Petróleo Brasileiro S.A. - PETROBRAS and Subsidiaries · Petróleo Brasileiro S.A. - PETROBRAS and Subsidiaries Consolidated Balance Sheets Expressed in Millions of United States

Petróleo Brasileiro S.A. - PETROBRAS and Subsidiaries Consolidated Financial Information As of June 30, 2002 and 2001 and Report of Independent Accountants

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Report of Independent Accountants To the Board of Directors and Stockholders of Petróleo Brasileiro S.A. - PETROBRAS We have reviewed the accompanying consolidated balance sheet of Petróleo Brasileiro S.A. - PETROBRAS and its subsidiaries at June 30, 2002 and the unaudited consolidated statements of income, of cash flows and of changes in stockholders' equity for the six-month periods ended June 30, 2002 and 2001. This financial information is the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial information taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial information as of June 30, 2002 and for the six-month periods ended June 30, 2002 and 2001, for it to be in conformity with accounting principles generally accepted in the United States of America. We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Petróleo Brasileiro S.A. - PETROBRAS and its subsidiaries as of December 31, 2001, and the related consolidated statements of income, of cash flows and of changes in stockholders' equity for the year then ended (not presented herein), and in our report dated March 31, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2001 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. As described in Note 8, PETROBRAS has been subject to significant Brazilian Federal Government regulations. PricewaterhouseCoopers Auditores Independentes Rio de Janeiro, Brazil August 2, 2002 COPY OF THE ORIGINAL

Petróleo Brasileiro S.A. - PETROBRAS and Subsidiaries Consolidated Balance Sheets Expressed in Millions of United States Dollars

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June 30, December 31, Assets 2002 2001 Current assets Cash and cash equivalents 4,306 7,360 Accounts receivable, net 2,766 2,759 Inventories 2,524 2,399 Deferred income tax 100 149 Recoverable taxes 691 664 Advances to suppliers 663 483 Other current assets 506 512 11,556 14,326 Property, plant and equipment, net 18,173 19,179 Investments in non-consolidated companies and other investments 385 499 Other assets Accounts receivable, net 304 212 Advances to suppliers 418 403 Petroleum and Alcohol Account - Receivable from Federal Government 295 81 Government securities 598 665 Unrecognized pension obligation 115 187 Restricted deposits for legal proceedings and guarantees 295 337 Receivable from non-consolidated companies 406 264 Recoverable taxes 114 164 Marketable securities 221 212 Other assets 306 335 3,072 2,860 Total assets 33,186 36,864

Petróleo Brasileiro S.A. - PETROBRAS and Subsidiaries Consolidated Balance Sheets Expressed in Millions of United States Dollars (except number of shares) (continued)

The accompanying notes are an integral part of this interim consolidated financial information.

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June 30, December 31, Liabilities and stockholders' equity 2002 2001 Current liabilities Trade accounts payable 1,661 1,783 Income taxes 305 1,044 Taxes payable, other than income tax 1,640 1,101 Short-term debt 749 1,101 Current portion of long-term debt 457 940 Current portion of project financings 485 680 Capital lease obligations 341 298 Employee postretirement benefits 78 117 Payroll and related charges 217 333 Sugar cane cost equalization program 211 Accrued interest 111 104 Other payables and accruals 569 543 6,824 8,044 Long-term liabilities Employees postretirement benefits 2,921 3,380 Project financings 3,379 3,153 Long-term debt 6,245 5,908 Capital lease obligations 1,791 1,930 Deferred income taxes 690 717 Other liabilities 249 406 15,275 15,494 Minority interest (17 ) 79 Commitments and contingencies (Note 16) Stockholders' equity Shares authorized and issued (Note 13) Preferred stock - 2002 and 2001 - 451,935,669 shares 2,459 1,882 Common stock - 2002 and 2001 - 634,168,418 shares 3,761 2,952 Capital reserve - fiscal incentive 108 128 Accumulated other comprehensive income Cumulative translation adjustments (14,824 ) (11,854 ) Amounts not recognized as net periodic pension cost (1,523 ) (1,867 ) Unrealized gain on available-for-sale securities 13 Retained earnings Appropriated 4,458 6,869 Unappropriated 16,665 15,124 11,104 13,247 Total liabilities and stockholders’ equity 33,186 36,864

Petróleo Brasileiro S.A. - PETROBRAS and Subsidiaries Consolidated Statements of Income Expressed in Millions of United States Dollars (except number of shares and earnings per share) (Unaudited)

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Six-month period ended June 30, 2002 2001 Sales of products and services 16,305 17,859 Less: Value-added and other taxes on sales and services (2,596 ) (4,550 ) Specific parcel price - PPE (Note 8) (325 ) CIDE (Note 8) (2,966 ) Net operating revenues 10,743 12,984 Cost of sales (net of impact of government regulation of US$ (31) and US$ (33), in 2002 and 2001, respectively (Note 8)) (5,456 ) (6,450 ) Depreciation, depletion and amortization (841 ) (1,004 ) Exploration, including exploratory dry holes (209 ) (158 ) Selling, general and administrative expenses (net of impact of government regulation of US$ 1 and US$ (29), in 2002 and 2001, respectively (Note 8)) (943 ) (907 ) Research and development expenses (71 ) (64 ) Total costs and expenses (7,520 ) (8,583 ) Equity in results of non-consolidated companies (42 ) 10 Financial income (including financial income on the Petroleum and Alcohol Account of US$ 1 and US$ 9, in 2002 and 2001, respectively (Note 8)) 674 775 Financial expense (447 ) (396 ) Monetary and exchange variation on monetary assets and liabilities, net (616 ) (859 ) Employee benefit expense (262 ) (172 ) Other taxes (178 ) (153 ) Other expenses, net (37 ) (280 ) (908 ) (1,075 ) Income before income taxes and minority interest 2,315 3,326

Petróleo Brasileiro S.A. - PETROBRAS and Subsidiaries Consolidated Statements of Income Expressed in Millions of United States Dollars (except number of shares and earnings per share) (Unaudited) (continued)


