UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

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

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

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

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

Title of each class:		Name of each exchange on which registered:
PETROBRAS Common Shares, without par value* PETROBRAS American Depositary Shares (as evidenced by American Depositary Receipts), each representing 4 Common Shares		New York Stock Exchange
PETROBRAS Preferred Shares, without par value* PETROBRAS American Depositary Shares (as evidenced by American Depositary Receipts), each representing 4 Preferred Shares		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:
PifCo U.S.$500,000,000 9.125% Senior Notes due 2007
PifCo U.S.$450,000,000 9.875% Senior Notes due 2008
PifCo U.S.$400,000,000 9.00% Global Step-Up Notes due 2008
PifCo U.S.$600,000,000 9.750% Senior Notes due 2011
PifCo U.S.$750,000,000 9.125% Global Notes due 2013
PifCo U.S.$750,000,000 8.375% Global Notes due 2018
PifCo U.S.$600,000,000 7.75% Global Notes due 2014
PifCo U.S.$899,053,000 6.125% Global Notes due 2016

as of the close of the period covered by this Annual Report :
At December 31, 2006, there were outstanding:
2,536,673,672 PETROBRAS Common Shares, without par value
1,850,364,698 PETROBRAS Preferred Shares, without par value

300,050,000 PifCo Common Shares

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

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.

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.

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

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

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

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

 

 

FORWARD-LOOKING STATEMENTS					2
CERTAIN TERMS AND CONVENTIONS					3
PRESENTATION OF FINANCIAL INFORMATION					3
		Petrobras			3
		PifCo			4
RECENT DEVELOPMENTS					4
		Acquisition of Assets of Ipiranga Group			4
PRESENTATION OF INFORMATION CONCERNING RESERVES					5
ITEM 1.		IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS			6
ITEM 2.		OFFER STATISTICS AND EXPECTED TIMETABLE			6
ITEM 3.		KEY INFORMATION			6
		Selected Financial Data			6
		Exchange Rates			13
		Risk Factors			13
		Risks Relating to Our Operations			13
		Risks Relating to PifCo			19
		Risks Relating to the Relationship between us and the Brazilian Government			19
		Risks Relating to Brazil			20
ITEM 4.		INFORMATION ON THE COMPANY			24
		History and Development of Petrobras			24
		Competitive Strengths			26
		Overview by Business Segment			29
		Exploration, Development and Production			29
		Refining, Transportation and Marketing			40
		Distribution			51
		Natural Gas, Power and Renewable Energy			54
		Renewable Energy Alternative			61
		International			62
		PifCo			73
		Organizational Structure			77
		Property, Plants and Equipment			79
		Regulation of the Oil and Gas Industry in Brazil			79
		Health, Safety and Environmental Initiatives			85
		Competition			87
		Insurance			88
ITEM 5.		OPERATING AND FINANCIAL REVIEW AND PROSPECTS			89
		Management’s Discussion and Analysis of Petrobras’ Financial Condition and Results of Operations			89
		Overview			89
		Sales Volumes and Prices			90
		Effect of Taxes on our Income			92
		Financial Income and Expense			93
		Inflation and Exchange Rate Variation			93
		Results of Operations			95
		Business Segments			104
		Management’s Discussion and Analysis of PifCo’s Financial Condition and Results of Operations			106
		Overview			106
		Purchases and Sales of Crude Oil and Oil Products			106
		Results of Operations			107
		Liquidity and Capital Resources			107
		Critical Accounting Policies and Estimates			118
		Impact of New Accounting Standards			121
		Research and Development			122
		Market Trend			123

ITEM 6.		DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES			124
		Directors and Senior Management			124
		Compensation			132
		Share Ownership			132
		Fiscal Council			133
		Audit Committee Petrobras			133
		PifCo			134
		Employees and Labor Relations			134
ITEM 7.		MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS			137
		Major Shareholders			137
		Petrobras Related Party Transactions			137
		PifCo Related Party Transactions			138
ITEM 8.		FINANCIAL INFORMATION			140
		Petrobras Consolidated Statements and Other Financial Information			140
		PifCo Consolidated Statements and Other Financial Information			140
		Legal Proceedings			141
		Dividend Distribution			147
ITEM 9.		THE OFFER AND LISTING			147
		Petrobras			147
		PifCo			153
ITEM 10.		ADDITIONAL INFORMATION			153
		Memorandum and Articles of Incorporation of Petrobras			153
		Restrictions on Non-Brazilian Holders			160
		Transfer of Control			161
		Disclosure of Shareholder Ownership			161
		Memorandum and Articles of Association of PifCo			161
		Material Contracts			164
		Exchange Controls			165
		Taxation relating to our ADSs and common and preferred shares			166
		Taxation relating to PifCo’s notes			173
		Documents on Display			176
ITEM 11.		QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK			177
		Petrobras			177
		PifCo			183
ITEM 12.		DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES			184
ITEM 13.		DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES			184
ITEM 14.		MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS			184
ITEM 15.		CONTROLS AND PROCEDURES			184
ITEM 16A.		AUDIT COMMITTEE FINANCIAL EXPERT			186
ITEM 16B.		CODE OF ETHICS			186
ITEM 16C.		PRINCIPAL ACCOUNTANT FEES AND SERVICES			187
		Principal Accountant Fees			187
		Audit and Non-Audit Fees			187
		Audit Committee Approval Policies and Procedures			188
ITEM 16D.		EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES			188
ITEM 16E.		PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS			188
ITEM 17.		FINANCIAL STATEMENTS			188
ITEM 18.		FINANCIAL STATEMENTS			188
ITEM 19.		EXHIBITS			189
GLOSSARY OF PETROLEUM INDUSTRY TERMS					194
ABBREVIATIONS					195
CONVERSION TABLE					195
SIGNATURES					196
SIGNATURES					197

FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

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

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

CERTAIN TERMS AND CONVENTIONS

     A glossary of petroleum industry terms, a table of abbreviations and a conversion table are presented beginning on page 194.

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, 2006 and 2005, and for each of the three years in the period ended December 31, 2006, and the accompanying notes, contained in this annual report have been presented in U.S. dollars and prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. See Item 5. “Operating and Financial Review and Prospects” and Note 2(a) to our audited consolidated financial statements. We also publish financial statements in Brazil in reais in accordance with the accounting principles required by Law No. 6404/76, as amended, or Brazilian Corporate Law and the regulations promulgated by the Comissão de Valores Mobiliários (Brazilian Securities Commission, or the CVM), or Brazilian GAAP, which differs in significant respects from U.S. GAAP.

     Certain prior year amounts for 2005 and 2004 have been reclassified to conform to current year presentation standards. These reclassifications had no impact on our net income.

     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 Statement of Financial Accounting Standards No. 52 of the U.S. Financial Accounting Standards Board, or SFAS 52. U.S. dollar amounts presented in this annual report have been translated from reais at the period-end exchange rate for balance sheet items and the average exchange rate prevailing during the period for income statement and cash flow items.

     Unless the context otherwise indicates:

	•		historical data contained in this annual report that were not derived from the consolidated financial statements have been translated from reais on a similar basis;
	•		forward-looking amounts, including estimated future capital expenditures, have all been based on our Petrobras 2015 Strategic Plan, which covers the period from 2004 to 2015, which we refer to as the Petrobras 2015 Strategic Plan, and on our 2007-2011 Business Plan, and have been projected on a constant basis and have been translated from reais in 2007 at an estimated average exchange rate of R$2.50 to U.S.$1.00, and future calculations involving an assumed price of crude oil have been calculated using a Brent crude oil price of U.S.$55 per barrel for 2007, and U.S.$40 per barrel for 2008 and U.S.$35 per barrel for 2009 and thereafter, adjusted for our quality and location differences, unless otherwise stated; and

•

estimated future capital expenditures are based on the most recently budgeted amounts, which may not have been adjusted to reflect all factors that could affect such amounts.

