巴西石油 (PBR.A) 2008 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Petrobras conference call to discuss the second quarter 2008 results. At this time, all lines are in a listen only mode.

Later there will be a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded.

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

Good afternoon ladies and gentlemen. Welcome to our conference call to discuss second-quarter 2008 results. We have a simultaneous webcast on the Internet that can be accessed at the site www.Petrobras.com.br/IR/english. Before proceeding I'd like to draw your attention to the slide two.

We may make forward-looking statements which are identified by the use of the words will, expect, and similar that are based on the beliefs and assumptions of Petrobras management and on information currently available to the Company. Finally, let me mention that this conference call will discuss Petrobras's results prepared in accordance with Brazilian GAAP. At this moment we're unable to discuss any issues relating to US GAAP results.

This conference call will be conducted by our CFO and Investor Relations officer Mr. Almir Guilherme Barbassa. He will comment on the Company's operating and financial highlights and the main events during this quarter and he will be available to answer any questions you may have. Mr. Barbassa, you may begin.

Good afternoon ladies and gentlemen. It's a pleasure to be here with you and have the opportunity to talk about the second quarter results.

Let me begin by briefly highlighting our record income for the period. Net income totaled BRL8.8 billion for the second quarter, an increase of 26% from the prior period. EBITDA increased by 31% from the first quarter of 2008 to reach BRL18.1 billion.

Higher price, increase in production and cost discipline all contributed to the record earnings. The cash flow generated continues to be the (inaudible) for (inaudible) in the quarters we saw our long-term (inaudible) plan. We are reviewing the plan which we expect to complete in October.

At that time we will share with you our expectations for the future. Let's now go to slide three to look at the [national] oil and natural gas production. Oil production in Brazil grew by 2% mainly from the continuing (inaudible) of P-52 and P-54 and the completion of new wells in the Albacora (inaudible) fields.

Production from the new systems and wells more than offset natural decline from (inaudible). For the remainder of the year, P-52 and P-54 will continue to provide most of the production growth as they achieve their peak capacity of 108,000 barrels per day.

For the rest of the year we had three other platforms coming onstream -- P-51 and P-53 and (inaudible), adding a new total of new capacity production of 460,000 barrels of oil per day. Natural gas contributed substantially to the production growth increasing 6% during the quarter. This additional production was mainly nonassociated gas from the (inaudible) fields in the Espirito Santo basin and associated gas from the new production system in Campos basin.

It is worth mentioning that later this year we expect to begin producing from Lagosta, Canapu and Camaro (inaudible) fields adding some additional 10 million cubic meters equivalent to 60,000 barrels of oil per day. For the rest of the year, as you know we have a target of 1.95 million barrels of oil produced in Brazil with a range of plus or minus 2.5%.

We expect to meet the bottom range of this target as tightness in the entire supply chain is causing delays in some of our day-to-day activities. So when the unexpected occurs which inevitably happens, solutions can make some delay because of the lack of (inaudible) capacity in the industry. These delays in turn can reduce our average production for the year relative to our (inaudible). Let's go to slide four please and look at the new drilling rigs.

Our average production is also temporarily hampered by an insufficient number of drilling rigs to do all the exploration, appraisal and development and maintenance we would like. Fortunately, our fleet will be increasing substantially in the near future.

In 2009 and 2010 we will be adding 16 deepwater drilling rigs to our existing inventory. Many of these rigs we ordered as far back as 2005 anticipating our increasing demands. You can also see the table that we are contracting 12 additional new rigs that are scheduled for delivery in 2012.

And we're planning to order an additional 28 rigs to be built in Brazil with delivery between 13 and (inaudible). We're now in process of developing the (inaudible) terms of these new build. In addition to the drilling rigs, we are also expanding our fleet of (inaudible) supply vessels to 146 to meet our growing needs. (technical difficulty) slide five please.

These are good moments to briefly discuss some of the practices we are implying to increase the supply of equipment to develop our reserves. We have many challenges if were are to meet our targets including equipment, human resources and cost inflation.

We are addressing these challenges in a number of ways such as long-term contracts, standardization of equipment and training program for both Petrobras employees and the supply chain. We also recognize the need of increasing capacity to manufacture equipment for the offshore oil industry.

Since Brazil has become one of the primary sources of demand for deepwater equipment and services, we're encouraging all of our partners in the supply chain to add needed capacity in Brazil. We strongly believe that there are advantages to doing so ranging from logistics and efficiency to social and corporate responsibility as we help to create an industrial (inaudible) that contributes to the well-being of the Brazilian society.

We believe we can accomplish this in a way that is competitive with respect to the quality, timing and pricing. It is worth noting that national content has always been a criterion for the awarding of new upstream exploration blocks in Brazil. In the most recent round (inaudible) agreed to Brazilian content between 60% and 70% of their development costs. Slide six please.