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Six-month period ended June 30, 2002 2001 Income tax expense Current (785 ) (583 ) Deferred (138 ) (160 ) (923 ) (743 ) Minority interest in results of consolidated subsidiaries 94 107 Net income for the period 1,486 2,690 Net income applicable to each class of shares Common/ ADS 868 1,571 Preferred/ADS 618 1,119

Net income for the period 1,486 2,690 Basic and diluted earnings per share (Note 14) Common/ADS and Preferred/ADS 1.37 2.48 Weighted average number of shares outstanding Common/ADS 634,168,418 634,168,418 Preferred/ADS 451,935,669 451,935,669

Petróleo Brasileiro S.A. - PETROBRAS and Subsidiaries Consolidated Statements of Cash Flows Expressed in Millions of United States Dollars (Unaudited)

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Six-month period ended June 30, 2002 2001 Cash flows from operating activities Net income for the period 1,486 2,690 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization 1,022 1,059 Loss on property, plant and equipment 132 700 Foreign exchange and monetary loss 800 728 Others 81 (50 ) Decrease (increase) in assets Accounts receivable, net (693 ) 129 Petroleum and Alcohol Account (57 ) 389 Interest receivable on government securities (16 ) (123 ) Inventories (660 ) (377 ) Advances to suppliers (283 ) (203 ) Insurance receivable (497 ) Others (386 ) (371 ) Increase (decrease) in liabilities Trade accounts payable 164 (73 ) Payroll and related charges (72 ) 60 Taxes payable, other than income taxes 310 17 Employee postretirement benefits, net of unrecognized pension obligation 215 65 Other liabilities 268 261 Net cash provided by operating activities 2,311 4,404

Petróleo Brasileiro S.A. - PETROBRAS and Subsidiaries Consolidated Statements of Cash Flows Expressed in Millions of United States Dollars (Unaudited) (continued)


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Six-month period ended June 30, 2002 2001 Cash flows from investing activities Additions to property, plant and equipment (2,379 ) (1,952 ) Others (136 ) (150 ) Net cash used in investing activities (2,515 ) (2,102 ) Cash flows from financing activities Short-term debt, net issuances and repayments (350 ) (1,028 ) Proceeds from issuance of long term debt 549 690 Principal payments on long- term debt (548 ) (403 ) Project financings (284 ) (95 ) Payment of lease obligations (96 ) (367 ) Dividends paid (1,135 ) (1,224 ) Net cash used in financing activities (1,864 ) (2,427 ) Decrease in cash and cash equivalents (2,068 ) (125 ) Effect of exchange rate changes on cash and cash equivalents (986 ) (847 ) Cash and cash equivalents at beginning of period 7,360 5,826

Cash and cash equivalents at end of period 4,306 4,854

Petróleo Brasileiro S.A. - PETROBRAS and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity Expressed in Millions of United States Dollars (except number of shares and per-share amounts) (Unaudited)

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Six-month period ended June 30,

2002 2001

Preferred stock (Note 13) 2,459 1,882 Common stock (Note 13) 3,761 2,952 Capital reserve - fiscal incentive Balance January 1 128 37 Constitution 93 Transfer to unappropriated retained earnings (20 ) (6 ) Balance June 30 108 124 Accumulated other comprehensive income Cumulative translation adjustments Balance January 1 (11,854 ) (9,159 ) Change in the period (2,970 ) (2,465 ) Balance June 30 (14,824 ) (11,624 ) Amounts not recognized as net periodic pension cost Balance January 1 (1,867 ) (1,516 ) Decrease in additional minimum liability 513 343 Tax effect on above (169 ) (112 ) Balance June 30 (1,523 ) (1,285 )

Petróleo Brasileiro S.A. - PETROBRAS and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity Expressed in Millions of United States Dollars (except number of shares and per-share amounts) (Unaudited) (continued)

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Six-month period ended June 30, 2002 2001

Unrecognized gains (losses) on available-for-sale securities Balance January 1 13 65 Unrealized losses (20 ) (34 ) Tax effect on above 7 11

Balance June 30 42 Appropriated retained earnings Legal reserve Balance at January 1 768 648 Transfer to unappropriated retained earnings (141 ) (99 ) Balance at June 30 627 549 Unrealized income reserve Balance at January 1 1,471 Transfer to unappropriated retained earnings (223 )

Balance at June 30 1,248

Undistributed earnings reserve Balance at January 1 5,886 3,648 Capital increase (1,386 ) Transfer to unappropriated retained earnings (844 ) (553)

Balance at June 30 3,656 3,095

Petróleo Brasileiro S.A. - PETROBRAS and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity Expressed in Millions of United States Dollars (except number of shares and per-share amounts) (Unaudited) (continued)


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Statutory reserve Balance at January 1 215 221 Transfer to unappropriated retained earnings (40 ) (33 )

Balance at June 30 175 188

Total appropriated retained earnings 4,458 5,080

Unappropriated retained earnings Balance at January 1 15,124 14,456 Net income for the period 1,486 2,690 Dividends (per share: 2001 - US$ 1.62 to common and preferred shares; 2000 - US$ 0.47 to common and preferred shares (989 ) (1,757 ) Appropriation to fiscal incentive reserve (4 ) (93 ) Appropriation from reserves 1,048 911

Balance at June 30 16,665 16,207

Total stockholders' equity 11,104 13,378

Comprehensive income (loss) is comprised as follows:

Net income for the period 1,486 2,690 Cumulative translation adjustments (2,970 ) (2,465 ) Amounts not recognized as net periodic pension cost 344 231 Unrealized loss on available-for-sale securities (13 ) (23 ) Total comprehensive income (loss) (1,153 ) 433

Petróleo Brasileiro S.A. - PETROBRAS and Subsidiaries Notes to Consolidated Financial Information Expressed in Millions of United States Dollars (except when specifically indicated)

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1 Basis of Financial Statement Preparation The accompanying unaudited consolidated financial information of Petróleo Brasileiro S.A. -

PETROBRAS (the Company) has been prepared pursuant to U.S. generally accepted accounting principles (U.S. GAAP) and the rules and regulations of the Securities and Exchange Commission (SEC). Although certain information normally included in annual financial statements prepared in accordance with U.S. GAAP has been condensed or omitted, management believes that the disclosures are adequate to make the information presented not misleading. The unaudited consolidated financial information should be read in conjunction with the consolidated financial statements for the year ended December 31, 2001 and the notes thereto.

