TABLE OF CONTENTS

PROSPECTUS SUPPLEMENT

PROSPECTUS

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ABOUT THIS PROSPECTUS SUPPLEMENT

This document consists of two parts. The first part is the prospectus supplement, which describes the specific terms of the notes PGF is offering and certain other matters relating to PGF and Petrobras and Petrobras’ financial condition. The second part, the accompanying prospectus, gives more general information about securities that PGF and Petrobras may offer from time to time. Generally, references to the prospectus mean this prospectus supplement and the accompanying prospectus combined. If the information in this prospectus supplement differs from the information in the accompanying prospectus, the information in this prospectus supplement supersedes the information in the accompanying prospectus.

We are responsible for the information contained and incorporated by reference in this prospectus supplement and in any related free-writing prospectus we prepare or authorize. PGF and Petrobras have not authorized anyone to give you any other information, and we take no responsibility for any other information that others may give you. Neither PGF nor Petrobras is making an offer to sell the notes in any jurisdiction where the offer is not permitted.

You should not assume that the information in this prospectus supplement, the accompanying prospectus or any document incorporated by reference is accurate as of any date other than the date of the relevant document.

In this prospectus supplement, unless the context otherwise requires or as otherwise indicated, references to “Petrobras” mean Petróleo Brasileiro S.A.-Petrobras and its consolidated subsidiaries taken as a whole, and references to “PGF” mean Petrobras Global Finance B.V., a wholly-owned subsidiary of Petrobras. Terms such as “we,” “us” and “our” generally refer to both Petrobras and PGF, unless the context requires otherwise or as otherwise indicated.

References herein to “reais” or “R$” are to the lawful currency of Brazil.  References herein to “U.S. dollars” or “U.S.$” are to the lawful currency of the United States.  References herein to “euros” or “€” are to the lawful currency of the member states of the European Monetary Union that have adopted or will adopt the single currency in accordance with the Treaty Establishing the European Community, as amended by the Treaty on European Union.

FORWARD-LOOKING STATEMENTS

Some of the information contained or incorporated by reference in this prospectus supplement are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are not based on historical facts and are not assurances of future results. Many of the forward-looking statements contained, or incorporated by reference, in this prospectus supplement may be identified by the use of forward-looking words, such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimate” and “potential,” among others. We have made forward-looking statements that address, among other things:

·         our marketing and expansion strategy;

·         our exploration and production activities, including drilling;

·         our activities related to refining, import, export, transportation of petroleum, natural gas and oil products, petrochemicals, power generation, biofuels and other sources of renewable energy;

·         our projected and targeted capital expenditures and other costs, commitments and revenues;

·         our liquidity and sources of funding;

·         our development of additional revenue sources; and

·           the impact, including cost, of acquisitions.

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 factors. These factors include, among other things:

·         our ability to obtain financing;

·         general economic and business conditions, including crude oil and other commodity prices, refining margins and prevailing exchange rates;

·         global economic conditions;

·         our ability to find, acquire or gain access to additional reserves and to develop our current reserves successfully;

·         uncertainties inherent in making estimates of our oil and gas reserves, including recently discovered oil and gas reserves;

·         competition; 

·         technical difficulties in the operation of our equipment and the provision of our services;

·         changes in, or failure to comply with, laws or regulations;

·         receipt of governmental approvals and licenses;

·         international and Brazilian political, economic and social developments;

·         natural disasters, accidents, military operations, acts of sabotage, wars or embargoes;

·         the cost and availability of adequate insurance coverage; and

·         other factors discussed below under “Risk Factors.”

For additional information on factors that could cause our actual results to differ from expectations reflected in forward-looking statements, please see “Risk Factors” in this prospectus supplement and in documents incorporated by reference in this prospectus supplement and the accompanying prospectus.

All forward-looking statements attributed to us or a person acting on our behalf are expressly qualified in their entirety by this cautionary statement, and you should not place undue reliance on any forward-looking statement included in this prospectus supplement or the accompanying prospectus. 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.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

Petrobras is incorporating by reference into this prospectus supplement the following documents that it has filed with the Securities and Exchange Commission (“SEC”):

(1)           The Petrobras Annual Report on Form 20-F for the year ended December 31, 2012, filed with the SEC on April 29, 2013.

