UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

for the fiscal year ended December 31, 2020
Commission File Number 001-15106

Petróleo Brasileiro S.A. — Petrobras

(Exact name of registrant as specified in its charter)

Brazilian Petroleum Corporation — Petrobras
(Translation of registrant’s name into English)

The Federative Republic of Brazil
(Jurisdiction of incorporation or organization)

Avenida República do Chile, 65 - 20031-912 - Rio de Janeiro – RJ - Brazil
(Address of principal executive offices)

Andrea Marques de Almeida
Chief Financial Officer and Chief Investor Relations Officer
(55 21) 3224-4477—dfinri@petrobras.com.br
Avenida República do Chile, 65 - 20031-912 - Rio de Janeiro – RJ - Brazil
(Name, telephone, e-mail and/or facsimile number and address of company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

The number of outstanding shares of each class of stock as of December 31, 2020 was:
7,442,231,382 Petrobras Common Shares, without par value

5,601,969,879 Petrobras Preferred Shares, without par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.

Yes ☐      No ☒

If this report is an annual or transitional report, indicate by check mark if the registrant is not required to file reports pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes ☐       No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒       No ☐

Indicate by check mark whether the registrant has submitted electronically if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒       No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 ☐       Item 18 ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐       No ☒

TABLE OF CONTENTS

DISCLAIMER

In order to present information to investors in a manner more consistent with how we view our business, last year we altered the structure and order of the disclosure in our annual report on Form 20-F. In this annual report on Form 20-F for the year ended December 31, 2020 (referred to herein as our “annual report”), we have included a cross reference guide to SEC Form 20-F under “Cross-Reference to Form 20-F”, in order to facilitate your review.

Unless the context otherwise indicates, please consider this report the annual report of Petróleo Brasileiro S.A. – Petrobras. Unless the context otherwise requires, the terms “Petrobras,” “we,” “us” and “our” refer to Petróleo Brasileiro S.A. – Petrobras and its consolidated subsidiaries, joint operations and structured entities.

Our audited consolidated financial statements, presented in U.S. dollars, included in this annual report and the financial information contained in this annual report that is derived therefrom are prepared in accordance with the International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).

Our functional currency and the functional currency of all of our Brazilian subsidiaries is the Brazilian real and the functional currency of most of our entities that operate outside Brazil, such as Petrobras Global Finance B.V. or PGF, is the U.S. dollar. In this annual report, references to “real,” “reais” or “R$” are to Brazilian reais and references to “U.S. dollars” or “US$” are to United States dollars.

Forward-Looking Statements

This annual report includes forward-looking statements that are not based on historical facts and are not assurances of future results. The forward-looking statements contained in this annual report, which address our expected business and financial performance, among other matters, contain words such as “believe,” “expect,” “estimate,” “anticipate,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” “potential” and similar expressions (which are not the exclusive means of identifying such forward-looking statements).

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. There is no assurance that the expected events, trends or results will actually occur.

We have made forward-looking statements that address, among other things:

Our forward-looking statements are not guarantees of future performance and are subject to assumptions that may prove incorrect and to risks and uncertainties that are difficult to predict. Our actual results could differ materially from those expressed or forecast in any forward-looking statements as a result of a variety of assumptions and factors. These factors include, but are not limited to, the following:

For additional information on factors that could cause our actual results to differ from expectations reflected in forward-looking statements, see “Risks” in this annual report.

All forward-looking statements attributed to us or a person acting on our behalf are qualified in their entirety by this cautionary statement. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events or for any other reason.

The crude oil and natural gas reserve data presented or described in this annual report are only estimates, which involve some degree of uncertainty, and our actual production, revenues and expenditures with respect to our reserves may materially differ from these estimates.

Documents on Display

We are subject to the information requirements of the Exchange Act, and accordingly our reports and other information filed and furnished by us with the SEC may be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can obtain further information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also inspect our reports and other information at the offices of the New York Stock Exchange, or NYSE, at 11 Wall Street, New York, New York 10005, on which our ADSs are listed. Our SEC filings are also available to the public at the SEC’s website at www.sec.gov and at our website at www.petrobras.com.br/ir. The information available on these websites, which might be accessible through a hyperlink resulting from the URLs, is not and shall not be deemed to be incorporated into this annual report. For further information about obtaining copies of our public filings at the NYSE, call (212) 656-5060.

We also furnish reports on Form 6-K to the SEC containing our unaudited consolidated interim financial statements and other financial information of our company.

We also file audited consolidated financial statements, unaudited consolidated interim financial information and other periodic reports with the CVM.

ABOUT US

We are a Brazilian company with over 49,000 employees committed to generate more value for our shareholders and the society, with a focus on oil and gas, with safety and respect for people and the environment. We are one of the largest companies in market capitalization in Latin America, with a market capitalization of US$72.5 billion as of December 31, 2020. We are one of the largest producers of oil and gas in the world, primarily engaged in exploration and production, refining, energy generation and trading. We have a large proven reserve base and have acquired expertise in deep and ultra-deepwater exploration and production as a result of almost 50 years spent developing the Brazilian offshore basins, becoming world leaders in this segment.

Datasheet

Name of the company: Petróleo Brasileiro S.A. – Petrobras

Date of Incorporation: 1953

Country of Incorporation: Brazil

Registration number at the CVM: 951-2

Central Index Key (or “CIK”) at the SEC: 0001119639

Address of principal executive office: Avenida República do Chile 65, 20031-912, Rio de Janeiro, RJ, Brazil

Telephone number: (55 21) 3224 4477

Corporate and investor relations websites: www.petrobras.com.br and www.petrobras.com.br/ir.

The information on these websites, which might be accessible through a hyperlink resulting from both URL, is not and shall not be deemed to be incorporated into this annual report.

Corporate purpose established in our Bylaws: research, extraction, refining, processing, trading and the transport of oil, its by-products, natural gas and other fluid hydrocarbon from wells, shale and other rocks, in addition to energy-related activities, and the research, development, production, transport, distribution, sale and trading of all forms of energy, and other related activities or similar purposes.

Overview

We have a large base of proved reserves and operate and produce the majority of Brazil’s oil and gas. The majority of our proved reserves are located in the adjacent offshore Campos and Santos Basins in southeast Brazil. Their proximity allows us to optimize our infrastructure and limit our costs of exploration, development and production. Additionally, we have developed technical knowledge in deepwater exploration and production from almost 50 years of developing Brazil’s offshore basins, including the Campos and Santos Basins. The Campos and Santos Basins are expected to remain the main source of our future growth in proved reserves and oil and gas production.

Our business, however, goes beyond the oil and gas exploration and production. It entails a long process through which we get the oil and gas to our refineries and gas treatment units which themselves must be equipped and in constant evolution to supply the best products.

We operate the majority of the refining capacity in Brazil. Our refining capacity is substantially concentrated in southeast Brazil, within the country’s most populated and industrialized markets and adjacent to the sources of most of our crude oil in the Campos and Santos Basins. We meet our demand for oil products through a planned combination of domestic refining of crude oil and oil products imports, seeking value creation. We are also involved in the production of petrochemicals through stakes in some companies. We distribute oil products through wholesalers and retailers.

We also participate in the Brazilian natural gas market, including the logistics, distribution and processing of natural gas.

To meet domestic demand, we process natural gas derived from our onshore and offshore production (mainly from fields in the Campos, Espírito Santo and Santos Basins), import natural gas from Bolivia and import liquefied natural gas (“LNG”) through our regasification terminals. We also participate in the domestic power market primarily through our investments in gas-fired, fuel oil and diesel oil thermoelectric power plants and in renewable energy.

We currently divide our business into three main segments:

Activities that are not attributed to the business segments are classified as “Corporate and Other Businesses” including, notably those related to corporate financial management, corporate overhead and other expenses, provision for the class action settlement, and actuarial expenses related to the pension and medical benefits for retired employees and their dependents. It also comprises biofuels and distribution businesses. The biofuels business covers the activities of production of biodiesel and its co-products and ethanol. The distribution business covers the equity interest in the associate BR Distribuidora and the business for the distribution of oil products abroad (South America).

For further information regarding our business segments, see Notes 13 and 33 to our audited consolidated financial statements, as well as “Operating and Financial Review and Prospects” in this annual report.

In 2020 we had activities in eight countries besides Brazil (i.e., Argentina, Bolivia, Colombia, Uruguay, the U.S., Netherlands, United Kingdom and Singapore). In Latin America, our operations include exploration and production, marketing, and retail services, including natural gas. In North America, we produce oil and gas through a joint venture. We have controlled companies in London, Rotterdam, Houston, and Singapore that support our trade and financial activities. They constitute a complete and active trading desk for markets worldwide, responsible for market intelligence and marketing of oil, oil products, natural gas, commodity derivatives and shipping. Beginning in 2021, we will end our European trading activities in the United Kingdom and concentrate them only in the Netherlands. In February 2021 we ended our operational activities in Uruguay with the sale of our shares in the distribution company.

We operate through 20 direct subsidiaries (18 incorporated under the laws of Brazil and two incorporated abroad) and two direct joint operations as listed below. We also have indirect subsidiaries, including Petrobras Global Finance B.V. (“PGF”).

For a complete list of our subsidiaries and joint operations, including each of their full names, jurisdictions of incorporation and our percentage of equity interest, see Exhibit 8.1 to this annual report and Note 30 to our Financial Statements. Additionally, we participate in consortia that engage in the exploration of blocks and the production of oil fields in Brazil – see “Our Business, E&P, Overview” for more details.

RECENT DEVELOPMENTS

Pending Changes in our Senior Management and Board of Directors

The Brazilian federal government controls a majority of our voting shares and has the right to elect a majority of the members of our Board of Directors. Our Board of Directors, in turn, selects our management.

On February 19, 2021, the Brazilian federal government, through the Ministry of Mines and Energy (MME), issued a formal notice (oficio) to the Chairman of our Board of Directors requesting that the Chairman call a general shareholders meeting for the election of Directors. The notice designated Joaquim Silva e Luna to replace Roberto da Cunha Castello Branco as a Director, based on the Brazilian federal government’s power to remove members of the Board of Directors. It also requested the Board of Directors to subsequently consider and elect Mr. Silva e Luna to replace Mr. Castello Branco as our CEO. Media reports have suggested that the decision to replace Mr. Castello Branco was related to our February 2021 announcement of increases in prices for diesel and gasoline products.

Under Brazilian law, the removal of a Director elected by cumulative voting automatically results in the removal of all other Directors elected through the same mechanism. Mr. Castello Branco and seven other Directors were elected by cumulative voting in the July 2020 Ordinary Shareholders Meeting. The MME notice proposed that, at the meeting to replace Mr. Castello Branco, the other Directors be re-elected for the balance of their terms. However, five of the seven have since announced that they would not accept their nomination for the election (João Cox Neto, Nivio Ziviani, Paulo Cesar de Souza e Silva, Omar Carneiro da Cunha Sobrinho and Leonardo Pietro Antonelli).

On March 5, 2021, the Brazilian federal government, through MME and the Ministry of Economy, designated six individuals for election to the Board of Directors: Eduardo Bacellar Leal Ferreira (for Chairman of the Board), Joaquim Silva e Luna, Ruy Flaks Schneider, Márcio Andrade Weber, Murilo Marroquim de Souza and Sonia Julia Sulzbeck Villalobos.

On March 8, 2021, minority shareholders designated Leonardo Pietro Antonelli for a Board position in the event that the election is conducted using cumulative voting. Under Brazilian law, the election of our Board members must be by cumulative voting if requested by holders of at least 5% of the outstanding shares. If cumulative voting is adopted, the Brazilian federal government may not be able to elect all of its designees in the general shareholders meeting.

On March 10, 2021, the Brazilian federal government, through MME, designated two more individuals for election to the Board of Directors: Cynthia Santana Silveira and Ana Silvia Corso Matte. These additional designations completed the list of eight nominees by the Brazilian federal government.

On March 11, 2021, our Board of Directors called an Extraordinary General Meeting, to be held on April 12, 2021, for the election of eight Directors.

Continuing Uncertainty Concerning our Senior Management and Board of Directors

The election of our Board of Directors will take place at the Extraordinary General Meeting to be held on April 12, 2021. This meeting may provide more definition about the future of Petrobras, the composition of our Board of Directors and our management team. However, the situation is changing rapidly and there can be no certainty as to the outcome of that meeting, the composition of our Board of Directors or our management team.

For a current list of our Executive Officers and Board of Director members as of the date of this annual report, see “Management and Employees – Management” and “Management and Employees – Executive Officers” in this annual report.

It is possible that members of our Board of Directors may resign prior to the Extraordinary General Meeting. Our CEO is expected to depart once his removal is approved by a majority of votes at the Extraordinary General Meeting. It is also possible that our CFO and other members of our senior management may depart, whether by termination or resignation, after the Extraordinary General Meeting. On March 24, 2021, four of our executive officers, Andrea Almeida, Chief Financial and Investor Relations Officer, Carlos Alberto Pereira de Oliveira, Chief Exploration and Production Officer, André Chiarini, Chief Trading and Logistics Officer, and Rudimar Andreis Lorenzatto, Chief Production Development Officer, informed our Board that they do not intend to renew their respective terms in such positions. Although their terms expired on March 20, 2021, they will continue to serve until their successors are appointed, in accordance with Brazilian law. On March 24, 2021, our Board approved the appointment of Salvador Dahan as our new Chief Governance and Compliance Officer, to be effective following completion of all internal processes. If there are vacancies at the Board of Directors or in senior management, it is possible that such positions will not be filled promptly.