The consolidated financial information as of June 30, 2002 and for the six-month periods

ended June 30, 2002 and 2001, included in this report is unaudited. However, in management's opinion, such consolidated financial information reflects all normal recurring adjustments that are necessary for a fair presentation. The results for the interim periods are not necessarily indicative of trends or of results to be expected for the full year ending December 31, 2002.

Pursuant to Rule 436 (c) under the Securities Act of 1933, this is not a “report” and should

not be considered a part of any registration statement prepared or certified within the meanings of Sections 7 and 11 of the Act and that the independent accountant’s liability under section 11 does not extend to it.

2 Recently Issued Accounting Pronouncements

The Financial Accounting Standards Board ("FASB") has recently issued the following Statements of Financial Accounting Standards ("SFAS"). In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). In October 2001, SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets ("SFAS 144") was also issued.

SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement

obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. Subsequently, the asset retirement cost should be allocated to expense using a systematic and rational method. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002.


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SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. It supersedes, with exceptions, SFAS No. 121, Accounting for the Impairment of Long -Lived Assets and for Long - Lived Assets to be Disposed Of, and is effective for fiscal years beginning after December 15, 2001. The Company is currently assessing the impact of SFAS No. 143 and No. 144 and therefore, at this time cannot reasonably estimate the effect of these statements on its financial condition, result of operations and cash flows.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This statement addresses how to report gains or losses resulting from the early extinguishment of debt. Under current accounting rules any gains or losses are reported on early extinguishment of debt as extraordinary items. If the SFAS No. 145 is adopted, it would be required to evaluate whether the debt extinguishment is truly extraordinary in nature. If the debt is routinely extinguished early, the gain or loss would be included in income from continuing operations. This statement will be effective for 2003 year-end reporting.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement requires recognition of costs associated with exit or disposal activities when they are incurred rather than when an exit or disposal plan occur. Examples of costs covered by this guidance include lease termination costs, employee severance costs that are associated with a restructuring, discontinued operations, plant closings or other exit or disposal activities. The provisions of this statement are effective for fiscal years beginning after December 31, 2002 and will impact any exit or disposal activities initiated after January 1, 2003.

3 Reclassifications

Certain prior period’s amounts have been reclassified to conform to the current period’s presentation. These reclassifications had no impact on the Company’s net income or stockholders’ equity.

4 Derivative Instruments, Hedging and Risk Management Activities

The Company is exposed to a number of market risks arising from the normal course of business. Such market risks principally involve the possibility that changes in interest rates, currency exchange rates or commodity prices will adversely affect the value of the Company's financial assets and liabilities or future cash flows and earnings. The Company maintains an overall risk management policy that is evolving under the direction of the Company's executive officers.


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The Company may use derivative and non-derivative instruments to implement its overall risk management strategy. However, by using derivative instruments, the Company exposes itself to credit and market risk. Credit risk is the failure of a counterpart to perform under the terms of the derivative contract. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, currency exchange rates, or commodity prices. The Company addresses credit risk by restricting the counterparts to such derivative financial instruments to major financial institutions. Market risk is managed by the Company's executive officers. The Company does not hold or issue financial instruments for trading purposes. The Company adopted SFAS 133 on January 1, 2001 and determined that all of its derivative financial instruments that had previously been treated as hedges will not qualify for hedge accounting under the new standard. The following summarizes the Company's current risk management activities:

(a) Foreign Currency Risk Management The Company’s foreign currency risk management strategy may use derivative instruments to protect against foreign exchange rate volatility, which may impair the value of certain of the Company’s assets. The Company currently uses zero cost foreign exchange collars to implement this strategy. During 2001 the Company entered into three zero cost foreign exchange collars to reduce its exposure to variations between the U.S. Dollar and the Japanese Yen, and between the U.S. Dollar and EURO relative to long-term debt denominated in foreign currencies with a notional amount of approximately US$ 470. The Company treats these instruments as non-hedge derivative instruments. These collars establish a ceiling and a floor for the associated exchange rates. If the exchange rate falls below the defined floor, the counterpart will pay to the Company the difference between the actual rate and the floor rate on the notional amount. Conversely, if the exchange rate increases above the defined ceiling, the Company will pay to the counterpart the difference between the actual rate and the ceiling rate on the notional amount. The contracts expire upon the maturity date of each note. As of June 30, 2002 and December 31, 2001, the Company had a balance obligation of US$ 83 and US$ 119, respectively, associated with its zero cost foreign exchange collar contracts.


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(b) Commodity Price Risk Management

The Company is exposed to commodity price risks through the fluctuation of oil and oil product prices. The Company’s commodity risk management activities primarily consist of futures contracts traded on stock exchanges and options and swaps entered into with major financial institutions. The futures contracts hedge anticipated crude oil purchases and sales, generally forecasted to occur within a 30 to 360 day period to reduce the Company’s exposure to volatile commodity prices.

The Company's exposure on these contracts is limited to the differential on the volumes

hedged between the contract value and the market value. Gains and losses on hedge transactions are recognized concurrently with gains and losses resulting from the underlying hedged transaction. During the first semester of 2002 and 2001 the Company carried out hedging activities on 37.9% and 23.7%, respectively, of its total traded volume (imports and exports) and recognized gains of US$ 25 and US$ 28, respectively.

(c) Interest Rate Risk Management

The Company’s interest rate risk is a function of the Company’s long-term debt and, to a lessor extent, short-term debt. The Company’s foreign currency floating rate debt is principally subject to fluctuations in LIBOR and the Company’s floating rate debt denominated in Reais is principally subject to fluctuations in the Brazilian long-term interest rate (TJLP), as fixed by the Brazilian Central Bank. The Company currently does not utilize derivative financial instruments to manage its exposure to fluctuations in interest rates.