With the completion of Guara, Yara and Jupiter wells later this quarter we will have completed at that time the minimal exploratory program of the exploration phase for all the (inaudible) we operate in Santos (inaudible) cluster. There will not be any additional expiration well drilled in the (inaudible) cluster related to the program with the exception of wells BM-S-22 operated by Exxon.

For the remainder of the year and before starting the appraisal campaign, we will continue evaluating the drilling results we've obtained thus far. And we will reenter well 1-RJS-646 in Tupi in preparation for the extended well test scheduled for the first quarter of next year. For Tupi and (inaudible) we will also be obtaining additional high-resolution seismic data.

While we had completed the exploration phase of the Santos pre-salt cluster, we continue to explore the Santos Basin. We're currently drilling RJS-655 in (inaudible) Block BM-S-45 and we will drill Santa Catarina 13 and 14 close to where we announced a find of light oil in June.

When the well being drilled in Jupiter is completed, the rig will move to Jequitinhonha in the eastern margin to drill for the first time in a promising new [frontier]. We continue to believe that the most important information we will gather over the next 12 to 18 months will be the results of these extended tests of Tupi.

These will give us a much better sense of the productivity of the pre-salt carbonate reservoir. I should also mention that at the last effective Board meeting, the pilot project for Tupi was approved and we can now begin executing the contracts that will lead to the production in December 2010.

It is worth noting that well [1-ESS-102A] in the pre-salt of the Espirito Santos is completed and connected to the E-34 platform and we will begin producing shortly. This well despite being more than 600 kilometers from the Santos pre-salt is expected to provide [credible] information given the similarity of the carbonate reservoir and the quality of oil. Slide seven please, downstream.

We will see later in the presentation that the refined segment earnings were adversely affected by the increases in the international price of oil and oil products. Operating performance however was quite positive.

(inaudible) our Brazilian refineries increased by 3% as a result of lower programmed maintenance, greater reliability and a higher charge of imported light oil. (inaudible) to maximize production of diesel oil and minimize (inaudible) pure oil.

As a result of these actions, capacity utilization rose from 90 to 93% although the [presentation] of the (inaudible) crudes decreased to 77%. It is also worth noting that in June that the (inaudible) refinery upgrade was completed and we will start seeing the benefit of that upgrade beginning in the third quarter.

When fully operational, the coker will reduce our output of fuel oil by 22,000 barrels per day while increasing the output of diesel LPG, NAFTA and coke representing substantial margin improvement. Next year we will have a similar coker being completed at (inaudible).

As you can see, sales volume of oil products increased by 3%. Most of the increase is concentrated in diesel which grew by 8% in the first half of the year as compared with the year earlier. In contrast, (inaudible) sales declined by 1% during the first half of the year as ethanol sales offset the growth of the Brazilian [car] fleet.

Slide eight, gas and power operational performance. Operations of our gas and energy segment also continues to improve as we will see when we discuss the segment results. Our gas and energy segment recorded positive operating and net income in this quarter. This is the result of a number of factors.

Among them, higher volume of gas available for sale, higher margin from renegotiated sales contracts through distributors, completion of additional infrastructure to deliver gas, growing dispatch and sales of thermo energy. Some of these improvements are reflected in slide eight where as you can see gas-fired thermo power is a growing share of the electricity mix in Brazil.

Given Brazil's growth prospect and the higher cost of new hydroelectirc power, we don't see the need for gas-fired thermo power diminishing. So, as we continue to add natural gas supply to (inaudible) of LNG domestic gas reduction and the completion of our natural gas infrastructure, we think this segment will continue to improve.

Let's see the lifting costs in slide nine please. During the quarter, lifting costs rose by just over $1 per barrel while grants increased by $24 during the same period.

We strive to minimize lifting cost but with more than half of such costs being material in third-party services, some correlation to the price of oil is inevitable. Given this cost environment, we are evaluating all of our extended operation frac's to see how we can reduce costs.

It's also worth noting that lifting cost expressed in dollars are adversely affected by the real strengths. As evidence, increases in lifting costs in reais had to be much more constrained.

High oil price has also lead to a significant increase in our production taxes adding (inaudible) production from P-52 and P-54 is subject to the highest bracket of special participation tax. Slide 10 please.

Average realization price of oil products. Each quarter we disclose the price of a basket of Brazilian products priced at United States Gulf Coast levels, not adjusted for quality and transportation. We then track these against our actual sales in Brazil.

As you can see even though we increased price for (inaudible) by 15% and gasoline by 10% (inaudible) it was not enough to offset the continued rise in international price. You will see also that for the first time Brent price were above the basket of US product price demonstrating the extent of reach we find margin worldwide are being compressed. The recent decline of Brent, if it is sustained should substantially improve our downstream earnings in the third quarter.

Net income, slide 11 please. Turning now to the financial results, higher price for our crude oil end products as well as volume drove the increase in the net income. Operating expenses were lower primarily as a result of reduced exploration expenses and the absence of penalties from the gas sales contract.

