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Executives

Theodore Helms – Executive Manager, IR

Almir Guilherme Barbassa – CFO and IR

Analysts

Frank McGann – Bank of America

Marcel (ph)

Emerson Leite – Credit Suisse

Gustavo Gattass – BTG

Felipe dos Santos – JP Morgan

Christian Audi – Santander

Unidentified Company Representative

Denis Parisien – Deutsche Bank

Pedro Medeiros – Citigroup

Robert Kessler – Tudor Pickering Holt

Petróleo Brasileiro S.A. – Petrobras (PBR) Q4 2011 Earnings Call February 14, 2012 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Petrobras conference call to discuss the fourth quarter 2011 results. At this time, all lines are in a listen-only mode. Later there will be a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

Today with us we have Mr. Almir Guilherme Barbassa, Petrobras CFO and Investor Relations Officer, and his staff. At this time, I would like to turn the conference over to Mr. Theodore Helms, Investor Relations Executive Manager of Petrobras, who has some additional comments. Please go ahead, Mr. Helms.

Theodore Helms

Good morning, ladies and gentlemen. Welcome to our conference call to discuss fourth quarter 2011 and year end results. We have a simultaneous webcast on the Internet that can be accessed at the site www.petrobras.com.br/ir.

Before proceeding, I’d like to draw your attention to the slide number two. We may make forward-looking statements which are identified by the use of the words will, expect and similar that are based on the beliefs and assumptions of Petrobras management and on information currently available to the company.

The conference call will be conducted by our CFO, Mr. Almir Barbassa. He will comment on the company’s operating and financial highlights and the main events during this quarter, and he will be available to answer any questions you may have.

Almir, please begin.

Almir Guilherme Barbassa

Good morning or good afternoon for everyone. Thank you for being with us in one more conference on our results of 2011 and the fourth quarter of 2011.

Starting with the highlights of the company, we can read in the spots, in the numbers and figures, we have here what is the performance of the company. We keep growing our reserves. We have a reserve replacement ratio of 148%, keeping our higher, long life of production year 18, 19 years, increasing the production of oil in Brazil. In total, the oil equivalent and mainly gas, we have increased by 18% mainly from Brazil because we finished the construction of some important pipeline that allowed for delivering this gas to the market.

Curaçao is contributing heavily to the increase of production. Our share of the production increase out today is 133,000 barrels per day, not including our partners here. With the partners we reach production near 200,000. And we have some new platforms and units that will come to production during 2012, including the new pilot on the Sapinhoá. Sapinhoá is the new name given to the field of Guará. Where we used to say Guará Area, now we have Sapinhoá. That was declared as commercially viable with proved reserves of 2.1 billion barrels of oil.

We keep selling more and more to the Brazilian market. That is growing and presented a 9% increase on 2011 over 2010. And in 2010 we had an increase of about 10% in average, so two exceptional years for the market. And our investment is kept in the range of R$70 billion, what allows for the growth of the company as projected. In dollars, this is near $45 billion, what means the R$224 billion as programmed for the five years plan.

Next, looking at the proven reserves, we can see that Petrobras is essentially a Brazilian company and with a large share of reserves in deep and ultradeep waters. We are growing the proven reserves in Brazil. In the last 20 years, we had reserve replacement higher than 100%, what means every year we were adding some new proved reserves to our total proved reserves, keeping our reserve production very few of 19 years.

Next, the exploratory activity has been very successful in Petrobras, with a success index higher than 50%, adding new fields offshore in the pre-salt and post-salt in Brazil. And this is contributing to add potential new reserves of cost lower than $2. In 2011, the average was $1.55, $1.56 per barrel of new oil found. We are expecting 2012 to present around $2.

And we are increasing our expenditures in exploration, with increasing from R$9 billion to R$10 billion dedicated to exploratory activities. We are increasing the number of wells we are going to do offshore, from 47 in 2011 to 66 in 2012, and this is a reflection of the availability of new rigs as we are going to discuss in more detail next slides. Next please.

The production in Brazil increased substantially in the last quarter, and you can see that the main contribution came from stoppages. The volume we lost in the third quarter on stoppages programmed and unprogrammed was 79,000 barrels per day, and in the fourth quarter it reduced to 24,000. This is important. And there is a new wells that were connected from the Varredura project discoveries that in the (inaudible) of areas that are producing and connecting wells to the existing platforms. We were able to add new production of more than 40,000 barrels per day during the year.

And but at the end of the year, we were expecting to complete 16 wells to increase production, but we were able to do only 9, the other 7 that will come on stream during the first half of this year. Four of them has been already completed in production. So we expect the planned and unplanned maintenance to be reduced from the 67,000 we lost in average 2011 to a lower range, mainly the unplanned that were in the level of 33,000 barrels per day we lost from production in 2011 and we expect not to happen in 2012. The wells I just commented has affected the production as well, the wells that were to be completed but not entered into production only in this year.

The gas and the energy, there is the inauguration of an important pipeline that allows for the production of Mexilhão, Uruguá and Lula. We’ve been pleased of domestic produced gas to be sold in Brazil and the reduction of flat gas as well. Next, please.