5 Monetary Variation and Transaction Gains and Losses The U.S. dollar amounts for the periods presented have been remeasured or translated from the Brazilian Reais amounts in accordance with SFAS 52 - Foreign Currency Translation ("SFAS 52") as applicable to entities operating in non-hyperinflationary economies. During the first semester of 2001 the Real devalued from US$ 1: R$ 1.9554 at December 31, 2000 to US$ 1: R$ 2.3049 at June 30, 2001. During the first semester of 2002 the Real devalued from US$ 1: R$ 2.3204 at December 31, 2001 to US$ 1: R$ 2.8444 at June 30, 2002. The impact of these exchange rate changes on the Company’s monetary assets and liabilities net of monetary variation, was a loss of US$ 616 and of US$ 859 for the six-month periods ended June 30, 2002 and 2001, respectively.


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6 Income Taxes

Income taxes in Brazil comprise federal income tax and social contribution, which is an additional federal income tax. The statutorily enacted tax rates applicable for the periods presented are 25% for federal income tax and 9% for social contribution, respectively, which represent an aggregate rate of 34%. From February 1, 2000 to December 31, 2002 the social contribution rate is 9% and as from January 1, 2003 it will be 8%. Substantially all of the Company's taxable income is generated in Brazil and is therefore subject to the Brazilian statutory tax rate. The following reconciles the tax calculated based upon statutory tax rates to the income tax expense recorded in this consolidated financial information.


Income before income taxes and minority interest 2,315 3,326

Tax expense at statutory rates (787 ) (1,131 ) Adjustments to derive effective tax rate: Non-deductible postretirement health-benefits (40 ) (38 ) Tax benefit on interest on stockholders’ equity 210 Foreign income subject to different tax rates (15 ) 126 Income taxes paid on investments transferred among subsidiaries (67 ) Others (14 ) 90

Income tax expense per consolidated statement of income (923 ) (743 )


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7 Inventories

Inventories are comprised of the following:

June 30, December 31, 2002 2001

Products Oil products 875 1,088 Fuel Alcohol 112 186

987 1,274

Raw materials, mainly crude oil 1,044 583 Materials and supplies 493 542

2,524 2,399

8 Petroleum and Alcohol Account -

Receivable from Federal Government

The Petroleum and Alcohol Account - Receivable from Federal Government (the Petroleum and Alcohol Account) has been used to accumulate the impact of the Federal Government's regulation policies for the Brazilian oil and gas industry on PETROBRAS. The Petroleum and Alcohol Account accrues financial income on its outstanding balance at the Referential Rate Index - TR, which was 1.21% per month for the six-month period ended June 30, 2002 and 0.78% per month for the six-month period ended June 30, 2001.

As provided in the applicable regulations, the Petroleum and Alcohol Account is a legal,

valid and binding receivable from the Federal Government and collectibility of the receivable is not subject to future operations. The applicable regulations also provide that the Company has the right to offset amounts owed to the Federal Government relating to the regulation policies of the Brazilian oil and gas industry against the receivable. These increases and decreases in the Petroleum and Alcohol Account relating to the programs described in Note 2(i) to the December 31, 2001 consolidated financial statements, have been recognized in accordance with applicable law when the underlying transaction occurred.


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According to specific legislation applicable to the Petroleum and Alcohol Account until December 31, 2001, the Petroleum and Alcohol Account was realized through collection of the Specific Parcel Price-PPE generated by the sale of the majority of basic oil products (gasoline, diesel oil and LPG).

The net effect of these regulations on the income statement for the six-month periods ending

June 30, 2002 and 2001 is summarized below:

Six-month period ended June 30,

2002 2001

PPE collected (6 ) (325 )

Cost of sales - decrease in cost of sales due to commercialization of fuel alcohol (31 ) (33 )

Selling, general and administrative expenses - transport of oil products 1 (29 )

Financial income (financial income on the Petroleum and Alcohol Account) 1 9

The balance of the Petroleum and Alcohol Account at June 30, 2002 represents a credit of PETROBRAS against the Federal Government in the amount of US$ 295, an increase of US$ 214 when compared with December 31, 2001, principally as a result of a provision of US$ 259 referring to expenses in connection with Article 7 of Law No. 10.453, of May 13, 2002, which includes the Sugar Cane Cost Equalization Program in the Northeast Region as well as the receipt of credits and settlement of debits relating to events prior to December 31, 2001, as established by the Agência Nacional do Petróleo - ANP (the National Petroleum Agency).


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The following summarizes the changes in the Petroleum and Alcohol Account for the period ended June 30, 2002: Six-month period ended June 30, 2002

Opening balance 81 Advances (collections): PPE (6 )

Reimbursements to third parties: Subsidies paid to fuel alcohol producers 267 Costs reimbursed to distributors for transport of oil products (17 ) Total reimbursements to third parties 250

Reimbursements to PETROBRAS - Transport of oil products (1 ) Net result of fuel alcohol commercialization activities 31 Total reimbursements to PETROBRAS 30 Total reimbursements 280 Financial income 1 Translation loss (61 ) Ending balance 295

National Treasury Bonds Series H (NTN-H) On June 30, 1998, PETROBRAS and the Federal Government reached an agreement

whereby the Federal Government issued National Treasury Bonds - H (NTN-H) into a federal depositary on behalf of PETROBRAS to support the balance of the account. The value of the outstanding bonds at June 30, 2002 was US$ 57, at which time the balance of


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the Petroleum and Alcohol Account was US$ 295. The legal, valid, and binding nature of the account is not affected by any difference between the balance of the account and the value of the outstanding bonds. The Brazilian Government, upon PETROBRAS' consent, can effect the cancellation of all or a portion of the bonds’ outstanding balance. The NTN-H will mature on June 30, 2003 and PETROBRAS, actually, has no other rights on those bonds; withdrawal or transfers are not allowed. Certification by the Federal Government

The Federal Government certified the balance of the Petroleum and Alcohol Account as of

March 31, 1992. In September 1999 the Ministers of Finance, Agriculture and Internal Supply, and Mines and Energy created a Working Group to certify the balance of the Petroleum and Alcohol Account, relating to the period April 1, 1992 to June 30, 1998.