The potential changes to the composition of our Board of Directors and our management team may result in significant additional uncertainty. It is difficult to predict the future strategic, business or policy decisions or views that any newly-elected members of our Board of Directors or our management team may take or have, and we cannot predict how this will affect our business, our results of operations and our financial condition, which could in turn adversely affect the value of our securities.

Potential Changes to our Strategic Plan and our Pricing Policies

Our Strategic Plan consists of our continuous evaluation of the business environment and the implementation of our strategies, allowing for adjustments to be made in a more efficient way. See “Strategic Plan—2021-2025 Strategic Plan” in this annual report. The recent developments described above, including any changes to our Board of Directors and our management team, may affect not only our ability to implement our Strategic Plan, but whether that Strategic Plan remains in place, as well as the direction of any subsequent strategic plans, including decisions related to the management of our operations and investments.

Our current pricing policy in Brazil takes into account domestic market conditions and seeks to align the price of oil products with international prices. Specifically, diesel oil, gasoline, LPG, jet fuel, fuel oil and other minor product prices are defined taking into account the international import parity price, margins to remunerate the risks inherent in our operations and the level of market share.

In 2021, we raised fuel prices according to international price parity as global oil prices surged. Although we announced increases in fuel prices in early March, on March 24, 2021, we announced that we would decrease wholesale diesel prices by 4.2% and wholesale gasoline prices by 4.4%, effective on March 25, 2021. For more information, see “Risks—Financial Risks—Our cash flow and profitability are exposed to the volatility of prices of oil, gas and oil products” and “Our Business—Refining, Transportation and Marketing—Marketing—Oil products prices.” The Brazilian federal government has recently made statements regarding the need to modify and adjust our pricing policy for domestic conditions.

In February 2021, the Brazilian federal government announced, for a two-month period, changes in state fuel taxes, and in March 2021, announced that it would eliminate federal taxes on diesel fuel (for two months) and residential LPG.

In view of the statements made by the Brazilian President and the recent developments described above, the new CEO, the new management team or the new Board of Directors may propose changes to our pricing policies, including a decision that such policies will not seek for alignment with international price parity. Changes to our fuel pricing policy could have a material adverse effect on our business and prospects, our results of operations and our financial condition, which could in turn adversely affect the value of our securities.

Lava Jato Investigation

In 2021, the Brazilian Supreme Court started to decide cases brought by criminal defendants in Lava Jato proceedings aimed at nullifying criminal convictions relating to the investigation. These cases are still in progress and their outcomes may affect our interests. For more information, see “Risks—Risk Factors—We may face additional proceedings related to the Lava Jato investigation” and “Legal and Tax—Legal Proceedings—Lava Jato Investigation” in this annual report.

Risk Factors

The recent developments described above may materially and adversely impact our business, prospects, results of operations and financial condition, and the value of our securities. The role of the Brazilian federal government as our controlling shareholder presents specific risks for investors. For more information, see “Risks—Government Ownership and Country Risks” in this annual report.

RISKS

The nature of our operations exposes us to a number of risks that could, individually or together, have an effect on our financial performance. We classify the risks to which we are exposed in the following groups: (i) operational risks, (ii) financial risks, and (iii) compliance, legal and regulatory risks. We also describe herein the risks arising from the government ownership and country risks, as well as debt and equity securities risks.

Risk Factors

Operational Risks

We are exposed to health, environment and safety risks in our operations, which may lead to accidents, significant losses, administrative proceedings and legal liabilities.

Some of our main activities present risks capable of leading to accidents, such as oil spills, product leaks, fires and explosions. In particular, deepwater, ultra-deepwater and refining activities present various risks, such as oil spills and explosions in our refineries and exploration and production units, including platforms, ships, pipelines, terminals and dams, among other assets owned or operated by us. These events may occur due to technical failures, human errors or natural events, among other factors. The occurrence of one of these events, or other related incidents, may result in various damages such as death, and serious environmental damage, and may impact our workforce or communities. They may cause property damage, loss of production, financial losses and, in certain circumstances, liability in civil, labor, criminal, environmental and administrative lawsuits. As a consequence, we may incur expenses for cleaning, repairing or remedying the damages caused.

We are also exposed to corporate security risks from acts of intentional interference by third parties in our downstream areas and pipelines, including illegal taps (thefts) of oil, gas and oil products, especially in the states of São Paulo and Rio de Janeiro. If this interference continues, we may experience short-term or long-term accidents, leaks or damage in our facilities as a result, which can impact the continuation of our operations. In addition, we may be compelled to indemnify for any damages caused to the environment or to third parties because of these incidents. In addition, public health epidemics and pandemics such as the Covid-19 outbreak could cause health restrictions to our workforce and, therefore, impact the operation of some of our facilities, including our platforms, refineries, terminals, among others. This condition could have a negative impact on our results and financial condition. Finally, due to risks such as those mentioned above, we may face difficulties in obtaining or maintaining operating licenses and may suffer damages to our image and reputation.

Changes in the competitive environment of the Brazilian oil and gas market may intensify the requirements for our performance levels to remain in line with the best companies in the sector. The need to adapt to an increasingly competitive and more complex environment may compromise our ability to implement our current Strategic Plan or any subsequent plans adopted.

We may face greater competitive forces in the downstream segment in Brazil, with the emergence of new companies competing against us in this sector. If we are unable to maximize return on capital employed, reduce costs, sell our products competitively, and implement new technologies in our business, we may encounter adverse effects on our results and operations.

Additionally, in the upstream segment, we may not be successful in acquiring exploration blocks in future bidding rounds if our competitors are able to bid based on better cost and capital structures than us. In that case, we may therefore have difficulty in repositioning our portfolio towards upstream assets that offer higher profitability and competitive advantage, especially in the pre-salt layer, which could negatively affect our results.

In addition, changes in the regulatory framework and inquiries regarding compliance with antitrust and competition laws may subject us to penalties, business restrictions and difficulties in renewing concessions, adversely affecting our operations, results and reputation.

In order to create a favorable environment for new investors to enter the natural gas and refining industries in Brazil, we signed commitment agreements with the Administrative Council for Economic Defense (CADE) and the National Petroleum, Natural Gas and Biofuels Agency (ANP). Under the agreements, we committed to include some of our shareholding participation in companies and assets of the gas transportation and distribution segments in our divestment program and to renounce some of the contracted transportation network capacity (of injection and withdrawal volumes), which would create more competitive conditions to encourage new economic agents to enter the downstream market. Failure to comply with these commitment agreements may result in negative impacts such as administrative proceedings and fines.

Failures in our information technology systems, information security (cybersecurity) systems and telecommunications systems and services can adversely impact our operations and reputation.

Our operations are highly dependent on information technology and communications systems and services. Interruption or malfunction affecting these systems and/ or their infrastructure, as a result of obsolescence, technical failures and/or deliberate acts, may harm or halt our business and adversely impact our operations and reputation.

Moreover, information security failures, including automation systems, either due to external acts, deliberate or unintentional, such as malware, hacking and cyberterrorism, or internal ones, such as negligence and misuse from employees or contractors, may also cause impacts on our business, our reputation, our relationship with stakeholders and external agents (government, regulatory bodies, partners, suppliers and others), our strategic positioning towards our competitors and our results. According to Law No. 13,709/2018 – Lei Geral de Proteção de Dados Pessoais (“LGPD”), we will be subject to penalties in cases of disclosure or misuse of personal information.

The selection and development of our investment projects have risks that may affect our expected results.

We have numerous project opportunities in our portfolio of investments. Since most projects are characterized by a long development period, we may face changes in market conditions, such as changes in prices, consumer preferences and demand profile, exchange and interest rates and financing conditions of projects that may jeopardize our expected rate of return on these projects.

We also face specific risks for oil and gas projects. Despite our experience in the exploration and production of oil in deepwater and ultra-deepwater and the continuous development of studies during the planning stages, the quantity and quality of oil produced in a certain field will only be fully known in the phases of deployment and operation, which may require adjustments throughout the project lifecycle and its expected rate of return.

Furthermore, decommissioning projects have grown and become more relevant to our portfolio as concession contracts and production systems expire. With the recent publication of Resolution ANP 817/2020, we might face some difficulties in defining the scope of these decommissioning projects and meeting the regulation requirements, particularly in light of our and the industry’s learning curve in this area.

Moreover, despite our experience in exploration and production, we may face new technical challenges as we move closer to the technology frontier.

In addition, public health epidemics and pandemics such as the Covid-19 outbreak could cause restrictions on of our workforce, partners and suppliers, that could have an impact in the productivity of various activities.

External factors could impact the successful implementation of our partnerships and our portfolio management.

Pursuant to our Strategic Plan, our divestment portfolio includes several assets in different stages of the sales process, which we expect to conclude in the coming years.

External factors, such as the decline of oil prices, exchange rate fluctuations, the deterioration of the Brazilian economy and global economic conditions, the Brazilian political scenario, judicial and administrative decisions, the passing of new laws, among other unpredictable factors, may reduce, delay or hinder sale opportunities for these assets or affect the price at which we can sell them.

Our Strategic Plan is adapted from time to time by our management; we cannot assure you that our Strategic Plan will not be changed in the future. In the event our Strategic Plan changes based on the decisions of the Brazilian federal government as our controlling shareholder, our divestment plan might be revised. See “—Risks Relating to Our Relationship with the Brazilian Federal Government—The Brazilian federal government, as our controlling shareholder, may pursue certain macroeconomic and social objectives through us that may have a material adverse effect on us” and “Recent Developments” in this annual report. In addition, any changes to our Board of Directors and our management team may affect not only our ability to implement our Strategic Plan, but whether that Strategic Plan remains in place, as well as the direction of any subsequent strategic plans, including decisions related to the management of our operations and investments. See “Recent Developments” in this annual report.

If we are unable to successfully implement our planned partnerships and divestments, or if our divestment plan is modified, this may negatively impact our business, results and financial condition, including by potentially exposing us to short and medium-term liquidity constraints.

Climate change could impact our results and strategy.

Climate change poses new challenges and opportunities for our business. More stringent environmental regulations can result in the imposition of costs associated with greenhouse gas emissions, either through environmental agency requirements relating to mitigation initiatives or through other regulatory measures such as carbon pricing taxation limitations on greenhouse gas emissions, which have the potential to increase our operating costs and reduce production.

In addition, environmental laws that may be implemented in the future could increase litigation risks and have a material adverse effect on us.

The risks associated with climate change could also include difficulties to access capital due to public image issues with investors; changes in the consumer profile, with reduced consumption of fossil fuels; and energy transitions in the world economy, towards a lower carbon matrix, with the insertion of substitute products for fossil fuels and the increasing use of electricity for urban mobility. These factors may have a negative impact on the demand for our products and services and may jeopardize or even impair the implementation and operation of our businesses, adversely impacting our results and financial condition and limiting some of our growth opportunities.

Maintaining our long-term objectives for oil production depends on our ability to successfully obtain and develop oil reserves.

Our ability to maintain our long-term objectives for oil production is highly dependent upon our ability to obtain additional reserves and to successfully develop our existing reserves.

Our ability to obtain additional reserves depends upon exploration activities, which demand significant capital investments, expose us to the inherent risks, and may not lead to the discovery of commercially producible crude oil or natural gas reserves. We may also obtain additional reserves by proposing and implementing new development projects. Deepwater reservoirs exploitation demands significant investments and involves numerous factors beyond our control, such as significant changes in economic conditions, delays in availability of offshore equipment and critical resources, and unexpected operational conditions, including equipment failures or incidents, that may cause operations to be curtailed, delayed or cancelled.

In addition, increased competition in the oil and gas sector in Brazil and our own capital constraints may make it more difficult or costly to obtain additional acreage in bidding rounds for new contracts and to explore existing contracted areas.

We are not insured against business interruption for our Brazilian operations, and most of our assets are not insured against war or sabotage.

We generally do not maintain insurance coverage for business interruptions of any nature for our Brazilian operations, including business interruptions caused by labor disputes. If, for instance, our workers or those of our key third-party suppliers, vendors and service providers were to strike, the resulting work stoppages could have an adverse effect on us. In addition, we do not insure most of our assets against war or sabotage. Therefore, an attack or an incident causing an interruption of our operations could have a material adverse effect on our results and financial condition.

Additionally, our insurance policies do not cover all types of risks and liabilities related to safety, environment, health, government fees, fines or punitive damages, which may impact our results. There can be no guarantee that incidents will not occur in the future, that there will be insurance to cover the damages or that we will not be held responsible for these events, all of which may negatively impact our results.

In addition, we cannot guarantee that the amounts of insurance coverage contracted to cover risks related to our activities will be sufficient to guarantee, in the event of a claim, the payment of all damages caused, which may adversely affect our business and results.

Strikes, work stoppages or labor unrest by our employees or by the employees of our suppliers or contractors could adversely affect our results and our business.

Disagreements on how we manage our business, in particular divestments and their implications for our personnel, changes in our strategy, human resources policies regarding remuneration, benefits and headcount, employee contributions to cover the deficit of our pension plan, implementation of regulations recently created relating to health and pension plans and changes in labor law may lead to judicial inquiries, labor unrest, strikes and stoppages.

