Petrobras’ policy with regard to the insurance market is to always disclose its risk management practices and to communicate promptly and openly any material information regarding claims

Risk Control aligned with Growth Targets

Petrobras’ results are affected by market variables, such as oil and oil product prices, local and foreign interest rates, exchange rates and other kinds of risk that are inherent to the business segments in which the company operates. The risks are managed in alignment with the company’s corporate objectives and targets.

The company’s entire integrated risk management structure – comprising policies and guidelines handed down by the senior management and the Risk Management Committee and Petrobras’ risk identification, quantification, response and control systems – is in a state of constant evolution, in line with the most advanced corporate governance practices, seeking to achieve a balance between risk tolerance and the growth and profitability targets set out in the Business Plan.

MARKET RISK

In managing the oil and oil product market risks, using the regular and systematic assessment of the consolidated net exposure to price risk, the company restricts its derivative operations to specific short-term transactions, involving a period of up to six months. In this way, it uses futures, swaps and options to safeguard the results of certain physical operations, within the limits of specific guidelines for the management of commodity risk. Similarly, in regard to its exposure to interest and currency exchange rates, Petrobras considers its cash, debt and commercial transaction positions when quantifying its net exposure and possible hedging in the derivatives market.

Petrobras adopts a restrictive risk management policy, when it comes to the use of derivatives, which is limited exclusively to strictly controled hedging operations.

CREDIT RISK

The company’s policy regarding the concession and revision of credits to its customers follows the principles of the Sarbanes-Oxley Act (SOX). Following analysis, the credits are approved according to the area of responsibility, which includes the credit committees and the financial and commercial directors of the customer’s contact area.

Control of credit utilization by customers, in Brazil and abroad, has been centralized and extended to the company’s subsidiaries Petrobras International Finance Company (PifCo), Petrobras Finance Limited (PFL), Petrobras Singapore Private Limited (PSPL) and Petrobras International Braspetro B.V. (PIB BV), in Rotterdam.

The processes for the concession and control of credit are constantly being refined, in order to improve support to the sustainable growth of the company’s commercial activities, especially those abroad, as well as to develop closer ties with customers and use credit as a commercial tool.

Due to the present world crisis, the company is even more cautious about conceding credit to its customers, with a view to keeping default at an extremely low level.

INSURANCE

The final Premium on Petrobras’ principal insurance policies (covering operational risk and petroleum risk) increased by 7%, in absolute terms, in 2008, to a total of US$ 27.9 million. Since the value of the insured assets increased by 28%, to US$ 61.3 billion, this represented a relative premium reduction of around 17%.

Petrobras’ policy in regard to the insurance market, both in Brazil and abroad, is to always disclose its risk management practices and to communicate, promptly and openly, any material information relating to claims.

The company bears a significant portion of the risk, with insurance exemptions running as high as US$ 50 million. Petrobras does not insure against lost profits, nor does it insure its wellhead controls or its Brazilian pipeline network. Platforms, refineries and other installations are covered by operational risk and petroleum risk insurance.

Projects and installations under construction, where the maximum likely damages could exceed US$ 50 million, are covered against engineering risks under policies taken out by the company or the contractor. The movement of cargoes is covered by transportation insurance policies, while the vessels are covered by hull and machinery insurance. Civil liability and environmental risks are also covered. For insurance purposes, the company’s assets are valued at replacement cost. Based on an assessment of the maximum likely damage at each installation, the indemnity ceiling under the operational risk policy has been fixed at US$ 800 million. The indemnity ceiling under the petroleum risk policy is set at US$ 1.1 billion, representing the cost of replacing the most expensive of Petrobras’ platforms.

Most of the company’s risk is reinsured in the international market. Many of the activities abroad are insured or reinsured through the Bear Insurance Co. Ltd., an exclusive Petrobras insurer, based in Bermuda.