Item 4.  Information on the Company

History and Development

Petróleo Brasileiro S.A.—Petrobras was incorporated in 1953 to conduct the Brazilian federal government’s hydrocarbon activities.  We began operations in 1954 and since then have been carrying out crude oil and natural gas production and refining activities in Brazil on behalf of the government. As of December 31, 2013, the Brazilian federal government owned 28.67% of our outstanding capital stock and 50.26% of our voting shares.  Our common and preferred shares have been traded on the BM&FBOVESPA since 1968 and on the NYSE since 2000.  

As part of a comprehensive reform of the oil and gas regulatory system, the Brazilian Congress amended the Brazilian Constitution in 1995 to authorize the Brazilian federal government to contract with any state or privately-owned company to carry out upstream, oil refining, cross-border commercialization and transportation activities in Brazil of oil, natural gas and their respective products.  On August 6, 1997, the Brazilian government enacted Law No. 9,478/1997, which established a concession-based regulatory framework, ended our exclusive right to carry out oil and gas activities, and allowed competition in all aspects of the oil and gas industry in Brazil.  The law also created an independent regulatory agency, the ANP, to regulate the oil, natural gas and renewable fuel industry in Brazil and to create a competitive environment in the oil and gas sector.  See “Regulation of the Oil and Gas Industry in Brazil—Price Regulation .”   

In 2010, new laws were enacted to regulate exploration and production activities in pre-salt areas not subject to existing concessions.  Pursuant to this new legislation, we entered into an agreement with the Brazilian government on September 3, 2010, the Assignment Agreement, under which the government assigned to us the right to activities for the exploration and production of oil, natural gas and other fluid hydrocarbons in specified pre-salt areas. On December 2, 2013, we executed our first agreement with the Brazilian government under a production sharing regime. See Item 10. “Material Contracts—Assignment Agreement” and Item 10. “Material Contracts – Production Sharing Agreement.” 

We operate through subsidiaries, joint ventures and associated companies established in Brazil and many other countries.  Our principal executive office is located at Avenida República do Chile 65, 20031-912 Rio de Janeiro, RJ, Brazil and our telephone number is (55-21) 3224-4477.

Overview of the Group

We are an integrated oil and gas company that is the largest corporation in Brazil and one of the largest companies in Latin America in terms of revenues.  As a result of our legacy as Brazil’s former sole supplier of crude oil and oil products and our deep and continuous commitment to find and develop oil fields in Brazil, our operations account for the majority of Brazil’s oil and gas production, and we hold a large base of proved reserves and a fully developed operational infrastructure.  In 2013, our average domestic daily oil production was 1,931.4 mbbl/d, an estimated 90.9% of Brazil’s total oil production.  Over 67.1% (8,419.4 mmboe) of our domestic proved reserves are in large, contiguous and highly productive fields in the offshore Campos Basin, which allows us to optimize our infrastructure and limit our costs of exploration, development and production.  In 45 years of developing Brazil’s offshore basins, we have developed special expertise in deepwater exploration and production, which we exploit both in Brazil and in other offshore oil areas. 

As of December 31, 2013, we had proved developed oil and gas reserves of 7,605.8 mmboe and proved undeveloped reserves of 4,934.5 mmboe in Brazil. The exploration and development of this large reserve base and the new pre-salt areas granted to us by the Brazilian federal government under the Assignment Agreement has demanded, and will continue to demand, significant investments and the rapid growth of our operations.  To support this growth we have ordered the construction of  21 new FPSOs and planned 14 more for the period between 2014 and 2020, and are also making necessary investments in subsea equipment and infrastructure.  

We operate substantially all of the refining capacity in Brazil.  Most of our refineries are located in southeastern Brazil, within the country’s most populated and industrialized markets and adjacent to the source of most of our crude oil in the Campos Basin.  Our domestic crude distillation capacity of 2,102 mbbl/d and domestic refining throughput of 2,074 mbbl/d are currently below the levels required to meet strong and increasing domestic demand for transportation fuels, particularly gasoline, diesel and jet fuel.  We are currently building two new refining facilities, but the resulting increase in our refining capacity may not fully address domestic demand.  Until there is sufficient refinery capacity to meet such demand, we will continue to import oil and oil products and our planning to build additional refineries.  We are also involved in the production of petrochemicals.  We distribute oil products through our own retail network and to wholesalers.