Higher net financial expenses were caused by a 9% strengthening of the real against the dollar during the quarter. The improvement of [nonoperating] results were also caused by recognizing again our BRL409 million from contributing acquired petrochemical assets to quarter. Income tax expense was higher not only because of higher operating costs but also because the absence of declaration of interest on our own capital during the quarter.

Let's see E&P on slide 12 please. Income from our Brazilian E&P segment increased by 22% primarily as a result of higher price for crude oil sales. As mentioned earlier, cost did increase but not to the same degree as the increase in price. Most of the increase in cost is attributable to higher production taxes caused by higher prices.

Slide 13, downstream please. Our downstream segment was adversely affected by price movement during the period. As discussed earlier, we did pass through a sizable price increase in May, however, the cost of crude oil end products increased by an even greater margin causing a loss for the segment. These cost pressures were experienced by the refining industry worldwide as we showed in the performance of prices.

These costs would have been greater except for our accounting (inaudible) of average inventory [purchase] over time. When averaging costs in a rising price environment, costs are (inaudible) otherwise be while in a declining price environment, they will be higher. For the Company as a whole, (inaudible) have had a positive pretax income on our earnings of approximately BRL1 billion.

International operating income, slide 14. Our international segments results were improved by a more favorable pricing environment in markets where it operates, primarily Argentina. Lower exploratory costs and the absence of contingencies related to Columbia royalties in the quarter contributed to higher net income quarter over quarter with the first oil from (inaudible) in deepwater Nigeria to be found by (inaudible) our international segment production is set to increase.

Gas and power operating income, slide 15. As mentioned earlier, our gas and energy segment is experiencing positive turnaround. Higher gas price from new contracts signed with distribution companies, higher volume of domestic gas available for sale, 3% gross 229 million cubic meters per day and increase in higher electrical generation as a result of more gas available and lower fines related to contractor supply of gas all contributed to positive results for the quarter.

Slide 16, cash flow please. During the quarter we generated a positive cash flow after CapEx of BRL919 million. During the period, EBITDA increased by 31% in relation to the first quarter of 2008. The payment of dividends combined with moderate increase in the net financing result in a small decline of cash balance of BRL514 million.

Finally the capital structure, slide 17. Since most of our debt is denominated in dollars, the re-evaluation of the real reduces our debt when expressed in reais. As a result and combined with our contained earnings for the periods, our net debt to net book capital declined to 19% at the end of the period. This is well below the target of 25, 35% allowing for additional debt capacity if needed.

Thank you. And at this time I would be happy to answer any questions you may have.

(OPERATOR INSTRUCTIONS) Frank McGann, Merrill Lynch.

Just three questions actually if I could. One is on lifting costs, how sustainable or do you expect the pressure that you saw in this quarter for pure lifting costs excluding taxes to stay or do you think because of higher volumes those might come down?

Secondly in terms of gas and energy, do you expect that this segment will now remain profitable as we go forward given the higher prices that you're receiving and the greater volumes that you are able to generate? Maybe you could go into a little bit of detail on the gas price, how it's determined under the new distribution contracts.

And then last, just in terms of gas production and you mentioned the fields that will be starting up later this year, looking towards 2009 could you give an update on what the status of the Mexilhao field is?

I'm going to ask the help of Molinari to answer the first question about lifting costs and the gas production and then to our friend from gas and energy to tell about the sustainability of the results.

Regarding the lifting cost in reais, we have an increase of 8% in the last quarter compared with the first quarter of this year. And mainly due to materials (inaudible) personnel (inaudible) personnel and (inaudible) of platforms and also maintenance costs.

And we expect the lifting costs to stabilize or go slightly down due to the increases in the production of P-52 and P-54 towards the end of this year. The lifting costs in dollars was very much influenced by the exchange rate.

So that is the lifting cost. It is -- I think it is sustainable for the future until the end of this year and we should keep the lifting costs at this level or lower with the increase of production.

How about the gas production?

The gas production we are increasing. We have to start production this year at the end of the year. Lagosta (inaudible) Santos basin (inaudible) and Canapu in the Espirito Santos added 10 million cubic meters a day of capacity. And the delivery to the market in the southeast region the (inaudible) gas where we are reaching the target (inaudible) to deliver 40 million cubic meters a day in the southeast region to the market.

And Mexilhao, how is that looking for next year?

Mexilhao, yes is next year. It should happen before next year.

And the volumes that you are anticipating next year coming from that?

It is the platform is being completed. The piping is being laid by (inaudible) and [things] are going to deliver the project next year.

About the gas and power units, we are still improving our (inaudible) quarter after quarter and we are still struggling to give (inaudible) improving and it depends basically on the energy markets and the price that we pay for [AP] for our gas. So that is the great variability of (inaudible) but we can -- what we can say is that we are diminishing the (inaudible) of loss in the segment.

So as long as your generation stays at reasonably strong levels, the level of profitability will be enhanced here?

