserves and the FASB’s issuance of the Accounting Standards Update No. 2010-03 “Oil and Gas Reserve Estimation and Disclosure” in December 2010 generated no material impact on our reported reserves or on our consolidated financial position or results of operations.  DeGolyer and MacNaughton (D&M) provided estimates of most of our net domestic reserves as of December 31, 2010.  D&M also provided estimates of most of our net international reserves where we are the operator as of December 31, 2010.  All reserve estimates involve some degree of uncertainty. See Item 3. “Key Information—Risk Factors—Risks Relating to Our Operations” for a description of the risks relating to our reserves and our reserve estimates.

On January 14, 2011, we filed reserve estimates for Brazil with the ANP, in accordance with Brazilian rules and regulations, totaling 12.91 billion barrels of crude oil and condensate and 14.24 trillion cubic feet of natural gas.  The reserve estimates filed with the ANP and those provided herein differ by approximately 25.9%.  This difference is due to: (i) the ANP requirement to estimate proved reserves through the technical-economical abandonment of production wells, as opposed to limiting reserve estimates to the life of the concession contracts as required by Rule 4-10 of Regulation S-X; and (ii) different technical criteria for booking proved reserves, including the use of current oil prices as opposed to the SEC requirement that the 12-month average price be used to determine the economic producibility of reserves in Brazil.

We also file reserve estimates from our international operations with various governmental agencies under the guidelines of the Society of Petroleum Engineers, or SPE.  The aggregate reserve estimates from our international operations, under SPE guidelines, amounted to 0.47 billion barrels of crude oil and NGLs and 1,406 billion cubic feet of natural gas, which is approximately 15% higher than the reserve estimates calculated under Regulation S-X, as provided herein.  This difference occurs because of different technical criteria for booking proved reserves, including the use of current oil prices as opposed to the SEC requirement that the 12-month average price be used to determine the economic producibility of international reserves.  In addition, we have not yet included all volumes from the Gulf of Mexico fields because there is no production history available for analogous reservoirs.

PART I

Item 1.                  Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2.                  Offer Statistics and Expected Timetable

Not applicable.

Item 3.                  Key Information

Selected Financial Data

Petrobras

The following tables set forth our selected consolidated financial data, presented in U.S. dollars and prepared in accordance with U.S. GAAP.  The data for each of the five years in the period ended December 31, 2010 has been derived from our audited consolidated financial statements, which were audited by KPMG Auditores Independentes for the years ended December 31, 2010, 2009, 2008, 2007 and 2006.  The information below should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements and the accompanying notes and Item 5. “Operating and Financial Review and Prospects.”  Certain prior year amounts for 2009, 2008, 2007 and 2006 have been reclassified to conform to current year presentation standards.  These reclassifications had no impact on our net income or any material effect on our consolidated financial statements. 

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BALANCE SHEET DATA—PETROBRAS

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PifCo

The following tables set forth PifCo’s selected consolidated financial data, presented in U.S. dollars and prepared in accordance with U.S. GAAP.  The data for each of the five years in the period ended December 31, 2010 have been derived from PifCo’s audited consolidated financial statements, which were audited by KPMG Auditores Independentes for the years ended December 31, 2010, 2009, 2008, 2007 and 2006.  The information below should be read in conjunction with, and is qualified in its entirety by reference to, PifCo’s audited consolidated financial statements and the accompanying notes and Item 5. “Operating and Financial Review and Prospects.”

BALANCE SHEET DATA—PifCo

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RISK FACTORS

Risks Relating to Our Operations

Exploration and production of oil in deep and ultra-deep waters involves risks.

Exploration and production of oil involves risks that are increased when carried out in deep and ultra-deep waters. The majority of our exploration and production activities are carried out in deep and ultra-deep waters, and the proportion of our deepwater activities will remain constant or increase due to the location of our pre-salt reservoirs in deep and ultra-deep waters. Our activities, particularly deep and ultra-deep water drilling, present several risks such as the risk of spills, explosions in platforms and drilling operations and natural disasters. The occurrence of any of these events or other incidents could result in personal injuries, loss of life, severe environmental damage with the resulting containment, clean-up and repair expenses, equipment damage and liability in civil and administrative proceedings.

Our insurance policies do not cover all liabilities, and insurance may not be available for all risks. There can be no assurance that incidents will not occur in the future, that insurance will adequately cover the entire scope or extent of our losses or that we will not be found liable in connection with claims arising from these and other events.

Substantial or extended declines and volatility in the international prices of crude oil, oil products and natural gas as well as a significant depreciation of the real in relation to the U.S. dollar may have a material adverse effect on us.

The majority of our revenue is derived primarily from sales of crude oil and oil products and, to a lesser extent, natural gas.  We do not, and will not, have control over the factors affecting international prices for crude oil, oil products and natural gas.  Changes in crude oil prices typically result in changes in prices for oil products and natural gas.  Historically, international prices for crude oil, oil products and natural gas have fluctuated widely as a result of many factors.  These factors include:

•         global and regional economic and geopolitical developments in crude oil producing regions, particularly in the Middle East;

Volatility and uncertainty in international prices for crude oil, oil products and natural gas may continue.  Substantial or extended declines in international crude oil prices may have a material adverse effect on our business, results of operations and financial condition, and the value of our proved reserves.  Significant decreases in the price of crude oil may cause us to reduce or alter the timing of our capital expenditures, and this could adversely affect our production forecasts in the medium term and our reserve estimates in the future.  In addition, our pricing policy in Brazil is intended to be at parity with international product prices over the long term.  In general we do not adjust our prices for diesel, gasoline and LPG during periods of volatility in the international markets.  As a result, material rapid or sustained increases in the international price of crude oil and oil products may result in reduced downstream margins for us, and we may not realize all the gains that our competitors realize in periods of higher international prices.  We are also exposed to this risk during periods of depreciation of the real   

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

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

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

Access to crude oil and natural gas reserves is essential to an oil and gas company’s sustained production and generation of income.  Under Brazilian law, the Brazilian federal government owns all subsoil accumulations of crude oil and natural gas in Brazil and the concessionaire owns the oil and gas it produces from those subsoil accumulations pursuant to concession agreements.  We possess the exclusive right to develop the volumes of crude oil and natural gas included in our reserves pursuant to concession agreements awarded to us by the Brazilian federal government and we own the hydrocarbons we produce under those concession agreements.  Our ability to generate income would be adversely affected if the Brazilian federal government were to restrict or prevent us from exploiting these crude oil and natural gas reserves.  In addition, we may be subject to fines by the ANP and our concessions may be revoked if we do not comply with our obligations under our concessions.