We participate in most aspects of the Brazilian natural gas market.  We expect the percentage of natural gas in Brazil’s energy matrix to grow in the future as a result of the expansion of Brazil’s gas transportation infrastructure that was largely completed in 2011 and as we expand our production of both associated and non-associated gas, mainly from offshore fields in the Campos, Espírito Santo and Santos Basins.  We import natural gas from Bolivia and use LNG terminals to meet domestic demand and diversify our supply.  We also participate in the domestic power market primarily through our investments in gas-fired thermoelectric power plants.  In addition, we participate in the fertilizer business, which is another important natural gas market. 

Outside of Brazil, we operate in 17 countries.  In South America, our operations extend from exploration and production to refining, marketing, retail services, natural gas and electricity power plants.  In North America, we produce oil and gas and have refining operations in the United States.  In Africa, we produce oil in Angola and Nigeria and have oil and gas exploration in other countries while in Asia we have refining operations in Japan. 

Comprehensive information and tables on reserves and production is presented at the end of Item 4. See “—Additional Reserves and Production Information.”

Our activities are organized into six business segments: 

·          Exploration and Production : crude oil, NGL and natural gas exploration, development and production in Brazil;

·          Refining, Transportation and Marketing : includes refining, logistics, transportation, trading operations, oil products and crude oil exports and imports and petrochemical investments in Brazil;

·          Distribution : distribution of oil products, ethanol and vehicle natural gas to wholesalers and through our Petrobras Distribuidora S.A. (“Petrobras Distribuidora”) retail network in Brazil;

·          Gas and Power : transportation and trading of natural gas and LNG, produced in or imported into Brazil, as well as generation and trading of electric power, and the fertilizer business;

·          Biofuel : production of biodiesel and its co-products and ethanol-related activities such as equity investments, production and trading of ethanol, sugar and the excess electricity generated from sugarcane bagasse; and

·          International : exploration and production of oil and gas, refining, transportation and marketing, distribution and gas and power operations outside of Brazil.

Additionally, we have a Corporate segment that has activities that are not attributed to the other segments, notably those related to corporate financial management, corporate overhead and other expenses, including actuarial expenses related to the pension and medical benefits for retired employees and their dependents.

The following table sets forth key information for each business segment in 2013:

Oil and gas exploration and production activities in Brazil are the largest component of our portfolio.  We have gradually increased production over the past four decades, from 164 mbbl/d of crude oil, condensate and NGLs in Brazil in 1970 to 1,931.4 mbbl/d in 2013.  We aim to grow oil and gas reserves and production sustainably and be recognized for excellence in exploration and production operations.

The primary focus of our exploration and production segment is to:

·          Continue to explore and develop the Campos Basin, leveraging the current infrastructure to drill in deeper horizons in existing concessions, including pre-salt reservoirs;

·          Explore and develop Brazil’s most promising offshore basin, Santos (gas and light oil), with a particular focus on pre-salt development;

·          Employ new technologies for secondary recovery and increase production efficiency of our older offshore fields and production systems, as well as sustain and increase production from onshore and shallow fields through drilling and enhanced recovery operations;

·          Explore light oil and natural gas in new frontiers, including Brazil’s equatorial and eastern margins; and

·          Develop associated and non-associated gas resources in the Santos Basin and elsewhere (including continued reductions in gas flaring) to meet Brazil’s growing demand for gas and to increase the contribution of Brazilian gas production as a proportion of total domestic gas supply.

Brazil’s richest oil fields are located offshore, most of them in deep waters.  We have been active in these waters since 1971, when we started exploration in the Campos Basin, and we have become globally recognized as innovators in the technology required to explore and produce hydrocarbons in deep and ultra-deep water.  According to production data from PFC Energy, we operate more production (on a boe basis) from fields in deep and ultra-deep water than any other company.  We focus much of our exploration effort on deepwater drilling, where the discoveries are substantially larger and our technology and expertise create a competitive advantage.