The generation and the price that we receive for that generation and it depends also by the price that we pay for [NP] (inaudible) units, you know?

Okay. Thank you.

I would just like to ask people when they ask questions if they could limit themselves to two questions at a time please. Thanks.

Arjun Murti, Goldman Sachs.

Thank you. Just kind of a clarification and follow-up on some of the pre-salt commentary. Just wanted to confirm that as far as the core pre-salt cluster goes your comments were that you're going to continue to participate in the Jupiter well and the Exxon BM-S-22 but besides that you're primarily just going to be studying the results of the 10 wells drilled to date and preparing for the extended will test.

If I did hear that correctly, if you could make any comments on how much of that decision is driven by some of the contract uncertainty. It's obviously natural to hear a lot of rhetoric from the government whenever major discoveries are made in a country and Brazil is no exception.

How much of your exploration development plans are driven by the uncertainty around what contact terms may be? And can you provide any color at this point in terms of when you think greater clarification might exist whether that's 2009 or 2010 on the contract terms regarding the pre-salt deal? Thank you.

(multiple speakers) just a moment please.

Sure.

(multiple speakers) We're just finishing the first phase or the minimal exploration program for the pre-salt cluster. It does not mean that this is due to any change in the contract.

This is just to comply with the terms of the contract. We have (inaudible) there is no change. There is nothing established in this area. There is a discussion going on about regulations. The government of Brazil created that committee. It's not part of Petrobras, it's the government. We've (inaudible) that. So there is no change at all.

So I guess just to confirm, with these last few wells you will have finished that first phase of exploration to test all the blocks and then you're going to study the results. The extended well test, both the one that starts up next year and then I guess more importantly 2010 at Tupi, you'll want to see the results from the extended well test before contemplating full field development of Tupi. Was that all correct what I just said?

Molinari, can you say something? I'm sorry (inaudible) going to be very important. The information that we're going to collect on the extended well test is going to be key for the development of the field but Molinari can you add something?

Yes, that's correct. What we want to see there is the behavior of the reservoir especially on the (inaudible) system that we have water injection, gas injection. So we want to see how (inaudible) forms with those (inaudible). And that will allow us to design the permanent system for the development of Tupi.

I guess hopefully over the time period by which you're studying results, hopefully at some point within that timeframe we will have better clarity on sort of how the country is thinking about pre-salt contract terms. I think -- is that a fair statement?

(inaudible) the new contracts (inaudible) didn't quite catch what you said.

I mean the country is obviously going through an evaluation of how it wants to consider developing the pre-salt trend. That always takes some time anywhere in the world. It will take some time in Brazil but you have a lot of studying to do whether it's of the extended well test or just the other information you've got from the wells.

I presume while you're studying these results, somewhere within that timeframe we ought to get some better certainty on how the country will go about developing these fields and those timeframes hopefully overlap (inaudible) some point by the early next part of next decade that would be then the timeframe by which you would be thinking about full field development of whether it's Tupi or the overall pre-salt cluster area.

I think what we have been trying to say is that we are following a process that begins with exploration, goes to appraisal. Within that appraisal you have the extended well test, the pilot and that that plan and process has nothing to do or is completely unrelated if you will or is not affected by this other discussion that is going on. It's just this is -- what we were trying to do is explain what is the process now and again it's a process that is not -- that doesn't need to or in no way is thinking about this other issue.

That's very helpful. That was basically the question whether any of the uncertainty or rhetoric was at all causing you to delay how you're thinking about this. But it sounds like it's two separate tracks. You're going to study the well test, go about your business and whatever happens with everything else will happen over time.

Yes, this is I think what we're trying to explain is how we think and what we're doing to most efficiently develop this whole new reserve and the blocks that are under concession.

Yes, it's very important to state that our program and our activity has not changed a drop from what we were doing because of this discussion. We are following our route. We're doing what we had planned. We did not change in any sense what we were doing to collect all the information. We needed them to follow ahead with the development of the new finds.

Yes, sir. Thank you. That answers my question. Thank you very much.

Ricardo Cavanaugh, Raymond James.

I have two questions. The first one was you mentioned the next ones to come on stream are P-51, P-53 and (inaudible); if you can provide some timeframe for those incorporations. And then on CapEx excluding the announcement that you would be making (inaudible) pre-salt area, how would CapEx look for elsewhere during the second half of the year?

You mean the CapEx for the second half of the year? We have today -- we have [plenty]. The total CapEx for the first half was almost BRL21 billion. And our target is to reach BRL62 billion.

Usually in the second half of the year we spend more on CapEx than the first half. But probably we will be somewhat behind the full target of BRL62 billion by 10 to 15% as is usual in the Company.

We established some targets that is very challenging and industry is sometimes behind the day-to-day activity happens to [retain] the development somewhat. So we expect to be increasing our CapEx in the second half maybe somewhat below the [proved] targets. Regarding P-51 and P-53 and (inaudible) FPSO, can you give us information on the timing of starting?