(2)           The Petrobras Report on Form 6-K furnished to the SEC on February 26, 2014, containing audited consolidated financial statements as of December 31, 2013 and 2012 and January 1, 2012 and for the years ended December 31, 2013,  2012 and 2011, in U.S. dollars, prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (the “Audited Financial Statements”), and our related amendment on Form 6-K/A, furnished to the SEC on March 10, 2014.

(3)           The Petrobras Report on Form 6-K furnished to the SEC on February 26, 2014, announcing Petrobras’ 2030 Strategic Plan and Business Plan for 2014-2018.

(4)           The Petrobras Reports on Form 6-K furnished to the SEC on the dates indicated below, concerning other recent developments in our business:

·         Report furnished on March 7, 2014 announcing Petrobras’ discovery of oil in the Transfer of Rights area.

·         Report furnished on March 7, 2014 containing management’s report on internal control over financial reporting.

·         Report furnished on March 7, 2014 announcing Petrobras’ proved reserves of oil, condensate and natural gas in 2013 according to SEC criteria.

·         Report furnished on March 6, 2014 announcing Petrobras’ oil and natural gas production in January 2014.

·         Report furnished on March 6, 2014 announcing 2013 operating results highlights.

·         Report furnished on March 3, 2014 announcing names of candidates appointed by Petrobras’ controlling and non-controlling shareholders to its Board of Directors and Fiscal Council in connection with the election to take place at Petrobras’ general and extraordinary shareholders meeting to be held on April 2, 2014.

·         Report furnished on March 3, 2014, convening Petrobras’ general and extraordinary shareholders meeting to be held on April 2, 2014.

·         Report furnished on February 27, 2014 announcing the approval by Petrobras’ Board of Directors of the merger of Termoaçu S.A., Termoceará Ltda. and Companhia Locadora de Equipamentos Petrolíferos – CLEP into Petrobras.

·         Report furnished on February 20, 2014 announcing the operation of a new well in the Sapinhoá field, located in the Santos Basin.

·         Report furnished on January 31, 2014 announcing Petrobras’ oil and gas production in December 2013 and its 2013 production reported to the Agência Nacional de Petróleo, Gás Natural e Biocombustíveis (National Petroleum, Natural Gas and Biofuels Agency, or the “ANP”).

·         Report furnished on January 27, 2014 announcing Petrobras’ voluntary separation incentive plan.

·         Report furnished on January 23, 2014 announcing the approval of the working and investment plan of the Libra field, located in the ultradeep waters of the Santos Basin.

·         Report furnished on January 8, 2014 announcing the operational performance of Petrobras’ refining park between January and November 2013.

·         Report furnished on January 2, 2014 announcing the start of the platform P-55 strategic project in Campos Basin’s Roncador field.

·         Report furnished on December 30, 2013 announcing the conclusion of the sale of Petrobras’ 35% stake in the offshore project known as Parque das Conchas (BC-10) for U.S.$1.636 billion.

·         Reports furnished on December 19, 2013 announcing the submission to the ANP of (i) the declaration of commerciality of the oil discoveries in the Carioca field, located in the Santos Basin pre-salt and (ii) the declaration of commerciality of the oil and gas discoveries in the Franco and Sul de Tupi fields (South of Tupi), both located in the Santos Basin pre-salt.

·         Report furnished on December 19, 2013 announcing the confirmation of the extension of the gas and light oil discovery on concession BM-SEAL-10 in the Moita Bonita area, located in the ultra-deep waters of the Sergipe-Alagoas Basin.

·         Report furnished on December 17, 2013 announcing the discovery of an oil accumulation on concession BM-POT-17, located in the deep waters of Potiguar Basin in the state of Rio Grande do Norte.

·         Report furnished on December 17, 2013 containing the minutes and resolutions of Petrobras’ extraordinary general meeting held on December 16, 2013 approving (i) the merger of Refinaria Abrea e Lima S.A. - RNEST and Companhia de Recuperação Secundária - CRSec into Petrobras and (ii) the partial spin-off of certain assets and liabilities of Petrobras International Finance Company S.A. (“PifCo”), with the subsequent merger of the spun-off portion into Petrobras.