The production for 2012 is expected to receive the largest contribution from P-56. That will have an additional average production for the year in the range of 90,000 barrels per day. The second largest will come from P-57. That will contribute to an additional production of 70,000 barrels per day. There is the Lula pilot, that has had its production increased at the end of 2011 and the average of 2012 will be higher. And there is another well that is – be connected to the pilot as well and new platforms that will come as well as new wells from the Varredura. We expect to have at least five production wells to be connect with existing platforms increasing by more than 30,000 barrels per day, the average production of the...

Next, please. The contribution of Santos Basin pre-salt and the accomplishment of the year. As we can see, the production of Lula’s pilot, that reached 65,000 barrels per day at the end of the year, and there is still another well to be connected. The declaration of commerciality of Sapinhoá field, our number, solidified number of new wells drilled in the region when compared with the existing wells. We drilled 17 right off, and in 2010, we had 20 wells drilled in the region. So this gain reflects the number of rigs available.

And important to say is that the dark areas shown in the slides are the areas that we acquired from (inaudible) the transfer of rights of 5 billion barrels. In this area, we have drilled the second well in the Franco field, Franco area, and it proved to be as productive – as good as the first one. And we are projecting to have that, at first extended well test in depth area before the end of this year. And this gives the information about the growing and the work we are doing to reach production that we are expecting 2015. To do that, we have already acquired for who’s to be transformed in FPSOs to produce in the area. Next, please.

Campos Basin pre-salt is contributing already with 81,000 barrels per day, and there is expected additional production of more than 30 that will come from new wells to be connected to existing platforms. And another known well, exploratory well shall be built. We hope to keep our success as we have so far in discovering new opportunities to increase production in the area. Next.

The number of rigs we have today is plus the ones we are going to receive during the year. We’ll complete 34 rigs able to drill up to 3,000 meters of water depth, and this gives us the equipment we need to perform our projected program. To receive new rigs after 2015, we just announced a bid where we agreed to hire another 26 rigs with the 7 we had acquired last year. We completed 33 rigs and they were all contracted under an international price scenario, very competitive with international standards. Next, please.

In the costs of E&P, we can show here how the performance of the different costs has been on the last years. When you see lifting costs on the left-hand side, there is the absolute price or the absolute cost or distribution of the price of a barrel to different shares that it contributes. The cost lifting has increased from 17% to 21% from 2009 to 2011. But looking at the relative share of this cost to the price, we see that there were a reduction from 17% of the price of a barrel to 13% in 2011, while at the same time the contribution to the net income has increased from 25% to 33%. So of course there are many impacts on side of this value in terms of costs that follows the price of oil, but we’ve been able to keep our exploratory costs, D&E and others, even reducing from 23% to 16% in the same period. So it shows how more productive and how more profitable has been the E&P production.

The next slide shows that on the left-hand side, the spread between the price we sell our oil, heavier than the Brent compared with Brent. The spread in the range of $6 to $10 remains as such. On the right-hand side we have an impact of the depreciation of the real mainly in the fourth quarter, increasing when translated to reais, the international price of oil products, increased the differential between the price we are selling, although we have increased the prices in the domestic market in November. But the impact of the exchange rate was bigger.

Next, domestic refining and sales. We are working hard to produce more and more, mainly of diesel and gasoline, but we are using more our refining capacity, reaching 92% of the refining capacity. But overall we have increased our production. The market has increased faster in that, so we need to import more to supply the consumption in Brazil until we have the new refineries that shall enter in production by 2013 and 2014. Next, please.

In the downstream, as I have mentioned, we add more products to our processing capacity, reach our utilization factor to 92%, and increasing the production of – but we now relate it as well during the year of 2011, 14 new units has still – improve the quality of product as required by regulation in Brazil. And we have many orders to be inaugurated as well as increasing the complexity of our existing refineries and becoming more prepared or better prepared to process the oil produced in Brazil.

Only in 2011 we have increased our processed oil in Brazil that were supplied by oil produced in Brazil by 50,000 barrels per day, and this is the best way to sell the production we have. We have no transportation costs on it. And for the year, the main projects we have in the downstream are the new, two new refineries that, as I said, is going to come on stream next year and 2014.

Next, gas and power. We supply the market with the same amount, but the origin of the gas is different from the previous year, mainly because of inauguration of the pipelines being built and allowed for more production than less production. And the growth of oil production we have more associated gas available as well. In terms of demand, we have less on the thermoelectric area because of the rainy season in Brazil has been very good, but the industry has increased the demand and mainly the industry and the use we have for gas in our own activities.

So these make the same volume with the different mix of demand as well as in the supply side. For the next year we are looking for more balanced CapEx distributed among different areas on the segment where we are going to build a new power generation plant, a new fertilizer plant, a new LNG terminal and a natural gas processing unit to face the increased production from the Campos and from pre-salt. Next, please.