P-51 is starting in November this year. Then we have (inaudible) oil and (inaudible) in December. P-51 and (inaudible) both have 180,000 barrels per day capacity and (inaudible) 100,000 barrels per day. So the contribution to the production for this year will be very (inaudible) although we are increasing total 460,000 barrels per day capacity that will increase (inaudible) need to increase production 2009.

Emerson Leite, Credit Suisse.

Two questions. One is (inaudible) about the Tupi cluster area. I would like to understand if in your mind the process for the development of Tupi and Yara that may result in need of unitization of areas that are not in the hands of anyone at the moment presents any challenge in terms of how the rules are established or if you understand the framework that we have today is already clear enough to provide for the unitization of this area and eventually the area of the BM-S-9, BM-S-22, (inaudible) and so on. So what is your view on the unitization process and how clear are the rules for that to take place? That's the first question.

Let's (inaudible) to answer this. Molinari, you may say something about this unitization, if it's going to be needed or not, if we have information at this point in time.

Yes, okay I can talk a little bit about (inaudible) the process, how it is and how it's going on and where it will go. But in general terms, unitization will be necessary since we have blocks with different partners and also the blocks which are not awarded yet in the pre-salt.

So all of this when we have (inaudible) last connected will require this unitization. And what will happen is that all companies involved in the area sits together, they present their views on the production. They have [delights] and they discuss and get to an agreement how much belong to each one. And after that any production in the area will be split according to what was established in this group.

Even if it's (inaudible) regulatory framework for the blocks not awarded, it's the same thing (inaudible) because it will be volume established for each partner. And the areas where there is no concern today, (inaudible) will be (inaudible) after interested in the group. But it is important to say that no process has started yet. nothing about unitization is being discussed with partners.

Second question would be about the Jupiter drilling. A few weeks ago (inaudible) speaking to the (inaudible) paper suggested that you had not decided whether it would be necessary to (inaudible) testing at Jupiter given the reservoir characteristics, the fact that you have a gas cap and a oil reservoir etc. I would like to understand if you now have made a decision about testing that well (inaudible) already reach the target position. So what is the game plan there if you have an update to share with us?

We're still drilling. We're going deeper into the reservoir. Today we don't have any thoughts of testing Jupiter, just completing the well and until the beginning of September when we're going to send the drilling rig (inaudible). That's our plan.

Right. One last question if I may, coming back to the comments about lifting costs. Every press release that we read about the lifting costs, the explanation all looks the same. The materials, personnel, (inaudible). I mean these are factors that affect the day-to-day lifting costs.

I want to understand how much more are you have having to expand with drilling or lifting to take -- to offset the decline of the acceleration of the decline of the fields -- of the most productive fields at the moment. Is the decline playing an increasing role in these increased lifting costs or that doesn't really have an impact?

Well the lifting costs, the factors I mentioned (inaudible) that cause the pressure on the lifting costs. And that means not only Petrobras is facing [decreasing] the lifting costs but nearly all oil companies due to the price of -- the oil price in the market that pressure (inaudible) contracts. And other thing is the exchange rate. Regarding the decline rate, our decline rate (inaudible) 10% for the reservoir (inaudible) 10% per year. And so that leaves -- I don't know exactly -- Molinari, maybe you can tell something about the program we have to keep production on the (inaudible) fields.

Yes, we have (inaudible) project to improve the forms of (inaudible) fields. We're doing a very great job onshore but we have fields producing for 50 years. Remember we're still reaching the second peak production. That is the case in (inaudible) and we're reaching the second peak.

We reached a peak decades ago and now we're reaching a second peak of production. So that says it all. Things we're doing to improve the recovery factor of the fields by injecting water, gas, (inaudible) and so we're having very much success in these techniques especially (inaudible).

Right, just some clarification here. I believe in the presentation you mentioned the drilling of two blocks -- SC-13 and SC-14 Santa Catarina 13 and Santa Catarina 14. In both blocks are you drilling for pre-salt targets?

Yes, well (inaudible) the BM-C-14 is not in the Campos basin. BM-C-14 will be the next well drilled by (inaudible) the drilling rig that is finishing (inaudible). Okay, what is the other one?

(inaudible) Santa Catarina earlier in the presentation also.

No, the Santa Catarina is BM-S-12 -- 13, 14 -- is it pre-salt or not? Are they gas?

This is in shallow water and I don't think it's pre-salt there. It's shallow water, below 1000 meters water depth.

It should be about the same time of target. We drilled and announced light oil discovery at the --

It is south of the [BM-S-40]. We announced recently this quarter there [were] light oil and BM-S-12 is south of BM-S-40 in shallow waters.

Thank you very much.

Paul Cheng, Lehman Brothers.

I have two follow-up. I just wanted to clarify an earlier comment and maybe one question. On the subsalt, I understand that you're coming close to the end of the exploration -- first phase of the expiration (inaudible). Have you mentioned or talked about the Jupiter? Maybe I missed it. Where are we in the drilling of the Jupiter?