The new regulatory model for the oil and gas industry in Brazil and the Assignment Agreement may be challenged in Brazilian courts.

The new regulatory model for the oil and gas industry in Brazil, enacted in 2010, establishes new rules for the exploration and production of oil and natural gas in the pre-salt areas in Brazil.  See Item 4. “Information on the Company—Regulation of the Oil and Gas Industry in Brazil—Current Regulatory Framework.” The assignment agreement we entered into with the Brazilian federal government on September 3, 2010 (Assignment Agreement), under which the government assigned to us exploration and production rights to oil, natural gas and other fluid hydrocarbons in pre-salt areas not under concession, of 5 billion barrels of oil equivalent, is a separate law that was also approved by Congress and enacted in 2010.

Challenges to the constitutionality or legality of the new regulatory model for the oil and gas industry in Brazil, including challenges to the Assignment Agreement, may be brought before the Brazilian Supreme Court (Supremo Tribunal Federal, or STF) or the Brazilian Superior Court of Justice (Superior Tribunal de Justiça, or STJ).  Challenges to the constitutionality or legality of the new regulatory model may relate to our status as the exclusive operator in all pre-salt areas not yet under concession, in addition to other areas that the CNPE may deem strategic, and the fact that exploration and production rights in such areas will be granted to us without a public bidding process. Challenges to the constitutionality or legality of the Assignment Agreement may relate to the direct award of exploration and production rights to us without a public bidding, contract price paid for the transfer of rights or the conditions, methodologies and results arising from the revision process pursuant to the terms of the Assignment Agreement.  If the new regulatory model for the oil and gas industry in Brazil, including the Assignment Agreement, is determined to be wholly or partly unconstitutional or illegal, uncertainties about the regulation of the oil and gas sector in which we operate may arise, including questions about the validity of the legal relationships that are based on the new regulatory model, including the rights acquired under the Assignment Agreement.

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In addition, we cannot assure you that the price paid for the transfer of rights will not be challenged.  We and our directors may be the subject of legal proceedings questioning the approval and the execution of the Assignment Agreement as being detrimental to the interests of our non-controlling shareholders.

We do not know whether a challenge to the constitutionality or legality of the new regulatory model for the oil and gas industry in Brazil, including the Assignment Agreement, will arise, nor can we predict, in the event it does arise, the outcome of any such legal proceeding.

The Assignment Agreement we entered into with the Brazilian federal government is a related party transaction.  

The transfer of oil and gas exploration and production rights to us related to specific pre-salt areas is governed by the Assignment Agreement, which is a contract between the Brazilian federal government, our controlling shareholder, and us. The negotiation of the Assignment Agreement involved significant issues, including negotiations regarding (1) the area covered by the transfer of rights, consisting of exploratory blocks; (2) the volume, on a barrels of oil equivalent basis, that we may extract from this area; (3) the price to be paid for the transfer of rights; (4) the terms of the subsequent revision of the contract price and volume under the Assignment Agreement; and (5) the terms providing for the reallocation of volumes among the exploratory blocks assigned to us.  This contract includes provisions for a subsequent revision of the contract terms, which are subject to oil and industry prices at the time the revision is made.  Once the revision process is concluded pursuant to the terms of the Assignment Agreement, if it is determined that the revised contract price is higher than the initial contract price, we will either make an additional payment to the Brazilian federal government or reduce the amount of barrels of oil equivalent subject to the Assignment Agreement. If it is determined, on the other hand, that the revised contract price is lower than the initial contract price, the Brazilian federal government will make a payment to us.  This will require a negotiation with the Brazilian federal government pursuant to the terms of the Assignment Agreement.

The Assignment Agreement provides for the reallocation of volumes among the exploratory blocks assigned to us if oil and gas production is deemed economically unviable in one or more blocks for geologic reasons that would prevent the fulfillment of the Assignment Agreement as a result of the revision process.  Such reallocation would result in a revision of the volume of barrels of oil equivalent we would have to produce per block, which could prevent us from producing the maximum amount of barrels of oil equivalent contemplated under the Assignment Agreement.  In the event that we cannot produce such maximum amount, the Brazilian federal government has contractually undertaken the obligation to compensate us for the volumes not produced pursuant to the terms of the Assignment Agreement. 

Over the course of the life of the Assignment Agreement, novel issues may arise in the implementation of the revision process and reallocation provisions that will require negotiations between related parties.

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

Our activities are subject to a wide variety of federal, state and local laws, regulations and permit requirements relating to the protection of human health and the environment, both in Brazil and in other jurisdictions in which we operate.  Particularly in Brazil, our oil and gas business is subject to extensive regulation by several governmental agencies, including the ANP, the ANEEL, the Brazilian Water Transportation Agency (Agência Nacional de Transportes Aquaviários) and the Brazilian Land Transportation Agency (Agência Nacional de Transportes Terrestres). 

Failure to observe or comply with these laws and regulations could result in penalties that could adversely affect our operations.  In Brazil, for example, we could be exposed to administrative and criminal sanctions, including warnings, fines and closure orders for non-compliance with these environmental regulations, which, among other things, limit or prohibit emissions or spills of toxic substances produced in connection with our operations.  Waste disposal and emissions regulations may also require us to clean up or retrofit our facilities at substantial cost and could result in substantial liabilities.  The Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis (Brazilian Institute of the Environment and Renewable Natural Resources, or IBAMA) and the ANP routinely inspect our facilities, and may impose fines, restrictions on operations, or other sanctions in connection with its inspections.  In addition, we are subject to environmental laws that require us to incur significant costs to cover damage that a project may cause to the environment.  These additional costs may have a negative impact on the profitability of the projects we intend to implement or may make such projects economically unfeasible.