Now we come to operating income, and we see the 2011 income, operating income compared with 2010. We see that we had a higher sale volume and increasing our sale production because of the volume and because of the price we sold the oil products in the year. But the cost of goods sold has increased as well and there is many factors here. We had a larger volume of imported oil and at the moment where we had in the domestic market a lower price when compared with international but higher than the previous year, and we paid the production of the oil in Brazil. We paid more above net take because of the increase of international oil price from one year to the other, as well as extraordinary costs we have with increase of expenses in the dry wells during the year. Next, please.

When we see the net income, we see that adjusting for operating income we have the financial results for the main reason that caused a reduction on the year-to-year comparison. And this was because in 2011 there were a depreciation of the real, while in 2010 there were an appreciation. So there is a movement that when applied to the debt we have denominated in dollar, the industry’s adjustment to our net income but has no cash effect. Next, please.

We are going to make a comparison here for third quarter with fourth quarter in terms of operating income. And as said, we sold more with higher price in the fourth quarter, but the costs, as already explained, has a bigger impact in this quarter mainly because of the average of the exchange rate applied to the fourth quarter compared with the one prevailing in the third quarter. We are going to discuss this in more detail ahead.

And we had a special participation tax due to the production growth as well that has increased. And there are a few wells, important wells, that is contributing more to the production and is being charged with a higher tax rate, what increases the cost of production. And there were also the dry holes in the impairment that has occurred at the end of the year. There’s not to refer exactly all of it to the first quarter, but the whole year sometimes (inaudible) is causing here the reduction for the fourth quarter results.

Going to the next, we have the net income, and adjusting for the operating income we just analyzed, we have here a big result from financial results. In the third quarter, we had a big impact on our results because of the depreciation of the real that has occurred at the end of third quarter, mainly at the second half of September, and this now is adjusted to make this comparison. Equity income, we had an increase in the participation we have in different companies, and taxes is another point that has caused a reduction in the results.

But there is a contribution here for an adjustment that were done in Nigeria, where we used to pay taxes and not including in our – as tax paid, but we were taking out of the production the oil that correspond to the tax. Now, we are taking the oil as ours, as is the most common procedure, and having the tax paid as cost of the company. But in terms of net income there is no impact, but there is an increase in the fourth quarter in terms of what we are showing as expense. And the minority interest is the other side of the financial results. That is not part of Petrobras but from the other shareholders on the controlled subsidiaries. Next, please.

Trying to give a contribution to better understand the factors that caused some deviation from what market was expecting in terms of results and what we have presented. I don’t mean that this is where the real or the items that caused that effect, but we did that just on the purpose of trying to bring some light to that difference. And the first item here is the average foreign exchange rate affecting the costs on the fourth quarter.

What this means? It means that we have many costs in terms of operating costs, in terms of government taking terms of product imported. All of these when the transaction was done are referred to dollars, it was affected during the quarter by more than 10% in the difference of the average exchange rate that prevailed in the third and fourth quarter, while the exchange rate at the end of these quarters were moved to just 1%. When compared at the end of September and the end of December, exchange rate were about the same, but the average moved more than 10%. And this sometimes cannot be seen easily in all impact it has.

We did our best estimate here for operating and EBITDA in the range of R$ 2.6 billion of difference between the two quarters. The participation of imported goods in the sales we did, that has increased from 28% to 32%, is another fact. The increase of sales were mainly supplied by imports, and this has increased the cost of goods sold. Our best estimate here is more than 1 billion also.

Inventories. We formed a board. What is this? One, the first information that comes to the market is the information of Brazil exports. Every product that leaves the boundary of Brazil is a sale for Brazil, is an export, but it’s not the case of Petrobras, that sometimes has a large and more expanded boundary. So when we have a subsidiary in other countries to where we are exporting our oil or oil products, and it’s still ours in terms of consolidation; it did not lacked that goods, did not lacked the company. It remains in our balance sheet.

So when looking at the Brazil exports, you may have a missed or wrong information giving an extra expectation on the sales generation that will produce more operating income and EBITDA as well as net income. That in fact did not happen because all that product went to inventories.

There is another item here; this is related to accounting procedure. We are now adopting Brazil, starting from the fourth quarter but applying to all the year of 2011, a new procedure to consolidate results on the joint controlled companies. We are now doing and using the same procedure as is in the US GAAP procedure. We are just taking the results of the joint controlled company by the results, the financial results, the share of the company in the results the company presents. The equivalents of inequity. Yes.

Dry hole costs is another item that happened to be higher in the fourth quarter than the average, and this is the results of procedure. At the end of the year you do a complete review on the wells that has been drilled, and an appraisal and a valuation if there’s discovery or not, and then we decide to bring that cost to the balance sheet results. So there is an increase in terms of average that could be expected, as well as impairment. We have ramped at the end of the year and it caused another R$ 700,000 million of extra cost.

And what we call here is extemporaneous depreciation, is depreciation that was due to other quarters but was located here because the assets were not properly allocated in due time but the assets start operating. They start operating before the first quarter and were not under depreciation process. So it was incorporated as a production asset at the end of the year, and this caused some extra depreciation costs at the fourth quarter. So this is just a tentative to contribute, to explain what these possible factors that caused deviation from what was expected. Next, please.