In December 2000, the Working Group concluded its certification process on a portion of the

activity for this period. The Working Group recommended and the Company agreed to reduce the balance of the Petroleum and Alcohol Account by US$ 106 during 2000 and US$ 405 during 2001.

In accordance with ANP Ruling No 50, effective April 19, 2002, the changes in the

Petroleum and Alcohol Account in the period July 1, 1998 to November 30, 2002, will be subject to audits by the National Petroleum Agency - ANP, and the results of the audit will be the basis for the settlement of the account with the Federal Government. This procedure will enable the settlement of accounts with the Federal Government, which will be formalized by means of a Debt Acknowledgement Agreement to be signed by December 31, 2002, in accordance to Decree No. 4,292 dated June 28, 2002.

Since the Company has implemented all recommendations made by the Working Group to

the accounting for the Petroleum and Alcohol Account for the period from July 1, 1998 to December 31, 2001, the Company does not expect significant adjustments from the ANP audit of this period.


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Liberation of the Brazilian fuel market In accordance with Law No. 9.478 (Oil Law) effective August 6, 1997 and subsequent

regulations, the Brazilian fuel market was entirely liberated on January 1, 2002. As part of this action: • the Brazilian government deregulated sales prices for oil and oil products, and, as a

consequence, realization prices and the PPE were eliminated; and • the Contribution for Intervention in the Economic Domain (Contribuição de Intervenção

do Domínio Econômico - CIDE) was established, a per-transaction payment to the Brazilian government required to be made by producers, blenders and importers upon sales and purchases of specified oil and fuel products at a set amount for different products based on volume. In the first six months of 2002 the Company’s gross sales were reduced by US$ 2,966 related to the CIDE.

Consequently, beginning in 2002 the Petroleum and Alcohol Account cannot be used to reimburse expenses related to the supply of oil products and fuel alcohol to PETROBRAS and third parties, incurred after December 31, 2001.

9 Financing

(a) Short-term debt

The Company's short-term borrowings are principally from commercial banks and include

import and export financing denominated in United States dollars, as follows:

June 30, December 31, 2002 2001

Import - Oil and equipment 486 352 Working capital 263 749

749 1,101


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(b) Long-term debt

• Composition June 30, December 31, 2002 2001

Foreign currency Financial institutions 1,835 1,861 Suppliers’ credits 803 1,377 Notes 2,275 1,733 Securitization of receivables 900 900 5,813 5,871 Local currency Debentures (related party) 229 276 BNDES (related party) 622 657 Others 38 44

889 977

6,702 6,848 Current portion of long-term debt (457 ) (940 ) 6,245 5,908 • Composition of foreign currency debt by currency June 30, December 31, 2002 2001 Currencies United States dollars 4,699 4,808 Japanese Yen 819 788 Sterling Pound 3 4 Euro (*) 292 271 5,813 5,871

(*) The currencies French Franc, Italian Lira and Austrian Schilling were replaced by the

Euro at February 28, 2002.


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• Maturities of the principal of long-term debt The long-term portion at June 30, 2002 becomes due in the following years: 2003 512 2004 606 2005 379 2006 779 2007 and thereafter 3,969 6,245 • Composition of long-term debt by annual interest rate Interest rates on long-term debt were as follows: June 30, December, 31 2002 2001 Foreign currency 6% or less 1,857 1,890 Over 6% to 8% 1,433 1,755 Over 8% to 10% 2,328 2,074 Over 10% to 15% 195 152 5,813 5,871 Local currency 6% or less 464 537 Over 6% to 8% 411 411 Over 8% to 10% 7 13 Over 10% to 15% 7 16 889 977 6,702 6,848


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On February 4, 2002, the Company, through its wholly - owned subsidiary, PIFCo, completed an offering of US$ 400, 9 1/8% Senior Notes due February 2007. On February 21, 2002, the Company also issued, through PIFCO, additional Senior Notes of US$ 100 with the same terms and maturities as the notes issued on February 4, 2002. The Company used these proceeds principally to finance the purchase of oil imports and to repay short-term indebtedness.

10 Project Financings

Since 1997, the Company has utilized project financing to provide capital for the continued development of the Company’s exploration and production and related projects. The Company’s arrangements related to these projects are considered leasing transactions. PETROBRAS’ responsibility under these contracts is to complete the development of the oil and gas fields, operate the fields, pay for all operating expenses related to the projects and remit a portion of the net proceeds generated from the fields to fund the special purpose companies’ debt and return on equity payments. At the end of each financing project, the Company will have the ability to purchase the leased or transferred assets from the special purpose company. Because the Company had commenced development or construction activities on each of these projects prior to completing the financing arrangement, and because of the Company’s continuing involvement in these projects, the Company continues to reflect the assets related to the projects as a component of property, plant and equipment and the related obligation as a component of project financing. The following summarizes the nature of the projects in progress at June 30, 2002 and December 31, 2001: June 30, December 31, 2002 2001 Marlim 531 713 Nova Marlim 802 933 Barracuda/Caratinga 1,096 773 Espadarte/Voador/Marimbá (EVM) 536 498 Cabiúnas 625 529 Albacora 211 303 Pargo, Carapeba, Garoupa and Cherne (PCGC) 63 84 3,864 3,833 Current portion of project financings (485 ) (680 ) 3,379 3,153


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At June 30, 2002, the long-term portion of project finance becomes due in the followings years: 2003 245 2004 503 2005 740 2006 652 2007 and thereafter 1,239 3,379 As of June 30, 2002 the amounts of commitments assumed arising from structured projects that will be reflected in future financial statements are presented as follows:

Cabiúnas 340 Barracuda/Caratinga 1,291 Espadarte/Voador/Marimbá (EVM) 91 Albacora 43 Pargo, Carapeba, Garoupa and Cherne (PCGC) 32 1,797

11 Capital Leases

The Company leases certain offshore platforms, which are accounted for as capital leases. At

June 30, 2002, these assets had a net book value of US$ 1,817 (US$ 1,886 at December 31, 2001).


