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

• 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, among other things:

• our ability to obtain financing;
  
  
• general economic and business conditions, including crude oil and other commodity prices, refining margins and prevailing exchange rates;
  
  
• global economic conditions;
  
  
• 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 oil and gas reserves including recently discovered oil and gas reserves;
  
  
• competition;
  
  
• technical difficulties in the operation of our equipment and the provision of our services;  

• changes in, or failure to comply with, laws or regulations;
  
  
• receipt of governmental approvals and licenses;
  
  
• international and Brazilian political, economic and social developments;
  
  
• military operations, acts of terrorism or sabotage, 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” set forth below.

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. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events or for any other reason.

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

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

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

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

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, 2009 and 2008, and for each of the three years in the period ended December 31, 2009, 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. Beginning in 2008, significant changes are being made to Brazilian Corporate Law to permit Brazilian GAAP to converge with International Financial Reporting Standards (“IFRS”). Pursuant to CVM regulations, we are required to report our financial statements in reais in IFRS beginning with the year ending December 31, 2010. Our consolidated financial statements as of March 31, 2010, in reais, were prepared in accordance with IFRS. We do not expect to discontinue U.S. GAAP reporting for the year ended December 31, 2010.

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

Unless the context otherwise indicates:

• historical data contained in this annual report that were not derived from the audited consolidated financial statements have been translated from reais on a similar basis;
  
  
• forward-looking amounts, including estimated future capital expenditures, have all been based on our Petrobras 2020 Strategic Plan, which covers the period from 2009 to 2020, and on our 2009-2013 Business Plan, and have been projected on a constant basis and have been translated from reais in 2010 at an estimated average exchange rate of R$2.00 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.$61 per barrel for 2010, U.S.$72 for 2011, U.S.$74 for 2012, U.S.$68 per barrel for 2013 and U.S.$60 per barrel for 2014 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, 2009 and 2008, and for each of the three years in the period ended December 31, 2009, 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.

Consolidation of Petrochemical Assets at Braskem

After a series of consolidations and restructurings, in early 2009 we held minority interests in Brazil’s two largest petrochemical companies: Braskem S.A. (Braskem), 25.4% of total capital and 31% of voting stock, and Quattor Participações (Quattor), 40% of total capital and 40% of voting stock. In January 2010, we further consolidated our position in the Brazilian petrochemical industry by announcing the merger of Braskem and Quattor, creating Brazil’s largest petrochemicals company and the largest producer of thermoplastic resin in the Americas. We and our partner, Odebrecht S.A. (Odebrecht), will create a new holding company for Braskem called BRK Investimentos Petroquímicos S.A. (BRK) and proceed to consolidate our direct and indirect interests in the Brazilian petrochemical industry at Braskem through a series of mergers and capital increases. Decision-making at Braskem will be governed by a Shareholders’ Agreement to be entered into with Odebrecht. See Item 4. “Information on the Company—Refining, Transportation and Marketing—Petrochemicals and Fertilizers.”

Proposed Changes to the Oil Law in Light of
Discoveries in the Pre-Salt Areas

The Brazilian Congress is currently considering legislation that, if adopted, will significantly expand our operations in the pre-salt areas located off the coast of Brazil. The proposed legislation would, among other things, introduce production-sharing contracts for oil and gas exploration and production in pre-salt areas not under concession and in potentially strategic areas as defined by the National Energy Policy Council (CNPE), make us the exclusive operator in all pre-salt areas not yet under concession, and grant us either a 100% interest or a minimum interest to be established by the CNPE that would not be less than 30% in all pre-salt blocks not yet under concession with the option to increase our stake through a public bidding process.

A second legislative proposal currently under discussion in the Brazilian Congress involves a “transfer of rights” under which the Brazilian government would assign to us oil and gas exploration and production rights in pre-salt areas not under concession, up to a maximum prospective recovery of 5 billion barrels of oil equivalent. Along with this transfer of rights, the Brazilian government would be authorized to subscribe for additional shares of our capital stock, and the proceeds would be used for exploration and production of the areas transferred to us by the Brazilian government, general corporate purposes and to finance our planned capital expenditures.

For more information on these and other proposed changes to the Oil Law pending before the Brazilian Congress, see Item 4. “Information on the Company—Regulation of the Oil and Gas Industry in Brazil—Proposed Changes to the Oil Law.”

Investment in Brazilian Ethanol Industry

On April 30, 2010, we announced a strategic partnership with Tereos Participações Ltda. (Tereos International), a Brazilian subsidiary of the Tereos Group, under which we will invest a total of R$1.6 billion (U.S.$909 million) over five years to acquire a 45.7% stake in Açúcar Guarani S.A. (Guarani), the fourth-largest sugarcane processor in Brazil. Our investment in Guarani, which is subject to Brazilian antirust approval, will allow us to significantly increase our ethanol production, stimulate improvements in product quality, and further develop our ethanol distribution and marketing operations in accordance with our 2009-2013 Business Plan. See Item 4. “Information on the Company—Bio-Renewables.”