Looking at the E&P results, we had an increased sale in terms of revenue contribution from price and from volume. We had a higher production the fourth quarter. And the main counter-effect on that was the effect on average costs in the cost of goods sold. And the reason here was the average exchange rate that cost us more costs when paid in dollars translated into more reais and as well as the price of crude oil in Brazil.

Although if you take the Brent price internationally, it fall from third quarter or fourth quarter but when translated into reais reached a higher exchange rate. You have a higher price and the government take is paid. There is (inaudible) information. And there is the dry holes, wells, operating expenses that has increased due to the salaries increased and other factors. So in average, we have almost leveled results for the quarters.

Next shows the results of downstream, and here we have a higher impact on the average costs, namely because of the imported goods. And although we have an increase in sales and price, these are not enough to compensate for the extra costs. And these brought the results to an even lower result in the fourth quarter when compared with the third one. Next, please.

We have here the investments and the 2012 investments in the range of R$ 87 billion. But we still split among different segments in Petrobras. If you’re growing the proportion of E&P, as our business plan shows, we are going to increase along the next years the budget space of E&P in the budget of the company. But we keep the downstreams that is investing in building new refineries, as well improving the quality of products and getting prepared for higher and bigger markets we are supplying only just in Brazil. Next, please.

We have our capital structure. That has increased somewhat our leverage in the third and fourth quarter, but this is highly due to the exchange rate that has depreciated real and increased the volume of debt when denominated in reais. But the important point here is the high liquidity we keep in the company. At the end of the year, with more than R$ 50 billion available and the just initial very successful transaction issuing $7 billion of bonds to international markets, very successfully when we had a demand of about $25 billion, which shows the health of the company and keeping, helping keeping the high liquidity to face our contracts and our programs we have ahead.

With that we finish the presentation, and we are prepared to answer the questions you may have. Thank you very much.

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions from Investors and Analysts. (Operator Instructions) Our first question comes from Frank McGann of Bank of America.

Frank McGann – Bank of America

Okay. Good morning, everyone. Just two questions. One, the tax rate. I know you touched on it briefly when you were going through the fourth quarter numbers, but it was quite high and I was wondering if maybe you could give a little bit more detail. Was there anything special that caused that to be high? And what kind of an average tax rate, perhaps, would you expect going forward from here if perhaps the deconsolidation of some subsidiaries has changed that in some way, perhaps?

And then in terms of importation, obviously a major factor, and it has been a growing factor over the last couple of years and likely to continue to be a factor. What are you seeing in the first quarter versus the fourth quarter? And what are your expectations in terms of the effects of importation on profitability in 2012 versus both the fourth quarter and the full year 2011?

Almir Guilherme Barbassa

Good morning, Frank. We have in terms of tax rate the main reason here is what I said regarding Nigeria. The contribution to the government in Nigeria were given in oil. So the oil produced, we’re taking a part of it and giving to development as their contribution. But from the beginning of 2011, and we did this correction in the fourth quarter, we start – we reviewed that procedure and we adopt a more common procedure in the area where we take the oil as ours and we sell and we give the proceeds to the government. This didn’t affect our net income, but it does affect our revenues and as well as tax paid, so there is really a high increase in that moment because of that reason.

The other, we are estimating that this was about R$ 700 million in the total of the tax expenses of R$ 1.5 billion. And this is – maybe the consolidation has some impact as well because now we are taking only our share in the net income that is added to the equity of our subsidiaries. But we did not calculate on how much this was, taking into consideration that the operational income for that deconsolidation was about R$ 700 million. Yes, there might be some impact as well, but much lower level than the case of Nigeria.

Frank McGann – Bank of America

Okay. Which should continue, and we could assume that would be spread out over a year as opposed to just one quarter in the future, so that the manufacturer would be spreading it out versus the absolute amount.

Almir Guilherme Barbassa

Frank, if I fully understood you, this is going to continue for the next time, for the next quarters. We are going to incorporate as income that will affect our operational income, EBITDA, and then adjusting to the tax at the end of the balance sheet building. Low impact on the net income, would increase somewhat in the other items. What in certain level of fuel compensate that part of the reduction caused by the deconsolidation that has an impact in the other direction. Regarding the import of fourth quarter 2011, first of 2012, I’ll ask Marcel from Downstream if he has some comments on that.

Marcel

Okay. Good afternoon. First of all, talking about sales, we expect to have on the 2012 the sales on the domestic market a little bit higher than we had on the 2011. Of course, we’re going to increase a little bit the production, but the level of good that we’re going to import on 2012, I mean talking about the average of the 2012, it’s going to be very close to the average that we had on 2011. I can’t tell you right now about the quarter, but talking about year versus year, it’s going to be around the same level. It’s okay?

Frank McGann – Bank of America

Yes, that’s perfect. Thank you very much.

Operator

And the next question comes from Emerson Leite of Credit Suisse.