Strikes, work stoppages or other forms of labor unrest at any of our facilities or in major suppliers, contractors or their facilities or in sectors of society that affect our business could impair our ability to complete major projects and impact our ability to continue our operations and achieve our long-term objectives.

Our success also depends on our ability to continue to train and qualify our personnel so they can assume qualified senior positions in the future. We cannot assure you that we will be effective in training and qualifying our workforce sufficiently, nor that we will be able to achieve this goal without incurring additional costs. Any such failure could adversely affect our results and our business.

We rely on suppliers of goods and services for the operation and execution of our projects and, as a result, we may be adversely affected by failures or delays of such suppliers.

We are susceptible to the risks of performance and product quality within our supply chain. If our suppliers and service providers delay or fail to deliver goods and services owed to us, we may not meet our operational goals within the expected timeframe. In this case, we may ultimately need to postpone one or more of our projects, which may have an adverse effect on our results and financial condition.

Additionally, there may be risks of delays in the customs clearance process caused by external factors, which may impact the supply of goods to us and affect our operations and projects.

Furthermore, disruptions due to health events such as Covid-19 could have a negative impact on our results and on our supply chain as well.

Our projects and operations may affect, and be affected by, the expectations and dynamics of the communities where we operate, impacting our business, image and reputation.

It is part of our policy to respect human rights and maintain responsible relationships with the local communities located where we operate. However, the various locations where we operate are exposed to a wide range of issues related to political, social and economic instability, as well as intentional acts, such as illegal diversion, crime, theft, sabotage, terrorism, roadblocks and protests. We cannot control the changes in local dynamics and the expectations of the communities where we operate and establish our businesses.

Social impacts that result from our decisions and direct and indirect activities – especially those related to divestments – and disagreements with these communities and local governments may affect the schedule or budget of our projects, hinder our operations due to potential lawsuits, have a negative financial impact and harm our image and reputation.

Water scarcity in some regions where we operate may impact the availability of water in the quantity and/or quality required for our operations, as well as difficulties in obtaining grants of the right to use water resources, impacting the business continuity of our industrial units.

We have industrial facilities that demand the use of water, ranging from large users such as refineries to small users like distribution bases and terminals that, although not very hydro-intensive, are logistically important within our chain. In recent years, several regions of the world, including some regions in Brazil, have experienced events of shortage of freshwater, including for public consumption. In case of water scarcity, the grants pursuant to which we have the right to use water resources may be suspended or temporarily modified and, as a result, we may be required to reduce or suspend our production activities, because the availability of water for public consumption and watering of animals has priority over industrial use. This may jeopardize our business continuity, as well as generate financial impacts on us and our image.

Developments in the economic environment and in the oil and gas industry and other factors have resulted, and may result, in substantial write-downs of the carrying amount of certain of our assets, which could adversely affect our results and financial condition.

We evaluate on an annual basis, or more frequently when the circumstances require, the carrying amount of our assets for possible impairment. Our impairment tests are performed by a comparison of the carrying amount of an individual asset or a cash generating unit with its recoverable amount. Whenever the recoverable amount of an individual asset value or cash generating unit is less than its carrying amount, an impairment loss is recognized to reduce the carrying amount to the recoverable amount.

Changes in the economic, regulatory, business or political environment in Brazil or other markets where we operate, such as the recent significant decline in international crude oil and gas prices, the depreciation of the real, as well as changes in financing conditions, such as deterioration of risk perception and interest rates, for such projects, among other factors, may affect the original profitability estimates of our projects, which could adversely affect our results.

The ability to develop, adapt, access new technologies and take advantage of opportunities related to innovations in digital technology is fundamental to our competitiveness.

The availability of technologies that ensure the maintenance of our reserve rates and the viability of production in an efficient manner, as well as the development of new products and processes that respond to environmental regulations and new market trends, play a key role in increasing our long-term competitiveness. In the event some disruptive technology is introduced into the energy industry, changing performance standards, it would be important for us to have access to this technology, which may impact our competitiveness in relation to other companies.

Recent advances in data acquisition and analysis, connectivity, artificial intelligence, robotics and other technologies are changing the sources that create competitive advantage. Eventual failure to capture these opportunities may have an impact on our competitiveness in the energy market and our long-term objectives.

Our crude oil and natural gas reserve estimates involve some degree of uncertainty, which could adversely affect our ability to generate income.

Our proved crude oil and natural gas reserves set forth in this annual report are the estimated quantities of crude oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be economically producible from a given date forward from known reservoirs under existing economic and operating conditions (i.e. using prices and costs as of the date the estimate is made) according to applicable regulations. Reserve estimates presented are based on assumptions and interpretations, which are subject to risks and uncertainties. If the geological and engineering data that we use to estimate our reserves are not accurate, our reserves may be lower than the ones currently indicated in the volume estimates of our portfolio and reported by companies that conduct an evaluation on our reserves estimates. In addition, reserve estimates may be affected by significant changes in economic conditions. Downward revisions in our reserve estimates indicate lower future production, which could have an adverse effect on our results and financial condition.

We do not own any of the subsoil accumulations of crude oil and natural gas in Brazil.

Under Brazilian law, the Brazilian federal government owns all subsoil accumulations of crude oil and natural gas in Brazil and, according to the Brazilian regulation, the concessionaire or contracted party owns the oil and gas it produces from those subsoil accumulations pursuant to applicable agreements executed with the Brazilian federal government. We possess, as a concessionaire or contracted party of certain oil and natural gas fields in Brazil, the exclusive right to develop the volumes of crude oil and natural gas included in our reserves pursuant to concession and other agreements. Access to crude oil and natural gas reserves is essential to an oil and gas company’s sustained production and generation of income, and our ability to generate income would be adversely affected if the Brazilian federal government were to restrict or prevent us from exploiting these crude oil and natural gas reserves.

As a result of divestments and partnerships, we are exposed to risks that could lead to unforeseen financial losses.

Upon completion of each divestment or partnership (post-closing stage), we must perform integrated management and monitoring of the actions required and provided for in the contracts related to each project, paying attention to the fulfillment of the obligations established for the buyer and the seller. In the event of non-compliance with these obligations, the financial adjustments between the parties may show results different from the ones expected at the time of divestment or partnership. In addition, as determined by the ANP in the event of total or partial sale of our participation in E&P contracts, we remain jointly liable for abandonment costs after the new concessionaire’s production closes, should it default on this task. Such joint liability covers obligations arising prior to or after the transfer, provided that it arises from activities carried out on a date prior to the transfer. The same is true for any environmental liabilities.

Additionally, our sale of assets may negatively impact existing synergies or logistical issues within our company which may adversely affect our results.

In addition, our partners may not be able to meet their obligations, including financial obligations, which may jeopardize the viability of some projects in which we participate. When we act as operators, our partners may have the right to veto certain decisions, which may also affect the viability of some projects. Regardless of the partner responsible for the operations of each E&P project, we may be exposed to the risks associated with those operations, including litigation (where joint liability could apply) and the risk of government sanctions arising from such partnerships, which could have a material adverse effect on our operations, reputation, cash flow and financial condition.

We have assets and investments in other countries in South America, where the political, economic and social situation may negatively impact our business.

Although we have significantly reduced our participation abroad, we still operate and have businesses in several countries, particularly in South America in areas where there may be political, economic and social instabilities. In such regions, external factors may adversely affect the results and the financial condition of our subsidiaries in these countries, including: (i) the imposition of price controls; (ii) the imposition of restrictions on hydrocarbon exports; (iii) the fluctuation of local currencies against the real; (iv) nationalization of our oil and gas reserves and our assets; (v) increases in export tax and income tax rates for oil and oil products; and (vi) unilateral (governmental) and contractual institutional changes, including controls on investments and limitations on new projects.

If one or more of the risks described above occurs, we may lose part or all of our reserves in the affected country and may also fail to achieve our strategic objectives in these countries, or in our international operations as a whole, which may negatively impact our results and financial resources.

The performance of companies licensed to use our brands may impact our image and reputation.

Our divestment plan includes the partial or total sale of our companies in the fuel distribution segment and some of these businesses involve licensing agreements for our brands. Once a licensee holds the right to display our brands in products, services and communications, it can be perceived by stakeholders as our legitimate representative or spokesperson. Licensees’ actions or events related to their business, such as, failures, accidents, errors in business performance, environmental crises, corruption scandals and improper use of our brand, among other factors, may negatively impact our image and reputation.

Financial Risks

Our cash flow and profitability are exposed to the volatility of prices of oil, gas and oil products.

Most of our revenue derives primarily from sales of crude oil, oil products and, to a lesser extent, natural gas. International prices for oil and oil products are volatile and strongly influenced by conditions and expectations of world supply and demand. In addition, public health epidemics and pandemics (such as the Covid-19 pandemic during 2020) could affect oil prices and demand, which, consequently, may affect our financial results. Volatility and uncertainty in international oil prices are structural and likely to continue. Changes in oil prices usually result in changes in the prices of oil products and natural gas.

Currently, diesel and gasoline prices are defined taking into account the international import parity price, margins to remunerate the risks inherent in our operations and the level of market share. Price adjustments can be made at any time. Since one of our pricing objectives is to maintain fuel prices in parity with global market trends, substantial or extended declines in international crude oil prices may have a material adverse effect on our business, results and financial condition, and may also affect the value of our proved reserves.Additionally, the periodicity of the fuel readjustments, determined by us, may be revised due to exogenous factors that affect our customers, such as the transportation sector, among others and consequently, our business.

In the past, our management has adjusted our pricing of oil, gas and oil products from time to time. In the future, there may be periods during which our product prices will not be at parity with international product prices. Actions of the Brazilian government, as our controlling shareholder, could affect these pricing decisions. See “—Risks Relating to Our Relationship with the Brazilian Federal Government—The Brazilian federal government, as our controlling shareholder, may pursue certain macroeconomic and social objectives through us that may have a material adverse effect on us.” We cannot guarantee that our way of setting prices will not change in the future. As a result, when we are a net importer by volume of oil and oil products to meet Brazilian demand, increases in the price of crude oil and oil products in the international markets may have a negative impact on our costs of sales and margins, since the cost to acquire such oil and oil products may exceed the price at which we are able to sell these products in Brazil. A similar effect occurs when the real depreciates in relation to the U.S. dollar, as we sell oil and oil products in Brazil in reais and international prices for crude oil and oil products are set in U.S. dollars. A depreciation of the real increases our cost of imported oil and oil products, without a corresponding increase in our revenues unless we are able to increase the price at which we sell products in Brazil.

The Brazilian President has, at times, made statements regarding the need to modify and adjust our pricing policy for domestic conditions. In view of the statements made by the Brazilian President and the recent developments described in “Recent Developments” above, a new CEO, a new management team or Board of Directors may propose changes to our pricing policies, including a decision that such policies will not seek for alignment with international price parity. Changes to our fuel pricing policy could have a material adverse impact on our businesses, results, financial condition, and the value of our securities. See “Recent Developments” in this annual report.

We have substantial liabilities and may be exposed to significant liquidity constraints in the near and medium term, which could materially and adversely affect our financial condition and results.

We have incurred in a substantial amount of debt related to investments decisions taken in the past and in order to finance the capital expenditures needed to meet our long-term objectives.

Since there may be liquidity restrictions on the debt market to finance our planned investments and repay principal and interest obligations under the terms of our debt, any difficulty in raising significant amounts of debt capital in the future may impact our results and the ability to fulfill our Strategic Plan or any subsequent plan adopted.

The loss of our investment grade credit rating and any further lowering of our credit ratings could have adverse consequences on our ability to obtain financing in the market through debt or equity securities, or may impact our cost of financing, also making it more difficult or costly to refinance maturing obligations. The impact on our ability to obtain financing and the cost of financing may adversely affect our results and financial condition.

In addition, our credit rating is sensitive to any change in the credit rating of the Brazilian federal government. Any further lowering of the Brazilian sovereign’s credit ratings may have additional adverse consequences on our ability to obtain financing or the cost of our financing, and consequently, on our results and financial condition.

We are vulnerable to increased debt service resulting from depreciation of the real in relation to the U.S. dollar and increases in prevailing market interest rates.

As of December 31, 2020, 84.9% of our financial debt was denominated in currencies other than the real. A substantial portion of our indebtedness is, and is expected to continue to be, denominated in or indexed to the U.S. dollar and other foreign currencies. A further depreciation of the real against any of these other currencies will increase our debt service in reais, as the amount of reais necessary to pay principal and interest on foreign currency debt will increase with this depreciation.

Foreign exchange variations may have an immediate impact on our reported income. According to our cash flow hedge accounting policy, hedging relationships are designated for the existing natural hedge between our U.S. dollar denominated future exports that are considered to be highly probable (hedged item) and U.S. dollar denominated financial debt (hedging instruments).

Following a depreciation of the real, some of our operating expenses, capital expenditures, investments and import costs will increase. As most of our revenues are denominated in reais but linked to Brent prices in U.S. dollars, unless we increase the prices of our products in the local market to reflect the depreciation of the real, our cash generation relative to our capacity to service debt may decline.

To the extent we refinance our maturing obligations with newly contracted debt, we may incur additional interest expense.

As of December 31, 2020, 41.9% of our finance debt consisted of floating rate debt. We generally do not enter into derivative contracts or similar financial instruments or make other arrangements with third parties to hedge against the risk of an increase in interest rates.