Petrobras adopted new SEC rules for estimating and disclosing oil and gas reserve quantities included in this annual report. In accordance with these new rules, the year-end 2009 reserve volumes have been estimated using average prices during the 12-month period and include non- traditional reserves, such as synthetic oil and gas. Year-end 2008 and 2007 reserve volumes were estimated using year-end prices. In addition, the amended rules also adopted a reliable technology definition that permits reserves to be added based on field-tested technologies. The adoption of the SEC’s new rules for estimating and disclosing oil and gas reserves and the FASB’s issuance of the Accounting Standards Update No. 2010-03 “Oil and Gas Reserve Estimation and Disclosure” in December 2009 generated no material impact on our reported reserves or on our consolidated financial position or results of operations other than additional disclosures as discussed in Note 2(n) to our audited consolidated financial statements. DeGolyer and MacNaughton (D&M) provided estimates of most of our net domestic reserves as of December 31, 2009. D&M also provided estimates of most of our net international reserves where we are the operator as of December 31, 2009. All reserve estimates involve some degree of uncertainty. See Item 3. “Key Information—Risk Factors—Risks Relating to Our Operations” for a description of the risks relating to our reserves and our reserve estimates.

On January 14, 2010, we filed reserve estimates for Brazil with the ANP, in accordance with Brazilian rules and regulations, totaling 12.06 billion barrels of crude oil and condensate and 12.67 trillion cubic feet of natural gas. The reserve estimates we filed with the ANP and those provided herein differ by approximately 22.5%. This difference is due to (i) 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 (ii) different technical criteria for booking proved reserves, including the use of current oil prices as opposed to the SEC requirement that the 12-month average price be used to determine the economic producibility of reserves in Brazil.  

We also file reserve estimates from our international operations with various governmental agencies under the guidelines of the Society of Petroleum Engineers, or SPE. The aggregate reserve estimates from our international operations, under SPE guidelines, amounted to 0.49 billion barrels of crude oil and NGLs and 1.22 trillion cubic feet of natural gas, which is approximately 20% higher than the reserve estimates calculated under Regulation S- X, as provided herein. This difference occurs because we have not yet included all volumes associated with fluid injection projects in Nigeria as proved reserves in accordance with the new SEC rules for estimating and disclosing oil and gas reserves. We will gradually add these volumes to our SEC proved reserves after performing additional engineering analysis of oil recovery techniques.

(U.S.$ million)

Assets:

Total current assets

42,644

26,758

29,140

30,955

25,784

Property, plant and equipment, net

136,167

84,719

84,282

58,897

45,920

Investments in non-consolidated companies and other investments

4,350

3,198

5,112

3,262

1,810

Total non-current assets

Total assets

Liabilities and shareholders' equity:

Total current liabilities

30,965

24,756

24,468

21,976

18,161

Total long-term liabilities(1)

25,736

17,731

21,534

16,829

12,747

Long-term debt(2)

Total liabilities 

Shareholders' equity

Shares authorized and issued:

Preferred share

15,106

15,106

8,620

7,718

4,772

Common share

21,088

21,088

12,196

10,959

6,929

Capital reserve and other comprehensive income

Petrobras' shareholders' equity

Noncontrolling interest

Total equity

Total liabilities and shareholders' equity

(U.S.$ million, except for share and per share data)

Net operating revenues

91,869

118,257

87,735

72,347

56,324

Operating income(1)

21,869

25,294

20,451

19,844

15,085

Net income for the year attributable to Petrobras(2)

15,504

18,879

13,138

12,826

10,344

Weighted average number of shares outstanding:(3)

Common

5,073,347,344

5,073,347,344

5,073,347,344

5,073,347,344

5,073,347,344

Preferred

3,700,729,396

3,700,729,396

3,700,729,396

3,699,806,288

3,698,956,056

Operating income per:(1)(3)

Common and Preferred Shares.

2.49

2.88

2.33

2.26

1.72

Common and Preferred ADS(4)

4.98

5.76

4.66

4.52

3.44

Basic and diluted earnings per:(2)(3)

Common and Preferred Shares

1.77

2.15

1.50

1.46

1.18

Common and Preferred ADS(4)

3.54

4.30

3.00

2.92

2.36

Cash dividends per:(3)(5)

Common and Preferred shares  

0.59

0.47

0.35

0.42

0.34

Common and Preferred ADS(4)

1.18

0.94

0.70

0.84

0.68

PifCo

The following tables set forth PifCo’s selected consolidated financial data, presented in U.S. dollars and prepared in accordance with U.S. GAAP. The data for each of the five years in the period ended December 31, 2009 have been derived from PifCo’s audited consolidated financial statements, which were audited by KPMG Auditores

Independentes for the years ended December 31, 2009, 2008, 2007 and 2006, and by Ernst & Young Auditores Independentes S/S for the year ended December 31, 2005. 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.”