F-26

The following is a schedule by year of the future minimum lease payments at June 30, 2002: 2002 229 2003 427 2004 349 2005 306 2006 261 Thereafter 1,114 Estimated future lease payments 2,686 Less amount representing interest at 6.187% to 11.0% (542 ) Less amount representing executory costs (12 ) Present value of minimum lease payments 2,132 Less current portion (341 ) Long-term portion 1,791

12 Pension Plan

In May 2001, the Board of Directors of PETROBRAS approved the creation of a mixed social security plan, for current and new employees, based on a defined contribution formula for programmable benefits and a defined benefit formula for risk benefits. The new plan, PETROBRAS VIDA, was also approved by the Coordination and Control Department of State Companies (DEST) and by the Supplementary Social Security Secretariat (SPC) in October 2001, and was ratified by PETROBRAS’ Board of Directors. The migration process of participants in the current plan to PETROBRAS VIDA is currently temporarily suspended as a result of a judicial ruling by the Regional Federal Court of the 1st Region handed down on January 10, 2002. Therefore the impact of migration to the new plan will only be computed and recognized in the accounts in accordance with the requirements of SFAS 88 - " Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits", when the issues being litigated have been resolved and the migration process finalized.


F-27

The determination of the expense and liability relating to the PETROBRAS pension plan involves the use of actuarial assumptions. These include estimates of future mortality, withdrawal, changes in compensation and discount rate to reflect the time value of money as well as the rate of return on plan assets. These assumptions are reviewed at least annually and may differ materially from actual results due to changing market and economic conditions, regulatory events, judicial rulings, higher or lower withdrawal rates or longer or shorter life, spans of participants. PETROBRAS and its actuarial consultants are currently reviewing the basis for estimating the assumed discount rate in light of the recent development of a secondary bond market in Brazil for high-grade long-term government securities. In the event the rate of return offered by these securities is deemed to be consistent with the requirements of SFAS No. 87, and subsequent interpretations, for measurement of defined benefit obligations, PETROBRAS may adopt different assumptions in the future, which may have a significant impact on the amount of pension liability and expense.

13 Stockholders’ equity The Company’s subscribed and fully paid-in capital at June 30, 2002 and December 31, 2001 consisted of 634,168,418 common shares and 451,935,669 preferred shares. At the Extraordinary Stockholders’ Meeting, held jointly with the Stockholders’ General Meeting on March 22, 2002, the increase of the Company’s capital stock from US$ 4,834 to US$ 6,220 was ratified. This was done by partial capitalization of the Undistributed Earnings Reserve, without issuing new shares. The dividends for the 2001 financial year approved at the Stockholders’ General Meeting held on March 22, 2002, in the amount of US$ 989 (net of the interim dividend distributed on August 22, 2001) were made available to shareholders on May 3, 2002, duly restated according to the variation in the SELIC rate (from January 1 through May 3, 2002).

On June 13, 2002, the Board of Directors approved the implementation of a global offering of marketable securities in the total amount of up to US$ 1.5 billion. This offering will consist in the issue of preferred shares of up to US$ 1 billion and debentures and other securities compulsorily convertible into preferred shares of up to US$ 500 million, for a 3-year period. Preferred shares may be represented by American Depositary Shares - ADSs.


F-28

The Company intends to place the global offering in the third quarter of 2002, and it will be subject to acceptable market terms and conditions as well as to procedures relating to filing and obtaining registrations from the proper authorities.

Additionally, PETROBRAS obtained approval from the Brazilian Securities Commission - CVM and the Brazilian Central Bank - BACEN to start the Depositary Receipt Program - DR on the Spanish Stock Exchange - LATIBEX as of July 9, 2002, in connection with the Company’s existing common and preferred shares.

14 Basic and Diluted Earnings per Share

Basic and diluted earnings per share amounts have been calculated as follows: Six-month period ended June 30, 2002 2001 Net income for the period 1,486 2,690 Less priority preferred share dividends (95 ) (118 ) Less common shares dividends, up to the priority preferred shares dividends on a per-share basis (134 ) (165 ) Remaining net income to be equally allocated to common and preferred shares 1,257 2,407 Weighted average number of shares outstanding Common/ADS 634,168,418 634,168,418 Preferred/ADS 451,935,669 451,935,669 Basic and diluted earnings per share Common and Preferred 1.37 2.48


F-29

15 Segment Information The following presents the Company's assets by segment: Six-month period ended June 30, 2002 Exploration International and Gas and (see separate

Production Supply Energy disclosure) Distribution Corporate Eliminations Total Current assets 1,511 4,207 648 561 993 4,538 (902 ) 11,556

Cash and cash equivalents 391 49 170 34 3,662 4,306 Other current assets 1,511 3,816 599 391 959 876 (902 ) 7,250 Investments in non-consolidated companies and other investments 1 208 57 15 17 84 3 385 Property, plant and equipment, net 11,854 3,449 1,339 1,007 298 228 (2 ) 18,173 Other assets 428 204 756 60 155 2,166 (697 ) 3,072 Petroleum and Alcohol Account 295 295 Government securities 2 219 221 Other assets 428 202 756 60 155 1,652 (697 ) 2,556 Total assets 13,794 8,068 2,800 1,643 1,463 7,016 (1,598 ) 33,186


F-30

Six-month period ended June 30, 2002 International Exploration and Gas and Production Supply Energy Distribution Corporate Eliminations Total Current assets 191 126 2 104 207 (69 ) 561 Cash and cash equivalents 38 24 30 78 170 Other current assets 153 102 2 74 129 (69 ) 391 Investments in non-consolidated companies and other investments 9 3 1 2 15 Property, plant and equipment, net 802 156 10 37 2 1,007 Other assets 44 4 2 2 2 6 60 Total assets 1,046 286 17 144 213 (63 ) 1,643


F-31

Year ended December 31, 2001 Exploration International and Gas and (see separate

Production Supply Energy disclosure) Distribution Corporate Eliminations Total Current assets 1,529 4,125 604 566 1,002 7,425 (925 ) 14,326