On Jupiter are we announced (inaudible) in the first announcement we made. That was the only announcement we made so far for Jupiter. And Jupiter is going until the beginning of September. The drilling will continue.

I'm sorry - when are you going to complete that?

Beginning of September

Beginning of September you're going to finish?

Yes.

Okay. And that on the I think earlier talking about the capital spending, you're saying that your (inaudible) is [60] BRL62 billion and that you may be 10 to 15% lower. Even assuming 15% lower -- that's about 50 to BRL51 billion for the year, you spend about 20, BRL21 billion in the first half so you need to spend about BRL30 billion in the second half. Can you actually spend that quickly?

I'm sorry Paul. Just to clarify you're asking -- we spent BRL20 billion in the first half of the year and how much do we expect to spend in the second half?

Right, based on the earlier comment, you're saying that for the full year you think you'll spend about 50, BRL51 billion. Even assuming you're 15% lower than your budget, that would still suggest that in the second half you have to spend in about the BRL30 billion -- I mean can you actually spending as fast as that? How (multiple speakers) you can spend this fast?

Yes, we are expecting to increase and this is not unusual to have the second half much higher than the first one. If you took 2006 and compared with 2007 year-over-year we have an increase of more than 30% to 50%. So it's feasible to reach (inaudible) of CapEx for the rest of the year -- the total of the year.

Last one, and I think also the last several months it seems like there's a substantial shift in the Company focus and strategy (inaudible) back into the domestic expansion and growth both in the downstream and the upstream. Wondering if you can comment how your international refining and upstream strategy has since changed.

I think at one point last several years that acquisition is a big piece of this strategy. Is acquisition still a big piece of the strategy in the international or that you're really going to (inaudible) substantially more and put more effort and resources that are primarily in the domestic?

Yes, we are revising this strategy right now with the business plan and in October we intend to release all these kind of information, the new strategy we may have if we're going to change or not.

So you're not going to be able to comment anything here then?

No, not at this point.

Marcus Vin Sequeira, Deutsche Bank.

Just two questions. One on refining, you mentioned you had a BRL1 billion benefit during the quarter through the average cost accounting. I was wondering if you could comment on how is the average cost of your inventory right now.

And then on AP again, so I understand that you in terms of the delineation of (inaudible) reserves, I understand that those should take between 12 to 18 months. And just if you could comment on what is your prospects for the continuing (inaudible) frontier and what are you expecting or what is the indication there. Thank you very much.

I'm sorry Marcus. Could you repeat the second question?

The second question is about the -- on the E&P. I understand that you -- it will take some time for you guys to have an idea of the size of the reserves. Just and checking if it's around 12 to 18 months for you guys to be able to have an idea of the size of the reserves in the pre-salt, I'm sorry.

The pre-salt cluster you mean.

Yes.

This is a very, very frequent question and of course these will take some time yet but probably not 12 to 18 months. But of course also in a degree of certainty as time goes more information will be collected, better evaluation we will have. But I believe earlier than that we will have some idea on the total reserve of the area.

And then Marcus your second question I think with respect to the average inventory of you were asking what is the additional value if you will today that would be (technical difficulty)

Yes, more or less have an idea of what would the average cost of (inaudible) right now and just to have an idea of -- I understand that in the third quarter you probably will have higher costs in your inventories and that will have a negative impact in the third quarter. Just trying to have a sense of how much the impact will be.

In other words, the negative impact that could happen in the fourth quarter with declining prices given that we had a positive impact in the second quarter (multiple speakers) estimate there? I guess -- Almir, correct me if I'm wrong -- but I think if you could assume that -- if you had a BRL1 billion positive in the second quarter and prices declined, you could have up to a BRL1 billion reduction in the third quarter. Would that be a proper way to express it, Almir?

It is correct. It depends of course of order items in the next quarter. We cannot say now but this positive effect this quarter if the other items don't vary in the next quarter we can believe that we will reduce our results in BRL1 billion the next quarter. It is correct. But I would like to say it depends on the order items that we can say now. Prices might expire. It depends on the price.

If (inaudible) could comment on what is your indication (inaudible). I understand it is a new frontier and so what are you guys seeing right now at this [pacing]?

That's a new frontier, eastern margin of Brazil's south of Bahia. (inaudible) very great potential area but we never drilled there. It's deepwater. That's why -- we are ultra deepwater -- that's why we have (inaudible) to that area.

And we just got an extension because the regional exploratory contract was ending (inaudible) and now we got an extension of 464 days (inaudible) to the delay in obtaining the result the environmental licensing. So now we have -- we're going to do the first drilling there and hopefully find a new area for exploration.

Marc McCarthy, Rexford Capitol.

I have a few questions. Just going to put the note there, see how we do. The first one is (multiple speakers) two questions, two questions Ted. The first one is an easy one.