(U.S.$ million)

Assets:

Total current assets

22,986

30,383

28,002

19,241

13,242

Property and equipment, net

2

2

1

1

-

Total other assets

Total assets

Liabilities and stockholder's equity:

Total current liabilities

13,175

28,012

27,686

9,264

7,098

Total long-term liabilities(1)

-

-

-

7,442

3,734

Long-term debt(2)

Total liabilities

Total stockholder's (deficit) equity

Total liabilities and stockholder's equity

(U.S.$ million)

Net operating revenue

28,850

42,443

26,732

22,070

17,136

Operating income (loss)

578

(927)

127

(38)

(13)

Net income (loss) for the year

487

(772)

29

(211)

(28)

Risks Relating to Our Operations

Substantial or extended declines and volatility in the international prices of crude oil, oil products and natural gas may have a material adverse effect on our income and future growth targets.

The majority of our revenue is derived primarily from sales of crude oil and oil products and, to a lesser extent, natural gas. We do not, and will not, have control over the factors affecting international prices for crude oil, oil products and natural gas. The average price of Brent crude, an international benchmark oil, was approximately U.S.$62.40 per barrel in 2009, U.S.$96.99 per barrel for 2008 and U.S.$72.52 per barrel for 2007, and the average price of Brent crude was U.S.$76.78 per barrel in the first quarter of 2010. Changes in crude oil prices typically result in changes in prices for oil products and natural gas.

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

• global and regional economic and geopolitical developments in crude oil producing regions, particularly in the Middle East;
  
  
• 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, oil products and natural gas;
  
  
• global financial crises, such as the global financial crisis of 2008;
  
  
• competition from other energy sources;
  
  
• domestic and foreign government regulations; and
  
  
• weather conditions.

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

Our ability to achieve our long-term growth objectives for oil production 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 for oil production, including those defined in our 2009-2013 Business Plan, is highly dependent upon our ability to obtain new concessions through new bidding rounds and discover additional reserves, as well as to successfully develop our existing reserves. We will need to make substantial investments to achieve the growth targets set forth in our 2009-2013 Business Plan and we cannot assure you we will be able to raise the required capital.

Further, our competitive advantage in bidding rounds for new concessions in Brazil has diminished over the years as a result of the increased competition in the oil and gas sector in Brazil. 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 and ultra-deep water. Deep and ultra-deepwater drilling represented approximately 72.6% of the offshore exploratory wells we drilled in 2009.

Unless we conduct successful exploration and development activities or acquire properties containing proved reserves, or both, and are able to raise the necessary capital to fund these activities, our proved reserves will decline as reserves are extracted.

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 hydrocarbons 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.

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 may not have sufficient resources to support future exploration, production and development activities in our newly discovered pre-salt reservoirs.

Exploiting our oil and gas discoveries in the pre-salt reservoirs will require substantial additional amounts of capital, human resources and a broad range of offshore oil services. A primary operational challenge will be the development of an innovative set of solutions to the new challenges posed by exploration and production in the newly discovered pre-salt reservoirs.

These reservoirs are located in deep and ultra-deep waters at considerable distances from the shore and are of a size and magnitude that present operational challenges to our resources. In addition, the oil from these reservoirs presents a unique set of properties requiring the development of new exploration technology. We will be continually faced with these new challenges, and we may not be able to secure sufficient resources to develop the technology we will require to meet our exploration, production and development goals with respect to our pre-salt reservoirs.

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. We have experienced oil spills in the past that resulted in fines by various state and federal environmental agencies, and several civil and criminal proceedings and investigations. See Item 8. “Financial Information—Legal Proceedings.” Waste disposal and emissions regulations may also require us to clean up or retrofit our facilities at substantial cost and could result in substantial liabilities. The Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis (Brazilian Institute of the Environment and Renewable Natural Resources, or IBAMA) 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. 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, and as new laws and regulations relating to climate change, including carbon controls, become applicable to us, it is probable that our capital expenditures for compliance with environmental regulations and to effect improvements in our health, safety and environmental practices will increase substantially in the future. Increased expenditures to comply with environmental regulations may result in reductions in other strategic investments. Any substantial increase in expenditures for compliance with environmental regulations or reduction in strategic investments may have a material adverse effect on our results of operations or financial condition.

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

We are currently a party to numerous legal proceedings relating to civil, administrative, environmental, labor and tax claims filed against us. These claims involve substantial amounts of money and other remedies. Several individual disputes account for a significant part of the total amount of claims against us. 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 a tax assessment against us that on December 31, 2009, amounted to R$4,391 million (approximately U.S.$2,522 million). See Item 8. “Financial Information—Legal Proceedings.”

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

Our investment in the natural gas and domestic power markets may not generate the returns we expect.

Over the past few years, we have invested, alone or with other investors, in a number of gas- fired power plants in Brazil. These gas-fired power plants provide non-base-load capacity to the grid and tend to operate at low average utilization rates. This low utilization rate may limit our ability to provide a full return of capital on these investments.