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, 2006 and 2005, and for each of the three years in the period ended December 31, 2006, and the accompanying notes contained in this annual report have been presented in U.S. dollars and prepared in accordance with U.S. GAAP and include PifCo’s wholly-owned subsidiaries: Petrobras Europe Limited, Petrobras Finance Limited, Bear Insurance Company Limited – BEAR and Petrobras Singapore Private Limited.

RECENT DEVELOPMENTS

PESA Issues Notes

     On May 7, 2007, Petrobras Energía S.A. (PESA), a company indirectly controlled by us, issued notes amounting to U.S.$300 million, with a term of 10 years and bearing interest at 5.875% per year. Interest will be paid semi-annually and the principal will be paid in a single installment at maturity. The issuance was made both in the Argentine market and in the international market.

Acquisition of Assets of the Ipiranga Group

     On March 18, 2007, Ultrapar Participações S.A. (“Ultrapar”) acquired, as a commission agent acting on behalf of Braskem S.A. (“Braskem”) and us, the total share capital of the controlling shares of Refinaria de Petróleo Ipiranga S.A. (“RPI”), Distribuidora de Produtos de Petróleo Ipiranga S.A. (“DPPI”) and Companhia Brasileira de Petróleo Ipiranga (“CBPI”) (together, the “Ipiranga Group”), including petrochemical, refining and distribution assets. Under the investment agreement, we and Braskem acknowledged and agreed to the terms of the proposed transaction.

     After completion of the proposed acquisition, the businesses of the Ipiranga Group will be managed by Ultrapar, Braskem and us. Ultrapar will hold the retail businesses located in the South and Southeast regions of Brazil, and we will hold the retail businesses located in the North, Northeast and Central-West regions of Brazil. Besides these, we will hold a 100% of the share capital of “IASA” (a subsidiary of the group that produces asphalt). We and Braskem will jointly hold the petrochemical assets, represented by Ipiranga Química S.A. and Ipiranga Petroquímica S.A. (“IPQ”) and for IPQ’s stake in Copesul – Companhia Petroquímica do Sul (“Copesul”), in the proportion of 40% and 60%, respectively. The assets related to refining operations will be equally shared between Ultrapar, Braskem and us.

     The Ipiranga transaction is expected to close during the fourth quarter of 2007. The transaction is expected to take place in four phases. In the first phase, Ultrapar acquired RPI, DPPI and CBPI from these entities’ controlling shareholders for a purchase price of R$2,000.2 million. In the second phase Ultrapar will make a mandatory tender offer for the remaining outstanding voting shares of RPI, DPPI and CBPI, as required under Brazilian law. In the next phase, Ultrapar will issue preferred shares in exchanges for the outstanding preferred shares of RPI, DPPI and CBPI. In the fourth phase Ultrapar will delivery part of the distribution assets to us and total petrochemical assets to us and Braskem.

     The total value estimated for the operation is U.S.$4.0 billion and we are expected to pay approximately U.S.$1.3 billion for our interest. The transaction will be subject to the approval of the Brazilian anti-trust authorities (CADE – Administrative Board for Economic Defense), the Secretary for Economic Rights and the Secretary for Economic Monitoring.

Acquisition of Refinery — Pasadena Texas

     In September 2006, we announced the closing of the acquisition by Petrobras America, Inc., or PAI, our wholly-owned subsidiary in the U.S. Gulf of Mexico, of 50% of Pasadena Refining System Inc. (PRSI), formerly the Crown Refinery in Pasadena, Texas, from Astra Oil Company, a U.S.-based refining and trading company owned by the Belgian group Compagnie Nationale à Portefeuille SA-CNP. The purchase price was approximately U.S.$416 million. PAI and Astra are conducting studies to expand its capacity and install units that will enable it to process heavy oils and deliver high quality products.

Electrical Energy

     Petrobras is expected to sign an agreement with the National Electrical Energy Agency (Agência Nacional de Energia Elétrica, or ANEEL), in an effort to increase capacity in 24 gas-fired power plants. This agreement is highlighted as a part of our strategy to develop the Brazilian natural gas market as an integrated energy company with a goal of making the gas-fired power business profitable. The actions to be undertaken before 2011 will allow for an additional electrical energy capacity of 4 GW, which are expected to be reached not just through a greater supply of gas, but also through the conversion of plants into those that can support biocombustible operations and through the availability of plants that can process combustible oil. We understand that our actions, along with the actions of other companies, with the contracting for expected demand and the reserve capacity for energy generation, will allow the electrical business greater operational stability.

PRESENTATION OF INFORMATION CONCERNING RESERVES

     The estimates of our proved reserves of crude oil and natural gas as of December 31, 2006, included in this annual report have been calculated according to the technical definitions required by the U.S. Securities and Exchange Commission, or the SEC. DeGolyer and MacNaughton provided estimates of most of our net domestic reserves as of December 31, 2006. All reserve estimates involve some degree of uncertainty. See Item 3. “Key Information—Risk Factors—Risks Relating to Our Operations” for a description of the risks relating to our reserves and our reserve estimates.

     We also file oil and gas reserve estimates with governmental authorities in most of the countries in which we operate. On January 12, 2007, we filed reserve estimates for Brazil with the Agência Nacional de Petróleo (the National Petroleum Agency, or the ANP), in accordance with Brazilian rules and regulations, totaling 11.671 billion barrels of crude oil and condensate and 12,492.9 billion cubic feet of natural gas. The reserve estimates we filed with the ANP and those provided herein differ by approximately 30.1%. This difference is due to (1) the ANP requirement that we estimate proved reserves through the technical abandonment of production wells, as opposed to limiting reserve estimates to the life of our concession contracts as required by Rule 4-10 of Regulation S-X and (2) different technical criteria for booking proved reserves, including the use of 3-D seismic data to establish proved reserves in Brazil.

     We also file reserve estimates from our international operations with various governmental agencies under the guidelines of the Society of Petroleum Engineers, or SPE. The aggregate reserve estimates from our international operations, under SPE guidelines, amounted to 0.66 billion barrels of crude oil and NGLs and 3,679 billion cubic feet of natural gas, which differs by approximately 44 percent from reserve estimates provided herein because the SPE’s different technical guidelines allow for (1) the booking of reserves in Bolivia beyond the life of certain gas sale contracts and (2) the booking of reserves in Nigeria based on 3-D seismic data and certain oil recovery techniques, such as fluid injection, based on analogous fields.

     Bolivia and Venezuela implemented new nationalization measures during 2006. The nationalization measures in Bolivia and Venezuela caused a reduction of our reserves in these countries in 2006. The new regulation in Venezuela reduced our reserves as Petróleos de Venezuela S.A. (PDVSA) became the main controller of the companies, created to operate the fields with private companies. Due to new government regulations, our reserves in Bolivia were also reduced. In Nigeria, the consortium in charge of the Akpo field included Total, Petrobras and a Nigerian private company called SAPETRO. The agreement underwritten by these companies established that Total and Petrobras carry the investment cost of the third party and it would be compensated in the

future with SAPETRO’s production/reserves. Throughout 2006, SAPETRO sold its participation to a Chinese oil company and, as part of this agreement, Petrobras and Total were reimbursed for their past carrying investments. In addition, in Nigeria, due to certain farm-in arrangements in the Akpo field, we reduced our expectations for future production. See “Item 4.—Information on the Company—International.”

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

     Not applicable.