Emerson Leite – Credit Suisse

Thank you. Good morning, everyone. I have two questions and maybe if there’s time a third one. First one is related to this overall pressure in costs. Obviously we are seeing cost pressures from different sources. We had an important increase in labor costs by the end of last year given the wage negotiations, and service costs or contracted services are also going up meaningfully.

My question is, what is the view of cost inflation in services? In your direct employees we kind of know what were the increases. But from elsewhere in the supply chain, what is your perceived cost inflation there and any hope that these could diminish going forward? That will be the first question, Almir.

Second question is related to this recent contract for the conversion of four FPSO holes for the rights transfer areas. I understand that the winning bid was for a lump sum of $1.7 billion. And I wanted to understand better the scope of this contract, as it seems to be for the conversion of four holes and it seems to be a pretty higher number on a per-hole basis. Just to make a comparison, the company is paying $3.5 billion for the construction of eight holes, and the conversion of half of those holes is almost half of that contract. So the number really comes up it seems way too high. So I wanted to understand what is the scope there, what else is being provided that we might not be seeing at the surface?

And finally, if there is time, I would like to see what is the company official opinion whether the current level of refined product prices is adequate or not for the current level of profitability. We had some comments yesterday from the incoming CEO, but I don’t know whether the press had the comments in the right context or not. So why don’t you give the official message whether prices are adequate or not at the current time? Thank you very much.

Almir Guilherme Barbassa

Emerson, starting from the pressure on costs, this is not new. When you look at labor sizes and other, we are seeing cost increase since the oil price start growing. What I have shown you is that the average cost, lifting cost, that is a very important cost, the average in relative terms has been lower than it used to be. Of course, we have every year one adjustment on salaries. We are growing. We have more employees working for the company, but we don’t have these on a day-to-day basis. We have long-term contracts. And they are adjusted every year by inflation.

So we are reflecting the cost of inflation, but what has impacted us more was the exchange rate. Exchange rate is another price that moves dramatically somewhat, sometimes in the short term. And these reach all our costs, although in the long run we are perfectly hedged with that, taking into consideration the price of oil denominated in dollars. And that we follow in the long run.

So this is what I can tell you regarding – I don’t see as a problem. This is what is happening for some time over that. Regarding the cost of conversion, really, I don’t have the figures. I cannot help you at this moment, but I’m going to see if I can give you an answer on that, mainly comparing the conversion costs of these four rules that we’ll be using in terms of rights and the eight ones that is being built for the other fields. And regarding refining the product price, Marcel, you have any information on that please? Additional to the one you have given already.

Theodore Helms

Well, I guess it’s just that that I said; I don’t have any additional information right now.

Almir Guilherme Barbassa

But let me add something here The question was if prices were up at a fair level or not, I can tell you that taking into consideration the price policy of the company, yes, the company keep generating high EBITDA, is being able to keep the liquidity of the company, and we are in line with our long-term plan. So I don’t see even if you look at the moment and take a picture at the moment, yes, you may have a different view in the short, very short field of time, but on the long run it’s all in line with our projections.

Emerson Leite – Credit Suisse

Almir, thank you. Just a follow-up on the first, after the first question about the labor costs. On the service contracts that you have, you mentioned they have clauses for readjustments on a yearly basis. Most of them are inflation package only. So you don’t have like cost best rules for instance, if labor is going up for your suppliers of services on the day to day, your indirect employees. The inflation that you’re seeing from indirect employees is actually inflation based only; it’s like even less than the 10% or so that your employees got. That’s what you meant by yearly annual increases?

Almir Guilherme Barbassa

Yes, we have the index adjustments, not cost relayed, transferred to us from other sources. And depending on the contract, there is more than one index that is tied to the adjustment of price. Even for index, it’s on costs of construction of the oil industry in other countries that have – where we used to supply or the supplier used to source the goods. So it’s not only one index; there are many methods. They are all indexes.

Emerson Leite – Credit Suisse

Okay. Thank you. I will then wait for the follow-up on the conversion costs. Thank you very much.

Almir Guilherme Barbassa

Welcome.

Operator

And the next question comes from Gustavo Gattass of BTG.

Gustavo Gattass – BTG

Yes. Hello, Almir?

Almir Guilherme Barbassa

I can hear Gustavo.

Gustavo Gattass – BTG

Okay. Sorry, guys, I was confused here with the telephone. I just had a couple of questions on your slide 20, coming back to the point that you mentioned about going from the third quarter to the fourth quarter. Some of that I just wanted to understand a little bit better. The first question that I had, Almir, had to do with CPC 19 and the comments there. Because when we initially did the math on your filings, looking at the restated amounts for the third quarter, the impression we had was that you effectively had an impact of about R$ 100 million or so per quarter on your operational results and not really something very, very big.

I just wanted to understand, is that something that changes or did change a lot between first, second and third and then fourth quarter in such a way that the fourth quarter number is a lot bigger? Or I just really want to understand how that number was calculated because I’m a little bit puzzled by it. So that’s actually the first question.

And effectively, the second question, just with regards to the inventory build in – okay, abroad, my question here is, I was doing the math and just assuming that this inventory is E&P inventory so that it’s crude that you effectively sold. It would imply something like 10 million barrels of oil that effectively were outside of Brazil but not yet booked.