To the extent that such floating rates rise, we may incur in additional expenses. Moreover, as we refinance our existing debt in the coming years, the mix of our indebtedness may change, specifically as it relates to the ratio of fixed to floating interest rates, the ratio of short-term to long-term debt, and the currencies in which our debt is denominated or to which it is indexed.

Changes that affect the composition of our debt and cause rises in short or long-term interest rates may increase our debt service payments, which could have an adverse effect on our results and financial condition.

The obligations relating to our pension plan (“Petros”) and health care benefits (“AMS”) are estimates, which are reviewed annually, and may diverge from actual future contributions due to changes in market and economic conditions, as well as changes in actuarial assumptions.

The criteria used for determining commitments relating to pension and health care plan benefits are based on actuarial and financial estimates and assumptions with respect to (i) the calculation of projected short-term and long-term cash flows and (ii) the application of internal and external regulatory rules. Therefore, there are uncertainties inherent in the use of estimates that may result in differences between the forecasted value and the actual realized value. In addition, the financial assets held by Petros to cover pension obligations are subject to risks inherent to investment management and such assets may not generate the necessary returns to cover the relevant liabilities, in which case extraordinary contributions from us, as sponsor, and the participants, may be required.

With respect to health care benefits (AMS), the projected cash flows can also be impacted by (i) higher medical costs than expected; (ii) additional claims arising from the extension of benefits; and (iii) difficulties in adjusting the contributions of participants to reflect increases in health care costs.

In addition, we and Petros face risks relating to pension funds in lawsuits that may occasionally require additional disbursements from us.

These risks may result in an increase in our liabilities and may adversely affect our results and our financial conditions.

We are exposed to the credit risks of certain of our customers and associated risks of default. Any material nonpayment or nonperformance by some of our customers could adversely affect our cash flow, results and financial condition.

Some of our customers may experience financial constraints or liquidity issues that could have a significant negative effect on their creditworthiness. Severe financial issues encountered by our customers could limit our ability to collect amounts owed to us, or to enforce the performance of obligations owed to us under contractual arrangements.

In addition, many of our customers finance their activities through their cash flows from operations, the incurrence of short and long-term debt.

Declining economic conditions in Brazil, and resulting decreased cash flows, combined with a lack of debt or equity financing for our customers may affect us, since many of our customers are Brazilian and may have significantly reduced liquidity and limited ability to make payments or perform their obligations.

This could result in a decrease in our cash flow and may also reduce or curtail our customers’ future demand for our products and services, which may have an adverse effect on our results and financial condition.

Compliance, Legal and Regulatory Risks

We may incur losses and spend time and financial resources defending pending litigations and arbitrations.

We are currently party to numerous legal and administrative proceedings relating to civil, administrative, tax, labor, environmental and corporate claims filed against us. These claims involve substantial amounts of money and other remedies, and the aggregate cost of unfavorable decisions could have a material adverse effect on our results and financial condition.

We may be frequently affected by changes in rules and regulation.

In addition, changes in rules and regulations applicable to us may have a material adverse effect on our financial condition and results.

These legal and administrative proceedings can have a negative impact on our results due to their outcome, such as contracts` termination and/or the revision of governmental authorizations.

Depending on the outcome, litigation can result in restrictions on our operations and have a material adverse effect on some of our businesses.

Failures to prevent, detect in a timely manner, or correct behaviors inconsistent with our ethical principles and rules of conduct may have a material adverse effect on our results and financial condition.

We are subject to the risk that our management, employees, contractors, or any person doing business with us may engage in fraudulent activity, corruption or bribery, circumvent or override our internal controls and procedures or misappropriate or manipulate our assets for their personal benefit or of third parties, against our interest.

This risk is heightened by the fact that we have many complex, high value contracts with local and foreign suppliers, as well as the geographic distribution of our operations and the wide variety of counterparties involved in our business.

We cannot guarantee that all our employees and contractors will comply with our principles and rules of ethical behavior and professional conduct aimed at guiding our management, employees and service providers. Any failure, whether actual or perceived, to abide by our ethical principles or to comply with applicable governance or regulatory obligations could harm our reputation, limit our ability to obtain financing and have a material adverse effect on our results and financial condition, if not detected in a timely manner.

We are subject to the risk that our internal controls may become inadequate in the future because of changes in conditions, or that our degree of compliance with our policies and procedures may deteriorate.

Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. It is also difficult to project the effectiveness of internal control over financial reporting for future periods, as our controls may become inadequate because of changes in conditions, or because our degree of compliance with our policies or procedures may deteriorate and we cannot be certain that in the future additional material weaknesses will not occur or otherwise be identified in a timely manner.

Any failure to maintain our internal control over financial reporting could adversely impact our ability to report our financial results in future periods accurately and in a timely manner, and to file required forms and documents with government authorities, including the SEC. We may also be unable to detect accounting errors in our financial reports or may even have to restate our financial results. Any of these occurrences may adversely affect our business and operation, and may generate negative market reactions, potentially affecting our financial conditions leading to a decline of our shareholder value.

Any violation of the agreements that resolved the investigations conducted by the SEC and the DoJ and potential future investigations regarding the possibility of noncompliance with the U.S. Foreign Corrupt Practices Act could adversely affect us. Violations of this or other laws may require us to pay fines and expose us and our employees to criminal sanctions and civil suits.

In 2018, in light of facts uncovered in connection with the Lava Jato investigation, we entered into a nonprosecution agreement (“NPA”) with the DoJ, pursuant to which we admitted that certain of our former executives and officers had engaged in conduct during the period from 2004 to 2012 that gave rise to violations of books and records and internal controls provisions under U.S. law. As part of the SEC resolution, we settled charges of violation of the United States Securities Act of 1933 and the books and records and internal control provisions of the Securities Exchange Act of 1934, without admitting the SEC allegations.

If, during the term of the NPA (three years, unless extended), the DoJ determines that we have committed a felony under U.S. federal law, provided deliberately false or misleading information, or otherwise breached the NPA, we could be subject to prosecution and additional fines or penalties, including charges under the U.S. Foreign Corrupt Practices Act (“FCPA”).

The Lava Jato investigation is still in progress by Brazilian authorities and additional relevant information affecting our interests may come to light. Adverse developments in relation to any of the above matters could negatively impact us and could divert the efforts and attention of our management team from our ordinary business operations. In connection with any further investigations or proceedings carried out by any authorities in Brazil or in any other jurisdiction, or any violation of the NPA, we may be required to pay fines or other financial relief, or consent to injunctions or orders on future conduct or suffer other penalties, any of which could have a material adverse effect on us.

We may face additional proceedings related to the Lava Jato investigation.

In 2018 and 2019, we paid a total of US$2,950 million in the United States to settle a consolidated securities class action filed in connection with the Lava Jato proceedings.

We are currently party to a collective action commenced in the Netherlands, an arbitration proceeding in Argentina, and arbitration and judicial proceedings commenced in Brazil. In each case, the proceedings were brought by investors (or entities that allegedly represent investors’ interests) who purchased our shares traded on the B3 Stock Exchange or other securities issued by us outside of the United States, alleging damages caused by facts uncovered in the Lava Jato investigations.

In Argentina, we are the defendant in two criminal lawsuits. The first lawsuit alleges non-compliance by us with the obligation to disclose to the Argentinian market a pending class action filed by Consumidores Financieros Asociación Civil para su Defensa before the Judicial Commercial Courts, pursuant to provisions of Argentine capital markets law. The second criminal action alleges a fraudulent offer of securities aggravated by allegedly false information included in our financial statements issued prior to 2015.

In addition, EIG Management Company, LLC (“EIG Management”) and eight of EIG Management’s managed funds (“EIG Funds”) (together with EIG Management, “EIG”) filed a complaint against us on February 23, 2016 before the United States District Court for the District of Columbia. The dispute arises out of the EIG Funds’ indirect purchase of equity interests in Sete Brasil Participações S.A., and EIG currently has claims against us for fraud and aiding and abetting fraud related to the Lava Jato investigation. EIG seeks damages of at least US$221 million.

It is possible that additional complaints or claims might be filed in the United States, Brazil, or elsewhere against us relating to the Lava Jato investigation in the future. It is also possible that further information damaging to us and our interests will come to light in the course of the ongoing investigations of corruption by Brazilian authorities. Our management may be required to direct its time and attention to defending these claims, which could prevent them from focusing on our core business.

In addition, as a result of the continuing Lava Jato investigation, substantive additional information may come to light in the future that would make the estimate that we made in 2014 for overpayments incorrectly capitalized appear, retrospectively, to have been materially low or high. In prior years, we were required to write off capitalized costs representing amounts that we overpaid for the acquisition of property, plant and equipment. We may be required to restate our financial statements to further adjust the write offs representing the overstatement of our assets recognized in our audited consolidated financial statements for prior years.

Differing interpretations and numerous environmental, health and safety regulations and industry standards that are becoming more stringent may result in increased capital and operating expenditures and decreased production.

Our activities are subject to evolving industry standards and best practices, and a wide variety of federal, state and local laws, regulations and permit requirements relating to the protection of human health, safety and the environment, both in Brazil and in other jurisdictions where we operate. These laws, regulations and requirements may result in significant costs, which may have a negative impact on the profitability of the projects we intend to implement or may make such projects economically unfeasible.

Any substantial increase in expenditures for compliance with environmental, health or safety regulations may have a material adverse effect on our results and financial condition. These increasingly stringent laws, regulations and requirements may result in significant decreases in our production, including unplanned shutdowns, which may also have a material adverse effect on our results and financial condition.

Moreover, we have operational units in several metropolitan regions of the country and, in some of these locations, the concentration of pollutants generated by a variable set of polluters (industries, passenger cars, trucks, etc.) may exceed the air quality standards defined by legislation. Recently, more restrictive air quality standards were defined, which may increase the demands on industrial units installed in regions that already have air quality problems. This could include obstacles to obtaining or renewing operating licenses and the need to adopt new environmental control practices such as new types of practices, increasing the frequency of monitoring emissions and installing new environmental protection equipment, generating higher costs for us. There is also a risk that the use of fuels will be subject to restrictions related to the level of pollutant emissions, which may increase the need for investments in refineries or loss of market.

In addition, changes in interpretation or differing interpretations regarding environmental, health and safety regulations, as well as our decision to settle any claims related to such regulations, could have a material adverse effect on our financial condition and results.

Differing interpretations of tax regulations or changes in tax policies could have an adverse effect on our financial condition and results.

We are subject to tax rules and regulation that may be interpreted differently over time, or that may be interpreted differently by us and Brazilian tax authorities (including the federal, state and municipal authorities), both of which could have a financial impact on our business. In some cases, when we have exhausted all administrative appeals relating to a tax contingency, further appeals must be made in the judicial courts, which may require that, in order to appeal, we provide collateral to judicial courts, such as the deposit of amounts equal to the potential tax liability in addition to accrued interest and penalties. In certain of these cases, settlement of the matter may be a more favorable option for us.

We may face similar situations in which our interpretation of a tax regulation may differ from that of tax authorities, or tax authorities may dispute our interpretation and we may eventually take unanticipated provisions and charges. In addition, the eventual settlement of one tax dispute may have a broader impact on other tax disputes. Any of these occurrences could have a material adverse effect on our financial condition and results.

Differences in interpretations and new regulatory requirements by the agencies in our industry may result in our need for increased investments, expenses and operating costs, or may cause delays in production.

Our activities are subject to regulation and supervision by regulatory agencies, such as the ANP. Issues such as local content requirements, procedures for the unification of areas, definition of reference prices for the calculation of royalties and governmental participation, among others, are subject to a regulatory regime overseen by the ANP.

Any regulatory change, as well as change or differences of interpretation between us and regulatory agencies may materially impact our results, since such newly enacted or revised pronouncements or interpretations may directly affect the economic and technical assumptions that guide our investment decisions.

We are subject to sanctions or the granting of environmental licenses and permits, that may result in delays to deliver some of our projects and difficulties to reach our crude oil and natural gas production objectives.

Our activities are subject to and depend on the granting of environmental licenses and permits by a wide variety of federal, state and local laws, relating to the protection of human health, safety and the environment, both in Brazil and in other jurisdictions in which we operate. As environmental, health and safety regulations become increasingly complex, it is possible that our efforts to comply with such laws and regulations will increase substantially in the future.

We cannot ensure that the planned schedules and budgets of our projects, including the decommissioning of mature fields and divestments, will not be affected by demands of new regulatory bodies or that the relevant licenses and permits will be transferred or issued in a timely manner. Potential delays in obtaining licenses may impact our crude oil and natural gas production objectives, negatively influencing our results and financial condition.

We are also subject to sanctions that may result in delays in the execution of some of our projects and difficulties in achieving our oil and natural gas production objectives, such as embargoes or partial or total interdictions.

Operations with related parties may not be properly identified and handled.

Transactions with related parties must follow market standards and generate mutual benefit. Decision processes surrounding such transactions must be objective and documented. Further, we must comply with the rules of competition and adequate disclosure of information, in accordance with the applicable legislation and as determined by the CVM and the SEC. The possible failure of our process to identify and deal with these situations may adversely affect our economic and financial condition, as well as lead to regulatory assessments by agencies.

We may be required by courts to guarantee the supply of products or services to defaulted counterparties.

As a company controlled by the federal government and operating throughout Brazil, we may be required by the Brazilian courts to provide products and services to clients, whether public or private institutions, with the purpose of guaranteeing supplies to the domestic oil and gas market, even in situations where these clients and institutions are in default with contractual or legal obligations. Such supply in exceptional situations may adversely affect our financial position.