We are also subject to fines and may lose our license to sell electricity if we are unable to fulfill our energy delivery commitments to the Agência Nacional de Energia Elétrica—ANEEL, the Brazilian energy regulator, due to gas supply constraints. There are several factors that may affect our ability to deliver gas to our gas-fired power plants including our inability to secure supply of natural gas, problems affecting our natural gas infrastructure and increasing demand in the non-thermoelectric market. See Item 4. “Information on the Company—Gas and Power—Power—Electricity Sales” for a more detailed description of these risks.

Natural gas demand is also influenced by general economic conditions and oil prices. Our natural gas prices do not immediately adjust to fluctuations in the international price of crude oil and oil products, which can make natural gas less competitive until it adjusts to lower international prices. If the Brazilian market does not develop as we expect, the resulting decrease in demand for our natural gas may have a material adverse effect on our results of operations and financial condition.

As a result of the foregoing, our investment in the natural gas and domestic power markets has generated losses in the past and may not generate the returns we expect in the future.

Exchange rate 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 73% 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 2009 we imported U.S.$12.3 billion of crude oil and oil products, the prices of which were all denominated and paid in U.S. dollars.

Our recent financial statements reflect the appreciation of the real by 8.7%, 17.2% and 25.4% against the U.S. dollar in 2006, 2007 and 2009, respectively, and the depreciation of the real by 31.9% against the U.S. dollar in 2008. The weakness of the U.S. dollar against other currencies in general has also affected our results. As of May 17, 2010, the exchange rate of the real to the U.S. dollar was R$1.8045 per U.S.$1.00, representing a depreciation of approximately 3.6% in 2010, year-to-date.

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

As of December 31, 2009, approximately 51% — U.S.$29,047 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 South America, West Africa and the Middle East.

We operate in a number of different countries, particularly in South 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 fluctuation of local currencies against the real;
  
  
• the nationalization of oil and gas reserves, as experienced in recent years in Venezuela, Ecuador and Bolivia;
  
  
• increases in export tax and income tax rates for crude oil and oil products, as experienced in recent years in Argentina, Venezuela, Ecuador and Bolivia; and
  
  
• unilateral (governmental) institutional and contractual changes, including controls on investments and limitations on new projects, as experienced in recent years in Venezuela, Ecuador and Bolivia.

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

Of the countries outside of Brazil in which we operate, Argentina is the most significant, representing 43.6% of our total international crude oil and natural gas production and 44.3% of our international proved crude oil and natural gas reserves as of December 31, 2009. Since 2007, the Argentine government has increased export tax rates for crude oil, natural gas and oil products that have negatively affected our results of operations and financial condition. We also have operations in Bolivia and Venezuela that represented, respectively, 19.8% and 4.3% of our total international production in barrels of oil equivalent at December 31, 2009. At December 31, 2008, Bolivia accounted for 31.02% of our international proved crude oil and natural gas reserves. However,
on January 25, 2009, Bolivia adopted a new constitution that prohibits private ownership of the country’s oil and gas resources. As a result, we were not able to include any proved reserves in Bolivia as reported at December 31, 2008 in our proved reserves for year-end 2009. We continue to report production from our operations in Bolivia under our existing contracts in that country. For more information about our operations outside Brazil, see Item 4. “Information on the Company—International.”

Risks Relating to PifCo 

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

PifCo’s financial position and results of operations are directly affected by our decisions. PifCo is a direct wholly owned subsidiary of Petrobras incorporated in the Cayman Islands as an exempted company with limited liability. Currently, PifCo purchases crude oil and oil products from third parties and sells them at a premium to us on a deferred payment basis. PifCo also purchases crude oil and oil products from us and sells them outside Brazil.

Accordingly, intercompany activities and transactions, and therefore PifCo’s financial position and results of operations, are affected by decisions made by us. Additionally, PifCo sells and purchases crude oil and oil products to and from third parties and related parties, mainly outside Brazil. Commercial operations are carried out under market conditions and at market prices. PifCo’s ability to service and repay its indebtedness is consequently dependent on our own operations.

Financing for PifCo’s commercial operations is provided by us, as well as third-party credit providers in favor of whom we provide credit support. Our support of PifCo’s debt obligations is made through unconditional and irrevocable guaranties of payment.

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

PifCo depends on its ability to pass on its financing costs to us.

PifCo is currently 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 a guaranty or other support from us, and PifCo has historically passed on its financing costs to us by selling crude oil and oil products to us at a premium to compensate for its financing costs. 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 Our Relationship with 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 and pricing 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. Prior to January 2002, prices for crude oil and oil products were regulated by the Brazilian government, occasionally set below prices prevailing in the world oil markets. We cannot assure you that price controls will not be reinstated in Brazil.

