Rio de Janeiro, March 4, 2016 – Petróleo Brasileiro S.A. – Petrobras hereby responds to Official Letter 71/2016-CVM/SEP/GEA-1, which requests the following clarifications:

Official Letter 71/2016-CVM/SEP/GEA-1

“Dear Officer,

We refer to the news item published today in the Empresas (Companies) section of the newspaper Valor Econômico, entitled: Petrobras perde US$1.95 bi no Japão (Petrobras loses US$1.95 billion in Japan), which contains the following affirmations:

Petrobras’ investment in Japan in 2008 through the acquisition of the Nansei Sekiyu K.K. refinery in Okinawa has generated losses of US$1.95 billion, according to a source who had access to studies undertaken by Petrobras itself. The refinery ceased operations in April 2015 and, in January of this year the Board of Directors approved the closure of the unit, which had been put up for sale on various occasions but had found no takers.

The final balance represents the acquisition price of US$76 million, plus accrued losses of US$710 million, a capital injection of US$650 million, costs of US$270 million with the unit’s closure, and debt of US$240 million. Petrobras did not respond to requests for comment.

According to a source who is aware of the matter in the company, the loss is “very similar” to that suffered by the American refinery in Pasadena, but much less talked about. “The loss is massive,” declared the source. A confidential study prepared in October 2007 by Petrobras specialists, obtained by Valor, identified risks and showed that the business could result in losses.

Nicknamed the “Island Project”, the aim of the analysis was to assess the acquisition of a shareholding interest. It was coordinated by the International area’s Business Development Department, headed by Rafael Comino, who was one of the targets of Operation Corrosion as part of the Car Wash investigations, in November of last year.

The document, which was signed by legal, financial and accounting specialists, drew attention to the paucity of available documentation in the due diligence processes carried out in May 2006 and May 2007, stating that, because “[the available documentation] was mostly in Japanese, it was difficult to have a complete understanding of certain issues”. The document made it clear that if the refinery were acquired without a revamp costing around US$1.5 billion enabling it to process Brazilian heavy crude from the Marlim field, the business would be a loss-maker. Without the revamp, the refinery’s estimated Net Present Value (NPV) was US$214.6 million negative, considering an economic value of US$159.1 million for the 87.5% to be acquired by Petrobras.

If the revamp had occurred, the NPV would have been US$251.4 million positive, with Petrobras’ interest valued at US$306.9 million. As with the Pasadena refinery, the Okinawa unit was also equipped to handle light crude only and, despite its daily processing capacity of 100,000 barrels, it produced just 50,000 barrels/day.

On page 28 of the report, the specialists stated that the shareholders’ agreement envisaged that Sumitomo would accompany Petrobras’ investment decisions, “being able to dilute its interest or exercise a sale option of its shares in case of disagreement”. This last clause, known as a put option, was exercised in 2010.

The specialists explained in the document that, in the envisaged scenario, which involved a US$1.5 billion expansion (never carried out, including due to environmental barriers), the Technical and Economic Feasibility Study considered that, in addition to meeting demand from Okinawa, the refinery would sell fuel to China. However, it warned of great uncertainties “regarding selling conditions in that market”.

One source who took part in the decision at the time defended the acquisition, saying that the plan was to supply Asia with Brazilian ethanol and heavy oil, accompanied by a terminal capable of storing 10 million barrels of fuel. “But Brazil changed its policy and the gasoline subsidy destroyed the ethanol market,“ the source claimed.

When explaining that an external consulting firm would be responsible for defining the scope and the estimated amount of the investment in the project, the Petrobras specialists stated that the estimates at the time had a FEL1 level of precision, i.e. they were in the very initial stage, with no detailing of the project. This, they stated, “indicates a high degree of uncertainty regarding the amount of this investment”.

The plan to acquire the Okinawa refinery began to be drawn up when Nestor Cerveró headed Petrobras’ international area, but the transaction was concluded when Jorge Zelada, currently in prison in Curitiba, occupied this position and Dilma Rousseff chaired the Board of Directors. In 2014, the President’s Office released a note stating that the acquisition of the first installment of the Okinawa facility had been authorized by a Board of Directors meeting held on November 9, 2007, based on the Executive Summary.

“Said Executive Summary, presented to the Board of Directors and prepared by the Executive Board, refers to the existence of contractual clauses that gave rise to the put option, as well as the corresponding technical information”.

The note also stated that the acquisition of the refinery “was aligned with the company’s overall strategy, envisaged in the 2004-10 Business Plan and the 2015 Strategic Plan in regard to increasing refining capacity abroad”, further observing that the refinery had “an additional advantage in that it has a major oil and oil product terminal capable of storing 9.6 million barrels”. (…)

In view of the above, we determined that you clarify whether the news are true, and, if confirmed its veracity, you should explain the reasons why it decided not to consider it as a material fact, as well as comment on other information considered important on the subject, in particular on the respective work performed by internal and external auditors to the company, as well as the conclusions of the reports by any internal committees of investigation of Petrobras. ”

Clarification

In February 2015, Petrobras decided to begin its plan to exit Okinawa, Japan, which envisaged the winding up of the refining activities of the Nansei Sekiyu (NSS) refinery, as disclosed in the “Subsequent Events” item to the 2014 Financial Statements. This decision was taken by Petrobras after evaluating the alternatives to recover the asset.

The exit plan envisages transforming this refinery in a maritime terminal in order to maintain Okinawa island’s supply. This transition to a different model is ongoing and began with the winding up of the refinery’s oil processing activities in April 2015 and should be completed by April 2016.

The losses related to NSS were duly recognized in the Financial Statements over the years and, in 2014, a loss of R$343 million in the impairment of this asset was recorded, as disclosed in the explanatory notes, item 14.1.2. (h) – Impairment Tests of fixed and intangible assets – Nansei Sekiyu K.K. Refinery.

Petrobras, as part of its regulatory capabilities, held internal investigation to assess the acquisition process of Nansei Sekiyu refinery (NSS) and the result of the investigation was transferred to the Brazilian public authorities.