ITEM 3. KEY INFORMATION

Selected Financial Data

Petrobras

     The following table sets forth our selected consolidated financial data, presented in U.S. dollars and prepared in accordance with U.S. GAAP. The data for each of the five years in the period ended December 31, 2006 has been derived from our audited consolidated financial statements, which were audited by KPMG Auditores Independentes for the year ended December 31, 2006, by Ernst & Young Auditores Independentes S/S for each of the years ended December 31, 2005, 2004 and 2003, and by PricewaterhouseCoopers Auditores Independentes for the year ended December 31, 2002. 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 2005 and 2004 have been reclassified to conform to current year presentation standards. These reclassifications had no impact on our net income.

BALANCE SHEET DATA – PETROBRAS

										As of December 31,
		2006				2005				2004				2003				2002
		(in millions of U.S. dollars)
Assets
Current assets:
Cash and cash equivalents		$	12,688			$	9,871			$	6,856			$	8,344			$	3,301
Accounts receivable, net			6,311				6,184				4,285				2,905				2,267
Inventories			6,573				5,305				4,904				2,947				2,540
Recoverable taxes			2,593				2,087				1,475				917				672
Advances to suppliers			948				652				422				504				794
Other current assets			1,842				1,685				1,484				1,817				748
Total current assets			30,955				25,784				19,426				17,434				10,322
Property, plant and equipment, net			58,897				45,920				37,020				30,805				18,224
Investments in non-consolidated companies and other investments			3,262				1,810				1,862				1,173				334
Other assets:
Accounts receivables, net			513				642				411				528				369
Advances to suppliers			852				462				580				416				450
Petroleum and Alcohol Account-Receivable from the Brazilian government(1)			368				329				282				239				182
Government securities			479				364				326				283				176
Unrecognized pension obligation			—				—				—				—				61
Restricted deposits for legal proceedings and guarantees			816				775				699				543				290
Recoverable taxes			1,292				639				536				467				156
Investments PEPSA and PELSA			—				—				—				—				1,073
Goodwill			243				237				211				183				—
Prepaid expenses			244				246				271				190				100
Marketable securities			94				129				313				806				208
Fair value asset of gas hedge			—				547				635				—				—
Others			665				754				510				545				209
Total other assets			5,566				5,124				4,774				4,200				3,274
Total assets		$	98,680			$	78,638			$	63,082			$	53,612			$	32,154
Liabilities and Shareholders’ equity
Current liabilities:
Trade accounts payable		$	5,418			$	3,838			$	3,284			$	2,261			$	1,702
Taxes payable			3,357				3,423				2,569				2,305				1,801
Short-term debt			1,293				950				547				1,329				671
Current portion of long-term debt			2,106				1,428				1,199				1,145				727
Current portion of project financings			2,182				2,413				1,313				842				239
Current portion of capital lease obligations			231				239				266				378				349
Dividends and interest on capital payable			3,693				3,068				1,900				1,955				307
Payroll and related charges			1,192				918				618				581				283
Advances from customers			880				609				290				258				119
Employees’ postretirement benefits obligations – Pension			198				206				166				160				89
Other current liabilities			1,236				1,069				1,176				823				976
Total current liabilities			21,786				18,161				13,328				12,037				7,263
Long-term liabilities:
Long-term debt			10,510				11,503				12,145				11,888				6,987
Project financings			4,192				3,629				4,399				5,066				3,800
Employees’ postretirement benefits obligations – Pension			4,645				3,627				2,915				1,895				1,363
Employees’ postretirement benefits obligation – Health Care			5,433				3,004				2,137				1,580				1,060
Capital lease obligations			824				1,015				1,069				1,242				1,907
Deferred income tax			2,916				2,166				1,558				1,122				259
Gas-fired power liabilities			—				—				1,095				1,142				—
Deferred Purchase Incentive			—				144				153				—				—
Provision for abandonment of wells			1,473				842				403				396				—
Other liabilities			636				556				497				541				350
Total long-term liabilities			30,629				26,486				26,371				24,872				15,726
Minority interest			1,966				1,074				877				367				(136	)

										As of December 31,
		2006				2005				2004				2003				2002
		(in millions of U.S. dollars)
Shareholders’ equity
Shares authorized and issued:
Preferred share			7,718				4,772				4,772				2,973				2,459
Common share			10,959				6,929				6,929				4,289				3,761
Capital reserve and other comprehensive income			25,622				21,216				10,805				9,074				3,081
Total Shareholders’ equity			44,299				32,917				22,506				16,336				9,301
Total liabilities and Shareholders’ equity		$	98,680			$	78,638			$	63,082 $				53,612			$	32,154

INCOME STATEMENT DATA — PETROBRAS

		For the Year Ended December 31,
		2006				2005 (8)				2004 (8)				2003(8)				2002(8)
		(in millions of U.S. dollars, except for share and per share data)
Sales of products and services		$	93,893			$	74,065			$	51,954			$	42,690			$	32,987
Value-added and other taxes on sales and services			(17,906	)			(14,694	)			(10,906	)			(9,527	)			(7,739	)
CIDE(1)			(3,640	)			(3,047	)			(2,620	)			(2,249	)			(2,636	)
Net operating revenues			72,347				56,324				38,428				30,914				22,612
Cost of sales			40,061				29,828				21,279				15,533				11,506
Depreciation, depletion and amortization(2)(3)			3,673				2,926				2,481				1,785				1,930
Exploration, including exploratory dry holes(2)			934				1,009				613				512				435
Selling, general and administrative expenses			4,989				4,474				2,901				2,091				1,741
Other operating expense			1,829				2,008				793				597				222
Total costs and expenses			51,486				40,245				28,067				20,518				15,834
Financial income			1,165				710				956				634				1,142
Financial expense			(1,340	)			(1,189	)			(1,733	)			(1,247	)			(774	)
Monetary and exchange variation on monetary assets and liabilities, net			75				248				450				509				(2,068	)
Employee benefit expense			(1,017	)			(994	)			(650	)			(595	)			(451	)
Other non-operating income (expense), net(4)			(583	)			(262	)			(449	)			(924	)			(1,395	)
Income before income taxes, minority interest, extraordinary item and accounting change			19,161				14,592				8,935				8,773				3,232
Income tax (expense) benefit:
Current			(5,011	)			(4,223	)			(2,114	)			(2,599	)			(1,269	)
Deferred			(680	)			(218	)			(117	)			(64	)			116
Total income tax expense			(5,691	)			(4,441	)			(2,231	)			(2,663	)			(1,153	)
Minority interests in results of consolidated subsidiaries			(644	)			35				(514	)			(248	)			232
Income before extraordinary item and effect of change in accounting principle			12,826				10,186				6,190				5,862				2,311
Extraordinary gain net of tax			—				158				—				—				—
Cumulative effect of change in accounting principle, net of taxes(2)			—				—				—				697				—
Net income for the year		$	12,826			$	10,344			$	6,190			$	6,559			$	2,311
Weighted average number of shares Outstanding:(5)
Common(5)			2,536,673,672				2,536,673,672				2,536,673,672				2,536,673,672				2,536,673,672
Preferred(5)			1,850,364,698				1,849,478,028				1,849,478,028				1,849,478,028				1.807.742.676
Basic and diluted earnings per share:(5)(6)
Common and Preferred Shares(5)(6)		$	2.92			$	2.36			$	1.41			$	1.50			$	0.53
Common and Preferred ADS(5)(6)		$	11.68			$	9.44			$	5.64			$	6.00			$	2.12
Cash dividends per(5)(7):
Common and Preferred shares(5)(7)		$	0.84			$	0.68			$	0.42			$	0.37			$	0.29
Common and Preferred ADS(5)(7)		$	3.36			$	2.72			$	1.68			$	1.48			$	1.16

PifCo

     The following table sets forth PifCo’s selected consolidated financial data, presented in U.S. dollars and prepared in accordance with U.S. GAAP. The data for each of the five years in the period ended December 31, 2006 have been derived from PifCo’s audited consolidated financial statements, which were audited by KPMG Auditores Independentes for the year ended December 31, 2006, by Ernst & Young Auditores Independentes S/S for each of the years ended December 31, 2005, 2004 and 2003 and by PricewaterhouseCoopers Auditores Independentes for the year ended December 31, 2002. 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.”

