The year was notable for some important milestones, including additional discoveries in the pre-salt layer and record net income of R$ 33 billion

Message From the Ceo

Despite the international turbulence in 2008, Petrobras again succeeded in overcoming the technological and financial challenges that are inherent in our business. The year was notable for some important milestones, including additional discoveries in the pre-salt layer and record net income of R$ 33 billion.

The international economic crisis reduced access to financial capital and created wide swings in oil prices during the second half of the year. The crisis has not affected our investment plans, however. In fact, our revised Business Plan projects an increase in capital expenditures, as we develop newly discovered reserves to meet aggressive production targets.

The effectiveness of the economic, financial and operational strategies we have adopted over the years has positioned Petrobras to withstand current uncertainties in world markets. In 2008 we introduced significant cost control measures and we have maintained our capital discipline, thus enabling us to complete our projects and consolidate our growth prospects.

Our combined average domestic and foreign production of oil and natural gas totaled 2,400 thousand barrels of oil equivalent per day (boed), an increase of 4.3% over 2007. Highlights were the start of oil production from the pre-salt layer in the Campos Basin, and growth in domestic production of natural gas, which reached an average of 51 million m3/day, an increase of 17.8% over 2007.

At the same time as we raise our production, we have also replaced more than 100% of our production. Total proven reserves of oil, condensate and natural gas as at December 31, 2008, increased to 15.08 billion boe, according to Society of Petroleum Engineers (SPE) criteria. Of the total proven reserves, 93% are located within Brazilian territory, where we replaced 123% of production. At the end of 2008, our reserves to production ratio stood at a very comfortable 18.9 years. These reserve figures do not yet include the discoveries made in the pre-salt layer of the Santos Basin, which are still being evaluated.

Petrobras’ capital expenditures were a record R$ 53.3 billion, an increase of 17.8% from 2007. The largest share of that investment went towards expanding future domestic production capacity of oil and natural gas. In addition to the growth in our conventional fields, the highlight within the Exploration & Production segment was the important pre-salt discoveries in the Santos Basin and deeper knowledge of that region. In 2009, the first extended well test will be carried out in the Tupi field, and in 2010 a pilot production system will be installed with a production capacity of 100 thousand bpd. These are the first steps towards changing the company’s production profile, from the predominantly heavy oil of the Campos Basin to the lighter oil of our new frontier, the Pre-Salt. In addition to generating future production growth, the Pre-Salt oil has the added benefit of a higher market value, given its better quality as compared to the heavy oil of the Campos Basin.

An important component of Petrobras’ long-term strategy is to maintain the balance between our upstream and downstream operations. We therefore continue to invest in greater integration to fully capture margins throughout the oil and gas chain in Brazil. The Downstream business segment accounted for 22.5% of total investment, which was directed at adapting our refineries to process domestic heavy oil, improving oil product quality and expanding our refining capacity to meet demand. The company also undertook a corporate consolidation of its position in the petrochemical area – a strategic segment to diversify our product range. Our investment in the Gas & Energy area accounted for 13.5% of total investments, and was directed primarily at extending the gas pipeline network and building LNG re-gasification terminals. In 2008 we surpassed our previous record for electricity generation for the country’s integrated national system (SIN), generating 2,025 MW, 253% above our generation in 2007.

We retained our leadership in Distribution and further increased our market share, which reached 34.9% for 2008. The company also established Petrobras Biocombustível S.A., a fully-owned subsidiary, for the purpose of developing and marketing ethanol and biodiesel and consolidating our activities in this segment.

We also strengthened our international presence, with completion of the acquisition of Nansei Sekiyu Kabushiki Kaisha (NSS), whose principal assets are a refinery and an oil products terminal in Japan. We also signed an agreement to purchase ExxonMobil’s stake in Esso Chile Petrolera, which will secure our participation in one of South America’s most profitable markets. In the U.S. section of the Gulf of Mexico Petrobras acquired twenty-three blocks at auction, of which we are the operator for fifteen. With operations in 27 foreign countries, the company allocated 11.5% of its investment to its international activities, the greater part to exploration and production.

Petrobras’ commitment to technological development is reflected in our spending on Research & Development, which amounted to R$ 1.7 billion in 2008. The technological gains from R&D spending have been decisive in our progress towards developing deep water oil exploration and production projects, particularly the recent discoveries in the pre-salt layer, as well as developing new technologies to upgrade our capacity to refine heavy oil.

All our operations are guided by the highest standards for health, safety and the environment (HSE). In 2008, the company’s additional investments and operating practices prevented the emission of 680 thousand tons of carbon dioxide into the atmosphere. In January 2009, Petrobras placed its new, low sulphur Diesel S50 in the market on schedule, based on a timetable agreed with the government and different institutions. Based on our fundamental commitment to sustainable development, Petrobras’ activities are guided by the principles of transparency and social and environmental responsibility. Our performance in this area has led to our inclusion in the Dow Jones Sustainability Indexes (DJSI) for the third consecutive year.

Petrobras split its stock during the year, to increase the liquidity of its shares and ADRs. At the end of 2008, the company’s shareholder base amounted to almost 1 million investors, including mutual fund investors and Brazilians who have invested their FGTS resources.

The Business Plan projects total investment spending of US$ 174.4 billion during 2009-2013, a 55% increase in relation to the 2008-2012 Business Plan. The expenditures include an allocation of US$ 28 billion for the exploration and development of reserves in the pre-salt layer. Despite the international economic crisis and unstable oil prices, Petrobras is maintaining its audacious growth targets, given the number of opportunities in its portfolio that offer attractive returns.

The resources for carrying out projects are backed both by the company’s own cash generation and by external financing. Petrobras is rated investment grade by each of the rating agencies, and our sound growth prospects ensure the company’s access to a broad range of debt capital, including the bond and bank markets, as well as government development agencies. These sources have remained available to us despite the general scarcity of credit in the world’s capital markets.

Petrobras believes that it is on the right path towards achieving the objectives defined in its Vision for 2020: to be one of the five largest integrated energy companies in the world and the preferred choice among its many stakeholders.

José Sergio Gabrielli de Azevedo
Petrobras CEO