Government Ownership and Country Risks

The Brazilian federal government, as our controlling shareholder, may pursue certain macroeconomic and social objectives through us that may have a material adverse effect on us.

Our Board of Directors consists of a minimum of seven and a maximum of eleven members, who are elected at our shareholders’ meeting for a term of up to two years, with a maximum of three consecutive reelections allowed. Brazilian law requires that the Brazilian federal government owns a majority of our voting stock, and so long as it does, the Brazilian federal government will have the power to elect a majority of the members of our Board of Directors and, through them, the executive officers who are responsible for our day-to-day management. As a result, we may engage in activities that give preference to the objectives of the Brazilian federal government rather than to our own economic and business objectives, which may have an adverse effect on our results and financial condition. The interests of our controlling shareholder may differ from the interests of our other shareholders, and the decisions taken by our controlling shareholder may involve different considerations, strategies and policies than they have in the past.

Presidential elections in Brazil occur every four years, and changes in elected representatives may lead to a change of the members of our Board of Directors appointed by the controlling shareholder, which may further impact the management of our business strategy, including our Strategic Plan, and guidelines, as mentioned above.

As our controlling shareholder, the Brazilian federal government has guided and may continue to guide certain macroeconomic and social policies through us, pursuant to Brazilian law. Accordingly, we may make investments, incur costs and engage in transactions with parties or on terms that may have an adverse effect on our results and financial condition.

Fragility in the performance of the Brazilian economy, regulatory changes and investor perception of these conditions may adversely affect the results of our operations and our financial performance and may have a material adverse effect on us.

Our activities are strongly concentrated in Brazil. Economic policies adopted by the Brazilian federal government may have important effects on Brazilian companies, including us, and on market conditions and prices of Brazilian securities. Our financial condition and results may be adversely affected by the following factors and the response of the Brazilian federal government to these factors:

Uncertainty over whether the Brazilian federal government will implement changes in policy or regulations that may affect any of the factors mentioned above or other factors in the future may lead to economic uncertainty in Brazil and increase the volatility of the Brazilian securities market and securities issued abroad by Brazilian companies, which may have a material adverse effect on our results and financial condition.

Instability in the Brazilian Political Environment.

The Brazilian economy has been and continues to be affected by political events in Brazil, which have also affected the confidence of investors and the public in general, adversely affecting the performance of the Brazilian economy and resulting in heightened volatility in the Brazilian securities markets. You should make your own assessment about Brazil and prevailing conditions in the country before deciding to invest in us.

The Brazilian political environment has been considered polarized in the past few years. Brazil had not fully recovered from the impact of the 2015-2016 economic crisis when the country began feeling the effects of the Covid-19 pandemic, which severely affected the economy and increased political tensions.

The Brazilian government’s policies to address economic and fiscal reforms in response to the Covid-19 pandemic remain divisive issues for Brazilian society. Any developments to the current political situation or any new relevant facts in connection with the Brazilian political situation could adversely affect Brazil’s economic growth and, in turn, affect our financial condition and results of operations.

In addition, any difficulties of the Brazilian government in obtaining a majority vote in the national congress to implement reforms may result in congressional gridlock and political unrest, which could adversely affect us. Uncertainties relating to the implementation by the Brazilian government of changes to monetary, fiscal and social security policies and related legislation may contribute to economic instability and heighten market volatility and may materially and adversely affect us.

Allegations of political corruption against members of the Brazilian government could create economic and political instability.

In the past, members of the Brazilian federal government and the Brazilian legislative branch have faced allegations of political corruption. As a result, a number of politicians, including senior federal officials and congressmen, resigned or have been arrested.

Currently, elected officials and other public officials in Brazil are being investigated for allegations of unethical and illegal conduct identified during the Lava Jato investigation being conducted by the Office of the Brazilian Federal Prosecutor. The potential outcome of these investigations is unknown, but they have already had an adverse impact on the image and reputation of the implicated companies (including us), in addition to the adverse impact on general market perception of the Brazilian economy. These proceedings, their conclusions or further allegations of illicit conduct could have additional adverse effects on the Brazilian economy. Such allegations may lead to further instability, or new allegations against Brazilian government officials and others may arise in the future, which could have a material adverse effect on us. We cannot predict the outcome of any such allegations nor their effect on the Brazilian economy.

Equity and Debt Securities Risks

The size, volatility, liquidity or regulation of the Brazilian securities markets may curb the ability of holders of ADSs to sell the common or preferred shares underlying our ADSs.

Our shares are among the most liquid traded on the B3, but overall, the Brazilian securities markets are smaller, more volatile and less liquid than the major securities markets in the United States and other jurisdictions, and may be regulated differently from the way in which U.S. investors are accustomed. Factors that may specifically affect the Brazilian equity markets may limit the ability of holders of ADSs to sell the common or preferred shares underlying our ADSs at the price and time they desire.

Holders of our ADSs may be unable to exercise preemptive rights with respect to the common or preferred shares underlying the ADSs.

Holders of ADSs who are residents of the United States may not be able to exercise the preemptive rights relating to the common or preferred shares underlying our ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the common or preferred shares relating to these preemptive rights, and therefore we may not file any such registration statement. If a registration statement is not filed and an exemption from registration does not exist, JPMorgan, as depositary, will attempt to sell the preemptive rights, and holders of ADSs will be entitled to receive the proceeds of the sale. However, the preemptive rights will expire if the depositary cannot sell them. For a more complete description of preemptive rights with respect to the common or preferred shares, see “Shareholder Information – Shares and Shareholders – Shareholders’ Rights – Other Shareholders’ Rights” in this annual report.

If holders of our ADSs exchange their ADSs for common or preferred shares, they risk losing the ability to timely remit foreign currency abroad and other related advantages.

The Brazilian custodian for our common or preferred shares underlying our ADSs must obtain a certificate of registration from the Central Bank of Brazil to be entitled to remit U.S. dollars abroad for payments of dividends and other distributions relating to our preferred and common shares or upon the disposition of the common or preferred shares.

The conversion of ADSs directly into ownership of the underlying common or preferred shares is governed by CMN Resolution No. 4,373 and foreign investors who intend to do so are required to appoint a representative in Brazil for the purposes of CMN Resolution No. 4,373, who will be in charge for keeping and updating the investors’ certificates of registrations with the Central Bank of Brazil, which entitles registered foreign investors to buy and sell directly on the B3. Such arrangements may require additional expenses from the foreign investor. Moreover, if such representatives fail to obtain or update the relevant certificates of registration, investors may incur in additional expenses or be subject to operational delays which could affect their ability to receive dividends or distributions relating to the common or preferred shares or the return of their capital in a timely manner.

The custodian’s certificate of registration or any foreign capital registration directly obtained by such holders may be affected by future legislative or regulatory changes, and we cannot assure such holders that additional restrictions applicable to them, the disposition of the underlying common or preferred shares, or the repatriation of the proceeds from the process will not be imposed in the future.

Holders of our ADSs may face difficulties in protecting their interests.

Our corporate affairs are governed by our Bylaws and Law No. 6,404/76 (“Brazilian Corporate Law”), which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States or elsewhere outside Brazil. In addition, the rights of an ADS holder, which are derivative of the rights of holders of our common or preferred shares, as the case may be, to protect their interests are different under Brazilian Corporate Law than under the laws of other jurisdictions. Rules against insider trading and self-dealing and the preservation of shareholder interests may also be different in Brazil than in the United States. In addition, the structure of a class action in Brazil is different from that in the U.S. Under Brazilian law, shareholders in Brazilian companies do not have standing to bring a class action, and under our Bylaws must, generally with respect to disputes concerning rules regarding the operation of the capital markets, arbitrate any such disputes. See “Shareholder Information – Shares and Shareholders – Dispute Resolution” in this annual report.

We are a state-controlled company organized under the laws of Brazil, and all of our directors and officers reside in Brazil. Substantially all of our assets and those of our directors and officers are located in Brazil. As a result, it may not be possible for holders of ADSs to effect service of process upon us or our directors and officers within the United States or other jurisdictions outside Brazil or to enforce against us or our directors and officers’ judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain requirements are met, holders of ADSs may face greater difficulties in protecting their interest in actions against us or our directors and officers than would shareholders of a corporation incorporated in a state or other jurisdiction of the United States.

Holders of our ADSs do not have the same voting rights as our shareholders. In addition, holders of ADSs representing preferred shares do not have voting rights.

Holders of our ADSs do not have the same voting rights as holders of our shares. Holders of our ADSs are entitled to the contractual rights set forth for their benefit under the deposit agreements. ADS holders exercise voting rights by providing instructions to the depositary, as opposed to attending shareholders’ meetings or voting by other means available to shareholders. In practice, the ability of a holder of ADSs to instruct the depositary as to voting will depend on the timing and procedures for providing instructions to the depositary, either directly or through the holder’s custodian and clearing system.

In addition, a portion of our ADSs represents our preferred shares. Under Brazilian Corporate Law and our Bylaws, except for specific situations, holders of preferred shares do not have the right to vote in shareholders’ meetings. Holders of ADSs representing preferred shares are not entitled to vote most of decisions as well. See “Shareholders – Shares and Shareholders – Shareholders Rights – Shareholders’ Meetings and Voting Rights” in this annual report.

The market for PGF’s debt securities may not be liquid.

Some of PGF’s notes are not listed on any securities exchange and are not quoted through an automated quotation system. Most of PGF’s notes are currently listed both on the NYSE and the Luxembourg Stock Exchange and trade on the NYSE Euronext and Euro Multilateral Trading Facility (“MTF”) market, respectively, although most trading in PGF’s notes occurs over-the-counter. PGF can issue new notes that can be listed in markets other than the NYSE and the Luxembourg Stock Exchange and traded in markets other than the NYSE Euronext and the Euro MTF market. We can make no assurance as to the liquidity of or trading markets for PGF’s notes. We cannot guarantee that the holders of PGF’s notes will be able to sell their notes in the future. If a market for PGF’s notes does not develop, holders of PGF’s notes may not be able to resell the notes for an extended period of time, if at all.

We would be required to pay judgments of Brazilian courts enforcing our obligations under the guaranty relating to PGF’s notes only in reais.

If proceedings were brought in Brazil seeking to enforce our obligations in respect of the guaranty relating to PGF’s notes, we would be required to discharge our obligations only in reais. Under Brazilian exchange controls, an obligation to pay amounts denominated in a currency other than reais, which is payable in Brazil pursuant to a decision of a Brazilian court, will be satisfied in reais at the rate of exchange in effect on the date of payment, as determined by the Central Bank of Brazil.

A finding that we are subject to U.S. bankruptcy laws and that the guaranty executed by us was a fraudulent conveyance could result in PGF noteholders losing their legal claim against us.

PGF’s obligation to make payments on the PGF notes is supported by our obligation under the corresponding guaranty. We have been advised by our external U.S. counsel that the guaranty is valid and enforceable in accordance with the laws of the State of New York and the United States. In addition, we have been advised by our general counsel that the laws of Brazil do not prevent the guaranty from being valid, binding and enforceable against us in accordance with its terms. In the event that U.S. federal fraudulent conveyance or similar laws are applied to the guaranty, and we, at the time we entered into the relevant guaranty:

Corporate Risk Management

We believe that integrated and proactive risk management is essential for the delivery of results in a safe and sustainable way. Our risk-management process is centralized, allowing the standardization and uniformity of risk analysis and the management of risk responsibilities. We have an executive risk committee to advise our Board of Executive Officers in the analysis of matters relating to risk management. Each of our organizational units must identify, prioritize, monitor and, together with our business risks teams, periodically communicate to the executive risk committee the main risks involved in the activities performed by such unit, as well as planned mitigating actions.

In order to assist in this process, our corporate risk management policy establishes guidelines and responsibilities and is based on the following fundamental principles:

The risk management organizational structure, that is under the supervision of our CFO, is responsible for:

In order to support the risk management process, our corporate risk management policy specifies authorities to be consulted, responsibilities to be undertaken, and five principles and ten guidelines that drive our risk management initiatives.

This policy has a comprehensive approach to corporate risk management, which combines the traditional economic and financial risk management approach with other relevant areas of interest, such as protection of life, health and environment, assets and business information protection (property and security) and combating fraud and corruption (legal and compliance), among other corporate risks. With a focus on integrating risk management actions, our policy allows any employee to have access to the terms and concepts related to risk management, as well as to the measures taken and parties responsible for the management of each of the risks we are exposed to.

For further information regarding our revised business risk management policy, please visit our website at www.petrobras.com.br/ir. The information on this website, which might be accessible through a hyperlink resulting from this URL, is not and shall not be deemed to be incorporated into this annual report.

Disclosures about Market Risk

Commodity Price Risk

We operate in an integrated manner throughout the various stages of the oil industry. A significant portion of our results relate directly to oil exploration and production, refining and the sale of natural gas, biofuels, and electricity in Brazil. As our purchases and sales of crude oil and oil products are linked to international commodity prices, we are exposed to their price fluctuations, which may influence our profitability, our cash flow from operations and our financial situation.

We prefer to maintain exposure to the price cycle than use financial derivatives to systematically protect purchases and sale transactions that focus on fulfilling our operation needs. However, based on crude oil market conditions and prospects of realization of our Strategic Plan, we may decide to implement protection strategies using financial instruments to manage our cash flow expenses.

