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CEO Aldemir Bendine talks about our challenges and achievements

Desafios2015 was very challenging, and a period of deep changes in our governance. It was marked by the appointment of a new board and the setting of new operational records, with production in pre-salt layer averaging 919,000 barrels of oil equivalent per day in the first nine months of 2015. These were some of the topics addressed during an Executive Board breakfast with journalists who cover our daily activities, held on Tuesday (Dec. 15), at our main office in Rio de Janeiro.

While opening the event, CEO Aldemir Bendine said: "First, we had a challenge of presenting a credible, audited balance sheet to show the company's numbers reliably. That was done. We also had the challenge of presenting a business plan that would reflect the new scenario that the oil and gas industry was facing. That was done. We had a major challenge, which was the issue of financial viability. We anticipated all possible funding for the year. Cash is now robust for 2016, to cover all of the company's commitments and even to face more challenging scenarios."

Bendine stressed free cash flow generation for the first time in eight years - considering the result accumulated up to the third quarter 2015. "The company has been downsizing, restructuring its manageable cost successfully. Despite the adverse situation, Petrobras now has a very good operating result," noted the CEO.

He pointed out that in 2015, despite the adverse scenario, we managed to reduce our debt in dollars by approximately 5 percent. Still on the challenge of addressing our debt, Bendine highlighted the importance of the divestment process. "The conditions have been given, and negotiations are in progress. We have a very positive outlook about it," he said.

About the new Business Plan, the president said that will be presented at the beginning of the year. "It will be more mature, facing this new reality that the market put upon us. The paths are correct, we have no major change in route compared to what we had planned," he said. Bendine noted that the challenges we faced have strengthened the company, including the adoption of a new governance, risk, and compliance model. "We have pursued this improvement relentlessly by implementing the best management practices," he added.

Our highlights in 2015:

Pre-salt - Activities in the pre-salt layer have afforded results that are higher than expected. The cost of production in the region is almost half that of the majors', and has been dropping very quickly. The pre-salt fields now account for ¼ of our production.

The wells are highly productive, averaging 25,000 barrels per day. With our partners, we managed to reach the mark of 520,000 barrels of oil per day (bpd) just eight years after the first discovery was made in the region. To achieve the same level of total production, it took us 31 years, from 1953, the year of our establishment, to 1984.

Extraction cost today is below $8 per barrel, while the average among the majors is $15. The time it takes to drill a well in the pre-salt is now less than 30 days, while in 2010 it took over 120 days to do it.
Contract renegotiation has contributed to reduce exploration and production operation costs. In 2015, we were able to decrease E&P contract costs by 13 percent, on average. A second round of renegotiations for cost reduction in new contracts will begin in January 2016.

These results underpin both our leadership in technology for deep and ultradeep waters, and the expectations concerning the high potential of the pre-salt production. The output record showed the quality of the reservoirs and these projects' technical and economic feasibility. These results confirm the economic viability of the pre-salt, despite the adverse oil price scenario.

Refining - In 2015, diesel yield in the total oil product output was up, with more participation of Brazilian oil in the process. This production profile improvement, combined with other factors, contributed to reduce oil product imports, particularly diesel. A record was set in S-10 diesel fuel production in Brazil in 2015, coming in at 42 percent more than 2014.

Governance - We created the Governance, Risk, and Compliance Department, appointing engineer João Elek to head it. He was chosen in selection process from among several executives. The new department's compliance measures include the adoption of the Integrity Due Diligence process for evaluating suppliers. The goal is to increase safety in the procurement of goods and services and to mitigate risks related to fraud and corrupt practices. Only suppliers who demonstrate integrity and adopt compliance measures will be kept in our reference file and can take part in bidding processes. From August to November, 6,625 Integrity Due Diligence cases were opened by the Registration System.

We have also adopted a number of initiatives to enhance our internal controls. One of the guiding principles of these changes is the limitation of individual decisions at all levels of the company, promoting joint decisions. Another measure is the creation of two new committees (Strategic and Financial), in addition to the three that already existed (Audit, Security, Environment and Health, and Compensation and Succession), to advise the Board of Directors in assessing issues. All projects prepared and approved at the company are now also submitted to the assessment of a matrix that takes into account possible risks, including from the control and transparency standpoint. A process got underway to restructure the company's Ombudsman's Office, which included the selection of new ombudsman-general and the creation of a new independent Reporting Channel. The new Reporting Channel is managed by an independent company specializing in receiving, collecting, and listening to complaints. By November 30, the new channel had received 195 records of complaints and denunciations, including cases of theft or fraud.

We were also able to secure compensation for damage caused by illegal acts in the courts. So far, R$296 million have been returned, repatriated through action taken by the Federal Public Prosecutor's Office.

Operating and financial results - At the end of the first half of the year, we posted net income of R$5.9 billion, 43 percent lower than a year earlier. Operating income, meanwhile, added up to R$22.8 billion, up 39 percent compared to the previous year. In November, the results of the first three quarters of 2015 were announced, indicating a 6 percent growth in oil and natural gas production in Brazil and abroad in the first nine months of 2014.

For the first time in history, the total output in Brazil, including the portion we operate for partner companies, surpassed 3 million barrels of oil equivalent per day, closing at 3.01 million in August. The daily average was 919,000 barrels in the pre-salt fields, which now account for 24 percent of all oil and gas we produce.

Technology and innovation - For the third time in our history, we were granted the Offshore Technology Conference (OTC) award, the main recognition in the global oil and gas industry, for the number of innovative technologies developed for production in the pre-salt layer.

The ten award-winning technology solutions have assured us gains in productivity, especially the riser support buoy, a steel device that is submerged at a depth of 250 meters in the ocean and interconnects pipelines installed in oil wells to the vessel platforms. The technology reduces the impact platform movement has on the risers, increasing the useful life of the equipment, and is installed in the Sapinhoá field, in the Santos Basin pre-salt cluster.

Business Plan - In June 2015, we rolled out the 2015-2019 Business and Management Plan (BMP), focusing on exploration and production projects and with an emphasis on the pre-salt. In October, the BMP underwent adjustments, reducing by $11 billion the forecast for the 2015-2016 biennium, investments for which have dropped from $55 billion to $44 billion.

When releasing the 2015-2019 BMP, we had already reported that the Plan's implementation would be subject to risk factors that could impact projections adversely. We anticipate the release of the new business plan and management in early 2016.

Divestments - The 2015-2019 Business and Management Plan foresees divestments totaling $15.1 billion in the 2015-2016 biennium. The divestment portfolio is dynamic, and realizing these opportunities depends on business and market conditions.

There were three disposals in 2015 (the latter two are subject to customary conditions, including approval by the relevant regulatory bodies):

- Assets in the Austral Basin, in the province of Santa Cruz, in Argentina, to CGG (Compañia General de Combustibles S.A.): $101 million.

- Full interest (20%) in the Bijupirá and Salem fields, located in the Campos Basin, to PetroRio: $25 million.

- 49% of Petrobras Gás S.A. (Gaspetro) to Mitsui Gás e Energia do Brasil Ltda.: R$1.9 billion.

Funding - We raised $13.5 billion in 2015, including operations in the banking and capital markets (domestic and international), BNDES, Development Agencies, and Export Credit Agencies (ECAs). These loans, compared to the international secondary market for Petrobras' debt bonds, afforded savings of $1.1 billion.

We have our cash needs envisaged for 2016, and continue evaluating funding opportunities to maintain our liquidity position and meet the resource requirements foreseen under the Business Plan. In addition to traditional sources, such opportunities include securitization and sale and lease back transactions, in addition to transactions with export credit agencies, among others.

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