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

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

In addition, we expect to raise a substantial amount of capital to finance our exploration and production activities in pre-salt reservoirs and other planned investments by means of a capitalization. As part of the proposed changes to the Oil Law, the Brazilian Congress may authorize an onerous transfer of exploration and production rights in pre-salt areas not under concession from the Brazilian government to us, and allow us to exploit those areas. The proposed changes to the Oil Law are subject to approval from the Brazilian Congress. See Item 4. “Information on the Company—Regulation of the Oil and Gas Industry in Brazil—Proposed Changes to the Oil Law.” Our operating results and financial condition may be adversely affected if a capitalization does not occur and we are unable to make our planned investments.

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:

• interest rates;
  
  
• liquidity of domestic capital and lending markets;
  
  
• tax policy;
  
  
• regulatory policy for the oil and gas industry, including pricing policy; and
  
  
• other political, diplomatic, social and economic developments in or affecting Brazil.

We may specifically be affected by certain initiatives to increase taxation on our exploration and production activities. In June 2003, the State of Rio de Janeiro enacted a new tax law that imposed a Domestic State Tax (ICMS) on our exploration and production activities, including on import of oil and gas exploratory equipment. The State of Rio de Janeiro has never enforced this law, and its constitutionality is being challenged in the Brazilian Supreme Court (Supremo Tribunal Federal, or STF). In the event that the state government attempts to enforce this law and the courts uphold that enforcement, we estimate that the amount of ICMS that we would be required to pay to the State of Rio de Janeiro could increase approximately R$10.2 billion (U.S.$5.9 billion) per year.

In addition, the recent discovery of large petroleum and natural gas reserves in the pre-salt areas of the Campos and Santos basins has prompted a proposal to change the existing Oil Law. The Brazilian Congress is currently considering substantial changes in the regulation of exploration and production activities in the pre-salt areas not subject to existing concessions. We cannot estimate the impact that any change to the Oil Law would have on Petrobras, or when any new regulations may become effective. See Item 4. “Information on the Company—Regulation of the Oil and Gas Industry in Brazil—Proposed Changes to the Oil Law.”

Uncertainty over whether the Brazilian government will implement these or other changes in policy or regulations that may affect any of the factors mentioned above or other factors in the future may lead to economic uncertainty in Brazil and increase the volatility of the Brazilian securities market and securities issued abroad by Brazilian companies.

Such changes in policies and regulations may have a material adverse effect on our results of operations and financial condition.

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 have been historically high in Brazil prior to 1995 and Brazil experienced hyperinflation in the past. As measured by the National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo, or IPCA), Brazil had annual rates of inflation of 4.46% in 2007, 5.90% in 2008 and 4.31% in 2009. 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.

Developments and the perception of risk in other countries, especially in the United States and in emerging market countries, may adversely affect the market price of Brazilian securities, including our shares and ADSs, and limit our ability to finance our operations.

The market value of securities of Brazilian companies is affected to varying degrees by economic and market conditions in other countries, including the United States and other Latin American and emerging market countries. Although economic conditions in these countries may differ significantly from economic conditions in Brazil, investors' reactions to developments in these other countries may have an adverse effect on the market value of securities of Brazilian issuers. Crises in other countries or economic policies of other countries may diminish investor interest in securities of Brazilian issuers, including ours. This could adversely affect the market price of our shares and ADSs, and could limit our ability to finance our operations.

Risks Relating to Our Equity and Debt Securities

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

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

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

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

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

Holders of ADSs who are residents of the United States may not be able to exercise the preemptive rights relating to the common or preferred shares underlying our ADSs unless a registration statement under the U.S. Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the common or preferred shares relating to these preemptive rights, and therefore we may not file any such registration statement. If a registration statement is not filed and an exemption from registration does not exist, JPMorgan Chase Bank, N.A., as depositary, will attempt to sell the preemptive rights, and holders of ADSs will be entitled to receive the proceeds of the sale.

However, the preemptive rights will expire if the depositary cannot sell them. For a more complete description of preemptive rights with respect to the common or preferred shares, see Item 10. “Additional Information–Memorandum and Articles of Association of Petrobras–Preemptive Rights.”

Restrictions on the movement of capital out of Brazil may impair the ability of holders of ADSs 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 guaranties 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. The Brazilian government could decide to take similar measures in the future. 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. If such restrictions were imposed, the depositary for the ADSs would hold the reais it cannot convert for the account of the ADS holders who have not been paid. The depositary would not invest the reais and would not be liable for the interest.

Similar restrictions, if imposed, could also impair or prevent the conversion of payments under the guaranties supporting PifCo’s notes from reais into U.S. dollars and the remittance of the U.S. dollars abroad. 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. These restrictions, if imposed, could also prevent us from making funds available to PifCo in U.S. dollars abroad, in which case PifCo may not have sufficient U.S. dollar funds available to make payment on its debt obligations.

In addition, payments of dividends and other distributions to shareholders and payments under Petrobras' guaranties in connection with PifCo’s notes do not currently require approval by or registration with the Central Bank of Brazil. The Central Bank of Brazil may nonetheless impose prior approval requirements on the remittance of U.S. dollars abroad, which could cause delays in such payments.