INCOME STATEMENT AND BALANCE SHEET DATA - PifCo
		For the Year Ended December 31,
		2006				2005				2004				2003				2002
		(in millions of U.S. dollars)
Income Statement Data:
Sales of crude oil and oil products and Services:
Related Parties		$	14,236.5			$	13,974.4			$	10,118.4			$	5,543.0			$	5,375.5
Others			7,833.3				3,161.7				2,237.2				1,432.5				1,014.7
Lease income(1)			—				—				—				—				36.1
		$	22,069.8			$	17,136.1			$	12,355.6			$	6,975.5			$	6,426.3
Operating Expenses:
Cost of sales
Related Parties			(8,122.0	)			(7,780.3	)			(4,391.3	)			(2,851.4	)			(2,409.0	)
Others			(13,778.5	)			(9,203.0	)			(7,844.7	)			(4,068.7	)			(3,962.5	)
Lease expense(1)			—				—				—				—				(24.0	)
Selling, general and Administrative expenses
Related parties			(189.7	)			(158.1	)			(98.7	)			(17.1	)			—
Others			(17.7	)			(7.6	)			(1.1	)			(1.5	)			(1.2	)
			(22,107.9	)			(17,149.0	)			(12,335.8	)			(6,938.7	)			(6,396.7	)
Operating income (loss)			(38.1	)			(12.9	)			19.8				36.8				29.6
Financial income(2)
Related Parties			999.2				765.5				568.6				401.7				201.9
Others			286.0				218.5				110.2				41.2				17.7
Total			1,285.2				984.0				678.8				442.9				219.6
Financial expense(3)
Related Parties			(722.4	)			(409.8	)			(169.0	)			(111.9	)			(61.3	)
Others			(735.4	)			(589.1	)			(592.2	)			(370.8	)			(253.4	)
Total			(1,457.8	)			(998.9	)			(761.2	)			(482.7	)			(314.7	)
Other income, net
Related Parties			—				—				(0.5	)			—				—
Others			0.2				—				4.0				—				—
Net loss		$	(210.5	)		$	(27.8	)		$	(59.1	)		$	(3.0	)		$	(65.5	)
Balance Sheet Data (end of period):
Cash and cash equivalents		$	510.8			$	230.7			$	1,107.3			$	664.2			$	260.6
Trade accounts receivable
Related parties			10,658.9				8,681.1				7,788.1				5,064.5				4,837.1
Others			835.4				212.7				153.6				109.4				57.1
Notes receivable
Related parties			6,354.4				3,909.3				1,936.9				1,726.4				1,631.6
Export Prepayment
Related parties			532.2				943.9				1,414.7				1,479.4				751.2
Marketable Securities			1,796.9				2,248.6				1,864.8				615.8				96.3
Total assets			21,321.3				16,748.9				14,670.2				10,196.6				8,697.3
Trade accounts payable
Related parties			1,142.9				950.7				562.1				271.0				292.0
Other			1,122.0				616.1				568.1				349.0				281.1
Notes payable
Related parties			12,828.5				8,080.3				6,435.0				2,442.8				3,688.2
Short-term financing and current portion of long-term debt			1,205.9				891.1				680.9				1,076.4				367.5
Long-term debt(4)			4,640.1				5,908.4				6,151.8				5,825.3				3,850.4
Total stockholders’ equity			(24.8	)			8.0				35.7				94.8				43.9
Total liabilities and stockholders’ equity			21,321.3				16,748.9				14,670.2				10,196.6				8,697.3

Exchange Rates

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

     The real depreciated 52.3% in 2002 against the U.S. dollar, before appreciating 18.2% in 2003 and continuing to appreciate 8.1% in 2004, 11.8% in 2005 and 8.7% in 2006. As of June 21, 2007, the real has appreciated to R$1.920 per U.S.$1.00, representing an appreciation of approximately 10.2% in 2007 year-to-date. The real may depreciate or appreciate substantially in the future. See “—Risk Factors—Risks Relating to Brazil.”

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

						(R$ /U.S.$)
		High				Low				Average (1)				Period End
Year ended December 31,
2006			2.371				2.059				2.175				2.138
2005			2.762				2.163				2.435				2.341
2004			3.205				2.654				2.926				2.654
2003			3.662				2.822				3.075				2.889
2002			3.955				2.271				2.924				3.533
Month
November 2006			2.187				2.135				2.156				2.167
December 2006			2.169				2.138				2.150				2.138
January 2007			2.156				2.125				2.139				2.125
February 2007			2.118				2.077				2.096				2.118
March 2007			2.139				2.050				2.089				2.050
April 2007			2.050				2.023				2.032				2.034
May 2007			2.034				1,929				1.986				1,929
June 2007 (through June 21)			1.964				1.905				1.930				1.920

     Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or serious reasons to foresee such an imbalance, temporary restrictions on remittances from Brazil may be imposed by the Brazilian government. These types of measures may be taken by the Brazilian government in the future, including measures relating to remittances related to our preferred or common shares or American Depositary Shares, or ADSs. See “Risk Factors-Risks Relating to Brazil.”

Risk Factors

Risks Relating to Our Operations

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

     The majority of our revenue is derived from sales of crude oil and oil products. We do not, and will not, have control over the factors affecting international prices for crude oil and oil products. The average prices of Brent crude, an international benchmark oil, were approximately U.S.$ 65.14 per barrel for 2006, U.S.$54.38 per barrel for 2005 and U.S.$38.21 per barrel for 2004. Changes in crude oil prices typically result in changes in prices for oil products.

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

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

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

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

     Our ability to achieve our long-term growth objectives is highly dependent upon our ability to discover additional reserves, as well as to successfully develop our current reserves. In addition, our exploration activities expose us to the inherent risks of drilling, including the risk that we will not discover commercially productive crude oil or natural gas reserves. The costs of drilling wells are often uncertain, and numerous factors beyond our control (such as unexpected drilling conditions, equipment failures or accidents, and shortages or delays in the availability of drilling rigs and the delivery of equipment) may cause drilling operations to be curtailed, delayed or cancelled. These risks are heightened when we drill in deep water (between 300 and 1,500 meters’ water depth) and ultra deep water (more than 1,500 meters). Deep water drilling represented approximately 34 % of the exploratory wells we drilled in 2006, a higher proportion than for many other oil and gas producers.

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

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

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

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

     Our activities are subject to a wide variety of federal, state and local laws, regulations and permit requirements relating to the protection of human health and the environment, both in Brazil and in other jurisdictions in which we operate. In Brazil, we could be exposed to administrative and criminal sanctions, including warnings, fines and closure orders for non-compliance with these environmental regulations, which, among other things, limit or prohibit emissions or spills of toxic substances produced in connection with our operations. In 2006, we experienced spills totaling 77,402 gallons of crude oil, as compared to 71,141 gallons in 2005 and 140,000 gallons in 2004. As a result of certain of these spills, we were fined by various state and federal environmental agencies, named the defendant in several civil and criminal suits, and remain subject to several investigations and potential civil and criminal liabilities. See Item 8. “Financial Information—Legal Proceedings.” Waste disposal and emissions regulations may require us to clean up or retrofit our facilities at substantial cost and could result in substantial liabilities. The Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis (Brazilian Institute of the Environment and Renewable Natural Resources, or IBAMA) routinely inspects our oil platforms in the Campos Basin, and may impose fines, restrictions on operations or other sanctions in connection with its inspections. In addition, we are subject to environmental laws that require us to incur significant costs to cover damage that a project may cause to the environment (environmental compensation). These additional costs may have a negative impact on the profitability of the projects we intend to implement or may make such projects economically unfeasible.