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As environmental regulations become more stringent, and as new laws and regulations relating to climate change, including carbon controls, become applicable to us, it is probable that our capital expenditures for compliance with environmental regulations and to effect improvements in our health, safety and environmental practices will increase substantially in the future.  We cannot guarantee that we will be able to maintain or renew our licenses and permits if they are revoked or if the applicable environmental authorities oppose or delay their issuance or renewal.  Increased expenditures to comply with environmental regulations, mitigate the environmental impact of our operations or restore the biological and geological characteristics of the areas in which we operate may result in reductions in other strategic investments.  Any substantial increase in expenditures for compliance with environmental regulations or reduction in strategic investments may have a material adverse effect on our results of operations or financial condition.

We may incur losses and spend time and money defending pending litigations and arbitrations.

We are currently a party to numerous legal proceedings relating to civil, administrative, environmental, labor and tax claims filed against us.  These claims involve substantial amounts of money and other remedies. Several individual disputes account for a significant part of the total amount of claims against us, including a tax dispute amounting to approximately U.S.$2.7 billion.  See Item 8. “Financial Information—Legal Proceedings.”  In the event that claims involving a material amount and for which we have no provisions were to be decided against us, or in the event that the losses estimated turn out to be significantly higher than the provisions made, the aggregate cost of unfavorable decisions could have a material adverse effect on our financial condition and results of operations.  We may also be subject to litigation and administrative proceedings in connection with our concessions and other government authorizations, which could result in the revocation of such concessions and government authorizations.  In addition, our management may be required to direct its time and attention to defending these claims, which could preclude them from focusing on our core business.  Depending on the outcome, certain litigation could result in restrictions on our operations and have a material adverse effect on certain of our businesses.

We are vulnerable to increased financing expenses resulting from increases in prevailing market interest rates and exchange rate fluctuation.

As of December 31, 2010, approximately 60.3% — U.S.$41,462 million of our total indebtedness — consisted of floating rate debt.  In light of cost considerations and market analysis, we decided not to enter into derivative contracts or make other arrangements to hedge against the risk of an increase in interest rates.  Accordingly, if market interest rates (principally LIBOR) rise, our financing expenses will increase, which could have an adverse effect on our results of operations and financial condition.

Fluctuations in exchange rates, especially a depreciation of the real  in relation to the U.S. dollar rate, may also increase our financing expenses as most of our revenues have been denominated in reais, while some of our operating expenses and capital expenditures and a substantial portion of our indebtedness are, and are expected to continue to be, denominated in or indexed to U.S. dollars and other foreign currencies.

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

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

We are subject to substantial risks relating to our international operations.

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

•         the imposition of price controls;

If one or more of the risks described above were to materialize we may lose part or all of our reserves in the affected country and we may not achieve our strategic objectives in these countries or in our international operations as a whole, which may result in a material adverse effect on our results of operations and financial condition.  For more information about our operations outside Brazil, see Item 4. “Information on the Company¾International.” 

Risks Relating to PifCo

PifCo’s operations and debt servicing capabilities are dependent on us.

PifCo’s financial position and results of operations are directly affected by our decisions.  PifCo is a direct wholly owned subsidiary of Petrobras incorporated in the Cayman Islands as an exempted company with limited liability.  Currently, PifCo purchases crude oil and oil products from third parties and sells them to us.  PifCo also purchases crude oil and oil products from us and sells them outside Brazil.  Accordingly, intercompany activities and transactions, and therefore PifCo’s financial position and results of operations, are affected by decisions made by us.  Additionally, PifCo sells and purchases crude oil and oil products to and from third parties and related parties, mainly outside Brazil.  Commercial operations are carried out under market conditions and at market prices.

PifCo is gradually reducing its sales of crude oil and oil products to us and will gradually reduce its sales of crude oil and oil products to third parties, and will eventually cease these commercial operations altogether.  At that time, PifCo will become a finance subsidiary functioning as a vehicle for us to raise capital for our operations outside of Brazil through the issuance of debt securities in the international capital markets, among other means.  PifCo’s ability to service and repay its indebtedness is consequently dependent on our own operations.  Financing for PifCo’s commercial operations is provided by us, as well as third-party credit providers in favor of whom we provide credit support.  Our support of PifCo’s debt obligations has been and will continue to be made through unconditional and irrevocable guaranties of payment.

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Our own financial condition and results of operations, as well as our financial support of PifCo, directly affect PifCo’s operational results and debt servicing capabilities.  For a more detailed description of certain risks that may have a material adverse impact on our financial condition or results of operations and therefore affect PifCo’s ability to meet its debt obligations, see “Risks Relating to Our Operations.”

PifCo depends on us to service its indebtedness to third parties.

PifCo is gradually reducing its sales of crude oil and oil products to us and will gradually reduce its sales of crude oil and oil products to third parties and will eventually cease these commercial operations altogether, as described above.  PifCo regularly incurs indebtedness and will continue to do so as our finance subsidiary.  PifCo depends, and will continue to depend, on financing and credit support from us to service its indebtedness to third parties.  All such indebtedness has the benefit of a guaranty or other equivalent credit support from us.  If for any reason we are not permitted to continue to finance PifCo’s operations or continue to provide credit support to the indebtedness it incurs, this would have a materially adverse effect on PifCo’s ability to meet its debt obligations.

Risks Relating to Our Relationship with the Brazilian Federal Government

The Brazilian federal government, as our principal shareholder, may cause us to pursue certain macroeconomic and social objectives that may have a material adverse effect on us.

The Brazilian federal government, as the principal shareholder of a mixed capital company such as ours, has pursued, and may pursue in the future, certain of its macroeconomic and social objectives through us, as permitted by law.  Brazilian law requires the Brazilian federal government to own a majority of our voting stock, and so long as it does, the Brazilian federal government will have the power to elect a majority of the members of our board of directors and, through them, a majority of the executive officers who are responsible for our day-to-day management.  As a result, we may engage in activities that give preference to the objectives of the Brazilian federal government rather than to our own economic and business objectives.