·         Reports furnished on December 4, 2013, November 29, 2013, October 30, 2013 and October 28, 2013, announcing (i) Petrobras’ pricing policy, as prepared by Petrobras’ Board of Executive Officers and approved by its Board of Directors and (ii) the increase of gasoline and diesel prices at the refinery gate beginning on November 30, 2013.

·         Report furnished on November 29, 2013, announcing Petrobras’ acquisition, on its own behalf and through partnerships, of 49 blocks offered in the 12th bid round held by the ANP.

·         Reports furnished on November 19, 2013 and November 13, 2013, announcing the completion of the drilling of one additional well in the Franco area and the drilling and test of the fifth exploratory well at Iara area, both in the Santos Basin pre-salt area.

·         Report furnished on November 13, 2013, announcing the execution of an agreement to sell 100% of the shares issued by Petrobras’ subsidiary Petrobras Energia Peru (PEP) to China Petroleum Corporation for U.S.$2.6 billion.

·         Report furnished on November 13, 2013, announcing the approval by Petrobras’ Board of Directors of (i) the merger of CRSEC into Petrobras and (ii) the partial spin-off of certain assets and liabilities of PifCo, with the subsequent merger of the spun-off portion into Petrobras.

·         Report furnished on November 12, 2013, announcing the commencement of production of Platform P-63 at the Papa Terra field.

·         Report furnished on October 28, 2013, announcing the approval by Petrobras’ Board of Directors of the merger of Refinaria Abreu e Lima S.A into Petrobras.

·         Report furnished on October 22, 2013, announcing that in a public auction a consortium including Petrobras was awarded the rights and obligations to operate and explore the Libra field.

·         Reports furnished on October 18, 2013 and August 12, 2013, announcing the confirmation of formation tests and drilling potential of the Farfan area in the ultradeep waters of the Sergipe Basin.

·         Reports furnished on October 10, 2013 and October 1, 2013, containing the minutes and resolutions of Petrobras’ extraordinary general meeting held on September 30, 2013 approving (i) the sale of Petroquímica Innova S.A. to Videolar S.A. for R$870 million, (ii) the merger of certain entities into Petrobras, and (iii) the waiver granted by Petrobras’ Board of Directors on its preemptive right to subscribe debentures convertible into shares to be issued by Sete Brasil Participações S.A.

·         Report furnished on October 7, 2013, announcing that Petrobras’ Board of Directors approved the sale of certain Petrobras’ assets in Uruguay to Shell.

·         Report furnished on September 13, 2013, announcing that Petrobras’ Board of Directors approved the sale of 100% of the shares issued by Petrobras Colombia Limited (PEC) to Perecen for U.S.$380 million.

·         Reports furnished on August 26, 2013 and May 28, 2013, announcing the payments of interest on capital related to Petrobras’ 2012 fiscal year earnings.

·         Report furnished on August 19, 2013, announcing drilling results and potential of the Muriú area in the ultradeep waters of the Sergipe Basin.

·         Report furnished on August 19, 2013, announcing the approval by Petrobras’ Board of Directors of the sale of (i) 100% of Petroquímica Innova S.A. shares to Videolar S.A. for R$870 million and (ii) a 35% stake held by Petrobras in block BC-10, known as Parque das Conchas, to the Sinochem Group for U.S.$1.54 billion, among other divestments.

·         Report furnished on August 12, 2013, announcing the redomiciliation of its wholly owned finance subsidiary PifCo to Luxembourg, as a Luxembourg public company limited by shares (société anonyme). 

·         Reports furnished on August 7, 2013 and May 8, 2013, announcing a new discovery of oil reserves in the Santos Basin pre-salt area.

·         Report furnished on July 25, 2013, announcing the completion of drilling and test of the fourth exploratory well at Iara area, in the Santos Basin pre-salt area.

·         Report furnished on July 11, 2013, announcing the adoption of cash flow hedge accounting by Petrobras on its exports.

·         Report furnished on June 19, 2013, announcing the execution of a non-binding letter of intent with SINOPEC for the development of joint studies in connection with the Premium 1 Refinery Project, located in the state of Maranhão, Brazil.