Historically, our offshore exploration and production activities were focused on post-salt reservoirs, primarily in the Campos Basin.  In recent years, we have made important discoveries in pre-salt reservoirs located in a region of approximately 149,000 km ² (36.8 million acres) stretching from the Campos to the Santos Basins, also known as the pre-salt province. Our existing contracts in this area cover 22.2% (approximately 33,100 km ² or 8.2 million acres) of the pre-salt areas, including the acreage assigned to us under the Concession Contracts and the Assignment Agreement.  We are also part of the consortium that was granted a concession covering approximately 1,547.8 km ² or 0.4 million acres of the Libra field under the Production Sharing Agreement.

In the southern part of the pre-salt province, within the Santos Basin, where the salt layer is thick and the hydrocarbons have been more perfectly preserved, we have made several particularly promising discoveries since 2006, including those made in Blocks BM-S-11 (Lula, formerly Tupi), BM-S-9 (Lapa and Sapinhoá, formerly Carioca and Guará), in the Assignment Agreement area (Búzios and Sul de Lula, formerly Franco and Sul de Tupi) and in Libra, one of the most important discoveries made in the pre-salt area.  In the northern part of the province, within the Campos Basin, we made significant discoveries in 2008 and early 2010 in the area known as Parque das Baleias and in the Barracuda, Albacora, Marlim and Caratinga fields. We are committing substantial resources to develop these pre-salt discoveries, which are located in deep and ultra-deep waters and reservoirs at total depths of up to 7,000 meters (22,965 feet).

As of March 31, 2014, we had 147 exploration agreements (covering 96 exploratory blocks and 51 evaluation plans currently underway), corresponding to a gross exploratory acreage of 103,597 km ² (25.6 million acres), or a net exploratory acreage of 54,210 km ² (13.4 million acres).  We are exclusively responsible for conducting the exploration activities in 38 exploratory blocks and in 17 evaluation plans currently underway.  As of March 31, 2014, we had exploration partnerships with 24 foreign and domestic companies.  We conduct exploration activities under 62 of our 92 partnership agreements. We hold interests ranging from 20% to 100% in the exploration areas under concession or assigned to us.

In 2013, we invested a total of U.S.$7.8 billion in exploration activities in Brazil.  We drilled a total of 76 exploratory wells in 2013, of which 31 were offshore and 45 onshore. Our 2014-2018 Plan, which was released on February 25, 2014, foresees capital expenditures and investments in exploration and production activities in Brazil of U.S.$153.9 billion from 2014 to 2018 (not including investments by our partners).

Throughout our history, we have been successful in finding and developing significant oil reservoirs offshore, which has allowed us to achieve economies of scale by spreading the total costs of exploration, development and production over a large base. In 2013, offshore production accounted for 89% of our production and deep water production accounted for 77% of our production in Brazil.  In 2013, we started production from 34 wells.

During 2013, our oil and gas production from Brazil averaged 2,165.7 mboe/d, of which 89.2% was oil and 10.8% was natural gas.  On December 31, 2013, our estimated net proved crude oil and natural gas reserves in Brazil were 12.5 billion boe, of which 85% was crude oil and 15% was natural gas.  Brazil provided 91% of our worldwide production in 2013 and accounted for 96% of our worldwide reserves at December 31, 2013 on a barrels of oil equivalent basis.  Over the last five years, approximately 90% of our total Brazilian production has been oil.

In 2013, our production of crude oil, condensate and NGLs in Brazil averaged 1,931.4 mbbl/d, a 2.5% decline in comparison with the previous year. This production decrease is mainly attributable to:

·          production delays caused by the need to rearrange the layout of certain subsea equipment for the P-63 platform (which operates in the Papa Terra field);

·          delays in the delivery and installation of BSRs and the first steel catenary risers to be connected to the FPSOs Cidade de São Paulo and Cidade de Paraty, which delayed the production ramp-up from the Sapinhoá and Lula NE fields;

·          delays in the delivery and first oil of some of the production units that began production in 2013; and

·          the lack of sufficient PLSVs available to install the flowlines that connect subsea wells to our new production systems.

With the new production systems that came online in 2013 and the production systems expected to come online in 2014, we expect to achieve production growth of between 6.5% and 8.5% in 2014.