In particular, we continue to assist the Brazilian federal government to ensure that the supply and pricing of crude oil and oil products in Brazil meet Brazilian consumption requirements.  Accordingly, we may make investments, incur costs and engage in sales on terms that may have an adverse effect on our results of operations and financial condition.  Prior to January 2002, prices for crude oil and oil products were regulated by the Brazilian federal government, occasionally set below prices prevailing in the world oil markets.  We cannot assure you that price controls will not be reinstated in Brazil.  

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

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

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Risks Relating to Brazil

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

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

•         devaluations and other exchange rate movements;

Uncertainty over whether the Brazilian federal government will implement changes in policy or regulations that may affect any of the factors mentioned above or other factors in the future may lead to economic uncertainty in Brazil and increase the volatility of the Brazilian securities market and securities issued abroad by Brazilian companies, which may have a material adverse effect on our results of operations and financial condition.

Risks Relating to Our Equity and Debt Securities

The size, volatility, liquidity and/or regulation of the Brazilian securities markets may curb the ability of holders of ADSs to sell the common or preferred shares underlying our ADSs.

Petrobras shares are some of the most liquid in the São Paulo Stock Exchange (BM&FBOVESPA), but overall, the Brazilian securities markets are smaller, more volatile and less liquid than the major securities markets in the United States and other jurisdictions, and may be regulated differently from the way in which U.S. investors are accustomed.  Factors that may specifically affect the Brazilian equity markets may limit the ability of holders of ADSs to sell the common or preferred shares underlying our ADSs at the price and time they desire.

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

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

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

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

If holders of our ADSs exchange their ADSs for common or preferred shares, they risk losing the ability to remit foreign currency abroad and forfeiting Brazilian tax advantages.

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

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

Holders of ADSs may face difficulties in protecting their interests.

Our corporate affairs are governed by our bylaws and Brazilian Corporate Law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States or elsewhere outside Brazil.  In addition, the rights of an ADS holder, which are derivative of the rights of holders of our common or preferred shares, as the case may be, to protect their interests against actions by our board of directors are different under Brazilian Corporate Law than under the laws of other jurisdictions.  Rules against insider trading and self-dealing and the preservation of shareholder interests may also be different in Brazil than in the United States.  There is also a less active plaintiff’s bar dedicated to the enforcement of shareholders’ rights in Brazil than in the United States.  In addition, shareholders in Brazilian companies ordinarily do not have standing to bring a class action.

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

Holders of our ADSs may encounter difficulties in the exercise of voting rights and preferred shares and the ADSs representing preferred shares generally do not give holders of ADSs voting rights.  

Holders of ADSs may encounter difficulties in the exercise of some of their rights as a shareholder if they hold our ADS rather than the underlying shares.  For example, if we fail to provide the depositary with voting materials on a timely basis, holders of ADSs may not be able to vote by giving instructions to the depositary on how to vote for them.

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

We would be required to pay judgments of Brazilian courts enforcing our obligations under the guaranty relating to PifCo’s notes only in reais.

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

A finding that we are subject to U.S. bankruptcy laws and that the guaranty executed by us were a fraudulent conveyance could result in PifCo noteholders losing their legal claim against us.

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

•         were or are insolvent or rendered insolvent by reason of our entry into such guaranty;

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

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Item 4.                  Information on the Company

History and Development

Petróleo Brasileiro S.A.—Petrobras—was incorporated in 1953 to conduct the Brazilian federal government’s hydrocarbon activities.  We began operations in 1954 and have been carrying out crude oil and natural gas production and refining activities in Brazil on behalf of the government.

As part of a comprehensive reform of the oil and gas regulatory system, the Brazilian Congress amended the Brazilian Constitution in 1995 to authorize the Brazilian federal government to contract with any state or privately-owned company to carry out upstream, oil refining, cross-border commercialization and transportation activities in Brazil of oil, natural gas and their respective products.  On August 6, 1997, Brazil enacted Law No. 9,478, which established a concession-based regulatory framework, ended our exclusive right to carry out oil and gas activities, and allowed competition in all aspects of the oil and gas industry in Brazil.  Since that time, we have been operating in an increasingly deregulated and competitive environment.  Law No. 9,478 also created an independent regulatory agency, the ANP, to regulate the oil, natural gas and renewable fuel industry in Brazil and to create a competitive environment in the oil and gas sector.  Effective January 2, 2002, Brazil deregulated prices for crude oil, oil products and natural gas.  See “Regulation of the Oil and Gas Industry in Brazil—Price Regulation.”   

In 2010, three new laws were enacted to regulate exploration and production activities in pre-salt areas not subject to existing concessions:  Law No. 12,351, Law No. 12,304, and Law No. 12,276.  The enacted legislation does not regulate existing pre-salt concessions, which cover approximately 28% of the pre-salt region.

Pursuant to Law No. 12,276, we entered into an agreement with the Brazilian federal government on September 3, 2010 (Assignment Agreement), under which the government assigned to us the right to activities for the exploration and production of oil, natural gas and other fluid hydrocarbons in specified pre-salt areas, subject to a maximum production of five billion barrels of oil equivalent.  The initial purchase price for our rights under the Assignment Agreement was R$74,807,616,407, which was equivalent to U.S.$42,533,327,500 as of September 1, 2010.  On September 29, 2010, we issued 2,293,907,960 common shares (including common shares in the form of ADSs) and 1,788,515,136 preferred shares (including preferred shares in the form of ADSs) in a global public offering consisting of a registered offering in Brazil and an international offering that included a registered offering in the United States.  On October 1, 2010, we issued an additional 75,198,838 common shares (including common shares in the form of ADSs) and 112,798,256 preferred shares (including preferred shares in the form of ADSs) pursuant to the exercise of the underwriters’ over-allotment option.  We applied part of the net proceeds from the global offering to pay the initial purchase price under the Assignment Agreement.  In order to ensure transparency, our board of directors created a special committee comprised of minority shareholder representatives to monitor the transfer of rights transaction.  We complied with all Brazilian Corporate Law requirements in carrying out the capitalization process, including the protection of the rights of our minority shareholders. 