Can give us an update on your plans or if you are going to buy Valero's Aruba refinery? There's been quite a bit of discussions suggesting that you are at the final stages of negotiation. The second question in light of Ted's --

Actually, Marc, since you asked that first question you can ask the third because I think the first answered question will be very short. So you can ask a third.

That's great. The second question is related to Molinari's comments about extensions. As you think about your existing portfolio looking out five, seven years you had quite a bit of an existing backlog to declare commerciality, bring on development. And then all of a sudden you had the opportunity with the pre-salt which itself has its own sizable deadlines that you're facing to race around, drill wells to move towards the declarations of commerciality.

I guess I was always under the impression that you'd be faced with having to substitute some levels of production and possibly even having to relinquish existing discoveries, just facing infrastructure constraints. As you have now laid out this massive drilling program, should we interpret this as -- A, the development of the pre-salt may take longer but it's going to be ultimately incremental to all the existing discoveries? B, have you decided in some cases to relinquish existing discoveries to be resold back by the government? Or third, are you getting extensions for the most part across the board which will allow you more flexibility to do both?

Well we're doing our plan. We don't intend to relinquish any exploratory blocks. We are contracting drilling rigs -- 40 new build drilling rigs. 12 of them are already contracted to be built abroad and 28 won't deliver until 2012 and the other 28 that would be contracted probably in Brazil to be built in Brazil.

So we are -- we know the problems, the constraints of the market in (inaudible) drilling rigs for all the deepwater. And we decided then to (inaudible). So the plan we have today is to increase production also exploratory effort to fulfill all the obligations we have and to increase the proven reserves as well.

I would take that to be that you anticipate it to be incremental, you don't plan to relinquish anything and you're not getting extensions.

That's right. Extensions we may have if we have problems like I mentioned in obtaining environmental license or constrained (inaudible) delay (inaudible), extensions for the (inaudible)

Did you think about say the Wells Park which was a discovery in 2003? You need to be submitting a lot of commercial development plans really over the next year.

That's right. We have the exploratory phase ending we needed to the commercial feasibility where we think in the timeframe then pass to the development phase. But this is already considered in our plan. We are revising right now our strategic plan and it will be released at the end of October of this year and that will be taking into consideration all of the (inaudible), all the exploratory areas, and also production increases.

Okay and just if I can take that third question then. Going back to the unitization question, as you sit around the table and try to divide up the equity interests in the reservoir, how do you define the state interest and/or who controls ultimately the budget given that there's a very high probability I would suppose that Petrobras will be in majority control? And so a unitization agreement could actually work really to Petrobras's benefit.

That's the first part of it. Then to what extent if there are other area surrounding the areas that were already licensed and the state has 100% of areas that have not yet been sold but are defined also part of the reservoir, can they ultimately get themselves at the table?

Yes, that's what happened. Now all people -- companies interested and the national agent will see it and discuss the -- how much which one has (inaudible) the volume of each participant and then the operator usually (inaudible) that is (inaudible) again the production for each participant.

Just to complete the answer if there is any part of particular fields that lies in an area that are not awarded yet, it belongs to the government and according to the constitution the government can exert the exploration production directly. So they are going to decide what to do. They have many alternatives and probably they are (inaudible) they can become a partner, they can do many different things. And we're waiting to see.

Maybe this committee is having these at one point to consider, the committee that the government has created (inaudible) all these pre-salt problems. Regarding Valero, we have a re-evaluation -- we have no decision. Probably by the time we will be revealing the new business plan we will have a final decision on this point.

Thank you Almir.

Prabu Comoran, Lusight Research.

I have a couple of questions. Can you give us an update on the labor negotiations and how much was the production in fact expected for the coming quarter? And can we expect the supply division to have this high utilization rate going forward or is this like -- this 95% will be achieved going forward? Can you comment on the utilization rate as well?

Just a moment.

One of the questions was on what you can expect with respect to the utilization rate going forward? (inaudible) do you want to answer that quickly? The utilization rate which was very high this quarter, what would you expect going forward?

[Inaudible - microphone inaccessible]

Just even shorter. I mean this time it was 93% -- 95%. What do you expect it to be -- the utilization factor for refining the capacity utilization?

The refining -- all the refining we're going to produce diesel and gasoline.

Right but just the capacity utilization factor for the second quarter was very high. Do you expect that to continue (inaudible) 95%?

(inaudible) what we are -- we reach a level that probably is not going to be maintained for the remainder of the year. It will depend a lot on the maintenance of the refinery. We're going to stop (inaudible) of one refinery now in the third quarter and to have a (inaudible) program in the fourth quarter of (inaudible) which one is going to be maintained in the fourth quarter?

[Inaudible - microphone inaccessible]

As we understand (inaudible) it was mentioned that the [exploration] of refineries have been completed. So that's why I was asking whether you're going to have this higher domestic utilization rate going forward.

Probably we cannot maintain this level for the remainder of the year. So we will do our best to keep it but this is very high above the average of the world capacity.

Any comment on the labor issues?