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

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

If such holders attempt to obtain their own certificate of registration, they may incur expenses or suffer delays in the application process, which could delay their ability to receive dividends or distributions relating to the common or preferred shares or the return of their capital in a timely manner. 

The custodian’s certificate of registration or any foreign capital registration obtained by such holders may be affected by future legislative or regulatory changes and we cannot assure such holders that additional restrictions applicable to them, the disposition of the underlying common or preferred shares, or the repatriation of the proceeds from the process will not be imposed in the future.

Holders of ADSs may face difficulties in protecting their interests.

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

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

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

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

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

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

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

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

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

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

Item 4. Information on the Company 

History and Development

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

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

Our common and preferred shares have been traded on the São Paulo Stock Exchange since 1968. Petrobras was incorporated as a state- controlled company under Law No. 2,004 (effective October 3, 1953), and a majority of our voting capital must be owned by the Brazilian federal government, a state or a municipality. As of December 31, 2009, the Brazilian government owned 32.1% of our outstanding capital stock and 55.6% of our voting shares. We operate through subsidiaries, joint ventures, and associated companies established in Brazil and many other countries. Our principal executive office is located at Avenida República do Chile 65, 20031-912 Rio de Janeiro, RJ, Brazil and our telephone number is (55-21) 3224-4477.

Overview of the Group

We are an integrated oil and gas company that is the largest corporation in Brazil and one of the largest companies in Latin America in terms of revenues. Because of our legacy as Brazil’s former sole supplier of crude oil and oil products and our ongoing commitment to development and growth, we operate most of Brazil’s producing oil and gas fields and hold a large base of proved reserves and a fully developed operational infrastructure.

In 2009, our average domestic daily hydrocarbons production was 2,101.3 mboe/d, an estimated 98.5% of Brazil’s total. Over 84% of our domestic proved reserves are in large, contiguous and highly productive fields in the offshore Campos Basin, which allows us to concentrate our operational infrastructure and limit our costs of exploration, development and production. In 40 years of developing Brazil’s offshore basins we have developed special expertise in deepwater exploration and production, which we exploit both in Brazil and in other offshore oil provinces.

We operate substantially all the refining capacity in Brazil. Most of our refineries are located in Southeastern Brazil, within the country’s most populated and industrialized markets and adjacent to the Campos Basin that provides most of our crude oil. Our domestic refining capacity of 1,942 mbbl/d is well balanced with our domestic refining production of 1,823 mbbl/d and sales of oil products to domestic markets of 1,754 mbbl/d. We expect the growth of our production capacity to exceed sales in the domestic market and for that trend to strengthen over time. We are also involved in the production of petrochemicals and fertilizers. We distribute oil products through our own “BR” network of retailers and to wholesalers.

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

Outside of Brazil, we are active in 24 countries. In South America, our operations extend from exploration and production to refining, marketing, retail services and natural gas pipelines. In North America, we produce oil and gas and have refining operations in the United States. In Africa, we produce oil in Angola and Nigeria, and in Asia, we have refining operations in Japan. In other countries, we are engaged only in oil and gas exploration. 

Our activities comprise five business segments:

• Distribution: distribution of oil products to wholesalers and through our “BR” retail network in Brazil;
  
  
• Gas and Power: gas transportation and distribution, electric power generation using natural gas and renewable energy sources; and
  
  
• International: exploration and production, refining, transportation and marketing, distribution and gas and power operations outside of Brazil. 

(U.S.$ million)

Net operating revenues

38,777

74,621

29,672

5,652

10,197

–

(67,050)

91,869

Income (loss) before income tax

14,588

9,819

960

657

232

(3,520)

(675)

22,061

Total assets at December 31

77,596

50,469

6,127

24,861

14,914

31,198

(4,895)

200,270

Capital expenditures

16,488

10,466

369

5,116

2,111

584

–

35,134

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

Brazil:

Roncador field(2)

368.9

0.0

163.7

0.0

396.2

267.6

0.0

119.4

0.0

287.5

85.6

0.0

28.2

0.0

90.3

Other

Total Brazil.

International:

South America (outside of Brazil)

85.6

0.0

569.3

0.0

180.4

97.3

0.0

571.2

0.0

192.5

101.9

0.0

585.0

0.0

199.4

North America

1.5

0.0

10.6

0.0

3.3

1.7

0.0

13.3

0.0

3.9

4.2

0.0

35.8

0.0

10.2

Africa.

Total International.

Total consolidated production

Equity and non-consolidated affiliates:(3)

South America (outside of Brazil)

Worldwide production

Natural gas production figures are the production volumes of natural gas available for sale, excluding flared and reinjected gas and gas consumed in operations. 

Roncador field contains more than 15% of our total proved reserves. 

Companies in which Petrobras has a minority interest. 

We produce synthetic oil and synthetic gas from oil shale deposits in São Mateus do Sul, in the Paraná Basin of Brazil. 