Our common and preferred shares have been traded on the BM&FBOVESPA since 1968.  Petrobras was incorporated as a state-controlled company under Law No. 2,004 (effective October 3, 1953), and a majority of our voting capital must be owned by the Brazilian federal government.  As of December 31, 2010, the Brazilian federal government owned 48.3% of our outstanding capital stock and 63.6% of our voting shares.  We operate through subsidiaries, joint ventures, and associated companies established in Brazil and many other countries.  Our principal executive office is located at Avenida República do Chile 65, 20031-912 Rio de Janeiro, RJ, Brazil and our telephone number is (55-21) 3224-4477.

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Overview of the Group

We are an integrated oil and gas company that is the largest corporation in Brazil and one of the largest companies in Latin America in terms of revenues.  As a result of our legacy as Brazil’s former sole supplier of crude oil and oil products and our ongoing commitment to development and growth, we operate most of Brazil’s producing oil and gas fields and hold a large base of proved reserves and a fully developed operational infrastructure.  In 2010, our average domestic daily oil production was 2,004 mboe/d, an estimated 97.5% of Brazil’s total.  Over 79% of our domestic proved reserves are in large, contiguous and highly productive fields in the offshore Campos Basin, which allows us to optimize our infrastructure and limit our costs of exploration, development and production.  In 41 years of developing Brazil’s offshore basins we have developed special expertise in deepwater exploration and production, which we exploit both in Brazil and in other offshore oil provinces.

We operate substantially all the refining capacity in Brazil.  Most of our refineries are located in Southeastern Brazil, within the country’s most populated and industrialized markets and adjacent to the Campos Basin that provides most of our crude oil.  Our domestic refining capacity of 2,007 mbbl/d is well balanced with our domestic refining throughput of 1,798 mbbl/d and sales of oil products to domestic markets of 1,960 mbbl/d.  We are also involved in the production of petrochemicals.  We distribute oil products through our own “BR” network of retailers and to wholesalers.

We participate in most aspects of the Brazilian natural gas market.  We expect the percentage of natural gas in Brazil’s energy matrix to grow in the future as we expand our production of both associated and non-associated gas, mainly from offshore fields in the Campos, Espírito Santo and Santos Basins, and extend Brazil’s gas transportation infrastructure.  We use LNG terminals and import natural gas from Bolivia to meet demand and diversify our supply.  We also participate in the domestic power market primarily through our investments in gas-fired thermoelectric power plants.  In addition, we participate in the fertilizer business, which is another important source of natural gas demand. 

Outside of Brazil, we are present in more than 20 countries.  In South America, our operations extend from exploration and production to refining, marketing, retail services and natural gas pipelines.  In North America, we produce oil and gas and have refining operations in the United States.  In Africa, we produce oil in Angola and Nigeria, and in Asia, we have refining operations in Japan.  In other countries, we are engaged only in oil and gas exploration. 

Comprehensive information and tables on reserves and production is presented at the end of Item 4. See “—Additional Reserves and Production Information.”

Our activities comprise five business segments:  

•         Exploration and Production: oil and gas exploration, development and production in Brazil;

Our Corporate segment comprises our financing activities not attributable to other segments, including corporate financial management, central administrative overhead and actuarial expenses related to our pension and health care plans for inactive participants.  Since 2009, our Corporate segment has included the results from our Biofuels operations.  In prior years, results from our Biofuels operations were included in our Gas and Power segment.

The following table sets forth key information for each business segment in 2010:

Exploration and Production  

Oil and gas exploration and production activities in Brazil are the largest component of our portfolio.  We have gradually increased production over the past four decades, from 164 mbbl/d of crude oil, condensate and natural gas liquids in Brazil in 1970 to 2,004 mbbl/d in 2010.  We aim to grow oil and gas reserves and production sustainably and be recognized for excellence in Exploration and Production operations.

The primary focus of our E&P segment is to:

•         Continue to explore and develop the Campos Basin, leveraging the current infrastructure to drill in deeper horizons in existing concessions, including pre-salt reservoirs, and using new technologies for secondary recovery in producing fields;

During 2010, our oil and gas production from Brazil averaged 2,165.5 mboe/d, of which 76.7% was oil and 23.3% was natural gas.  On December 31, 2010, our estimated net proved crude oil and natural gas reserves in Brazil were 12.14 billion boe, of which 86% was crude oil and 14% was natural gas.  Brazil provided 89.8% of our worldwide production in 2010 and accounted for 95% of our worldwide reserves at December 31, 2010 on a barrels of oil equivalent basis.  Historically, approximately 85% of our total Brazilian production has been oil.  In connection with the development of the pre-salt, the contribution of natural gas to total hydrocarbon production is expected to grow.  In 2010, we drilled a total of 561 development wells, of which 78 were offshore and 483 were onshore.

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As of December 31, 2010, we had 138 exploration agreements covering 198 blocks, corresponding to a gross exploratory acreage of 130,000 km² (32.1 million acres), or a net exploratory acreage of 105,000 km² (25.9 million acres), and 31 evaluation plans.  We are exclusively responsible for conducting the exploration activities in 66 of the 138 exploration agreements.  As of December 31, 2010, we had exploration partnerships with 75 foreign and domestic companies.  We conduct exploration activities under 120 of our 138 partnership agreements. 

We focus much of our exploration effort on deepwater drilling, where the discoveries are substantially larger and our technology and expertise create a competitive advantage.  In 2010, we invested a total of U.S.$4.08 billion in exploration activities in Brazil.  We drilled a total of 116 gross exploratory wells in 2010, of which 49 were offshore and 67 onshore, with a success ratio of 57%.

Brazil’s richest oil fields are located offshore, most of them in deep waters.  Since 1971, when we started exploration in the Campos Basin, we have been active in these waters and we have become globally recognized as innovators in the technology required to explore and produce hydrocarbons in deep and ultra-deep water.  We operate more production (on a boe basis) from fields in deep and ultra-deep water than any other company.  In 2010, offshore production accounted for 87% of our production and deepwater production accounted for 76% of our production in Brazil.  In 2010, we operated 201 wells in water deeper than 1,000 meters (3,281 feet), and we drilled around 24 exploratory wells in water deeper than 1,000 meters (3,281 feet).