So there’s two things that I wanted to just understand on that number. The first one is when you report your export numbers in your press release, are you reporting a number that is consistent with the sales or are you reporting a number that basically is the amount that left Brazil, whether or not it was sold? So that’s the first part.

And the second part is when you calculate the R$ 738 million, did you calculate it as a delta of what was in transit in the third quarter relative to what was in transit in the fourth quarter? Because I would assume that you have oil in transit at all times and not only in the fourth quarter of 2011.

Those are the two questions. Sorry for being nitty-gritty, but I’m still trying to understand the results. That’s all.

Almir Guilherme Barbassa

Okay, Emerson. I will have the obvious from our accounting department.

Gustavo Gattass – BTG

Okay. Okay.

Almir Guilherme Barbassa

Yes.

Gustavo Gattass – BTG

Just before we go there, (inaudible), again, please no. It’s a lapse but it is actually the sixth time now, but that’s okay.

Theodore Helms

Sorry. Sorry. But Gustavo got tired, so let’s have (inaudible) helping us in this answer. Thank you.

Almir Guilherme Barbassa

Hi, Gustavo. The effect of the changes related to CPC 19 was almost R$ 700 million for all the years that we adjusted in the fourth quarter. For the order required, first, second and third, the effect is almost to – we estimated I think like R$ 200 million per quarter in terms of operational results. In our financial report, we restated the fourth quarter of last year and the third quarter without the effects, okay, but the average per quarter was almost R$ 200 million.

Gustavo Gattass – BTG

Okay, just so that I understand, so when you’re saying this, is if I have looked at your numbers and said, okay, this is the reported full year number and subtracted what you had reported before for the nine months, you would have an effect of 738, but the numbers that we actually saw in the press release, they don’t have that big an adjustment, is that – that’s what I understood from what you said. Just wanted to confirm it. Is that it?

Theodore Helms

Yes. You’re right.

Gustavo Gattass – BTG

Okay. Thanks.

Operator

And the next question comes from Felipe Santos with JPMorgan.

Almir Guilherme Barbassa

Yes, what’s your question?

Theodore Helms

Almir, I guess you had another question from Gustavo before.

Almir Guilherme Barbassa

Oh, Gustavo (inaudible) . Sorry, sorry. Missing a lot of things. I don’t know what’s happening today.

Gustavo Gattass – BTG

No. Just remind you, the second question was on the inventory build outside of Brazil, I just wanted to check if that is the delta on the inventory build calculation or if that’s just the number for the quarter. Again, I would assume that you’re always building inventory outside of Brazil and not fully exporting. So that’s the question there.

Theodore Helms

Can you help us please?

Almir Guilherme Barbassa

(Inaudible) speaking. This is the effect of R$ 700 million that recognizing the stock of abroad and don’t book as revenue and this is impacting the fourth quarter. And the first quarter, about our operations, we book in our revenue in the first quarter of 2011 – 2012, sorry.

Almir Guilherme Barbassa

But this fourth quarter presented an inventory higher than the third one by 700. Is this the...

Theodore Helms

Recognizing the inventory and based on our operation, we will recognize as revenue in the first quarter of 2011 – 2012, sorry. Okay?

Almir Guilherme Barbassa

Did you get the...

Gustavo Gattass – BTG

Okay. Thank you, guys. Yes, yes, I did. So later on I’ll follow up just with how you book the volumes, but we can do that later. The financial numbers were more important. Thanks, guys.

Almir Guilherme Barbassa

Okay.

Operator

And the next question is from Felipe dos Santos of JP Morgan.

Felipe dos Santos – JP Morgan

Just one quick question. For the (inaudible) reviews, you mentioned that the long-term oil that you are using now is $75 per barrel; before you had $85 per barrel. I would just first just confirm this. And second, would this new forecast change your long-term CapEx? How are you going to do this or it was just for the calculation of an impairment? Thank you.

Almir Guilherme Barbassa

Yes. In fact, we have reduced from $80 to $75. This is a reduction on projected oil price by the period beyond 2016 that has an impact on our impairment calculation at the end of last year. But we have no impact on our CapEx because the average, we have, as average cost for the company, is below $40 a barrel. So there is no – the impact we had were only marginal to the secondary recovery fields that were in place of secondary recovery, marginal fields, not the main ones, that is a help in terms of cost and recovery.

Felipe dos Santos – JP Morgan

Okay, great. Thank you.

Operator

And the next question comes from Christian Audi of Santander.

Christian Audi – Santander

Thanks. Hi, Barbassa. A few questions related to the costs. First one, in the past when you disclosed lifting and refining costs in your press release you used to show the impact that FX had caused or how much of the change quarter over quarter was due to the FX. And I didn’t see it this time around. So could you provide us, for example, the lifting costs quarter over quarter has decreased – how much of it was related to FX versus actual operational development?

Theodore Helms

Hi, Christian. I can give you the numbers for comparing year over year. The ones for quarter over quarter, I would have to come back to you on that. But year-over-year comparison, the exchange rate effect was $0.45 of $1.