·         Reports furnished on June 17, 2013, announcing (i) the restructuring of Petrobras’ petrochemical portfolio, (ii) a favorable injunction in connection with its dispute over withholding income tax (IRRF) over remittances abroad for the payment of vessels charters, (iii) the execution of an agreement for the sale of common shares held by Petrobras in Brasil PCH S.A. to Cemig Geração e Transmissão S.A. for R$650 million and (iv) the execution of a binding agreement between Petrobras and Banco BTG Pactual S.A. to establish a joint venture for oil and gas exploration and production in Africa.

·         Report furnished on June 10, 2013, announcing the execution of a non-binding letter of intent with GS Energy Corporation for the development of a joint study in connection with Premium 2 Refinery Project, located in the state of Ceará, Brazil.

·         Report furnished on June 6, 2013, announcing the start of production of FPSO Cidade de Paraty in the Santos Basin pre-salt area.

·         Reports furnished on May 28, 2013, announcing that, based on the proposals presented, Petrobras’ board of executive officers did not approve the sale of its assets in Argentina.

·          Report furnished on May 28, 2013, relating to Standard & Poor’s Rating Services report assigning "strong" rating to Petrobras’ management and governance.  

·         Report furnished on May 24, 2013, announcing that Petrobras Tanzania, Ltd. signed a farm-out agreement for the sale of a 12% participation in Block 6 offshore Tanzania to Statoil Tanzania AS.

·         Report furnished on May 24, 2013, announcing that Petrobras completed drilling and testing oil quality in the Florin section of the Santos Basin pre-salt area.

·         Report furnished on May 16, 2013, announcing Petrobras’ acquisition of 34 blocks located in the Foz do Amazonas, Espírito Santo and Barreirinhas Basins offered in the 11th bid round held by the ANP.

·         Report furnished on May 1, 2013, relating to the sale of certain exploratory blocks in the Gulf of Mexico.

·         Report furnished on April 30, 2013, containing the minutes of Petrobras’ ordinary and extraordinary general meetings held on April 29, 2013, including the election of members of its Board of Directors and Fiscal Council.

 (5)          Any future filings of Petrobras on Form 20-F with the SEC after the date of this prospectus supplement and prior to the completion of the offering of the securities offered by this prospectus supplement, and any future reports of Petrobras on Form 6-K furnished to the SEC during that period that are identified in those forms as being incorporated into this prospectus supplement or the accompanying prospectus.

We will provide without charge to any person to whom a copy of this prospectus supplement is delivered, upon the written or oral request of any such person, a copy of any or all of the documents referred to above which have been or may be incorporated herein by reference, other than exhibits to such documents (unless such exhibits are specifically incorporated by reference in such documents). Requests should be directed to Petrobras’ Investor Relations Department located at Avenida República do Chile, 65 — 10^th Floor, 20031-912—Rio de Janeiro, RJ, Brazil (telephones: 55-21-3224-1510 or 55-21-3224-9947).

WHERE YOU CAN FIND MORE INFORMATION

Information that Petrobras files with or furnishes to the SEC after the date of this prospectus supplement, and that is incorporated by reference herein, will automatically update and supersede the information in this prospectus supplement. You should review the SEC filings and reports that Petrobras incorporates by reference to determine if any of the statements in this prospectus supplement, the accompanying prospectus or in any documents previously incorporated by reference have been modified or superseded.

Documents incorporated by reference in this prospectus supplement are available without charge. Each person to whom this prospectus supplement and the accompanying prospectus are delivered may obtain documents incorporated by reference herein by requesting them either in writing or orally, by telephone or by e-mail from us at the following address:

Investor Relations Department
Petróleo Brasileiro S.A.-Petrobras
Avenida República do Chile, 65 — 10^th Floor
20031-912 — Rio de Janeiro — RJ, Brazil
Telephone: (55-21) 3224-1510/3224-9947
Email: petroinvest@petrobras.com.br

In addition, you may review copies of the materials Petrobras files with or furnishes to the SEC without charge, and copies of all or any portion of such materials can be obtained at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the Public Reference Room.  Petrobras also files materials with the SEC electronically. The SEC maintains an Internet site that contains materials that Petrobras files electronically with the SEC. The address of the SEC’s website is http://www.sec.gov.