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

We may incur losses and spend time and money defending pending 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. For example, on the grounds that drilling and production platforms may not be classified as sea-going vessels, the Brazilian Revenue Service asserted that overseas remittances for charter payments should be reclassified as lease payment and subject to a withholding tax of 25%. The Revenue Service has filed two tax assessments against us that in the aggregate, on December 31, 2006, amounted to R$3,914 million (approximately U.S.$1,832 million). See Item 8. “Financial Information—Legal Proceedings.”

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

     In the event that claims involving a material amount and for which we have no provisions were to be decided against us, or in the event that the losses estimated turn out to be significantly higher than the provisions made, the aggregate cost of unfavorable decisions could have a material adverse effect on our financial condition and results of operations. 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.

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

     In June 2003, the State of Rio de Janeiro enacted a law, referred to as the “Noel Law,” imposing ICMS on upstream activities. The constitutionality of the Noel Law is currently being challenged in the Brazilian Supreme Court (Supremo Tribunal Federal, or STF) and although the law was approved by the State Legislature, the

government of the State of Rio de Janeiro has not yet enforced it. Currently, the ICMS for fuels derived from oil is assessed at the point of sale but not at the wellhead level. If the State of Rio de Janeiro enforces the Noel Law, it is unlikely (depending on the grounds of the Supreme Court’s decision) that the other states would allow us to use the tax imposed at the wellhead level in Rio de Janeiro as a credit to offset the tax imposed at the sale level. Therefore, we would have to pay ICMS at both levels. We estimate that the amount of ICMS that we would be required to pay to the State of Rio de Janeiro could increase by approximately R$9.4 billion (U.S.$4.3 billion) per year. This increase could have a material adverse effect on our results of operations and financial condition.

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

     Consistent with the global trend of other major oil and gas companies and to secure demand for our natural gas, we participate in the domestic power market. Despite a number of incentives introduced by the Brazilian government to promote the development of gas-fired power plants, development of such plants has been slow due to the market structure and regulation of the power industry, among other things. We have invested, alone or with other investors, in fifteen (thirteen in operation and two under construction or development) of the 21 existing gas-fired power generation plants. Demand for energy produced by our gas-fired power plants has been lower than we expected, as a consequence of the reduction in electricity demand due to a rationing that took place in Brazil in 2001 and 2002. The resulting excess of electricity generation capacity in Brazil has lowered the prices of energy and the majority of our thermoelectricity generation capacity is not contracted in the short term. Although almost all of our long-term capacity has been sold through the energy auctions promoted by the Brazilian government, we still face certain risks associated with our gas-fired power business. The main risks are:

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

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

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

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

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

     The impacts of fluctuations in exchange rates, especially the real/U.S. dollar rate, on our operations are varied and may be material. The principal market for our products is Brazil, as over the last three fiscal years over 75% 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. In addition, during 2006 we imported U.S.$10.7 billion of crude oil and oil products, the prices of which were all denominated and paid in U.S. dollars. Conversely, a substantial share of our liquid assets are held in U.S. dollar denominated assets, or indexed to the U.S. dollar, but we do not use forwards, swaps and futures contracts to mitigate the impact of changes in currency values on our operations and financial statements because of their limited liquidity and cost.

     Our recent financial statements reflect the appreciation of the real by 18.2%, 8.1%, 11.8% and 8.7% against the U.S. dollar in 2003, 2004, 2005 and 2006, respectively, as a result of improvement in macro-economic conditions and reduction in the markets perception of political risk in Brazil and global emerging market risk. As of June 21, 2007, the exchange rate of the real to the U.S. dollar was R$1.920 per U.S.$1.00, representing an appreciation of approximately 10.2% in 2007 year-to-date. Any reversal of this trend could affect negatively the results of our operations.

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

     In spite of marked improvements in our credit ratings, which have facilitated our access to fixed-interest long-term capital, a substantial portion of our total debt is represented by structured finance, export credits, trade financing and other similar financing methods the funding of which depends on floating rate instruments, and which for contractual, cost or other considerations cannot be prepaid. As of December 31, 2006, approximately 59%— U.S.$12,589 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.

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, in particular in Latin America and the Middle East.

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

	•		the imposition of exchange or price controls;
	•		the imposition of restrictions on hydrocarbon exports;
	•		the depreciation of local currencies;
	•		the nationalization of oil and gas reserves;
	•		increases in export tax / income tax rates for crude oil and oil products; or
	•		unilateral (governmental) institutional and contractual changes.

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

     Of the countries outside of Brazil in which we operate, Argentina is the most significant, representing approximately 44% of our total international crude oil and natural gas production and 35% of our international proved crude oil and natural gas reserves at December 31, 2006. In response to the Argentine peso crisis that began in 2001, the Argentine government has made a number of changes in the regulatory structure of the electricity and

gas sectors and has established export tax rates for crude oil, natural gas and oil products. We also have significant operations in Bolivia and Venezuela that represented, respectively, approximately 23% and 11% of our total international production in barrels of oil equivalent and 24% and 9% of our international proved crude oil and natural gas reserves, respectively, at December 31, 2006. Deterioration of the situation in Argentina, Bolivia or Venezuela may have an adverse effect on our results of operations and financial condition.

The nationalization measures taken by the Bolivian and Venezuelan governments may have an adverse effect on our results of operations and financial condition. The Bolivian and Venezuelan governments have recently increased their participation in their respective domestic oil and gas industries, which may generate material losses to us.

     We have been operating in Bolivia since 1996. Our consolidated interests related to Bolivia include two refineries, oil and gas reserves, which represented approximately 1.9% of our total reserves at December 31, 2006 and our interest in the Bolivia-Brazil gas pipeline (GTB). We also hold a long-term gas supply agreement, or the GSA, for the purchase of natural gas from the Bolivian state oil company, Yacimientos Petrolíferos Fiscales Bolivianos — YPFB. As of December 31, 2006, the book value of Bolivia assets was U.S.$1,173 million. In 2006, the natural gas we imported from Bolivia represented approximately 56% of our total natural gas sales. We supply this natural gas to the Brazilian market, including local distribution companies and gas-fired power plants in which we have an interest. On May 1, 2006, the Bolivian government announced that it would nationalize several industries in the country, including the oil and gas industry. As a result, companies engaged in oil and gas production activities in Bolivia were required to deliver to YPFB all their oil and gas production. The nationalization measures also included a significant increase in the government take (including royalties and direct taxes) for companies engaged in oil and gas production in Bolivia from 18% of total production in 2005 to approximately 82% in 2006, subject to production levels and the price of natural gas, among other variables to take into account. We reviewed our production estimates for Bolivia and reduced our proved reserves in this country from 2.7% of our total reserves in December 31, 2005 to 1.9% of our total reserves in December 31, 2006. After negotiations with the Bolivian government, in May 2007, we reached a sales agreement with YPFB, in which they have agreed to pay, in two installments, U.S.$112 millions for all the outstanding shares of Petrobras Bolivia Refinación S.A., which owns the two refineries in Bolivia. On June 11, 2007 we confirmed the first payment of U.S.$56 million from YPFB. The Bolivian government attempted to increase the gas prices under the agreement but currently has agreed to maintain the prices at the levels originally provided in the agreement, with the exception of prices for gas with a calorific power higher than 8,900 kcal/m3, for which a new price premium formula based on international market prices has yet to be negotiated.