In addition, we are party to derivative contracts in order to protect our margins for short-term commercial transactions carried out abroad. Our derivatives contracts provide economic hedges for oil product purchases and sales in the global markets, generally expected to occur within a 30 to 360-day period.

For more information about our commodity derivatives transactions, including a sensitivity analysis demonstrating the net change in fair value of a 25% (or 50%) adverse change in the price of the underlying commodity for options and futures, see Note 38 to our audited consolidated financial statements.

Exposure to interest rate and exchange rate risk

For information about interest rate and exchange rate risk, see “Operating and Financial Review and Prospects” in this annual report.

Insurance

Regarding operational risks, our policy is to maintain insurance coverage when the obligation to maintain such coverage derives from a legal or contractual instrument or our Bylaws; or the event covered may cause significant damage to our financial results, and coverage is economically feasible.

We maintain several insurance policies, including policies against fire, operational risk, engineering risk, property damage coverage for onshore and offshore assets such as fixed platforms, floating production systems and offshore drilling units, hull insurance for tankers and auxiliary vessels, third party liability insurance and transportation insurance. The coverages of these policies are contracted according to the objectives we define and the limitations imposed by the global insurance and reinsurance markets. Although some policies are issued in Brazil, most of our policies are reinsured abroad with reinsurers rated A- or higher by Standard & Poor’s or A3 by Moody’s and/or B ++ or higher by A.M. Best.

Our policies are subject to deductibles, limits, exclusions and limitations, and there is no assurance that such coverage will adequately protect us against liability from all possible consequences and damages associated with our activities. Thus, it is not possible to assure that insurance coverage will exist for all damages resulting from possible incidents or accidents, which may negatively affect our results.

Specifically, we do not maintain insurance coverage to safeguard our assets in case of war or sabotage. We also do not maintain coverage for business interruption, except for some specific assets in Brazil. Generally, we do not maintain coverage for our wells in operation in Brazil, except when required by a joint operating agreement. In addition, our third-party liability policies do not cover government fines or punitive damages.

Our national property damage policies have a maximum deductible of US$180 million and their indemnity limits can reach US$2.2 billion for refineries and US$1.9 billion for platforms, depending on the replacement value of our assets.

Our general third-party liability policy with respect to our onshore and offshore activities in Brazil, including losses due to sudden pollution, such as oil spills, has a maximum indemnity limit of US$250 million with an associated deductible of US$10 million. We also maintain marine insurance with additional protection and indemnity against third parties related to our domestic offshore operations with an indemnity limit of US$50 million up to US$500 million, depending on the type of vessel. For activities in Brazil, in the event of an explosion or similar event on one of our non-fixed offshore platforms, these policies may provide third-party combined liability coverage of up to US$750 million. In addition, although we do not insure most of our pipelines against property damage, we have insurance against damages or losses to third parties arising from specific incidents, such as unexpected infiltration and oil pollution.

Outside Brazil, we maintain different levels of third-party liability insurance, as a result of a variety of factors, including country risk assessments, whether we have onshore and offshore operations, or legal requirements imposed by a particular country in which we operate. We maintain separate well-control insurance policies in our international operations to cover liabilities arising from the uncontrolled eruption of oil, gas, water or drilling fluid. In addition, such policies cover claims of environmental damage caused by wellbore explosion and similar events as well as related clean-up costs with coverage limits of up to US$198 million depending on the country.

Emerging Risks

Emerging risks are the long-term risks that we have identified as the most severe and could significantly impact the execution of our current and subsequent strategic plans. We detail below the main emerging risks, which are also briefly described in “Risks – Risk Factors” in this annual report, either as a separate risk factor or as part of one or more risk factors.

Technology systems, security (cybersecurity) systems, telecommunications systems and services.

Recently, concerns about information security failures have been growing in the world. These failures may have an external source, such as malware, hacking, cyber terrorism, among others. These failures can also have an internal origin, through intentional and fraudulent acts by employees and contractors with the purpose of obtaining personal advantages.

The perception of the severity of this risk by our management has increased significantly over time. In addition to cybersecurity issues, the concern and actions by our management aimed to improve protection and privacy of personal data held by us.

According to Law No. 13,709/2018 – Lei Geral de Proteção de Dados Pessoais (“LGPD”), we will be subject to penalties in cases of disclosure or misuse of personal information.

We are using layers of protection over e-mails, analysis of vulnerabilities in networks and applications, audit trails in information systems, privileged access control, updating security packages, authentication of devices and users for access to the internet, corporate network, internet content filters, encryption and segregation of key functions.

Additionally, in order to guarantee our security in a world where data is considered valuable we have maintained an area dedicated to information security, linked to the Digital Transformation and Innovation Executive Officer, for the purpose of centralizing management related to all security information disciplines.

The strategic initiative for digital transformation of our Strategic Plan aims to prepare for a competitive environment that is being increasingly influenced by digital technologies and a new way of working, based on collaboration. The possibilities for transforming operational and business models bring opportunities to increase the efficiency and safety of operations, reduce costs and bring more robustness and agility to decisions. Efforts go beyond the implementation of technological solutions, also seeking to implement a culture of innovation that promotes experimentation, multifunctional collaboration and information sharing.

For more details, see “Risks – Risk Factors – Digital Transformation” in this annual report.

Carbon Risk

The Paris Agreement requires a profound reduction in GHG emissions and a transformation of the energy supply. Our scenarios point to an unequivocal energy transition and alterations are already being observed in the energy markets, through regulatory changes and some physical impacts of climate change on the infrastructure of companies and countries. The industry leaders have been expanding their commitments to lower carbon emissions, and the market’s increasing demand for transparency of the results related to the emissions of greenhouse gases and the impacts of the transition to low carbon emissions for the companies. The transition generates a series of additional expenses, both for controlling emissions and eventual adaptations to avoid or mitigate physical risks of the units, as well as for adapting to the business to regulatory and market changes.

The scenario predicts possible reduction in the demand for fossil fuels, carbon pricing generating higher costs, and segmentation of oils and fuels according to their carbon intensity. Greater requirements regarding the transparency of actions related to low carbon transition can also be expected, with the potential to generate image issues, loss of investors and greater difficulty in capital access.

While we work to safeguard a solid financial position in the medium and long term, we also work on our competitiveness to capture potential renewable opportunities from a long-term perspective. In this context, the Strategic Plan presents the strategies to “Undertake research aimed at operating, in the long term, in petrochemical and renewable energy businesses with a focus on wind and solar power in Brazil” and “Add value to the refining park, with more efficient processes and new BioRefining products, such as Biokerosene and Renewable Diesel Fuel, moving towards a low carbon market.”

In the short and medium term, our Strategic Plan also contains ten sustainability commitments, six of which are related to carbon with clear and well-defined metrics.

Since 2019, metrics related to carbon intensity in our refining and upstream operations have been integrated into executive remuneration. In 2020, these metrics were incorporated as a main indicator, influencing variable remuneration not only for executives, but for all company employees.

We have a greenhouse gas emission mitigation corporate program that aims to ensure compliance with disclosed commitments and is part of our US$1 billion investment forecast for environmental commitments between 2021 and 2025. The program involves all our operational areas and includes actions related to reduce natural gas flaring, CO₂ reinjection, energy efficiency gains and control of operational losses.

The commitments and actions of the GHG emissions mitigation program are monitored at different levels of governance, including senior management. In 2020, we created a climate change executive management position, reinforcing our existing carbon governance, also composed of advisory committees of the Executive Board and the Board of Directors, in addition to several management level positions that evaluate carbon aspects in its activities.

In addition, we assess the physical risk associated with climate change in our operations, through research and development of climate regionalization, with renowned institutions in Brazil and abroad (Federal University of São Paulo - USP, National Institute for Space Research - INPE and National Oceanic and Atmospheric Administration - NOAA), of parameters considered potentially more susceptible to these changes, such as water availability for our refineries and thermoelectric plants and wave, wind and current patterns for our offshore platforms, generating qualified information for the process of our operations adaptation.

The Covid-19 Pandemic

Public health epidemics and pandemics, such as the Covid-19 pandemic, can impact our workforce, our partners and our suppliers, which can affect our supply chain and the productivity of many our activities, including impact on some of our facilities, such as our platforms, refineries, terminals, among others. This may have a negative impact on our results and financial condition. A pandemic has the potential to influence our activities in many ways, which can result in operational discontinuity, increased costs, reduced revenues, compromised supply, delays in processes and projects, interruption and / or interdiction of activities. In addition, public health epidemics and pandemics may affect oil prices and demand and, consequently, our financial results. The risk of mass contagion of our own employees and contractors is being monitored by us. During the Covid-19 pandemic, we have observed:

In order to manage a situation that involves the mass contagion of our employees due to epidemics or public health pandemics, we must use mitigating actions that minimize the impact on our operations. Some of these actions are already being carried out at the time of the Covid-19 pandemic, such as the constitution of the ORS (Organizational Response Structure) for organizing actions and making decisions, adopting different work regimes for reducing exposure, defining ways operating conditions optimized for the prioritized assets and units and providing the necessary resources for operational continuity.

Exploration and Production

Overview

Our oil and natural gas exploration and production activities are the major components of our investment portfolio and include offshore and onshore exploration, appraisal, development, production and incorporation of oil and natural gas reserves, producing oil and natural gas in a safe and profitable way.

Our activities are focused on deepwater and ultra-deepwater oil reservoirs in Brazil, which accounted for 94% of our total production in 2020. We also have activities in mature fields in shallow waters and onshore, as well as outside Brazil as detailed below in this annual report. Brazilian exploration and production assets represent 93% of our worldwide blocks and fields, 99% of our global oil production and 99.7% of our oil and natural gas reserves.

We have 360 assets in exploration and production including 109 consortia with other oil and gas companies. From the 360 blocks and fields, 335 are under Concession Agreements, 15 are Production Sharing Agreements and 10 are regulated by Transfer of Rights Agreements.

Exploration and Production assets
(Number of assets)

Like most major oil and gas companies, we operate in partnerships using E&P consortia in the exploration of blocks and the production of oil fields in Brazil, mainly in ultra-deepwaters.

We lead and operate E&P consortia that are responsible for some major projects under development, such as Mero (Petrobras 40%, Shell 20%, Total 20%, CNODC 10% and CNOOC 10%), Berbigão, Sururu and Oeste de Atapu (all with Petrobras 42.5%, Shell 25%, Total 22.5% and Petrogal 10%).

These E&P consortia also comprise some of the biggest production fields in Brazil, such as Tupi (Petrobras 65%, Shell 25%, Petrogal 10%), Sapinhoá (Petrobras 45%, Shell 30%, Repsol Sinopec 25%), Roncador (Petrobras 75%, Equinor 25%) and Tartaruga Verde (Petrobras 50%, Petronas 50%). We also operate these fields in the Pre-salt Polygon area.

Other Basins

We produce oil and gas and hold exploration acreage in 17 other basins in Brazil. The most significant potential for exploratory success within our other basins are the Equatorial Margin and East Margin.

International

Outside Brazil, we have activies in South America and North America. In West Africa we had activities until January 14, 2020. We have focused on opportunities to leverage the deepwater expertise we have developed in Brazil. However, since 2012 we have been substantially reducing our international activities through the sale of assets in accordance with our portfolio management.

South America

We conduct exploration and production activities in Argentina, Bolivia and Colombia.

In Argentina, through our subsidiary Petrobras Operaciones S.A., we have a 33.6% working interest in the Rio Neuquén production asset. Our unconventional gas and condensate production is concentrated in the Neuquén Basin. In 2020, our production of oil and gas in Argentina, including NGL, was 5.9 mboed.

In Bolivia, our gas and condensate production derives primarily from the San Alberto and San Antonio fields with 35% working interest in each of those service operation contracts, which are operated mainly to supply gas to Brazil and Bolivia. In 2020, our production of oil and gas in Bolivia, including NGL, was 28.6 mboed. The return of those contracts is a proportion of the production.

In Colombia, we operate and hold a 44.44% working interest in the Tayrona offshore exploration block, which includes the Orca gas discovery. We also operate and hold a 50% working interest in the Villarica Norte onshore exploration block.

North America and West Africa

In the United States, we focus on deepwater fields in the Gulf of Mexico, where we have non-consolidated production from the 20% participation of Petrobras America Inc. (“PAI”) in the joint venture with Murphy Exploration & Production Company (“Murphy”), the MPGOM LLC. The main contributors to the production are the Chinook, Saint Malo and Dalmatian fields. In 2020, our 20% participation represents a production of 12.1 mboed, including NGL.

In West Africa, we used to explore oil and gas opportunities exclusively through our 50% equity interest in Petrobras Oil & Gas B.V. (“PO&G”). On October 31, 2018, our subsidiary Petrobras International Braspetro BV (”PIBBV”) signed a sale and purchase agreement for the sale of its 50% equity interest in PO&G with Petrovida Holding B.V. (“Petrovida”). Petrovida is owned by Africa Oil Corp. The transaction closed on January 14, 2020.

For more information on our divestments, see “Portfolio Management” in this annual report.

Exploration

The oil and gas industry value chain begins in the exploratory phase, with the acquisition of exploratory blocks either through bid rounds conducted by governments or by purchases from other companies.

In Brazil, the Brazilian State owns the oil deposits, but companies and consortia are allowed to extract and explore such oil upon payment in several forms, such as royalties. Forms of payment vary depending on the applied regulatory model. Biddings rounds are the main process for the acquisition of rights over the exploratory blocks.