As of December 31, 2013 and December 31, 2012, our reserves and production in Brazil are summarized in the tables below. 

(1) Includes synthetic oil and gas.

For the twenty-second consecutive year, we achieved a reserve replacement ratio higher than 100%, which means that we added more volume to our reserves than we produced throughout the year.

We have implemented a variety of programs designed to increase oil recovery from existing fields, reduce natural declines from producing fields and also reduce operational costs. During 2013, we continued to implement important programs: PROEF, which aims to increase operational efficiency within the Campos Basin, returning production efficiency to historical levels, and PROCOP to optimize operating costs and productivity. Additionally, in 2013 we implemented PRC Poço and PRC-Sub Programs, both focused on production growth and reduction of costs and time required to implement projects.

Our exploration and production activities outside Brazil are included in our International business segment.  See “—International.”

We have historically conducted exploration, development and production activities in Brazil through concession agreements, which we have obtained through participation in bid rounds conducted by the ANP.  Some of our existing concessions were granted by the ANP without an auction in 1998, as provided by Law No. 9,478/1997.  These are known as the “Round Zero” concession agreements.  Since that time, we have participated in all of the auction rounds conducted by ANP, including the first production-sharing regime auction round held on October 21, 2013 . Currently, we operate under three different exploration and production regimes :    

·                       Concession Agreements: ANP grants, from time to time through public auctions open to qualified operators, rights to explore and produce crude oil and gas reserves in Brazil under concession agreements for the blocks offered in each auction. We have participated in all of the concession auction rounds conducted by ANP, including the 11th Round, held on May 14, 2013, in which we acquired 34 blocks located in the Foz do Amazonas, Espírito Santo and Barreirinhas Basins and the 12 ^th Round, held on November 28, 2013, in which we acquired, directly and in partnership with other companies, 49 blocks located in the Acre, Paraná, Recôncavo and Sergipe-Alagoas Basins. These concession agreements have in general a term of 27 years or more following the declaration of commerciality, with the possibility of extension by ANP.

·                       Assignment Agreement ( Contrato de Cessão Onerosa ):     On September 3, 2010 we entered into an agreement with the Brazilian federal government under which we were assigned exclusive rights to explore and produce oil, natural gas and other fluid hydrocarbons in specified pre-salt areas located in the Santos Basin. The agreement is subject to maximum production of five billion boe over 40 years (extendable for five additional years), of which we have already declared commerciality for 3.18 billion boe on two of the areas (Búzios and Sul de Lula).

·                       Production Sharing Agreement  ( Contrato de Partilha de Produção ):     Under this regime, exploration and production licenses are awarded through a public auction to the consortium that offers the highest share of profit oil to the government. At a public auction held on October 21, 2013, a consortium including Petrobras was awarded the rights and obligations to operate and explore a strategic pre-salt area (known as Campo de Libra – which has an estimated recoverable volume of between 8 and 12 billion boe) located in the ultra-deep waters of the Santos Basin. On December 2, 2013, we executed the first agreement under this regime. We have a 40% interest in the Libra field, and this agreement has a term of 35 years.

The following map shows our concession areas in Brazil as of December 2013.

The map below shows the location of the pre-salt reservoirs as well as the status of our exploratory activities there.

Information about our main oil and gas producing fields in Brazil is summarized in the table below. 

(1)                  Heavy oil = up to 22° API; intermediate oil = 22° API to 31° API; light oil = greater than 31° API

Our domestic oil and gas exploration and production efforts are primarily focused on four major basins offshore in Brazil: Campos, Santos, Espírito Santo and Sergipe-Alagoas.

Campos Basin   

The Campos Basin, which covers approximately 115,000 km ² (28.4 million acres), is the most prolific oil and gas basin in Brazil as measured by proved hydrocarbon reserves and annual production.  Since we began exploring this area in 1971, over 60 hydrocarbon accumulations have been discovered, including eight large oil fields in deep water and ultra-deep water.  The Campos Basin is our largest oil- and gas-producing region, producing an average 1,531.1 mbbl/d of oil and 553.8 mmcf/d (14.7 mmm ³ /d) of associated natural gas from 47 producing fields. During 2013, 75% of our total domestic production came from this basin. In 2013, the proved crude oil and natural gas reserves in the Campos Basin represented 71.7% and 41.3% of our total proved crude oil and natural gas reserves in Brazil, respectively. In 2013, we operated 42 floating production systems and 14 fixed platforms in water depths from 80 to 1,886 meters (262 to 6,188 feet), delivering oil with an average API gravity of 21.9° and maximum basic sediment and water (a measurement of the water and sediment content of flowing crude oil) of 1%.