Cash and cash equivalents 553 60 145 30 6,572 7,360 Other current assets 1,529 3,572 544 421 972 853 (925 ) 6,966 Investments in non-consolidated companies and other investments 5 281 52 36 22 103 499 Property, plant and equipment, net 12,133 4,026 1,373 1,080 309 258 19,179 Other assets 325 250 637 33 192 2,099 (676 ) 2,860 Petroleum and Alcohol Account 81 81 Government securities 3 209 212 Other assets 325 247 637 33 192 1,809 (676 ) 2,567 Total assets 13,992 8,682 2,666 1,715 1,525 9,885 (1,601 ) 36,864


F-32

Year ended December 31, 2001 International Exploration and Gas and Production Supply Energy Distribution Corporate Eliminations Total Current assets 215 170 6 124 84 (33 ) 566 Cash and cash equivalents 72 30 11 32 145 Other current assets 143 140 6 113 52 (33 ) 421 Investments in non-consolidated companies and other investments 5 25 3 3 36 Property, plant and equipment, net 766 217 3 93 1 1.080 Other assets 11 11 1 8 2 33 Total assets 997 423 13 228 87 (33 ) 1,715


F-33

Revenues and net income by segment are presented as follows: Six-month period ended June 30, 2002 Exploration International and Gas and (see separate Production Supply Energy disclosure) Distribution Corporate Eliminations Total Net operating revenues to third parties 914 5,762 347 447 3,273 10,743 Intersegment net operating revenues 4,900 2,770 89 38 63 (7,860 ) Net operating revenues 5,814 8,532 436 485 3,336 (7,860 ) 10,743 Cost of sales (2,189 ) (7,108 ) (327 ) (373 ) (2,976 ) 7,517 (5,456 ) Depreciation, depletion and amortization (601 ) (113 ) (32 ) (49 ) (41 ) (5 ) (841 ) Exploration, including exploratory dry holes (186 ) (23 ) (209 ) Selling, general and administrative expenses (38 ) (404 ) (26 ) (43 ) (229 ) (203 ) (943 ) Research and development expenses (33 ) (21 ) (2 ) (15 ) (71 ) Costs and expenses (3,047 ) (7,646 ) (387 ) (488 ) (3,246 ) (223 ) 7,517 (7,520 ) Equity in results of non-consolidated companies (1 ) 2 (43 ) (42 ) Debt expenses, net (234 ) 1 (183 ) 25 8 (6 ) (389 ) Employee benefit expense (262 ) (262 ) Other expenses, net (63 ) 9 (64 ) 24 (8 ) (127 ) 14 (215 ) Income before income taxes and minority interest 2,470 895 (196 ) 3 90 (618 ) (329 ) 2,315 Income tax benefits (expense) (839 ) (301 ) (35 ) (32 ) (37 ) 202 119 (923 ) Minority interest (6 ) 152 (15 ) (37 ) 94 Net income (loss) 1,631 588 (79 ) (29 ) 38 (453 ) (210 ) 1,486


F-34

Six-month period ended June 30, 2002 International Exploration and Gas and Production Supply Energy Distribution Corporate Eliminations Total

Net operating revenues to third parties 38 205 15 189 447 Intersegment net operating revenues 90 227 (279 ) 38 Net operating revenues 128 432 15 189 (279 ) 485 Cost of sales (33 ) (397 ) (12 ) (210 ) 279 (373 ) Depreciation, depletion and amortization (40 ) (6 ) (3 ) (49 ) Exploration, including exploratory dry holes (23 ) (23 ) Selling, general and administrative expenses (15 ) (4 ) (11 ) (13 ) (43 ) Costs and expenses (111 ) (407 ) (12 ) (224 ) (13 ) 279 (488 ) Equity in results of non-consolidated companies (43 ) (43 ) Debt expenses, net 12 (7 ) (3 ) 23 25 Other expenses, net 8 3 (2 ) 15 24 Income before income taxes and minority interest 37 21 (37 ) (18 ) 3 Income tax benefits (expense) (20 ) (8 ) 13 (17 ) (32 ) Minority interest (1 ) 1 Net income (loss) 16 14 (24 ) (35 ) (29 )


F-35

Six-month period ended June 30, 2001 Exploration International and Gas and (see separate Production Supply Energy disclosure) Distribution Corporate Eliminations Total Net operating revenues to third parties 153 8,702 308 372 3,449 12,984 Intersegment net operating revenues 5,392 2,672 75 39 46 (8,224 ) Net operating revenues 5,545 11,374 383 411 3,495 (8,224 ) 12,984 Cost of sales (2,085 ) (8,941 ) (281 ) (237 ) (3,195 ) 8,289 (6,450 ) Depreciation, depletion and amortization (678 ) (222 ) (35 ) (49 ) (15 ) (5 ) (1,004 ) Exploration, including exploratory dry holes (138 ) (20 ) (158 ) Selling, general and administrative expenses (47 ) (381 ) (40 ) (25 ) (198 ) (216 ) (907 ) Research and development expenses (29 ) (21 ) (1 ) (13 ) (64 ) Costs and expenses (2,977 ) (9,565 ) (357 ) (331 ) (3,408 ) (234 ) 8,289 (8,583 ) Equity in results of non-consolidated companies 8 3 (1 ) 10 Debt expenses, net (268 ) (79 ) (277 ) 2 4 138 (480 ) Employee benefit expense (172 ) (172 ) Other expenses, net (88 ) 31 (3 ) (9 ) (7 ) (357 ) (433 ) Income before income taxes and minority interest 2,212 1,769 (254 ) 76 83 (625 ) 65 3,326 Income tax benefits (expense) (603 ) (447 ) (16 ) (23 ) (28 ) 379 (5 ) (743 ) Minority interest 124 (2 ) (15 ) 107 Net income (loss) 1,609 1,322 (146 ) 51 40 (246 ) 60 2,690


F-36

Six-month period ended June 30, 2001 International Exploration and Gas and Production Supply Energy Distribution Corporate Eliminations Total