     Our interests in Venezuela include oil and gas reserves, which represented approximately 0.7% of our total reserves at December 31, 2006. In April 2005, the Venezuelan Energy and Oil Ministry instructed Petróleos de Venezuela S.A. (PDVSA), the Venezuelan government-controlled company created to operate oil and gas reserves with private companies, to review thirty-two operating agreements signed by PDVSA with oil companies from 1992 through 1997. In addition, PDVSA was instructed to take measures in order to convert all effective operating agreements into state-controlled companies in order to grant the Venezuelan government, through PDVSA, more than 50% ownership of each field, including agreements with our affiliates in connection with the areas of Oritupano Leona, La Concepcion, Acema and Mata. As a result, as of December 31, 2005, we recorded an impairment charge in order to adjust the book value of our Venezuelan assets in the amount of U.S.$134 million. In March 31, 2006, we, PDVSA and Corporación Venezolana del Petróleo S.A. (CVP), entered into memoranda of understanding (MOUs) in order to effect the migration of the operating agreements to partially state-owned companies (“mixed companies”), whereby the interest of PDVSA in each mixed company would be 60% and the interest of private companies like us would be limited to 40%. In August 2006, the final migrating contracts were executed for Oritupano Leona, Mata, Acema and La Concepción, with effective date of April 1, 2006.

     All these measures generate significant uncertainty as to the status and prospects of our investment and operations in Bolivia and Venezuela. We cannot estimate the degree to which these nationalization measures will affect us, and believe they may have a material adverse effect on our results of operations and financial condition. See Item 4. “Information on the Company¾International¾ Bolivian Activities” and Item 4. “Information on the Company¾International¾ Venezuelan Activities.”

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. PifCo has limited operations consisting principally of the purchase of crude oil and oil products from third parties and the resale of those products to us or to third parties. PifCo also buys crude oil and oil products from us, for sale to third parties and affiliates on a limited basis. PifCo’s ability to service and repay its indebtedness is consequently dependent on our own operations.

     Financing for PifCo’s operations is provided by us as well as third-party credit providers in favor of whom we provide credit support. This support to PifCo’s debt obligations is made through standby purchase agreements whereby we agree to repurchase from the holders of PifCo’s notes their right to receive payment from PifCo in case PifCo defaults payment.

     Our own financial condition or results of operations, or 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 its ability to pass on its financing costs to us.

     PifCo is principally engaged in the purchase of crude oil and oil products for sale to us, as described above. PifCo regularly incurs indebtedness related to such purchases and/or in obtaining financing from us or third-party creditors. All such indebtedness has the benefit of our standby purchase obligation or other support, and PifCo has historically has passed on its financing costs to us by selling crude oil and oil products to us at a premium to compensate for its financing costs. If for any reason we are not permitted to continue these practices, this would have a materially adverse effect on PifCo’s business and on its ability to meet its debt obligations in the long term.

Risks Relating to the Relationship between us and the Brazilian Government

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

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

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

     In the past, the Brazilian government set prices for crude oil and oil products in Brazil, occasionally below prices prevailing in the world oil markets. These prices involved elements of cross-subsidy among different oil products sold in various regions in Brazil. The cumulative impact of this price regulation system on us is recorded as an asset on our balance sheet under the line item “Petroleum and Alcohol Account—Receivable from the Brazilian government.” The balance of the account at December 31, 2006 was U.S.$ 368 million. All price controls for crude oil and oil products ended on January 2, 2002, however, the Brazilian government could decide to reinstate price controls in the future as a result of market instability or other conditions. If this were to occur, our financial condition and results of operations could be adversely affected.

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

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

Risks Relating to Brazil

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

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

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

     Uncertainty over whether the Brazilian government will implement changes in policy or regulations that may affect these 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.

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

     Our principal market is Brazil, which has, in the past, periodically experienced extremely high rates of inflation. Inflation, along with governmental measures to combat inflation and public speculation about possible future measures, has had significant negative effects on the Brazilian economy. The annual rates of inflation, as measured by the National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo, or IPCA), have decreased from 2,477.15% in 1993 to 916.46% in 1994 and to 5.97% in 2000. The same index increased to 9.30% in 2003, before decreasing to 3.14% in 2006. Considering the historically high rates of inflation, Brazil may experience higher levels of inflation in the future. The lower levels of inflation experienced since 1995 may not continue. Future governmental actions, including actions to adjust the value of the real, could trigger increases in inflation, which may adversely affect our financial condition.

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

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

Risks Relating to our Equity and Debt Securities

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

     Petrobras shares are the most liquid in the São Paulo Stock Exchange (BOVESPA), but overall, the Brazilian securities markets are smaller, more volatile and less liquid than the major securities markets in the United States (and perhaps 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 your ability to sell the common or preferred shares underlying our ADSs at the price and time you 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.

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

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

     Our preferred ADSs have been listed on the New York Stock Exchange since February 21, 2001, while our common ADSs have been listed on the New York Stock Exchange since August 7, 2000. We cannot predict whether an active liquid public trading market for our ADSs will be sustained on the New York Stock Exchange, where they

are currently traded. Active, liquid trading markets generally result in lower price volatility and more efficient execution of buy and sell orders for investors. Liquidity of a securities market is often a function of the volume of the underlying shares that are publicly held by unrelated parties. We do not anticipate that a public market for our common or preferred shares will develop in the United States.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

If Brazilian law restricts us from paying PifCo in U.S. dollars, PifCo may have insufficient U.S. dollar funds to make payments on its debt obligations and we may not be able to pay our obligations under the standby purchase agreement in U.S. Dollars.

     Currently, payments by us to PifCo for the import of oil, the expected source of PifCo’s cash resources to pay its obligations under the PifCo notes, will not require approval by or registration with the Central Bank of

Brazil. There may be other regulatory requirements that we will need to comply with in order to make funds available to PifCo. Nonetheless, Central Bank of Brazil may impose prior approval requirements on the remittance of U.S. dollars abroad. If Brazilian law were to impose restrictions, limitations or prohibitions on our ability to convert reais into U.S. dollars, PifCo may not have sufficient U.S. dollar funds available to make payment on its debt obligations.

     In the case that the PifCo noteholders receive payments in reais corresponding to the equivalent U.S. Dollar amounts due under PifCo’s notes, it may not be possible to convert these amounts into U.S. Dollars. We will not need any prior or subsequent approval from the Central Bank of Brazil to use funds we hold abroad to comply with our obligations under the standby purchase agreement.

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

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

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

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

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

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

ITEM 4. INFORMATION ON THE COMPANY

History and Development of Petrobras

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

must be owned by the Brazilian federal government, a state or a municipality. We are controlled by the Brazilian federal government, but our common and preferred shares are also publicly traded. Our principal executive office is located at Avenida República do Chile, 65, 20031-912 — Rio de Janeiro — RJ, Brazil and our telephone number is (55-21) 3224-4477.

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

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

     Based upon our 2006 consolidated revenues, we are the largest corporation in Brazil and one of the largest oil and gas companies in Latin America. In 2006, we had sales of products and services of U.S.$93,893 million, net operating revenues of U.S.$72,347 million and net income of U.S.$12,826 million.