Our oil and gas activities in the Campos Basin are focused on increasing production by installing new production systems, tapping pre-salt reservoirs with both new and existing production units, and maintaining our production in relatively mature fields. We also have significant exploration plans in this area.

Expanding production through new production systems, including from pre-salt reservoirs

                Roncador Modules 3 and 4 will develop the production of Roncador Field, located in the post-salt of Campos Basin, through two stationary production units: the SS P-55, which was installed in December 2013, and the FPSO P-62, which will be installed in 2014. The production capacity of each unit is 180,000 bbl/d of oil and 211.9 mmcf/d (6 mmm ³ /d) of natural gas.  We own 100% of the oil produced from these units.

                The FPSO P-58 will develop production in the Parque das Baleias area, which encompasses the following fields: Baleia Franca (pre- and post-salt), Cachalote (post-salt), Jubarte (pre- and post-salt), Baleia Azul (pre-salt) and Baleia Anã (post-salt). This unit has an oil production capacity of 180,000 bbl/d and 211.9 mmcf/d (6 mmm ³ /d)  of natural gas. We own 100% of the oil produced from this unit.

                The Papa-Terra Modules 1 and 2 project aims to develop production of the Papa-Terra field located in the post-salt of Campos Basin. We started production at this field in November 2013, using P-63 (which is a FPSO), and in 2014 a second unit will be installed, P-61 (which is a TLWP). The joint production capacity of P-61 and P-63 is 140,000 bbl/d of oil and 35.3 mmcf/d (1 mmm ³ /d) of natural gas. The TLWP will be supported by a Tender Assisted Drilling (TAD) rig, and its output will be transferred to the FPSO.  Our share of the oil produced from these units is 62.5%.

While most of our production in the Campos Basin is from post-salt reservoirs, pre-salt reservoirs in the basin are a growing source of production.  We first began pre-salt oil production in 2008 in the Jubarte field located in the Parque das Baleias region.  We subsequently began producing from the Baleia Franca field in the second half of 2010.  In September 2012, we started a pilot system exclusively dedicated to pre-salt evaluation and production in the Baleia Azul region using the FPSO Cidade de Anchieta, with a capacity to produce 100,000 bbl/d of oil and 123.6 mmcf/d (3.5 mmm ³ /d) of gas. During 2013, this unit produced an average of almost 90,000 bbl/d. By the end of 2013, the Campos Basin pre-salt area was producing 165.2 mbbl/d, which represents an increase of almost 100% compared to 2012.  Our share of oil from produced from Campos Basin pre-salt reservoirs is 100%.

Maintenance in mature fields

We seek to slow the natural decline in mature fields of the Campos Basin by improving the operational efficiency of our equipment and reservoirs through our PROEF program. Based on efficiency metrics set forth under the PROEF program, we increased the efficiency of Campos Basin operational units by 3.7 p.p., to 75.4% in 2013 from 71.7% in 2012, and of our Rio de Janeiro operational units by 0.7 p.p., to 92.4% in 2013 from 91.7% in 2012. As a result of our investments, production in 2013 from these areas was 63 mbbl/d greater than it otherwise would have been. To achieve these results, we conducted extensive campaigns and regular maintenance on our platforms, in addition to scheduled unit stoppages to improve performance. Furthermore, we have internal planning and resource management procedures, such as standardization of equipment to ease maintenance and the preparation of backup inventory for critical equipment, ensuring greater availability of those resources.

Exploration

As of December 31, 2013, we held rights to five exploratory blocks and seven exploration plans in the Campos Basin, comprising a total of 4,493 km ² (1.1 million acres). During 2013, we have made important progress in the Campos Basin, where we have drilled a total of five exploratory wells (three of them in pre-salt reservoirs).