Offshore exploration, development and production costs are generally higher than those onshore, but we have been able to offset these higher costs by higher drilling success ratios, larger discoveries and greater production volumes.  We have historically been successful in finding and developing significant oil reservoirs offshore, which has allowed us to achieve economies of scale by spreading the total costs of exploration, development and production over a large base.  By focusing on opportunities that are close to existing production infrastructure, we limit the incremental capital requirements of new field development.

Historically, our offshore exploration and production activities were focused on post-salt reservoirs.  The discovery of the Lula field (formerly Tupi) in 2006 marked the beginning of a new chapter in our E&P history.  In recent years, we have focused our offshore exploration efforts on pre-salt reservoirs located in a region approximately 800 km (497 miles) long and 200 km (124 miles) wide stretching from the Campos to the Santos Basins.  Our existing contracts in this area cover 26.6% (approximately 45,615 km² or 11.3 million acres) of the pre-salt areas, including the pre-salt areas assigned to us under Concession Contracts and the Assignment Agreement.  An additional 4% (approximately 9,000 km² or 2.2 million acres) is under concession to other oil companies for exploration.  The remaining 69.4% (approximately 103,000 km² or 25.4 million acres) of the pre-salt region is open acreage area, not licensed yet, and the licensing of new pre-salt areas will be made under a production-sharing regime under Law No. 12,351, enacted on December 22, 2010.

Since 2005, we have drilled 52 exploratory wells as operator in this 149,000 km² (36.8 million acres) pre-salt area, 88% of which have yielded discoveries of hydrocarbon resources.  We hold interests ranging from 20% to 100% in the pre-salt exploration areas under concession to us.  In the southern part of the Santos Basin, where the salt layer is thick and the hydrocarbons have been more perfectly preserved, we have made several particularly promising discoveries since 2006, including those made in Blocks BM-S-11 (Iara, Lula and Cernambi fields) and BM-S-9 (Carioca and Guará).  In the northern part of the region, we made significant discoveries in 2008 and early 2010 in the area known as Parque das Baleias and in the Barracuda, Marlim and Caratinga fields, all of which are in the Campos Basin. As a result, we are committing substantial resources to develop these pre-salt discoveries, which are located in deep and ultra-deep waters at total depths of up to 8,000 meters (26,245 feet).

Our 2010-2014 Business Plan, which was released in June 2010 prior to the signing of the Assignment Agreement,  foresees investments of U.S.$33 billion from 2010 to 2014 (not including investments by our partners) to develop  our then-existing  concessions in the pre-salt areas, or approximately 31% of our total domestic capital expenditures for exploration and production through 2014.  In May 2011, our board of directors approved the annual revision of the Santos Basin pre-salt development plan (PLANSAL), which foresees capital expenditures of up to U.S.$73 billion through 2015 in the Santos Basin pre-salt areas, 74% of which is being provided by us and the remainder by our partners. This annual revision to the PLANSAL also provides for the development of the areas transferred to us by the Assignment Agreement while successfully reducing capital expenditures planned for the development of the Santos Basin pre-salt areas by 45% since 2008.

We have also implemented a variety of programs designed to increase oil recovery from existing fields and reduce natural declines from producing fields.

Our exploration and production activities outside Brazil are included in our International business segment.  See “—International.”

Information about our principal oil and gas producing fields in Brazil is summarized in the table below.

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Our domestic oil and gas exploration and production efforts are primarily focused on three major basins offshore in Southeastern Brazil: Campos, Espírito Santo and Santos.  The following map shows our concession areas in Brazil as of December 2010.

The map below shows the location of the pre-salt reservoirs as well as the status of our exploratory activities there.

Campos Basin  

The Campos Basin, which covers approximately 115,000 km² (28.4 million acres), is the most prolific oil and gas basin in Brazil as measured by proved hydrocarbon reserves and annual production.  Since we began exploring this area in 1971, over 60 hydrocarbon accumulations have been discovered, including eight large oil fields in deep water and ultra-deep water.  The Campos Basin is our largest oil- and gas-producing region, producing an average 1,676.9 mbbl/d of oil and 13.6 mmm³/d (480.3 mmcf/d) of associated natural gas during 2010, 81.5% of our total production from Brazil.  In 2010 we produced oil at an average rate of 1,676.9 mbbl/d from 43 fields in the Campos Basin and held proved crude oil reserves representing 84% of our total proved crude oil reserves in Brazil.  We held proved natural gas reserves in the Campos Basin representing 48% of our total proved natural gas reserves in Brazil.  We operated 40 floating production systems, 14 fixed platforms and 6,680 km (4,151 miles) of pipeline and flexible pipes in water depths from 80 to 1,886 meters (262 to 6,188 feet), delivering oil with an average API gravity of 22.9° and an average BSW of 1%. 

We have also made important progress in pre-salt E&P activities in the Campos Basin.  In the pre-salt region of the Campos Basin, we have drilled a total of 25 wells.  In February 2010 we made a promising discovery of 28° API oil at our ultra-deep exploratory well in the Barracuda area, which followed a significant discovery of intermediate oil (30° API) in the Parque das Baleias area in November 2008.  In the Jubarte field in the Campos Basin off the coast of the State of Espírito Santo, an EWT using a single well pilot system produced at an average rate of 17 mbbl/d from September 2008 to February 2011.  We expect to accelerate pre-salt production in Parque das Baleias using existing infrastructure in the area.  We started producing from the Baleia Franca field in the second half of 2010 using the existing FPSO Capixaba.  In 2012, we expect to start up a pilot system exclusively dedicated to pre-salt exploration in the Baleia Azul region using another FPSO.

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In 2010, the startup of operations at FPSO Capixaba located in the Cachalote field and P-57 located in the Jubarte field in the offshore Campos Basin added combined capacities of 280 mbbl/d of oil and 5.5 mmm³/d of natural gas.