Christian Audi – Santander

$0.45. And on the refining, I know that’s mostly real based, but is there any FX issue there as well or no? From the refining costs for that?

Almir Guilherme Barbassa

Marcel, do you have this information?

Unidentified Company Representative

Yes, comparing quarter to quarter on the refining cost, the effect was $0.02 on the difference that we had on the third quarter to fourth quarter.

Christian Audi – Santander

Okay. And the other thing that I was confused, Barbassa, was in the last conference call when we talked about these two important costs lifting and refining, the sense that I got was that it would be difficult for these costs to go down at least in the short term, yet we did see a drop in both of them. So going forward, how should we read that? Do you see the beginning of the year space for these costs to fall more or this was a one-time event that we shouldn’t put into our expectations for lifting any refining costs in 2012 to be substantially lower than 2011? Could you provide us some color in terms of how you’re looking at those two please?

Almir Guilherme Barbassa

We don’t expect in the long run to have a reduction on costs because of inflation, because of oil prices, because of this pressure that mounts on the oil industry. Of course, there are moments where we have more impact than others, when you compare quarter to quarter, for example. If we are installing new equipment mainly in the production area, where you have all the team prepared to produce the top production or platform and all the fixed costs of the platform will be there regardless the volume it’s producing. So this sometimes contributes to have a higher cost in the moment than the other.

In average, we are reducing the cost when compared with price, and this is what I think is very important for the company, looking at the costs regarding prices. The price is a pressure of course to the cost and we have other sources of cost as well. But increasing positivity, becoming more efficient in our operation in downstream, increasing our average utilization of the refineries and all of that is contributing to if not reducing, at least keeping price costs increasing.

Christian Audi – Santander

Okay, thanks. And then last question is in the past you had released production guidance for the coming year in this fourth quarter results. So how come you were not able to do that this time around in terms of the production target for 2012?

Almir Guilherme Barbassa

We are better placing what will be the conditions and how far we can see with more certainty. But it’s not going to take too much, I believe, to release a new figure for this year.

Christian Audi – Santander

Okay, thank you.

Operator

And the next question comes from Denis Parisien of Deutsche Bank.

Denis Parisien – Deutsche Bank

Hi, thanks for taking my question. I wasn’t able to see your bond roadshow, so I was wondering if you could give a little bit of clarity on your financing plans for 2012. Are you going to do as last year only the one multi-tranche jumbo in the dollar market and seek financing in other markets this year as last year? If not, what would we expect in the dollar market going forward? And if so, or in either case, what would we expect in other markets this year? Thanks.

Almir Guilherme Barbassa

We have not changed our financial policy translation. We keep looking for the best opportunities for the company in terms of (inaudible) and cost. And in terms of the dollar market, we’ve been saying for some years what is our policy very clearly and we have said this year again that we do not intend – we have no plan to come back to that market along of the year again.

And the other markets we will be looking at and seeing if there is an opportunity to access or not. And we have enough liquidity to maintain the company operating. We are generating that income cash by the operation of the company in volumes that give us the comfort to keep maintaining our CapEx and our financial policy as announced.

Denis Parisien – Deutsche Bank

Thanks very much for that. Did you also give any CapEx guidance for this year and whether or not you expect to execute closer to the guidance?

Almir Guilherme Barbassa

Our guidance is 87.5 more than we had done last year. We will be trying to deliver that, but of course, being the company on the size of Petrobras, we are a lot dependent on the performance of many different suppliers, not only in Brazil but abroad. Our drill ships, for example, they – 15 we are going to receive this year, but we expect in former years and they were built in other countries, so just to say that we began from help from suppliers. We do our best to keep all under control, but sometimes it’s not possible to achieve, and so we are aiming to reach the target. Although to fulfill $224 billion in five years, we do not need to make, to reach a CapEx of 87 this year. Lower, 10% lower would be enough.

Denis Parisien – Deutsche Bank

Great. Thanks very much.

Operator

And the next question comes from Pedro Medeiros from Citigroup.

Pedro Medeiros – Citigroup

Hi, guys. I think most of my questions towards the results have been already cleared. I just have two other questions, one more related to strategy and the other to the refining bid. The first one, Barbassa, I would like to understand how is the progress of the divestment program announced last year? We can see that during the fourth quarter there was an asset sale on the international E&P front from Africa, but the numbers that the company had been guiding for were materially bigger than what this initial asset represented.

Can you comment a little bit more about how this plan is evolving through this year? There had been talks about potentially selling international refineries as well. What can we expect to see for the year on that front?

Almir Guilherme Barbassa

Yes, this is a new program for Petrobras. As you may know, following the history of Petrobras, we built, we grew organically. We are not a company that do too much of acquisition and very few divestments too. So we are working on this process and getting prepared. First, we are working on identifying the assets we are going to sell, although we had done a first exercise before announcing the volume. We did count much more than we announced. We were conservative in expressing the numbers because not all comes to be true at the end. So we are now doing a more specific design on the strategy, on the asset and to start bringing them to the market.