Santos Basin  

The Santos Basin, which covers approximately 348,900 km ² (86 million acres located adjacent to and southwest of Campos Basin), is one of the most promising offshore exploration and production areas in the world. We are currently exploring and developing the Santos Basin pre-salt region under the Concession, Assignment, and Production Sharing Agreements.

Concession Agreements

In 2000 and 2001, we and our partners acquired through public auction under concession agreements eight blocks in what is now known as the Santos Basin pre-salt.  In November 2007, we announced the discovery of this important new province, and we began producing oil in May 2009, with an EWT in block BMS -11 (formerly Tupi, now Lula).  

In November 2010, we replaced the EWT with a long-term production system, the FPSO Cidade de Angra dos Reis. During 2013, this FPSO produced near its full oil production capacity of 100 mbbl/d. 

Following Lula, the second field in development in the Santos Basin pre-salt is Sapinhoá (formerly known as Guará) with a total estimated recoverable volume of 2.1 billion boe. Commercial production began in January 2013 through FPSO Cidade de Sao Paulo.  This pilot system has a production capacity of 120,000 bbl/d of oil and natural gas processing of 176.6 mmcf/d (5 mmm ³ /d). The first production well has been producing over 25,000 bbl/d of oil.  The second well began production in February 2014, with initial production of 36 mbbl/d. This well was the first to produce through a pioneering connecting system, the BSR. The well is located at a water depth of 2,118 meters.

The third pilot system for the Santos pre-salt is FPSO Cidade de Paraty, located in the Lula field, which started production in June 2013. This FPSO has a capacity of 120,000 bbl/d of oil and 176.6mmcf/d (5 mmm ³ /d) of natural gas processing.

We currently have two systems performing EWTs in the Santos Basin pre-salt area, the FPSO Cidade de São Vicente and the FPSO Dynamic Producer.

During 2014, two additional systems will be installed: The FPSO Cidade de Ilhabela with a production capacity of 150,000 bbl/d of oil and 211.9 mmcf/d (6 mmm³/d) of gas to be located in the Sapinhoá field. This FPSO is currently in Brazil on the shipyard Brasa for modules integration and is expected to start operating during the second half of 2014. The second FPSO to be installed is Cidade de Mangaratiba, with a production capacity of 150,000 bbl/d of oil and 282.5 mmcf/d (8 mmm³/d) of gas to be located in Iracema. This FPSO is currently undergoing a module integration at the Brasfels shipyard, in Brazil.

 We continue to concentrate our efforts on gathering information about the pre-salt reserves through EWTs and testing drilling technologies to improve efficiency and to plan the definitive design of production platforms.

 As of December 31, 2013, we held exploration rights to seven blocks in the Santos Basin and 11 exploration plans, comprising 10,404 km ² (3.6 million acres).  Our share of average daily production of oil was 136.9 mbbl/d, of which 83.0 mbbl/d was produced in the pre-salt area, and our average daily production of natural gas was 280.9 mmcf/d (7.4 mmm ³ /d), of which 262.3 mmcf/d (6.9 mmm ³ /d) was produced in the pre-salt area.  As of December 31, 2013, 20.7% and 34.9% of our total proved crude oil and natural gas reserves in Brazil, respectively, were in the Santos Basin.

The Santos Basin pre-salt was a central focus of exploration and production activities in 2013. In this period, we drilled 12 exploratory wells (11 in the pre-salt area) in total. In 2013, we made several oil discoveries in the areas of Franco, Florim, BM-S-42 (Sagitário), Entorno de Iara, Sul de Tupi and Júpiter and we also declared the commerciality of a new exploratory field named Lapa (formerly known as Carioca), with estimated recoverable volume of 459 million barrels of petroleum. Lapa is operated by Petrobras (45%) in partnership with BG E&P Brasil (30%) and Repsol Sinopec Brasil (25%) and its first oil is planned for 2016.