We expect that future new source production from the Campos Basin will be predominantly from deepwater oil fields.  We are currently developing nine major projects in the Campos Basin:  Marlim Sul Module 3, Roncador Modules 3 and 4, Papa-Terra, Aruanã (BM-C-36) EWT and long-term production system, Jubarte Phase II, Parque das Baleias and the pre-salt reservoirs of Baleia Azul.

At December 31, 2010, we held exploration rights to 21 blocks in the Campos Basin, comprising 6,374 km² (1.5 million acres).

Espírito Santo Basin  

We have made several discoveries of light oil and natural gas in the Espírito Santo Basin, which covers approximately 75,000 km² (18.5 million acres) offshore and 14,000 km² (3.5 million acres) onshore.  At December 31, 2010, we were producing oil at an average rate of 68.7 mbbl/d from 47 fields and held proved crude oil reserves representing 0.71% of our total proved crude oil reserves in Brazil.  At December 31, 2010, we were producing natural gas at an average rate of 4.2 mmm³/d (148.3 mmcf/d) and held proved natural gas reserves representing 6% of our total proved natural gas reserves in Brazil. 

In 2010, we began operations at the Canapu project served by the FPSO Cidade de Vitória with capacity to produce 2 mmm³/d (70.6 mmcf/d).

In addition to developing new production projects, we are also optimizing existing resources in the Espírito Santo area by constructing the Sul Norte Capixaba gas pipeline with capacity to transport 7 mmm³/d (247.2 mmcf/d).  The pipeline, which runs from the Parque das Baleias area to the Cacimbas gas treatment unit, is expected to come online in 2012.

On December 31, 2010, we held exploration rights to 19 blocks, three onshore and 16 offshore, comprising 8,086 km² (1.9 million acres).

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Santos Basin

The Santos Basin, which covers approximately 348,900 km² (86 million acres) off the city of Santos, in the State of São Paulo, is one of the most promising exploration areas offshore Brazil and the focus of our plans to develop domestic natural gas.  In 2010, we produced oil at an average rate of 32.7 mbbl/d from two fields and one exploration area and held proved crude oil reserves representing 7% of our total proved crude oil reserves in Brazil.  Our average natural gas production in 2010 was 0.8 mmm³/d (28.3 mmcf/d) and our proved natural gas reserves in the Santos Basin represented 24% of our total proved natural gas reserves in Brazil. 

In recent years we have been carrying out plans to increase our gas production and build supporting infrastructure in the Santos and Espírito Santo Basins.  These plans are now reaching fruition, and we expect that they will increase our average gas production capacity in the Santos Basin from 0.8 mmm³/d (28.3 mmcf/d) in 2010 to 15.4 mmm³/d (543.9 mmcf/d) by the end of 2011.  In 2010 we started up post-salt operations at FPSO Cidade de Santos platform located in the Uruguá field, which produces 30 mbbl/d of light oil and is expected to produce 1 mmm³/d (35.3 mmcf/d) of gas in 2011 and as much as 7.9 mmm³/d (279.0 mmcf/d) of gas in 2012.  Mexilhão, located in shallow waters in the Santos Basin Block BS-400, is scheduled to come online in 2011 with initial production of approximately 1.9 mmm³/d (67.0 mmcf/d), potentially increasing to 9.3 mmm³/d (328.4 mmcf/d) in 2012.  An EWT at the SS-11 Atlantic Zephyr platform, located in the BM-S-40 block, also started up in 2010.  We are using the results of the EWT to develop a long-term production system for this block, including a plan to install the FPSO Cidade de Itajaí, with an expected capacity of 80 mbbl/d of oil.

The Santos Basin pre-salt was also a central focus of E&P activities in 2010.  We continue to concentrate our efforts on gathering information about the pre-salt reservoirs in the region and testing drilling technologies to improve efficiency and minimize costs in the near term.  During the next phase, which we will start in 2013, we plan to install several FPSOs in the Santos Basin pre-salt.  The subsequent phase, beginning in 2017, will include the application of improved technologies and engineering specifically designed for the pre-salt fields.

In May 2009, we initiated production in the pre-salt region of the Santos Basin with an EWT at Tupi (now called the Lula field) that has produced on average 15 mbbl/d.  In 2010, we declared the commerciality of that area, presenting development plans for the Lula and Cernambi fields and installing the first system capable of producing in the long-term at Lula, FPSO Cidade de Angra dos Reis, with a production capacity of 100 mbbl/d.  We also started the second EWT in the pre-salt region of the Santos Basin at Guará.

In 2010, we drilled eight new wells, increasing to 20 the number of wells in the pre-salt region of the Santos Basin.  We expect to start drilling up to 24 new wells in this region in 2011. 

All six blocks and one contingent block assigned to us under the Assignment Agreement are located in the pre-salt region of the Santos Basin.  We are developing these blocks in an integrated manner with the areas we already have under concession.  Over the next four years, we will move ahead with our exploration program and are targeting first oil at the Franco prospect by 2015.

On December 31, 2010, we held exploration rights to 47 blocks in the Santos Basin, comprising 29,302 km² (7.2 million acres).  

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Other Basins  

We produce hydrocarbons and hold exploration acreage in 19 other basins in Brazil.  Of these, the most significant are the shallow offshore Camamu Basin and the onshore Potiguar, Recôncavo, Sergipe, Alagoas and Solimões Basins.  While our onshore production is primarily in mature fields, we plan to sustain and slightly increase production from these fields in the future by using enhanced recovery methods.

We had a total of 286 production agreements as of December 31, 2010, and were the 100% owner in 256 of them.  We are operators under nine of our 30 partnership agreements.

Critical Resources in Exploration and Production

We have sought to ensure that critical service sector resources are sufficient to permit us to move ahead with our E&P plans.  Because offshore Brazil is geographically isolated from other offshore drilling areas, and because we often drill in unusually deep waters, we plan carefully for our future drilling rig needs.  By using a combination of our own rigs and units that we contract for periods of three years or longer, we have historically ensured the availability of drilling units to meet our needs, and paid lower average daily rates than if we had contracted the units on a spot basis.  We continually evaluate our need for rigs, renew our drilling contracts, contract ahead for rigs as needed, and stimulate new rig construction by signing long-term operating leases with drilling contractors for rigs that are not yet built.