We have done very small ones, as you said, in Africa, but it is not material. We have to bring assets with higher value. And we hope by the first half of this year, we’ll have the opportunity to present a few of them. But there is one that is being announced that is the Japanese refinery we hold, we have today. But in terms of E&P domestic and international, it will take a few times more, some times more. And, but, you are going to see some news on the first half of this year.

Pedro Medeiros – Citigroup

Okay. Just as a follow-up, I recall that on the last plan you were estimating a divestment that would total from $13 billion to $15 billion. And out of that metric or that estimate, the amount of asset sales itself were close to $5 billion, whereas nearly $10 billion were supposed to come from working capital improvements. From what I heard now, you think that this estimate of $13 billion to $15 billion would increase, and specifically on the $5 billion, do you expect that the bulk of this comes from the market in the first half of this year or in 2012 at all? Or it’s just a small percentage of it still?

Almir Guilherme Barbassa

Just to place the figure more in line with what we have announced, we announced that $13.6 billion of divestment and working capital, about half and half in the two projects. We are already working in the working capital, and we have achieved some gains already in the divestments. I believe a very considerable amount of what has been announced shall be in the market in the first half of this year, yes.

Pedro Medeiros – Citigroup

Okay. Well, thank you. And my second question is on the refining side. I think the company had been expecting for a confirmation from PDVSA about its interest or its true participation on the northeast refinery, and there had been some investment contingencies aligned with that decision or not. I think the latest that I heard is that a participant can still confirm its participation to the start-up of the unit. But will there be any changes to the project or to the overall budget assigned to the northeast refinery since we don’t have this confirmation yet? And will the unit be able to process the Venezuelan crude that is a little heavier than the average in Brazil?

Almir Guilherme Barbassa

No. we did not start the unit that we will be processing the oil from Venezuela. And this is going probably to be one of the moments to take the final decision either to be a partner or not. But so far we did not start that construction.

Pedro Medeiros – Citigroup

Okay. And just one final question, if I may, are you guys able to sell what was the contribution to your reserves for 2011 coming from Sapinhoá and if there were any contributions coming from the Varredura project at this point?

Almir Guilherme Barbassa

Yes. I’m going to have my colleagues from E&P to help me in this answer.

Theodore Helms

From everything we have found so far from a ring-fence exploration that occurred after the Varredura project, today we have roughly 350 billion barrels of oil equivalent in our proven reserves. And the contribution of Sapinhoá was not the biggest share in the pre-salt reserve booking for 2011. It was roughly 200 million barrels. The biggest contribution came from a revision in the Lula area of proven reserves.

Operator

And the next question comes from Robert Kessler of Tudor Pickering and Holt.

Robert Kessler – Tudor Pickering Holt

Good morning. I wanted to see if I could get you to give some perspective on the downstream as you look forward to 2012. Clearly had a big loss on a full year basis for 2011, almost $6 billion in US dollar terms. And I recognize there’s always a lag effect on pricing, although crude prices were relatively stable. I know as you suggested the exchange rate of fluctuations influenced the loss in the quarter towards the back part of the year. But if you were to stabilize the crude price and the exchange rate, what would your expectations be for downstream profitability for 2012?

Almir Guilherme Barbassa

The best we can say regarding that is the stability. Of course, the fourth quarter, impacted mainly by the exchange rate, we have a high difference when compared with the previous quarter. But in a normal scenario of exchange rate and the international price, we don’t expect to move from the average we have in the year. Not different on that.

Robert Kessler – Tudor Pickering Holt

Can I ask why – just looking at the – if I understand correctly ethanol was priced higher than what you were supplying petrol-based gasoline for in the quarter. And yet you’re increasing your market share, effectively buying product off the international market at a net negative gross margin. So why – that begs the question, why supply the domestic market, undercut the locally grown price and do so at a loss on the top line? Did I understand the dynamics there correctly? And why are you embarking on that near-term strategy?

Almir Guilherme Barbassa

I believe that the reason was the flexibility of ethanol producers. They can move their production from ethanol to sugar. And there were some impact on sugar price internationally, moving them to do that change and reducing the supply of ethanol to the market. These, associated with the fact that we have increase in the market, domestic market, an average of 9% taking all the oil products, it really makes a big difference.

Of course gasoline on that participation has increased 24% in part due to this fact that we have a crop production reduction, ethanol production in this year due to the big reduction in the crop of sugarcane. But there were also some different mix on ethanol and sugar produced in the country. So that’s what leads to a higher import of gasoline to Brazil.

Operator

Thank you, ladies and gentlemen. There are no further questions at this time. Mr. Barbassa, please proceed with your closing remarks.

Almir Guilherme Barbassa

Thank you very much for being with us and I hope to see or to talk to you in the next quarter with good results that maybe then we are presenting. All is improving. Thank you very much.

Operator

Ladies and gentlemen, your host is making today’s conference available for replay starting one hour from now. You may access this replay at the company’s IR website at www.petrobras.com.br/ir. This concludes Petrobras’ conference call for today. Thank you very much for your participation. You may now disconnect.

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