Production of crude oil and natural gas in Brazil is divided into onshore and offshore production, comprising 11% and 89% of total production in Brazil, respectively. Campos Basin is one of Brazil’s main and most prolific oil and gas offshore basins, with over 60 hydrocarbon reserves discovered, eight large oil fields and a total area of approximately 115,000 km² (28.4 million acres).

In 2009, Campos Basin produced an average 1,693.6 mbbl/d of oil and 12.0 mmm³ /d (453.6 mmcf/d) of associated natural gas during 2009, comprising 84.2% of our total production from Brazil. 

(U.S.$)

Average production prices

Oil, per barrel

54.22

46.00

62.23

68.09

54.18

64.64

Natural gas, per thousand cubic feet(1)

3.76

2.06

3.87

2.87

–

Synthetic oil, per barrel

50.88

 –

–

–

50.88

–

Synthetic gas, per thousand cubic feet

2.97

–

–

–

2.97

–

Average production costs, per barrel – total

9.91

7.06

22.64

9.15

9.69

17.12

Average production prices

Oil, per barrel

81.55

61.96

108.05

67.65

80.54

87.96

Natural gas, per thousand cubic feet(1)

6.69

2.58

9.94

5.07

Synthetic oil, per barrel

–

 –

 –

 –

–

–

Synthetic gas, per thousand cubic feet

–

 –

–

–

Average production costs, per barrel – total

12.34

6.40

17.49

7.28

11.82

20.98

Average production prices

Oil, per barrel

61.57

49.51

71.32

63.64

60.88

66.22

Natural gas, per thousand cubic feet(1)

5.86

2.23

7.69

–

4.26

–

Synthetic oil, per barrel

–

 –

–

–

–

–

Synthetic gas, per thousand cubic feet

–

 –

–

–

–

–

Average production costs, per barrel – total

10.32

5.55

10.51

27.40

9.90

12.47

The volumes of natural gas used in the calculation of this table are the production volumes of natural gas available for sale and are also shown in the production table above. 

Proved developed:

Brazil

6,121.4

5,382.8

6.84

5.62

International

South America (outside of Brazil)

139.9

485.6

0.0

0.0

North America

3.8

37.2

0.0

0.0

Africa

Total International

Total consolidated proved reserves

6,323.6

5,937.4

6.84

5.62

Equity and non-consolidated affiliates

South America (outside of Brazil) 

Total proved developed reserves

6,345.8

5,969.9

6.84

5.62

Proved undeveloped:

Brazil..

3,797.9

4,476.4

0.0

0.0

International

South America (outside of Brazil)

84.7

554.2

0.0

0.0

North America

3.5

14.3

0.0

0.0

Africa

Total International

140.7

568.5

0.0

0.0

Total consolidated proved reserves

3,938.6

5,044.9

0.0

0.0

Equity and non-consolidated affiliates

South America (outside of Brazil)

17.6

30.7

0.0

0.0

Total proved undeveloped reserves

Total proved reserves (developed and undeveloped)

Volumes of synthetic oil and synthetic gas from oil shale deposits in the Paraná Basin in Brazil have been included in our proved reserves for the first time in accordance with the new SEC rules for estimating and disclosing reserve quantities. 

We calculate reserves based on forecasts of field production, which depend on a number of technical parameters, such as seismic interpretation, geological maps, well tests, reservoir engineering studies and economic data. All reserve estimates involve some degree of uncertainty. The uncertainty depends primarily on the amount of reliable geological and engineering data available at the time of the estimate and the interpretation of that data. Our estimates are thus made using the most reliable data at the time of the estimate, in accordance with the best practices in the oil and gas industry.

The statements contained in this Item 4 regarding exploration and development projects and production estimates are forward-looking and subject to significant risks and uncertainties. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that our actual levels of activity, production or performance will meet these expectations. See Item 3. “Key Information—Risk Factors.” 

Internal Controls over Proved Reserves

The reserves estimation process begins with an initial evaluation of our assets by geophysicists, geologists and engineers. Corporate Reserves Coordinators (Coordenadores de Reservas Corporativo, or CRCs) safeguard the integrity and objectivity of our reserves estimates by supervising and providing technical support to Regional Reserves Coordinators (Coordenadores de Reservas Regionais, or CRRs) who are responsible for preparing the reserves estimates. Our CRRs and CRCs have degrees in geophysics, geology, petroleum engineering and accounting and are trained internally and abroad in international reserves estimates seminars. CRCs are responsible for compliance with Securities and Exchange Commission rules and regulations, consolidating and auditing the reserves estimation process. The technical person primarily responsible for overseeing the preparation of our domestic reserves is a member of the SPE, with 20 years of experience in the field and has been with Petrobras for 26 years. 

The technical person primarily responsible for overseeing the preparation of our international reserves has 15 years of experience in the field and has been with Petrobras for 30 years. Our reserves estimates are presented to our senior management and submitted to the board of directors for final approval.