There are currently three regulatory models in Brazil: Concession Agreements, Transfer of Rights Agreements and Production Sharing Agreements. The concession model fully governed the oil and natural gas exploration and production until 2010, when the Brazilian federal government enacted laws establishing the Transfer of Rights Regime and the Production Sharing Regime in the Pre-salt Polygon. Currently, our main production fields follow the Concession Agreements model. However, our production fields under the Transfer of Rights Agreement and Production Sharing Agreements will represent an important part of our production in the medium and long term.

For information on the regulatory models applicable to our exploration and production activities, see “Legal and Tax” in this annual report.

Bidding rounds

Over the past few years, we have participated selectively in the bidding rounds carried out by the ANP, aiming to reorganize our exploratory portfolio and maintain the relationship between our reserves and our production in order to ensure the sustainability of our future oil and gas production. Our joint operation with large oil companies in consortia is also aligned with our strategic goal to strengthen partnerships, with the intent to share risks, combine technical and technological skills and capture synergies to leverage results.

In 2018, we acquired 11 new offshore exploratory blocks, with a total area of 8,800 km2. In the Pre-salt Polygon, we acquired four areas under the production sharing regime, in partnerships with Chevron, Shell, Equinor, ExxonMobil, BP and Galp. In the Campos Basin, we acquired four blocks outside of the Pre-salt Polygon, under the concession regime, in partnerships with ExxonMobil, Qatar Petroleum and Equinor. We also acquired three blocks in the Potiguar Basin, two of them in partnership with Shell.

In 2019, we acquired two new offshore exploratory blocks, with a total area of 5,800 km2. In the Pre-salt Polygon, we acquired one area under the production sharing regime, in partnership with CNODC. In the Campos Basin, we acquired one block outside of the Pre-salt Polygon, under the concession regime, in partnership with BP. Additionally, we acquired 90% of the exploration and production rights of the surplus volume of the Búzios field during the Transfer of Rights Surplus Production Sharing Bidding Round, in a partnership with CNODC Brasil Petróleo e Gás Ltda. (5%) and CNOOC Petroleum Brasil Ltda. (5%). During the same bidding round, we also acquired 100% of the exploration and production rights of the surplus volume of the Itapu field.

In 2020, due to limitations resulting from the Covid-19 pandemic, the 17th Bidding Round was postponed. The 2nd Cycle of Open Acreage was the only bidding round of the year and took place on December 4, 2020. We did not present any offers during this bidding round.

Exploration Activities

As of December 31, 2020, we had 86 exploratory blocks (27 with 100% working interest) that had three discoveries under evaluation. We also had three discoveries being assessed in production areas. We serve as the operator in 59 of these exploration partnership blocks.

The table below breaks down our participation in exploration activities in 2020:

Our participation in exploration activities in 2020

These investments mainly cover the costs of drilling, seismic surveys and acquisition of blocks, which contributed to the following endeavors.

In 2020, we concentrated our exploratory efforts on delimiting pre-salt reservoirs, the main oil-producing areas in Brazil. In addition to confirming the presence of oil of excellent quality in the southeastern area of the Búzios field, in the Santos Basin, a well test proved greater potential in the pre-salt area of the Albacora field, in the Campos Basin. While the former is considered a promising area for a new Floating Production Storage and Offloading (“FPSO”), the latter still has remaining untapped potential and can continue to contribute to our production.

Another well in the pre-salt area of the Uirapuru block, in the Santos Basin, also resulted in discoveries of oil and gas. There is at least one extension well planned for this prospect in the next five years. Moreover, a prospect situated in block C-M-657, in the Campos Basin, but outside of the main pre-salt cluster, was drilled this year and the results identified the presence of hydrocarbons. Additional studies are being conducted to provide better measurements and to guarantee each project’s economic viability and future resources incorporation.

We also obtained encouraging results outside the pre-salt reservoirs. In the southwestern portion of the ring fence of Tartaruga Verde, also located in the Campos Basin, an exploratory well discovered oil in carbonate reservoirs from the Albian age. We are currently evaluating the commerciality of the discovery and the possible incorporation of resources into existing infrastructure.

Finally, the turbiditic reservoirs in the Sergipe Alagoas Basin also showed promising results. After the incorporation of the results of two wells in our geological models, there was an increase in the expected volume of both Poço Verde and Moita Bonita´s appraisal blocks. These results contributed to an increase in the future resources incorporation. We also conducted a long-term test in the Farfan reservoir, which resulted not only in reduced uncertainties regarding reservoir properties, but also in an increase of the expected volumes. Thus, this test confirmed the good productivity projections for this region of the deepwater complex.

In order to achieve greater return on invested capital, while always prioritizing safety, the speed at which our new projects are implemented is key. Thus, we have a strategic program (PROD1000) with the objective of reducing the implementation time of our projects, with the ambition to reach 1,000 days between field discovery and the beginning of production, compared to our current average of 3,540 days, considering large projects that use FPSO systems. Our efforts in such program are related to the integration of exploration and production development and technical data teams, the optimization of reservoir processes, the standardization of FPSO, subsea and well design, the early supplier engagement, the reduction of the construction time, and the optimization of processes using digital technologies and agile methods. As an example of our standardization efforts in the FPSO design, we applied for a patent for a Polyvalent Riser Balcony, which can be applied to different project scenarios and reduce engineering time and late changes during the FPSO construction phase.

In addition, we implemented a strategic program (EXP100) that has the ambition to increase the chance of discovering oil to 100% in exploratory wells, reducing project risks and costs by expediting production development. This program aims to better evaluate the prediction of geological properties through the use of an integrated upstream data platform and high-performance computing capacity, that enables the application of more complex algorithms in the processing of large volumes of data. Several initiatives are already underway, with notable advances in the integration of the exploratory database and in the automated interpretation of seismic and well data.

Production

Production Development

After a field is declared commercially viable, the process of production development begins. The investments made in this phase are mainly focused on designing and contracting production systems, which includes platforms, subsea systems, drilling, and the completion of wells.

Over the last ten years, we pursued substantial cost optimizations related to project development. Time to drill and complete wells in the Santos Basin pre-salt area decreased by 64% in 2020 when compared to 2010. In 2020, we spent an average of 117 days in the drilling and completion of a pre-salt well on the Santos Basin. This helped to significantly reduce our capital expenditures per well. Through the Well Efficiency Program (PEP70), launched in 2019, we strive to further reduce well construction costs by 30% by shortening construction time, optimizing well configurations, streamlining operations and adopting new technologies. In the post-salt, we highlight the adoption of the True One Trip - Three Phases (TOT-3P) technology, which allowed us to build a well in half the estimated time and cost and resulted in savings of US$30 million.

We have also pursued substantial cost optimizations in wells interconnections in the Santos Basin pre-salt area, with an average cost reduction of around 6-7% per year during the past four years. Regarding the integrity of subsea systems, we have made progress in the development and application of new tools for inspection, leading to greater reliability and availability of equipment, pipelines and other components, especially those subsea components exposed to SCC-CO₂ events.

In 2020, we also completed the Reference Basic Design for the new generation of FPSOs for pre-salts. The design, which focuses on maximizing the economic value of production development projects, features solutions aimed at reducing implementation times, increasing system standardization, enhancing operational efficiencies and integrating new technologies and innovations to meet our low carbon commitments. This project incorporates improvements based on more than a decade of experience with the design, construction, start-up and operation of production platforms in the pre-salt layer.

In the last three years, we have installed several major systems, mainly in the pre-salt area of the Santos Basin, which helped to mitigate the Santos Basin’s natural decline. In 2019, we started four new production systems: (i) the P-76 and P-77 platforms, located in the Búzios field; (ii) the P-67 platform, located in the Tupi field; and (iii) the P-68, located in the Berbigão and Sururu fields. In 2020, we started the P-70 platform, located in the Atapu field. Those five new systems connected 32 new wells (19 production wells and 13 injection wells) into our production systems. We expect to install 13 new FPSOs in the next five years.

In January 2020, the P-77 platform in the Búzios field reached its full capacity in only 10.4 months. In the Búzios field, we also achieved monthly production records of 615 kbpd of oil and 765 kboed in July, and the highest monthly production achieved by a well in Brazil, with a record of 69.6 kboed from the BUZ-10 well, registered in September. The performance of the Búzios platforms was aided by the temporary expansion of the oil and gas processing capacity of the units, using spare capacity in power generation and gas compression available until the beginning of gas exports, and by the high production potential of the wells and the reservoir.

In 2020, our producing platforms had a daily production of 2.06 million barrels of oil and 2,393 million cubic feet of natural gas (discounting the liquefied volume). As part of our response to the 2020 oil crisis, we indefinitely mothballed, and have no current plan to reenable, our 63 shallow water platforms (37 active and 26 inactive immediately prior to the mothballing). Additionally, during 2020, and due to divestment or demobilization efforts, we also discontinued eight active platforms that contributed to our annual production. These mothballed and discontinued platforms produced approximately 29 mbbl/d in 2020. As of December 31, 2020, we own 43 and lease 16 offshore producing platforms. Besides these offshore platforms, there are three platforms on fields operated by our partners, totalling 62 active platforms.

Pre-salt and the fields under the Transfer of Rights Agreements will be particularly important to support our production growth.

In 2021, the FPSO Carioca will be installed in the Sépia field. This platform has the capacity to process 180 kbpd and 211.9 mmcf/d of natural gas per day and arrived in Rio de Janeiro in February 2021 to finalize the integration and commissioning activities. In 2021, we also expect to install the FPSO Guanabara, the first definitive system in the Mero field. This FPSO has the capacity to process 180 kbpd and 423.8 mmcf/d of natural gas per day and is under construction in China.

After negotiations with our partners in the BM-S-11 Consortium, Shell Brasil Petróleo Ltda (owning a 25% stake in the partnership) and Petrogal Brasil S.A. (owning a 10% stake in the partnership), we signed a commitment to purchase platform P-71. The unit, which is in the final phase of construction, has a production capacity of 150 kbpd and will be allocated to the Itapu field, which will allow us to begin oil production one year earlier.

With the commitment to sell P-71, subject to the above-mentioned conditions, the partners of the BM-S-11 Consortium in Brazil agreed to prepare a new development plan for the Tupi field, to be delivered to the ANP in 2021. The acquisition of P-71 and the actions to elaborate a new DP for the Tupi field are in line with our strategy of concentrating our activities on world-class assets in deep and ultra-deepwaters.

Main Systems to be Installed through 2025

Decommissioning

When the output extension opportunities of an oil and gas production system are exhausted, it is necessary to carry out its decommissioning. Before that, however, we prioritize solutions for the continuity and maximization of production, including processes for assigning our rights (through divestments) of fields that no longer fit into our strategic portfolio or that have reached their economic limit.

In 2020, we made advancements in the approval of decommissioning plans and in the execution of activities relating to decommissioning.

We obtained the approvals of Brazilian regulatory bodies overseeing decommissioning plans as to: the P-07 platform, in the Bicudo field; the P-12 platform, in the Linguado field; the P-15 platform, in the Piraúna field; and the P-32 platform, in the Marlim field, all in the Campos Basin. During 2020, we sold three of those platforms (P-07, P-15 and P-12) through a public auction, one (P-12) of which was already removed from the location.

Additionally, some decommissioning processes approved before 2020 have also advanced. We started the decommissioning of the FPSO Piranema Spirit, and contracted Engineering, Preparation, Removal and Final Disposal (EPRD) services to assist with the decommissioning of the PCA-1, PCA-2 and PCA-3 platforms.

Critical Resources in Exploration and Production

We seek to procure, develop and retain all of the critical resources that are necessary to meet our production targets. Drilling rigs and special vessels are important resources for our exploration and production operations and are centrally coordinated to assure both technical specifications and proper lead time.

Since 2008, we have grown from three rigs capable of drilling in waters with depth greater than 2,000 meters (6,560 feet) to 19 rigs with this capacity as of December 31, 2020.

We have sufficient rigs to meet our production targets, and we will continue to evaluate our drilling and special vessels demands and will adjust our fleet size as needed.

Drilling units in use by exploration and production as of December 31⁽¹⁾

(1) In operated fields.

To achieve our production goals, we have also secured a number of specialized vessels (such as Pipe Laying Support Vessels or “PLSVs”) to connect wells to production systems. As of December 31, 2020, we had 13 PLSVs and our specialized vessels were sufficient to meet our needs.

In the subsea area, we have also been developing the HISEPTM Technology, which is a subsea separation and boosting system that will remove a significant portion of the produced gas rich in CO₂ from the seabed, debottlenecking the topside gas processing plants. The new technology will enable the extension of the oil production plateau, accelerating the production and boosting the economics of development projects in areas with high GOR and high CO₂ content. Once qualified, HISEPTM will have the potential to unlock the development of new FPSO generations suitable for areas with high GOR and high CO₂ content, since they will benefit from the synergy between topside and subsea processing systems capacities. This represents an opportunity to maximize oil production with controlled handled gas inventory in the surface facility, reducing CAPEX, OPEX, lead time as well as emissions, improving safety. The HISEPTM will be qualified in 2025 in the Mero Field via construction, installation and tests execution in a subsea real scale prototype that will be supported by Libra Consortium’s R,D&I levy.

Búzios field

The Búzios field started production in April 2018 and has already produced around 100 million boe. The Búzios field is the largest discovered deepwater field in the world. It has light oil and high productivity wells.