SUMMARY

This summary highlights key information described in greater detail elsewhere, or incorporated by reference, in this prospectus supplement and the accompanying prospectus. This summary is not complete and does not contain all of the information you should consider before investing in the notes. You should read carefully the entire prospectus supplement, the accompanying prospectus, including “Risk Factors” and the documents incorporated by reference herein, which are described under “Incorporation of Certain Documents by Reference” and “Where You Can Find More Information.”

In this prospectus supplement, unless the context otherwise requires or as otherwise indicated, references to “Petrobras” mean Petróleo Brasileiro S.A.-Petrobras and its consolidated subsidiaries taken as a whole, and references to “PGF” mean Petrobras Global Finance B.V., a wholly-owned subsidiary of Petrobras. Terms such as “we”, “us” and “our” generally refer to both Petrobras and PGF, unless the context requires otherwise or as otherwise indicated.

PGF

PGF is a wholly-owned finance subsidiary of Petrobras, incorporated under the laws of The Netherlands as a private company with limited liability on August 2, 2012. PGF is an indirect subsidiary of Petrobras, and all of PGF’s shares are held by Petrobras’ Dutch subsidiary Petrobras International Braspetro B.V. PGF’s business is to issue debt securities in the international capital markets to finance Petrobras’ operations. PGF does not currently have any operations, revenues or assets other than those related to the issuance, administration and repayment of its debt securities. All debt securities issued by PGF are fully and unconditionally guaranteed by Petrobras. PGF was incorporated for an indefinite period of time.

Since 2001, Petrobras has used its subsidiary PifCo as its vehicle to issue securities in the international capital markets. Petrobras now uses PGF as its main vehicle to issue securities in the international capital markets.  PGF’s first offering of notes fully and unconditionally guaranteed by Petrobras occurred in September 2012.  Petrobras does not expect to use PifCo as a vehicle to issue securities in the capital markets in the future.

PGF’s registered office is located at Weenapoint Toren A, Weena 722, 3014 DA Rotterdam, The Netherlands, and its telephone number is 31 (0) 10 206-7000.

Petrobras

Petrobras is one of the world’s largest integrated oil and gas companies, engaging in a broad range of oil and gas activities. Petrobras is a sociedade de economia mista, organized and existing under the laws of Brazil.  For the years ended December 31, 2012 and 2013, Petrobras had sales revenues of U.S.$144.1 billion and U.S.$141.5 billion, gross profit of U.S.$36.6 billion and U.S.$33.2 billion, and net income attributable to Petrobras’ shareholders of U.S.$11.0 billion and U.S.$11.1 billion, respectively. Petrobras engages in a broad range of activities, which cover the following segments of its operations:

·         Exploration and Production (E&P). This segment encompasses exploration, development and production activities in Brazil, sales and transfers of crude oil in domestic and foreign markets, transfers of natural gas to the Gas and Power segment and sales of oil products produced at natural gas processing plants. According to the ANP, as of December 31, 2013, we were responsible for approximately 90.9% of Brazil’s total production of oil and natural gas.

·         Refining, Transportation and Marketing (RTM). This segment comprises refining, logistics, transportation, export and the purchase of crude oil, as well as the purchase and sale of oil products and ethanol. Additionally, this segment includes the petrochemical division, which comprises investments in domestic petrochemical companies and also extraction and processing of shale.  RTM purchases crude oil from E&P and imports oil to blend with Petrobras’ domestic oil. Additionally, RTM purchases oil products in the international markets to meet excess product demand in the domestic market. As of December 31, 2013, according to the ANP, we operated substantially all of Brazil’s total refining capacity.

·         Distribution. This segment comprises the oil products, ethanol and compressed natural gas distribution activities conducted in Brazil by Petrobras’ wholly-owned subsidiary Petrobras Distribuidora S.A. — BR (“Petrobras Distribuidora”). Petrobras Distribuidora is the largest oil products distributor in Brazil, with a market share of 37.5% as of December 31, 2013, according to the ANP. As of December 31, 2013, Petrobras Distribuidora had 7,710 service stations in Brazil.

·         Gas and Power. This segment covers activities that include transportation and trading of natural gas produced in or imported into Brazil, transportation and trading of liquefied natural gas (LNG), generation and trading of electric power, as well as corporate interests in local natural gas distribution companies, natural gas transportation companies and thermoelectric power stations in Brazil. The Gas and Power segment also includes results from our fertilizer operations.