DeGolyer and MacNaughton reviewed and certified 96.5% of our domestic proved crude oil, condensate and natural gas reserve estimates as of December 31, 2009. Outside of Brazil, D&M also reviewed and certified 93.3% of our estimates of international proved oil, condensate and natural gas reserves in fields where we are the operator as of December 31, 2009. The estimates for the certification were performed in accordance with Rule 4-10 of Regulation S-X of the SEC. For further information on our proved reserves, see “Supplementary Information on Oil and Gas Exploration and Production” beginning on page F-134.

Changes in Proved Reserves

The changes that occurred in 2009 to Petrobras’ proved reserves are primarily attributable to discoveries, well extensions, improved recoveries, production for the year and revisions to previous estimates. Revisions to previous estimates reflect changes in prices, technical revisions and changes in the status of concessions held by us. The most significant changes in our proved reserves in 2009 occurred within Brazil, with a net addition of 1,935.7 mmboe to our domestic proved reserves due primarily to higher oil prices and technical revisions. Outside of Brazil, the principal change in our proved reserves in 2009 occurred in Bolivia due to the adoption of a new constitution that prohibits private ownership of that country’s oil and gas resources. As a result, we were not able to include any of our 284.3 mmboe of proved reserves in Bolivia as reported at December 31, 2008 in our proved reserves for year-end 2009. 

Reserves quantity information for the year ended December 31, 2009

January 1, 2009

9,105.5

0.0

12,139.4

0.0

Revisions of previous estimates

1,734.8

0.0

(521.7)

0.0

Improved recovery

21.7

0.0

0.8

0.0

Purchases of minerals in situ

99.4

0.0

110.3

0.0

Extensions and discoveries

135.5

8.1

146.7

6.6

Production

(735.3)

(1.2)

(782.8)

(1.0)

Sales of minerals in situ

December 31, 2009

Reserves quantity information for the year ended December 31, 2008

January 1, 2008

9,552.8

0.0

12,479.8

0.0

Revisions of previous estimates

130.2

0.0

195.2

0.0

Improved recovery

29.8

0.0

7.5

0.0

Purchases of minerals in situ

12.3

0.0

123.1

0.0

Extensions and discoveries

76.2

0.0

152.7

0.0

Production

(685.1)

0.0

(818.9)

0.0

Sales of minerals in situ

December 31, 2008

Reserves quantity information for the year ended December 31, 2007

January 1, 2007

9,418.1

0.0

11,765.9

0.0

Revisions of previous estimates

666.8

0.0

586.1

0.0

Improved recovery

25.3

0.0

11.5

0.0

Purchases of minerals in situ

2.4

0.0

0.0

0.0

Extensions and discoveries

102.3

0.0

852.9

0.0

Production

(659.7)

0.0

(736.6)

0.0

Sales of minerals in situ

December 31, 2007

Natural gas production volumes used in the calculation of this table are the net volumes withdrawn from Petrobras’ proved reserves, including flared and reinjected gas volumes and gas consumed in operations. As a result, the natural gas production volumes in this table are different from those shown in the production table above, which shows the production volumes of natural gas available for sale. 

Proved Undeveloped Reserves

The most significant changes to and investments in our proved undeveloped reserves in 2009 occurred within Brazil. The net addition of proved undeveloped reserves in Brazil was 499.0 mmboe in 2009, 434.7 mmboe of which was due to higher oil prices and technical revisions. In 2009, we invested a total of U.S.$8.1 billion to convert proved undeveloped reserves into proved developed reserves, of which approximately 93% (U.S.$7.5 billion) was invested in Brazil. We converted a total of 714.3 mmboe of proved undeveloped reserves to proved developed reserves in 2009, approximately 90% (640 mmboe) of which were Brazilian reserves.

In recent years, we have developed projects and increased investments to convert our proved undeveloped reserves into proved developed reserves.

We had a total of 4.8 bnboe of proved undeveloped reserves at year-end 2009, approximately 9% (430 mmboe) of which have remained undeveloped for five years or more as a result of several factors affecting development and production, including the inherent complexity of ultra-deepwater developments projects, particularly in Brazil, and constraints in the capacity of our existing infrastructure.

Gross and net productive wells:

Brazil

7,910

7,907

281

275

0

0

0

0

International

South America (outside of Brazil)

5,615

4,303

534

383

0

0

0

0

North America

9

4

9

4

0

0

0

0

Africa

Total international

Total consolidated

Equity and non-consolidated affiliates:

South America (outside of Brazil)

Total gross and net productive wells

Gross and net developed acreage:

Brazil

3,501,418

3,408,257

97,764

85,602

34,595

34,595

0

0

International

South America (outside of Brazil)

1,446,170

964,839

2,068,363

1,498,066

0

0

0

0

North America

13,248

6,582

21,811

9,290

0

0

0

0

Africa

Total international

Total consolidated

Equity and non-consolidated affiliates:

South America (outside of Brazil)

Total gross and net developed acreage