(multiple speakers) regarding the strikes that has been discussed in the late last months, it's all over. It was only about the way to distribute the participation -- the share on (inaudible) to the employees.

And we agreed in a way that unions, employees and the Company were happy. So the issue is over. We don't expect more problems in the near future. We have of course in September the agreement on the salary rising but as we have [done] the last opportunities we had, we were able to negotiate and come to a gain-gain agreement.

How often does negotiations take place?

I'm sorry. We're trying to sort of conclude the conversation with a couple more questions and maybe at the end I think -- operator could we move to the next question please?

Gustavo Gattass, UBS.

I had two quick questions, the first one very much related to the quarter. When we look at slide 15 when you talk about the improvement and the results of the gas and gas and power unit, there is an improvement mentioned on the cost effect on average COGs. Can I get a little bit more color on that?

Can help us? (multiple speakers)

The greatest factor to cost was basically due to greater generation and the downside of the energy price in the spot markets. Quarter to quarter that variation reduced our costs in the energy segment (inaudible) improvement (multiple speakers)

Okay, so (multiple speakers) was lower spot purchases then?

Also with greater generation (multiple speakers)

Okay. Perfect. The second question, Almir, this one is little bit more strategic. We've been hearing a lot on regulation and I know that most of this is out on the government sphere.

But we have also heard a lot from Petrobras as far as their support of a change to (inaudible) on the pre-salt. Can you just briefly touch on why you guys think this is good for the Company?

Gustavo, we are not going to -- there is here an orientation not to discuss this subject until this committee comes with a conclusion. So we prefer not to comment at this time.

Paula Kovarsky, Itau Corretora.

I would like to follow on a little bit on production for production growth. Actually I was trying to reconcile a couple of numbers.

If they say (inaudible) is currently operating at 154,000 barrels a day and P-54 at 96,000; if you take from the beginning of the year where both were around the 40's it means those two platforms together have already added something like 150,000 barrels a day of production.

I don't know exactly where is (inaudible) ramp-up standing. But at the end of the day this is a significant production addition which all along would mean something like 10 or even more percent growth in production as compared to the end of last year.

So I would like to understand how is the pollution affecting Petrobras's ability to meet production growth goals? And what is -- if the Company is having any type of initiative to try and get lower depletion or I mean how can we evaluate or watch how we expect on the pollution going forward?

And then what is your new guidance if there's any on production growth for the year? What is the target for average domestic oil production?

Molinari, please.

The decline of the mature fields (inaudible) actually have a decline rate of 10% per year. And our target therefore this year is 1,950,000 barrels per day and with the variance of 2.5%. Right now we are running at the lower band of this target.

Maybe we can add something else here. If we compare with the first half of last year and the first half of this year, we can see that the new units we installed added to the production 202,000 barrels per day. We had a decline on the same period of 162 what has added to our production of oil and other liquids of 40,000 (inaudible). And in the year the decline was 162. That is less than 10% of the production we had last year. So, we have our performance in terms of declining rate is in the range we had estimated.

Okay and do you expect any additional contribution for the [programs] that you have recently announced like the (inaudible) or any other program to maybe lower a little bit that depletion and allow the overall production to grow on a steeper basis?

I talked about the programs (inaudible) onshore. The problem is not onshore -- the production, the contribution is lower in offshore but we're doing greater effort there to increase the production from mature fields. And regarding new projects, we're going to start production from Espirito Santos (inaudible) wells (inaudible) field that will give also a good contribution for the production increase during the second half of this year.

Can you quantify how much those two would contribute?

The Espirito Santos, it was limited by the capacity of (inaudible) P-34 platform which is 60,000 barrels per day. So we still have 12,000 to reach this capacity.

So if even the well can produce more, you'll have to reduce (inaudible) another well because (inaudible) light oil, it is more important for us. So if we reach the capacity then the well can provide more than 12,000 you would have to increase the production from this well and increase the production from all the heavy oil well.

In onshore we have (inaudible) the contribution is lower because the effort there is (inaudible) to increase the production. We very much with fields like (inaudible) I don't have a number here.

Okay but you mentioned the contribution of 12 from the P-34 but what about the other one?

The other is the (inaudible) (multiple speakers) several projects onshore.

Thank you. We're going to finish up our conference call with one question from the Internet which I will read. It's coming from Christopher Buck from [Barkley's Capital].

Could you comment on Petrobras plan to issue additional debt in 2008? Previously the Company indicated it may issue more than 2 billion international bonds during the second half of '08?. Is this still the case?

So we are looking at the market that is not in good shape now but -- and we were happy in the second quarter as you have seen by increasing our EBITDA to a record in the period. But depending on the market it might will come up in better shape after the month of August. It may touch the market. It may top the market (inaudible) the (inaudible) we were aiming at. It all depends on the market itself, market conditions.

Thank you.

Okay, thank you all for being here. I hope that next quarter we can have as good results as we have this time. See you then.