In the last three years we have successfully eased pressures related to a limited supply of deepwater rigs.  Whereas in 2008 we only had three rigs capable of drilling in water depths greater than 2000 meters (6,560 feet), we had 13 as of December 31, 2010, and we expect to have 30 by 2013.  We have entered into three to ten-year contracts for 22 additional drilling rigs to engage in deepwater exploration of our offshore fields.  These rigs will arrive in Brazil and begin operations during 2011 and 2012.  Of these 22 rigs, one will have the capacity to operate in water depths of up to 1,500 meters (4,920 feet), one will have the capacity to operate in water depths of up to 1,900 meters (6,233 feet), three will be capable of operating in water depths of up to 2,000 meters (6,560 feet), seven will be capable of operating in water depths of up to 2,400 meters (7,830 feet), and 10 will be capable of drilling in water depths of up to 3,000 meters (9,840 feet).  All of these rigs will be chartered by us and have been built or are being built in shipyards outside Brazil.

In addition to these 22 new drilling rigs already contracted, we have also announced plans for 28 rigs to be built in Brazil, supporting the development of the Brazilian rig building industry so that it can meet our long-term needs.  To this end, we have awarded one contract for seven drilling rigs to be built in the Atlântico Sul shipyard in Pernambuco State.  These rigs will be owned by Sete Brasil S.A. (Sete BR), a Brazilian company in which we hold a 10% interest.  We expect to fulfill our future drilling requirements with a combination of rigs built in Brazil, supplemented when needed by the international fleet of deepwater rigs.

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For our shallow water segment, we are building and will operate two jack-up drilling units designed to operate in water depths of up to 107 meters (350 feet) with High Pressure High Temperature (HPHT) capabilities.  We expect to begin operating these units in 2012.

We announced in November 2010 that we had signed two contracts worth a total of U.S.$3.46 billion for the construction of eight hulls for FPSOs to be used in the pre-salt area of the Santos Basin.  The FPSOs will be built in the State of Rio Grande do Sul.  These units are part of the new strategy for the construction of production units that emphasizes project simplification and the use of standardized equipment.  By producing identical hulls in series we expect to accelerate construction, gain economies of scale and minimize costs.

We are also increasing our use of industry standard equipment instead of developing our own customized equipment.  We intend to minimize costs by increasing supervision over suppliers and dividing engineering procurement and construction packages into smaller pieces.

Refining, Transportation and Marketing   

We are an integrated company with a dominant market share in our home market.  We own and operate 12 refineries in Brazil, with a total net distillation capacity of 2,007 mbbl/d, and are one of the world’s largest refiners.  As of December 31, 2010, we operated 90% of Brazil’s total refining capacity.  We supplied almost all of the refined product needs of third-party wholesalers, exporters and petrochemical companies, in addition to the needs of our Distribution segment.  We operate a large and complex infrastructure of pipelines and terminals and a shipping fleet to transport oil products and crude oil to domestic and export markets.  Most of our refineries are located near our crude oil pipelines, storage facilities, refined product pipelines and major petrochemical facilities, facilitating access to crude oil supplies and end-users.

We also import and export crude oil and oil products.  We import certain oil products, particularly diesel, for which Brazilian demand exceeds refining capacity.  We expect the need for imports to decline in the future as we build additional refining capacity and upgrade our refineries to facilitate the processing of domestically produced crudes. 

Our Refining, Transportation and Marketing segment also includes petrochemical operations that add value to the hydrocarbons we produce and meet the needs of the growing Brazilian economy. 

We participate in refining, transportation and marketing operations outside of Brazil through our International business segment.  See “—International.”

Refining

Our refining capacity in Brazil as of December 31, 2010, was 2,007 mbbl/d and our average throughput during 2010 was 1,798 mbbl/d.

The following table shows the installed capacity of our Brazilian refineries as of December 31, 2010, and the average daily throughputs of our refineries in Brazil and production volumes of principal oil products in 2010, 2009 and 2008.

In recent years, we have made substantial investments in our refinery system for the following purposes:

•         Improve gasoline and diesel quality to comply with stricter environmental regulations;

In 2010, we invested a total of U.S.$6,681 million in our refineries, of which U.S.$5,342 million was invested for hydrotreating units to improve the quality of our diesel and gasoline, U.S.$1,203 million for coking units to convert heavy oil into lighter products, and U.S.$136 million for debottlenecking projects.

During 2011, we expect to complete the following investment projects at our refineries:

•         Diesel quality upgrades at RECAP and RLAM; and

The following refinery upgrades are underway for expected completion between 2012 and 2014:

•         Diesel quality upgrades at REGAP, REPAR, REPLAN and RPBC;

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•         Gasoline quality upgrades at REPAR; and

The following refinery upgrade projects are scheduled for completion after 2014:

•         Diesel quality upgrades at REDUC; and

By the end of 2013, we will reduce the maximum sulfur content of the diesel produced in our refineries from 1800 ppm to 500 ppm, and six of our refineries will be producing 50 ppm sulfur diesel.  By the beginning of 2014, we will reduce the maximum sulfur content of the gasoline produced in our refineries from 1,000 ppm to 50 ppm.

Major Refinery Projects        

Brazil has one of the world’s most dynamic economies with above average rates of demand growth for automotive fuels.  We are planning capacity expansions to meet the needs of this growing market and add value to our growing volumes of crude oil production in Brazil.  We are currently building two new refining facilities:

•         Complexo Petroquímico do Rio de Janeiro—Comperj, an integrated refining and petrochemical complex.  We broke ground in 2008, and began construction in 2010.  The 165 mbbl/d refining operation is scheduled to start up in 2013.  A second phase, scheduled for 2018, will increase capacity to 330 mbbl/d and add petrochemicals manufacturing.  

We are in the planning stage for two new refineries in Northeastern Brazil.  Both refineries will be designed to process 20° API heavy crude oil, maximize production of low sulfur diesel, and also produce LPG, naphtha, low sulfur kerosene, bunker fuel and petroleum coke.  Both will be integrated with marine storage terminals.

•         Premium I in the State of Maranhão will be built in two phases of 300 mbbl/d each.

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