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

	•		Exploration and Production – Our exploration and production segment encompasses exploration, development and production activities in Brazil.
	•		Supply – Our supply segment encompasses refining, logistics, transportation, exportation and the purchase of crude oil, as well as the purchase and sale of oil products and fuel alcohol. In addition, this segment includes the petrochemical and fertilizers division, which includes investments in domestic petrochemical companies and our two domestic fertilizer plants.
	•		Distribution – Our distribution segment represents the oil product and fuel alcohol distribution activities conducted by our wholly owned subsidiary, Petrobras Distribuidora S.A. — BR in Brazil.
	•		Gas and Power – Our gas and power segment encompasses the purchase, sale, transportation and distribution of natural gas produced in or imported into Brazil. In addition, this segment includes our participation in domestic electricity production, including investments in domestic natural gas transportation companies, state owned natural gas distributors and gas-fired power companies.
	•		International – Our international segment encompasses Exploration and Production, Supply, Distribution and Gas and Power activities conducted in the following countries: Argentina, Angola, Bolivia, Colombia, Ecuador, Equatorial Guinea, Iran, Libya, Mexico, Mozambique, Nigeria, Paraguay, Peru, the United States, Tanzania, Turkey, Uruguay and Venezuela.
	•		Corporate – Our corporate segment includes the financial results and those activities not attributable to other segments, including corporate financial management, overhead related to central administration and other expenses, which include actuarial expenses related to our pension and health care plans for non-active participants.

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

Competitive Strengths

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

     Our legacy as Brazil’s former sole supplier of crude oil and oil products has provided us with a fully developed operational infrastructure throughout Brazil and a large proved reserve base. Our long history, resources and established presence in Brazil permit us to compete effectively with other market participants and new entrants now that the Brazilian oil and gas industry has been deregulated. We operate most of the development fields in Brazil and substantially all of the country’s refining capacity. Our average domestic daily production of crude oil and NGLs increased 5.6% in 2006, increased 12.8% in 2005, and decreased 3.1% in 2004.

Strong reserve base

     As of December 31, 2006, we had estimated proved developed and undeveloped crude oil and natural gas reserves of approximately 11.458 billion barrels of oil equivalent in Brazil and abroad, including proportional reserves related to unconsolidated companies in Venezuela in the volume of 78.6 million barrels of oil equivalent. In addition, we have a substantial base of exploration acreage both in Brazil and abroad, which we are exploring by ourselves and with industry partners in order to continue to increase our reserves.

     As of December 31, 2006, our worldwide proved reserves to production ratio was 14.5 years.

     The majority of our reserves, including recent discoveries, are located in deepwater areas that generally require additional planning, more comprehensive evaluation and added lead time to begin production when compared to onshore production. In accordance with our Business Plan for the period from 2007 to 2011, we have been investing the necessary capital to build the offshore platforms needed to derive income from these reserves. Although our proved reserve life is higher than the industry average, the additional planning required to bring deepwater areas into production also means that our percentage of proved undeveloped reserves may be higher than the industry average.

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

Upstream and downstream technological expertise and international recognition for production and exploration in deep and ultra-deep waters

     While developing Brazil’s offshore basins over the past 37 years, we have gained expertise in deepwater drilling, development and production techniques and technologies. We are currently in the process of developing technology to permit production from wells at water depths of up to 9,843 feet (3,000 meters).

     Our deepwater development and production expertise has allowed us to achieve high production volumes and relatively low lifting costs (excluding royalties, special government participation and rental of areas, which we refer to as “government take”). Our aggregate average lifting cost for crude oil and natural gas products in Brazil for 2006, excluding government take, increased to U.S.$ 6.59 per barrel of oil equivalent, as compared to U.S.$5.73 per barrel of oil equivalent for 2005. Government take, increased to U.S.$ 11.05 per barrel of oil equivalent for 2006, as compared to U.S.$9.00 per barrel of oil equivalent for 2005. The international price of oil is one of the factors in determining the government take.

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

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

•

the location of over 81% of our proved reserves in large, contiguous and highly productive fields in the offshore Campos Basin, which allows for the concentration of our operational infrastructure, thereby reducing our total costs of exploration, development and production;

	•		the location of most of our refining capacity in the Southeast region, directly adjacent to the Campos Basin and situated within the country’s most heavily populated and industrialized markets; and
	•		the relative balance between our domestic production of 1,778 Mbpd, our refining throughput of 1,746 Mbpd and our sales to the Brazilian market for hydrocarbon products of 1,697 Mbpd.

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

Strong position in Brazil’s growing natural gas markets

     We participate in most aspects of the Brazilian natural gas market, but our ability to meet potential demand has been limited by constraints in supply, transportation and distribution infrastructure, which is still under development. The output from gas-fired power plants was lower than in 2005, and as a consequence, the demand for natural gas in Brazil increased only 2.5% in 2006, despite the 9.8% growth in the non-thermoelectric market (mainly in the industrial and vehicular segments) as compared to 11% in 2005. Nonetheless, we still expect a significant growth due to new gas transportation pipelines that will start operations.

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

	•		increasing the internal production of both associated and non-associated gas, mainly offshore in the Espírito Santo, Campos and Santos Basins;
	•		expanding of the natural gas transportation network throughout Brazil;
	•		prioritizing the acceleration of investment projects in anticipation of the natural gas supply in the southeast region of Brazil;
	•		increasing participation in the natural gas distribution market through investments in 19 of the 25 natural gas distribution companies in Brazil;
	•		investments in gas-fired power plants, which serve as sources of demand for our natural gas; and
	•		seeking greater operational flexibility in our sources, including two LNG projects in the northeastern and southeastern regions, to improve our energy demand management.

Success in attracting international partners in all our activities

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

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

Strategy

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

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

     Our 2007-2011 Business Plan contemplates capital expenditures of approximately U.S.$40.7 billion in exploration and development activities in Brazil. Through these investments, we plan to implement 15 large-scope projects, among others, aimed at increasing production to 2.374 million bpd by 2011. Our 2007-2011 Business Plan contemplates capital expenditures of approximately U.S.$8.5 billion in exploration and development activities outside of Brazil. These investments will be primarily exploration and development activities in South America. At December 2006, we had exploration, development and production rights in 89.87 million gross and 46.84 million net acres (363,700 gross and 189,500 net square kilometers) outside Brazil.

     At the same time that we seek to expand production, we intend to increase proved reserves, focused on deepwater exploration in Brazil. We have net exploration, development and production rights in 33.8 million acres (136,772 square kilometers) in Brazil. We expect to continue to participate selectively with major regional and international oil and gas companies in bidding for new concessions and in developing large offshore fields.

     Our domestic production in 2006 supplied approximately 80% of the crude oil feedstock for our refinery operations in Brazil, the same level as in 2005 and 76% in 2004. We expect an increasing percentage of the crude oil feedstock to be supplied by our domestic production, as investments in our refineries permit. Our refineries were originally designed to process light imported crude oil, whereas our current reserves and production increasingly consist of heavier crude oil. We are in the process of improving and adapting our refineries in order to better process our domestic production of heavier crude oil. Because our domestic refining capacity constitutes 98.4% of the Brazilian refining capacity, we supply almost all of the refined product needs of third-party wholesalers, exporters and petrochemical companies, in addition to satisfying our internal consumption requirements with respect to wholesale marketing operations and petrochemical feedstock.

Selectively expand international activities in an integrated manner with our business

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

Develop and lead the domestic natural gas market and act in an integrated manner in the gas and power market in South America

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

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

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

Selectively expand our activities in the petrochemicals market

     We intend to expand activities in the petrochemical and fertilizer markets by seeking strategic partnerships and creating synergies with our existing business. Our 2007-2011 Business Plan contemplates investments of approximately U.S.$3.2 billion in petrochemical business. Such investment will be aimed at increasing production of our basic petrochemicals, including polyolefins (polyethylene and polypropylene), acrylic acid and terephtalic

acid. We believe that the growth of petrochemical activities will generate synergies with refining activities and we intend to benefit from the expected growth in the petrochemical market in Brazil.

