Contingency Payment: Macaé Merchant

01/06/2005

(Rio de Janeiro, January 6 2005). – PETRÓLEO BRASILEIRO S/A - PETROBRAS, Bovespa: PETR3/PETR4, NYSE: PBR/PBRA, Latibex: XPBR/XPBRA], a Brazilian international energy company, informs that to protect its interests and acting on guidance from the Board of Directors, it has formally notified El Paso Rio Claro Ltda. and El Paso Rio Grande Ltda. (collectively El Paso), operator(s) of the Macaé Merchant thermoelectric plant, that it wishes to begin immediately negotiations to stop or reduce the contingency payments to the plant. Petrobras is also proposing the suspension of this payment until the negotiations are concluded and the matter resolved. The notification and negotiation procedures proposed are strictly in accordance with the prevailing contractual terms.

 

Accordingly, Petrobras has also informed the institutions responsible for financing this project, namely the International Finance Corporation (IFC), the Brazilian Economic Development Bank (BNDES) and the Overseas Private Investment Corporation (OPIC).

 

Under the Priority Thermoelectric Program (PPT), Petrobras signed a participation agreement contract with El Paso for operating the Macaé Merchant thermoelectric plant. This contract provides for a contingency payment in the event of the plant failing to cover eventual financial shortfalls should the plant not meet forecasted sales of available energy and be unable to meet certain revenue targets, and consequently cover the capital remuneration, operational costs and taxes.

 

Unforeseen and extraordinary changes in the economic and market circumstances prevailing at the time have caused a serious imbalance in the economic and financial viability of the above-mentioned contract. The contractual equilibrium negotiated at the outset is based on the principle of eventual cash deficits arising from the project operation being offset by surpluses due to variations in spot prices in the electricity energy market. As the assumptions and parameters of this market used by the parties to the contract have become invalid in relation to current conditions, the contingent payments have lost their essential characteristic of unpredictability, becoming of a permanent nature with Petrobras exclusively bearing the onus of the loss.

 

According to its own in-house counsel as well as external consultancies hired for the purpose, Petrobras understands that given the financial imbalance, it has grounds based on the current legislation to proceed with its proposal for negotiations and/or solution in accordance with specific contractual procedures. The Company seeks a speedy and amicable solution to the case. Should this not be possible, following a contractual period of 30 days, Petrobras will take appropriate legal steps to resolve the dispute in a final and conclusive manner.