Assignment Agreement  (Contrato de Cessão Onerosa)

Under the Assignment Agreement, we acquired six blocks and one contingent block which comprise our rights to explore, evaluate and produce up to five billion boe in the pre-salt area of the Santos Basin, of which we have already declared as commercial 3.18 billion boe from the Buzios and Sul de Lula blocks.  We are developing these blocks in an integrated manner with the pre-salt areas we already have under concession.  Following the declaration of commerciality for these blocks, we have initiated the revision process of the Assignment Agreement with the Brazilian government and for the remaining blocks we must either declare commerciality or relinquish them by September 2014. See Item 10. “Material Contracts—Assignment Agreement.” 

In 2013, we concluded the drilling of nine wells located in the Assignment Agreement area. Over the next three years, we intend to proceed with our exploration program and are currently targeting the production of oil in the Búzios field in 2016.

Production Sharing Agreement  (Contrato de Partilha de Produção)

In October 2013, a consortium including Petrobras (40% interest), Shell (20% interest), Total (20% interest), Petrochina (10% interest) and CNOOC (10% interest) was awarded the rights and obligations to operate and explore the Libra field in the ultra-deep waters of the Santos Basin in the first production-sharing regime auction ever held in Brazil.  Through the Production Sharing Agreement, the consortium was granted rights to explore and produce in an area comprising 1,547.76 km ² (0.4 million acres) with estimated recoverable volumes from 8 to 12 billion boe according to the ANP. The exploration phase of the block will have a term of four years counted from the agreement’s execution date on December 2, 2013. The minimum exploratory program, to be carried out during this period, includes 3D seismic acquisition for the whole block, two exploratory wells and one extended well test. See Item 10. “Material Contracts – Production Sharing Agreement.”

Santos Basin Projects

The primary source of our expected future production growth will be from the Santos Basin pre-salt.  We currently have under construction through 2018, 19 major projects that will be installed in this area.  Of these, six are in the Assignment Agreement area (Búzios 1, Búzios 2, Búzios 3, Búzios 4, Nordeste de Tupi and Entorno de Iara). The following FPSOs are currently being constructed under contracts.

On February 27, 2014, our total pre-salt production reached 412 mboe/d, representing a new production record. This was accomplished with only 21 wells, highlighting the relatively high level of productivity of pre-salt fields that have been discovered. Ten of these wells are located in Santos Basin and were responsible for 59% of production (240 mboe/d).  In addition, we have reduced the time required to drill and complete production wells in the Santos Basin pre-salt cluster.  In January 2014, we drilled and completed SPH-5, located in Sapinhoá field, with a final depth of 2,126 meters in 109 days: 60 days for drilling and 49 days for well completion.

We are also developing post-salt fields in the Santos Basin.  The FPSO Cidade de Itajaí in Baúna (formerly Tiro and Sidon) started operating in February 2013. This FPSO has a capacity to process up to 80,000 bbl/d of oil and 70.6 mmcf/d (2 mmm³/d) of natural gas.

Espírito Santo Basin  

From 2000 to 2007, we made important discoveries in the Golfinho, Camurupim and Camurupim Norte fields. More recently we have made additional discoveries, still under evaluation, in the Parque dos Doces, Parque dos Deuses and Parque dos Cachorros fields.

During 2013, we produced oil from 45 fields at an average rate of 48.8 mbbl/d, and our average daily production of natural gas was of 182.2 mmcf/d (4.8 mmm ³ /d). The proved crude oil and natural gas reserves in the Espírito Santo Basin represented 0.6% and 3.7% in 2013 of our total proved crude oil and natural gas reserves in Brazil, respectively.

As of December 31, 2013, we held exploration rights to 16 blocks (10 onshore and 6 offshore) and 10 exploration plans offshore, comprising a total of 9,910 Km ² (2.4 million acres) in the Espírito Santo Basin. In 2013, we made two discoveries in its post-salt area, known as prospects São Bernardo and Arjuna.

Sergipe-Alagoas Basin    

The Sergipe-Alagoas Basin is one of our new frontiers in offshore regions. In 2013, we held proved crude oil and natural gas reserves in the Sergipe-Alagoas Basin representing 1.7% and 2.3% of our total proved crude oil and natural gas reserves in Brazil, respectively. Our aggregate production level in Sergipe–Alagoas Basin was 46.9 mbbl/d of oil and 72.7 mmcf/d (1.9 mmm ³ /d) of natural gas.