Selectively perform in the renewable energy market

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

	•		The diesel from the HBIO process. The HBIO technology has been developed by the Petrobras research and development facility as one of the projects of the Petrobras refining technology program. This process involves a catalytic hydroconversion of mixtures of diesel fractions and vegetable oil in an HDT reactor under controlled conditions of high temperature and hydrogen pressure. The triglycerides from vegetable oil are transformed into linear hydrocarbon chains, similar to those that already exist in the diesel coming from petroleum but, without residue generation and with a small propane production; and
	•		biomass energy.

Overview by Business Segment

Exploration, Development and Production

Summary and Strategy

     Our exploration and production segment includes exploration, development and production activities in Brazil and abroad. We began domestic production in 1954 and international production in 1972. As of December 31, 2006, our estimated net proved crude oil and natural gas reserves in Brazil were approximately 10.573 billion barrels of oil equivalent. Crude oil represented 85% and natural gas represented 15% of these reserves. Our proved reserves are located principally in the Campos Basin.

     During 2006, our average daily domestic production was 1,778 Mbpd of crude oil and NGLs and 1.660 billion cubic feet of natural gas per day. Our aggregate average lifting costs for crude oil and natural gas in 2006 were U.S.$6.59 per barrel of oil equivalent in Brazil (excluding government take).

     We conduct exploration, development and production activities in Brazil through concession contracts. Under the terms of the Oil Law, in 1998 we were granted the concession rights to areas where we were already producing or could demonstrate we could explore or develop within a certain time frame. We refer to these concessions as Round Zero. In a number of concessions, we have joint ventures with foreign partners to explore and develop the concessions. In conjunction with the majority of these arrangements, we received a carried interest for capital expenditures made during the exploration phase, with our partners incurring all capital expenditures until the development of a commercial discovery commences. Since then, we have participated in all the bid rounds for new concession areas in Brazil conducted by the Agência Nacional de Petróleo (the National Petroleum Agency, or the ANP).

     At December 31, 2006, we held 459 areas, representing 33,796 thousand net acres (136,772 square kilometers). We currently have joint venture agreements for exploration and production in Brazil with 25 foreign and domestic companies. We are also active in exploration and production activities outside Brazil. For a full description of our international activities, see “—International—Exploration and Production.”

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

	•		Strengthen our position in deep and ultra-deepwater drilling and operating;
	•		Operate both onshore and in shallow waters, focusing on profitable opportunities;
	•		Implement new practices and technologies in order to increase reserve recovery;

	•		Increase exploration and development efforts in new territories to maintain a sustainable reserves to production ratio;
	•		Assure long-term Brazilian self-sufficiency in oil, with production reaching approximately 20% above domestic consumption by 2015;
	•		Optimize the development of our existing proved reserves, especially by expanding light oil production; and
	•		Accelerate the production and supply of natural gas.

Principal Domestic Oil and Gas Producing Regions

     Our annual daily production in Brazil has consistently grown over the years. In 1970, we produced 164 Mbpd of crude oil, condensate and natural gas liquids in Brazil. We increased production to 181 Mbpd in 1980, 654 Mbpd in 1990, 1,271 Mbpd in 2000 and 1,778 Mbpd in 2006. In describing our oil and gas producing regions, reservoirs refer to underground formations containing producible oil or gas. Fields are areas that contain one or more reservoirs. Blocks are sections of a sedimentary basin where we carry out oil and gas exploration and production activities under concession contracts.

     Our main domestic oil and gas producing regions are:

Campos Basin

     The Campos Basin is the largest oil and gas producing region, and covers approximately 28.4 million acres (115 thousand square kilometers). Since exploration activities in this area began in 1968, over 60 hydrocarbon accumulations have been discovered in this region, including eight large oil fields in deepwater and ultra deepwater. We currently have exploration rights to 32 blocks in this Basin, which are grouped into 13 block contracts, with an exploration acreage of 11.1 thousand square kilometers. In terms of proved hydrocarbon reserves and annual production, the Campos Basin is the largest oil basin in Brazil and one of the most prolific oil and gas areas in South America. The annual crude oil production volume in the region increased steadily for the past ten years until 2004, when oil production in the Campos Basin decreased to 1,204 Mbpd from 1,252 Mbpd in 2003. In 2005, oil production in the Campos Basin increased to 1,405 Mbpd and in 2006, increased to 1,468 Mbpd. The Campos Basin’s oil production accounted for approximately 83% of Brazilian oil production in 2006.

     At December 31, 2006, we produced crude oil from 36 fields in the Campos Basin and its proved crude oil reserves were 7.85 billion barrels, representing 87.3% of our total proved crude oil reserves. In 2006, the crude oil we produced in the Campos Basin had an average API gravity of 23.2 and an average water cut of 1%. We currently have 29 floating production systems, 14 fixed platforms and 4,969 kilometers of pipeline and flexible pipes operating in 36 fields at water depths from 262 to 6,188 feet (80 to 1,886 meters) in the Campos Basin.

Espírito Santo Basin

     We have made several discoveries of light oil and natural gas in the Espírito Santo Basin. We currently have exploration rights to 48 blocks in this Basin, which are grouped into 23 block contracts, 13 onshore and 10 offshore, with an exploration acreage of 9.9 thousand square kilometers. During 2006, we produced 77.3 Mboe per day of oil and natural gas in the Espírito Santo Basin (19.7 Mboe onshore and 57.6 Mboe offshore). On February 21, 2006, we began gas production in the Peroá Field.

Santos Basin

     The Santos Basin represents one of the most promising exploration areas. In January of 2006, we approved the Master Plan for Development of Natural Gas and Oil Production in the Santos Basin, with a base of exploration and production in the city of Santos, in the state of São Paulo. We currently have exploration rights to 55 blocks in the Santos Basin, which are grouped into 32 block contracts, with an exploration acreage of 41.2 thousand square kilometers. Current production of oil and natural gas is 9.24 Mboe per day in the Coral and Merluza fields.

Properties

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

																		Average				Average
																		Oil and				Oil and
																		Natural Gas				Natural Gas
																		Production				Production
																		for the				for the Year
																		Year Ended				Ended
		Production Acreage as of																December				December
		December 31, 2006																31,				31,
		Developed								Undeveloped								2006(1)(4)				2005(1)(4)
		Gross(2)				Net(2)				Gross(2)				Net(2)
		(in acres)																(boe per day) (3)
Brazil(1)
Offshore
Campos Basin			1,706,226				1,587,370				399,808				388,441				1,594,820				1,530,147
Other offshore			310,358				280,459				690,892				665,193				120,147				64,510
Total offshore			2,016,583				1,867,829				1,090,700				1,053,634				1,714,967				1,594,657
Onshore			1,019,781				1,019,782				138,129				138,129				339,327				363,203
Total Brazil			3,036,364				2,887,611				1,228,829				1,191,763				2,054,294				1,957,860
International
Onshore			3,634,675				2,334,637				2,306,486				1,507,738				233,915				245,828
Offshore			113,457				31,893				332,816				68,185				9,377				12,909
Total International			3,748,132				2,366,530				2,639,302				1,575,923				243,292				258,737
Total			6,784,496				5,254,141				3,868,131				2,767,686				2,297,586				2,216,597

     The following table sets forth our total gross and net productive wells as of December 31, 2006:

		Productive Wells
		Oil				Gas				Total
Gross productive wells
Brazil			9,058				484				9,542
International			5,873				354				6,227
Total			14,931				838				15,769
Net productive wells
Brazil			9,046				484				9,530
International			4,237				236				4,473
Total			13,283				720				14,003