The Búzios field is an asset with significant reserves and low lifting costs. It is economically resilient to a low oil price scenario.

In 2019, we acquired 90% of the exploration and production rights of the surplus volume of the Búzios field from the Transfer of Rights Agreement, in a partnership with CNODC Brasil Petróleo e Gás Ltda. (5%) and CNOOC Petroleum Brasil Ltda. (5%). This acquisition is consistent with the strategy of focusing our investments on world-class assets.

In March 2020, we signed the Production Sharing Contract for the Suplus of the Transfer of Rights of the Búzios Area (ToR), with CNOOC and CNODC as private partners and Pré-Sal Petróleo S.A (PPSA) as its manager. The parties have been discussing the global development strategy and other matters related to the co-participation agreement, that will regulate the coexistence of the Transfer of Rights Contract and Production Sharing Contract for the Surplus of the ToR. Pursuant to Ordinance MME 265/2019, the co-participation agreement should be signed by September 2021. Each of the private partners will have the right to increase their participating interest by 5%, if certain conditions have been met.

There are currently four units in operation in Búzios. A fifth platform, the FPSO Almirante Barroso, is under construction and expected to start production in 2022. FPSO Almirante Barroso will be the first chartered unit in the Búzios Field, capable of processing 150,000 barrels of crude oil per day.

In July 2020, we received approval for three additional operational units in Búzios. FPSO Almirante Tamandaré, a chartered unit that will become the field’s sixth production system, is expected to start production in 2024. In addition, P-78 and P-79, two platforms owned by us, are expected to start production in 2025.

In 2020, with less than two years of operation, the Búzios field surpassed the 600 kbpd production mark, due to good operating results and a technical study that allowed its units to operate above the nominal capacity. In addition, three important field records were also achieved in 2020: daily field production of 674 kbbl, monthly field production of 615 kbpd in July and daily production of a single well of 65 kbbl (9-BUZ-4-RJS). Moreover, another important milestone achieved this year was the start of gas exports from the P-74 platform.

We expect better operating results for 2021 due to internal actions that have been taken to improve the production efficiency and the maintenance of the production level above the nominal capacity until the end of 2021. Finally, in 2021 we also expect to start exporting gas from other three FPSOs that are in operation.

In 2020, investments in the Búzios field totaled US$1.7 billion. According to the Strategic Plan, US$20.2 billion will be invested over the next five years. The average daily production from 2021 to 2025 is expected to be 639 kbbl, with Operational Expenditures around US$5.6 billion, including leasing of vessels.

Production

Despite the unprecedented crisis in the oil and gas sector, our operating performance has improved significantly, reaching daily, quarterly and annual oil and gas production records. In 2020, our total production of oil and gas, including NGL, was 2,836 mboed, of which 2,788 mboed were produced in Brazil and 48 mboed were produced abroad, a 2.4% increase compared to 2019. This production growth was due to higher production in the Búzios and Tupi fields.

Our 2020 operating performance was leveraged by the ramp-up of new production systems in the Búzios and Tupi fields, offsetting the negative effects derivedduring the Covid-19 pandemic. The oil production represented 81% of the average of 2,788 mboed oil and gas produced in Brazil.

Our production in the pre-salt layer reached 1,546 mbbl/d in 2020, representing an increase of 21.1% in relation to our production in 2019. In 2020, the oil production in the pre-salt layer represented 68% of all oil production in Brazil, compared to 59% in 2019.

(1) Including NGL.

(2) Includes the proportional production of our equity method investees, based on our percentage interest in these entities.

Pre-salt oil production increased 21.1%, reflecting higher production in the Búzios and Tupi fields. The pre-salt area is comprised of large accumulations of light oil, of excellent quality and with high commercial value. The post-salt oil production, in deep and ultra-deepwaters, decreased by 17.3%. This was due to natural decline in reservoirs, especially from the Campos Basin.

Shallow waters oil production decreased by 51.5%, to 32 mbbl/d, due to hibernation of all shallow water platforms. Onshore oil production decreased by 15.3%, to 105 mbbl/d, due to the natural decline in reservoirs.

We produced 88.40 million m³/d of gas in 2020. From that volume, we used 48.50 million m³/d in our production processes (reinjected, flared, consumed, liquefied) and destined 39.90 million m³/d for sale.

In 2020, our lifting cost, without government participation or leases, was US$5.2 per boe, which represents a 33% decrease from the 2019 cost of US$7.8 per boe. Including leases, our lifting cost in 2020 was US$6.8 per boe, which represents a 29% decrease from the 2019 cost of US$9.6 per boe.

Main production fields

Tupi Field

In July 2020, we reached the accumulated production of two billion barrels of oil equivalent (boe) in the Tupi field, located in the pre-salt of the Santos Basin, approximately 230 km from the coast of the state of Rio de Janeiro. This milestone took place in the same month in which we celebrated the 20th anniversary of the signing of the concession agreement for block BM-S-11, where the field is located currently producing approximately one million barrels per day (bpd).

This accumulated production occured just 10 years after the start of the first permanent production system, the FPSO Cidade Angra dos Reis, and 14 years after it was discovered, in 2006. From 2010 to 2019, the consortium, formed by us, with a 65% stake in the partnership with Shell Brasil Petróleo Ltda (25% stake in the partnership) and Petrogal Brasil S.A. (10% stake in the partnership), put into operation nine production systems, an average of one system per year.

In the process of implementing these production systems, we had to overcome a series of unprecedented challenges in the industry, such as the distance from the coast and the existence of very few similar reservoirs in the world, ultra-deep reservoirs under a thick layer of salt. In partnership with research institutions, partner companies and suppliers, we developed a series of technologies and innovations that allowed safe and profitable productions in pre-salt fields, which continues to be a reference in terms of its environmental performance. As a result of the unprecedented technologies we developed, in 2015 we received the Distinguished Achievement Award for Companies, Organizations and Institutions, which is the main award in the industry and is promoted by the Offshore Technology Conference (OTC).

The Future of Tupi

Together with our partners in the BM-S-11 block, we have developed several initiatives aimed at revitalizing the field even before the start of its decline, seeking to increase the oil and gas recovery factor that can be extracted from the field and, thus, maximize the value of the asset. Working towards this goal, we are developing projects to maintain the reservoir's pressure, such as interconnecting new wells into already implemented production systems and alternating water and gas injection technology (Water Alternating Gas - WAG). In addition to these projects, together with our partners we are also analyzing actions that will be taken according to the terms of the concession and seeking to develop other low-cost and highly reliable technologies that may increase the recovery factor.

We also carry out limited oil shale mining operations in São Mateus do Sul, in the Paraná Basin of Brazil, and convert the kerogen (solid organic matter) from these deposits into synthetic oil and gas. This operation is conducted in an integrated facility and its final products are fuel gas, liquefied petroleum gas (“LPG”), shale naphtha and shale fuel oil. Our business units in Brazil do not utilize the fracking method or the hydraulic fracturing method for oil production, since they are not appropriate in the context of our operations. Also, we do not inject any water or chemicals in the soil in connection with our open pit oil shale mining operations. Our process consists of crushing, screening and subsequently heating all the shale at high temperatures (pyrolysis) and we have in place a proper segregation process for the by-products derived from such process.

For more information on our production of crude oil, natural gas, synthetic oil and synthetic gas by geographic area in 2020, 2019 and 2018, see Exhibit 15.3 to this annual report.

Customers and Competitors

Crude oil is primarily sold through long-term contracts and also in the spot market. Our overseas portfolio includes approximately 60 clients, such as refiners that process or have processed Brazilian oils regularly, distributed throughout China, Americas, Europe, and other countries in Asia.

Oil clients (% vol)

Fuel oil is one of the most representative types of oil products in terms of volume in exports. In 2020, we exported high sulfur oil and, to a greater degree, low sulfur fuel oil to several destinations. Our fuel oil is available in the major hubs in the market such as Singapore, the Mediterranean, the US Gulf Coast, the west coast of Africa, Panama and the Caribbean. Our counterparties list consists of major companies, trading companies and barging companies. We have sold fuel oil to more than 40 different companies this year.

In the exploration and production industry, we deal with several competitors when we participate in bidding rounds conducted by the ANP.

Reserves

Preparation of reserves estimates

We apply SEC rules (Rule 4-10(a) of Regulation S-X) for estimating and disclosing oil and natural gas reserve quantities included in this annual report. In accordance with those rules, we estimate reserves by considering average prices calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period, except for the reserves of the Amazon fields for which volumes are estimated using gas prices as set forth in our contractual arrangements for gas sales. In 2020, we did not book proved reserves relating to non-traditional reserves such as synthetic oil and gas.

We estimate reserves based on forecasts of field production, which depends on an array of technical information, such as seismic surveys, well logs and tests, rock and fluid samples, and geoscience, engineering 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 and technology at the time of the estimate, in accordance with the best practices in the oil and gas industry and SEC rules and regulations.

Thus, the reserve estimation process begins with an initial evaluation of our assets by geophysicists, geologists and engineers. Reserves coordinators in each business unit in Brazil and the corporate reserves team provide guidance for reserves estimates in compliance with SEC requirements to the asset teams. General managers in our business units in Brazil and executive officers of companies outside Brazil where we have interests are responsible for regional reserves estimates in compliance with SEC requirements. The corporate reserves team is responsible for consolidating our reserves estimates, standardized measures of discounted net cash flows related to proved oil and gas reserves and other information related to proved oil and gas reserves. Our reserves estimates are approved by our Board of Executive Officers, which then informs our Board of Directors about the approval. The technical person primarily responsible for overseeing the preparation of our reserves is the manager of the corporate reserves team, who has a degree in engineering and 18 years of experience in the oil and gas industry.

DeGolyer and MacNaughton (“D&M”) conducted a reserves evaluation of 97% of our net proved crude oil, condensate and natural gas reserves as of December 31, 2020 in Brazil. The amount of reserves reviewed by D&M corresponds to 97% of our total proved reserves company-wide on a net equivalent barrel basis. For disclosure describing the qualification of D&M’s technical person primarily responsible for overseeing our reserves evaluation, see Exhibit 99.1 to this annual report.

For a description of the risks relating to our reserves and our reserve estimates, see “Risks” in this annual report.

We discover new areas through exploratory activity. Such areas constitute our fields after the declaration of commerciality. We then prepare a development plan for each field. As projects achieve adequate maturity, proved reserves may be reported.

Our fields’ proved reserves can be later increased with additional drilling, operational optimizations and improved recovery methods, such as water injection, among other activities.

Our net proved oil, condensate and natural gas reserves as of December 31, 2020 were estimated at 8,816 million boe. This estimate includes our interest in our equity method investees, which represents 0.2% of our net reserves.

Proved reserves⁽¹⁾ (million boe)

_________________ 

Oil and gas reserves volumes change yearly. Quantities included in our previous year’s reserves that are produced during the year are no longer reserves at year-end. Other factors, such as reservoir performance, revisions in oil prices, discoveries, extensions, purchases and sales of assets that occurred during the year, also influence year-end reserves quantities.

Proved reserves⁽¹⁾ (million boe)

_________________ 

In 2020, we incorporated 223.7 million boe of proved reserves by revising previous estimates, including:

In addition, we added 40.8 million boe to our proved reserves due to extensions and discoveries in the pre-salt of Santos Basin, and reduced 116.8 million boe due to sales of proved reserves.

Proved Undeveloped Reserves

As of December 31, 2020, our proved undeveloped reserves were estimated at 2,983.1 million boe, a net decrease of 16% when compared to 2019 year-end. This decrease is a result of the following changes:

Changes in proved undeveloped reserves⁽¹⁾ (million boe)

_________________ 

As of December 31, 2020, 55% (1,647 million boe) of our proved undeveloped reserves have remained undeveloped for five years or more, mainly due to the inherent complexity of ultra-deepwater development projects in giant fields, particularly in the Santos and Campos Basins, in which we are investing in the required infrastructure.

In 2020, we invested a total of US$5.7 billion in development projects, of which 99% was invested in Brazil.

Most of our investments relate to long-term development projects, which are developed in phases due to the large volumes and extensions involved, the deep and ultra-deepwater infrastructure and the production resources complexity. In these cases, the full development of the reserves related to these investments may exceed five years.

For further information on our reserves, see the unaudited section “Supplementary Information on Oil and Gas Exploration and Production” in our audited consolidated financial statements.

Oil and Gas Additional Information

The following tables show (i) the number of gross and net productive oil and natural gas wells and (ii) total gross and net developed and undeveloped oil and natural gas acreage in which we had working interests as of December 31, 2020. A gross well or acre is a well or acre where we own a working interest, while the number of net wells or acres is the sum of fractional working interests in gross wells or acres. We do not have any material acreage expiring before 2025.

Gross and net productive wells

Gross and net developed and undeveloped acreage (in acres)

For “net” figures, we used our working interest held on December 31, 2020. The division in oil and gas in the acreage table was not included because, usually, oil and gas are produced from the same acreage. Gross and net developed and undeveloped acreage presented in this table does not include exploratory areas.

The following table sets forth the number of net productive and dry exploratory and development wells drilled in the last three years.

Net productive and dry exploratory and development wells

The following table summarizes the number of wells in the process of being drilled as of December 31, 2020.

Number of wells being drilled as of December 31, 2020

The following table sets forth our average sales prices and average production costs by geographic area and by product type for the last three years.

Average sales prices and average production costs (US$)