Net operating revenues to third parties 108 264 372 Intersegment net operating revenues 94 39 (94 ) 39 Net operating revenues 202 303 (94 ) 411 Cost of sales (45 ) (287 ) 95 (237 ) Depreciation, depletion and amortization (46 ) (3 ) (49 ) Exploration, including exploratory dry holes (20 ) (20 ) Selling, general and administrative expenses (16 ) (5 ) (4 ) (25 ) Costs and expenses (127 ) (295 ) (4 ) 95 (331 ) Equity in results of non-consolidated companies 3 3 Debt expenses, net 4 (1 ) (1 ) 2 Other expenses, net 7 (3 ) (13 ) (9 ) (4 ) Income before income taxes and minority interest 86 7 (18 ) 1 76 Income tax benefits (expense) (24 ) 1 (23 ) Minority interest (2 ) (2 ) Net income (loss) 62 5 (17 ) 1 51


F-37

Capital expenditures incurred by segment for the following six-month periods were as follows:

June 30, 2002 2001

Exploration and production 1,486 1,401 Supply 362 247 Gas and energy 256 32 International Exploration and production 115 156 Supply 4 1 Gas and energy 2 Corporate 1 Distribution 95 31 Corporate 58 84 2,379 1,952

16 Commitments and Contingencies

PETROBRAS is subject to a number of commitments and contingencies arising in the

normal course of its business. Additionally, the operations and earnings of the Company have been, and may be in the future, affected from time to time in varying degrees by political developments and laws and regulations, such as the Federal Government's continuing role as the controlling shareholder of the Company, the status of the Brazilian economy, forced divestiture of assets, tax increases and retroactive tax claims, and environmental regulations. Both the likelihood of such occurrences and their overall effect upon the Company are not predictable.


F-38

(a) Litigation

The Company is a defendant in numerous legal actions arising in the normal course of its business. Based on the advice of its internal legal counsel and management’s best judgment, the Company has recorded accruals in amounts sufficient to provide for losses that are considered probable and reasonably estimable. The following presents these accruals by the nature of the claim:

June 30, December 31, 2002 2001 Labor claims 8 9 Tax claims 7 10 Civil claims 55 81 70 100

On May 28, 1981, Kallium Mineração S.A. brought an action against Petromisa, a former subsidiary of PETROBRAS, in the Federal Court of the State of Rio de Janeiro alleging damages of approximately US$ 450 relating to the rescission of a contract to develop a potassium salt mine. On August 10, 1999, the trial judge dismissed most of the plaintiff's claims, and ordered PETROBRAS to indemnify the plaintiff only with respect to the preliminary research expenses it had incurred. Kallium Mineração S.A. and PETROBRAS have appealed the decision. Management considers the risk of loss with respect to this lawsuit to be possible.

As of June 30, 2002 and December 31, 2001, in accordance with Brazilian law, the Company had paid US$ 295 and US$ 337, respectively, into federal depositories to provide collateral for these and other claims until they are settled. These amounts are reflected in the balance sheet as restricted deposits for legal proceedings and guarantees.

(b) Environmental matters The Company is subject to various environmental laws and regulations. These laws regulate

the discharge of oil, gas or other materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of such materials at various sites.


F-39

The Federation of Fishermen of the State of Rio de Janeiro (FEPERJ) filed a lawsuit against PETROBRAS claiming damages of approximately US$224 due to the release of crude oil into the Guanabara Bay caused by a rupture of a pipeline that connects one of our terminals to a refinery in the Bay. On February 21, 2002, the Judge hearing this matter found that damages should be effectively proved and determined in a proceeding of liquidation of the amounts involved in the final judgment (liquidação por arbitramento). Both parties appealed the decision.

17 Subsequent events

(a) Preliminary agreement for the acquisition of the stock control of Perez Companc S.A. On July 22, 2002, PETROBRAS signed a preliminary agreement to purchase a controlling equity interest of 58.6% of Perez Companc S.A., an integrated energy company headquartered in Argentina. The amount involved in the transaction will be settled in the form of a combined payment in cash, amounting to US$ 755, and US$ 371 in debt securities to be issued by PETROBRAS. The securities will have an annual coupon of 6%, due in 7 years, with features of convertibility into preferred shares of PETROBRAS in the form of American Depositary Shares. Additionally PETROBRAS negotiated a preliminary agreement to acquire 47.1% of the capital of Petrolera Perez Companc S.A. for US$ 56.7 payable in cash. Completion of this transaction is contingent upon the approval of a debt restructuring plan by Perez Companc, the due diligence process and the final approval from the Board of Directors of PETROBRAS and the regulatory authorities in Argentina and Brazil.

(b) Shelf Registration On July 31, 2002, PETROBRAS filed with the Securities and Exchange Commission - SEC a shelf registration for the issue of debt and/or equity securities up to US$ 8,000 within the next 24 months. This amount is in line with the Company's investments for the forthcoming years and the limits of financial leverage established in the Company's strategic planning.


F-40

(c) Lawsuit in the United States

On July 31, 2002, PETROBRAS received a favorable judgment for a lawsuit filed in the American courts by the insurance companies, United States Fidelity & Guaranty Company and American Home Assurance Company. These companies had attempted to obtain, since 1997, a legal judgment in the United States to exempt them from the obligation to pay the sum insured for the construction of platforms P-19 and P-31. The judgment recognized the Company’s right to receive US$ 207 from the insurers, comprising the sum insured, accumulated interest since the payment due date and the payment of attorney’s fees. This decision, however, is appealable by the insurance companies.

(d) Definitive agreement for the acquisition of the stock control of Petrolera Santa Fe

On August 13, 2002, PETROBRAS executed a definitive agreement to acquire full control of Petrolera Santa Fe, the Argentine subsidiary of Devon Energy Corporation, for US$ 89.5 PETROBRAS estimates that the operation will be concluded during the last quarter of 2002 upon of approval by the Argentine regulatory authorities.

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Documents

Petróleo Brasileiro S.A. - PETROBRAS and Subsidiaries · Petróleo Brasileiro S.A. - PETROBRAS and Subsidiaries Consolidated Balance Sheets Expressed in Millions of United States