During 2013, we continued to confirm the existence of oil and gas resources through our exploration plans, and we have made new discoveries made in the areas informally denominated as Muriú, Moita Bonita, Farfan, Cumbe and Barra-1. All of them are in ultra-deep water, almost 100 km from the coast of Aracaju. As of December 31, 2013, we held exploration rights to one block and seven exploration plans in the Sergipe-Alagoas Basin, comprising 5,917 km2 (1.4 million acres).

Other Basins

We produce hydrocarbons and hold exploration acreage in 20 other basins in Brazil.  While our onshore production is primarily in mature fields, we plan to sustain and slightly increase production from these fields in the future by using enhanced recovery methods.  In 2013, production from these other basins amounted to 167.7 mbbl/d of oil and 316.2 mmcf/d (8.4 mmm ³ /d) of natural gas.

The most significant potential for exploratory success within our other basins are the equatorial margin and the south of Bahia offshore . 

Critical Resources in Exploration and Production  

We seek to develop and retain the critical resources that are necessary to meet our production targets.  Drilling rigs are an important resource for our exploration and production operations and substantial lead time is required when fleet expansion is needed. When we discovered the pre-salt, in 2006, our activities were constrained by the availability of rigs, but our subsequent efforts to lease additional rigs have eliminated this constraint. Whereas in 2008 we only had three rigs capable of drilling in water deeper than 2,000 meters (6,560 feet), we had 40 as of December 31, 2013. We believe that we now have sufficient rigs to meet our long-term production targets, although we will continue to  evaluate our drilling requirements and will adjust our fleet size as needed.

In addition to leasing the additional rigs that are now operating in Brazil,  all of which were built internationally, we have been working since 2008 to develop the capacity to construct drilling rigs in Brazil. We have awarded contracts for 28 additional rigs to be built in Brazil to meet our long-term needs and satisfy Brazilian local content requirements arising out of the Assignment Agreement and concession agreements obtained in later Brazilian exploration bid rounds. We expect these rigs to be delivered from 2015 through 2020, and they will replace or supplement the existing fleet in Brazil. The contracts to build the 28 rigs were awarded to Sete Brasil S.A. (Sete BR), a Brazilian company in which Petrobras holds a 10% interest.

In order to advance our exploration and production plans, we also need to secure a number of specialized vessels to connect wells and the FPSOs and for subsea construction. In particular, we seek to increase the fleet of PLSVs available to us. We currently have 11 leased PSLVs, and we expect an additional eight leased PLSVs to arrive in Brazil during 2014 and another 11 through 2017 to help us meet our production targets.

We are an integrated company with a dominant market share in our home market.  We own and operate 12 refineries in Brazil, with a total net distillation capacity of 2,102 mbbl/d, and are one of the world’s largest refiners.  As of December 31, 2013, we operated substantially all of Brazil’s total refining capacity.  We supplied almost all of the refined product needs of third-party wholesalers, exporters and petrochemical companies, in addition to the needs of our Distribution segment.  We operate a large and complex infrastructure of pipelines, terminals and a shipping fleet to transport oil products and crude oil to domestic and export markets.  Most of our refineries are located near our crude oil pipelines, storage facilities, refined product pipelines and major petrochemical facilities, facilitating access to crude oil supplies and end-users.

The Brazilian market has been characterized since 2010 by very high rates of growth in consumption of oil products, driven primarily by economic growth, rising real incomes and the decline of domestic ethanol production. Because domestic oil consumption has grown faster than our oil production, we have shifted from being a net exporter of oil and oil products to being a net importer. 

Our Refining, Transportation and Marketing segment also includes (i) petrochemical operations that add value to the hydrocarbons we produce and meet the needs of the growing Brazilian economy and (ii) extraction and processing of shale.

We participate in refining, transportation and marketing operations outside of Brazil through our International business segment.  See “—International.”

Refining  

Our crude distillation capacity in Brazil as of December 31, 2013, was 2,102 mbbl/d and our average throughput during 2013 was 2,074 mbbl/d.

The following table shows the installed capacity of our Brazilian refineries as of December 31, 2013, and the average daily throughputs of our refineries in Brazil in 2013, 2012 and 2011.