The Rising Influence of Rising Affluence

[DewDiligence]

Following is the section of PBR’s 2010 20-F pertaining to reserves. I would be interested in knowing which sections you consider of particular interest for investors:

http://sec.gov/Archives/edgar/data/1119639/000129281411001552/pbraform20f2010.htm#_Toc293579253

Production of crude oil and natural gas in Brazil is divided into onshore and offshore production, comprising 11% and 89% of total production in Brazil, respectively. The Campos Basin is one of Brazil’s main and most prolific oil and gas offshore basins, with over 59 hydrocarbon fields discovered, eight large oil fields and a total area of approximately 115,000 km2 (28.4 million acres). In 2010, Campos Basin produced an average 1,676.9 mbbl/d of oil and 13.6 mmm3/d (513.0 mmcf/d) of associated natural gas during 2010, comprising 81.5% of our total production from Brazil. We also conduct limited oil shale mining operations in São Mateus do Sul, in the Paraná Basin of Brazil, and we use oil shale from these deposits to produce synthetic oil and gas.

On December 31, 2010, our estimated proved reserves of crude oil and natural gas in Brazil totaled 12.14 billion barrels of oil equivalent, including: 10.38 billion barrels of crude oil and natural gas liquids and 279.67 bnm3 (10.55 tcf) of natural gas. As of December 31, 2010, our domestic proved developed crude oil reserves represented 67% of our total domestic proved developed and undeveloped crude oil reserves. Our domestic proved developed natural gas reserves represented 66% of our total domestic proved developed and undeveloped natural gas reserves. Total domestic proved crude oil reserves increased at an average annual rate of 4% in the last five years. Natural gas proved reserves increased at an average annual rate of 4% over the same period.

In 2010, we added 1,372 mmboe of crude oil and natural gas to our domestic proved reserves, mainly due to discoveries in the pre-salt region of the Santos Basin (59% of the total), technical and economic revisions to previous estimates (31% of the total) and, to a lesser extent, increased recovery from existing fields and other new discoveries in exploratory blocks. After production of 797 mmboe in Brazil for the year, these additions to our reserves base in 2010 allowed us to grow our proved reserves in Brazil by 5%.

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

Internal Controls over Proved Reserves

The reserves estimation process begins with an initial evaluation of our assets by geophysicists, geologists and engineers. Corporate Reserves Coordinators (Coordenadores de Reservas Corporativo, or CRCs) safeguard the integrity and objectivity of our reserves estimates by supervising and providing technical support to Regional Reserves Coordinators (Coordenadores de Reservas Regionais, or CRRs) who are responsible for preparing the reserves estimates. Our CRRs and CRCs have degrees in geophysics, geology, petroleum engineering and accounting and are trained internally and abroad in international reserves estimates seminars. CRCs are responsible for compliance with Securities and Exchange Commission rules and regulations, consolidating and auditing the reserves estimation process. The technical person primarily responsible for overseeing the preparation of our domestic reserves is a member of the SPE, with 21 years of experience in the field and has been with Petrobras for 27 years. The technical person primarily responsible for overseeing the preparation of our international reserves has four years of experience in the field, a doctorate in reservoir engineering and has been with Petrobras for 31 years. Our reserves estimates are presented to our senior management and submitted to the board of directors for final approval.

D&M reviewed and certified 94.9% of our domestic proved crude oil, condensate and natural gas reserve estimates as of December 31, 2010. Outside of Brazil, D&M also reviewed and certified 91.2% of our estimates of international proved oil, condensate and natural gas reserves in fields where we are the operator as of December 31, 2010. The estimates for the certification were performed in accordance with Rule 4-10 of Regulation S-X of the SEC. For further information on our proved reserves, see “Supplementary Information on Oil and Gas Exploration and Production” beginning on page F-129.

Changes in Proved Reserves

We subtracted a net total of 447.9 mmboe from our company-wide (consolidated and non-consolidated entities) proved undeveloped reserves at year-end 2010 compared to year-end 2009. Thus, we had a total of 4,354.27 mmboe of proved undeveloped reserves company-wide at December 31, 2010, compared to 4,802.1 mmboe at December 31, 2009.

Proved undeveloped reserves in Brazil decreased by 500.1 mmboe, while outside of Brazil proved undeveloped reserves increased by 52.2 mmboe, resulting in a net reduction of 447.9 mmboe company-wide. The primary factor responsible for the net reduction in our proved undeveloped reserves in Brazil in 2010 compared to 2009 was the conversion of proved undeveloped reserves to proved developed reserves. We converted a net total of 1,349.1 mmboe of our proved undeveloped reserves to proved developed reserves in Brazil in 2010, mainly through the start-up of production from the P-57, FPSO Capixaba and FPSO Cidade de Santos platforms in the Campos and Santos basins. The volumes we converted from proved undeveloped to proved developed reserves in Brazil exceeded the volumes of proved undeveloped reserves added to our domestic reserves in 2010 as a result of new discoveries in the pre-salt regions of the Santos Basin and technical revisions in the Campos Basin consisting of historical adjustments and increased production from pilot projects. The 52.2 mmboe net addition of proved undeveloped reserves outside of Brazil was mainly due to newly estimated reserves in Peru. All reserves volumes described above are “net” to the extent that they only include Petrobras’ proportional participation in reserve volumes and exclude reserves attributed to our partners.

In 2010, we invested a total of U.S.$9.72 billion to convert proved undeveloped reserves into proved developed reserves, of which approximately 92.8% (U.S.$9.02 billion) was invested in Brazil. We converted a total of 1,373.0 mmboe of proved undeveloped reserves to proved developed reserves in 2010, approximately 98.3% (1,349.1 mmboe) of which were Brazilian reserves. In recent years, we have developed projects and increased investments to convert our proved undeveloped reserves into proved developed reserves.

We had a total of 4,354.27 mmboe of proved undeveloped reserves at year-end 2010, approximately 7.4% (323.52 mmboe) of which have remained undeveloped for five years or more as a result of several factors affecting development and production, including the inherent complexity of ultra-deepwater developments projects, particularly in Brazil, and constraints in the capacity of our existing infrastructure. A portion of the 323.52 mmboe of our proved undeveloped reserves that have remained undeveloped for five years or more consist of heavy crude oil located in the Parque das Baleias (Whales Park) area of the Campos Basin offshore Brazil. We originally disclosed these reserves as proved undeveloped reserves between 2003 and 2004 after completing a development plan for the Parque das Baleias region. However, due to the discovery in 2007 of more valuable light crude oil in the same region, we deliberately postponed production from these proved undeveloped reserves until we could allocate the necessary ultra-deep water infrastructure and production resources to develop both our existing proved undeveloped reserves of heavy crude oil and our recently discovered pre-salt light crude oil simultaneously. We initiated an extended well test in the pre-salt reservoirs of the Parque das Baleias region in 2008, and in 2010 we started production through FPSO Capixaba. As a result, we have reclassified a portion of the proved undeveloped reserves in the Parque das Baleias region that have remained undeveloped for five years as proved developed reserves at year-end 2010. The remaining portion of our proved undeveloped reserves that have remained undeveloped for five years or more consist of reserves in shallow water fields in the Santos Basin, for which we have invested the necessary infrastructure, including platforms and wells, to be able to begin production in the first half of 2011.

T.i.a. Dew