·         Biofuel. This segment covers activities that include production of biodiesel and its co-products and ethanol activities, through equity investments, production and marketing of ethanol, sugar and the excess electric power generated from sugarcane bagasse.

·         International. This segment comprises Petrobras’ activities in 17 countries other than Brazil as of December 31, 2013, which include exploration and production, refining, transportation and marketing, distribution and gas and power.

·         Corporate. This segment comprises financing activities and other activities not attributable to other segments, including corporate financial management, corporate overhead and other expenses, including expenses related to Petrobras’ pension and medical benefits for inactive participants and their dependents.

Petrobras’ principal executive office is located at Avenida República do Chile, 65 20031-912 - Rio de Janeiro RJ, Brazil, and its telephone number is (55-21) 3224-4477.

The Offering

RECENT DEVELOPMENTS

For a discussion of Petrobras’ results of operations for the year ended December 31, 2013 and recent developments, see Petrobras’ current report on Form 6-K furnished to the SEC on February 26, 2014, which is incorporated by reference in this prospectus supplement, and other reports on Form 6-K listed under “Incorporation of Certain Documents by Reference.”

RISK FACTORS

Our annual report on Form 20-F for the year ended December 31, 2012 includes extensive risk factors relating to our business and to Brazil. You should carefully consider those risks and the risks described below, as well as the other information included or incorporated by reference in this prospectus supplement and the accompanying prospectus, before making a decision to invest in the notes.

Risks Relating to PGF’s Debt Securities

The market for the notes may not be liquid.

The notes are an issuance of new securities with no established trading market. We intend to apply to list the notes on the NYSE. We can make no assurance as to the liquidity of or trading markets for the notes offered by this prospectus supplement. We cannot guarantee that holders of the notes will be able to sell their notes in the future. If a market for the notes does not develop, holders of the notes may not be able to resell the notes for an extended period of time, if at all.

The interest rate payable on the floating rate notes will vary.

The 2017 Floating Rate Notes and the 2020 Floating Rate Notes will bear floating rates of interest that are reset quarterly, and therefore are not a suitable investment for investors who require regular fixed income payments. The interest rate payable with respect to each interest period will be equal to the three-month U.S. dollar LIBOR plus 2.360% in the case of the 2017 Floating Rate Notes and plus 2.880% in the case of the 2020 Floating Rate Notes, with the three-month U.S. dollar LIBOR being determined as of the second LIBOR business day (as defined herein) prior to the start of the relevant interest period. The amount of interest payable on the notes with respect to any particular interest period will therefore decrease if such rate is lower than the rate used to calculate the amount of interest payable with respect to the previous interest period.

Restrictions on the movement of capital out of Brazil may impair your ability to receive payments on the guaranties and restrict Petrobras’ ability to make payments to PGF in U.S. dollars.

In the past, the Brazilian economy has experienced balance of payment deficits and shortages in foreign exchange reserves, and the government has responded by restricting the ability of Brazilian or foreign persons or entities to convert reais  into foreign currencies. The government may institute a restrictive exchange control policy in the future. Any restrictive exchange control policy could prevent or restrict our access to U.S. dollars, and consequently our ability to meet our U.S. dollar obligations under the guaranties and could also have a material adverse effect on our business, financial condition and results of operations. We cannot predict the impact of any such measures on the Brazilian economy.  In the event that any such restrictive exchange control policies were instituted by the Brazilian government, we may face adverse regulatory consequences in The Netherlands that may lead us to redeem the notes prior to their maturity.

In addition, payments by Petrobras under the guaranties in connection with PGF’s notes do not currently require approval by or registration with the Central Bank of Brazil. The Central Bank of Brazil may nonetheless impose prior approval requirements on the remittance of U.S. dollars, which could cause delays in such payments.

Petrobras would be required to pay judgments of Brazilian courts enforcing its obligations under the guaranties only in reais.

If proceedings were brought in Brazil seeking to enforce Petrobras’ obligations in respect of the guaranties, including in case of bankruptcy, Petrobras would be required to discharge its obligations only in reais. Under Brazilian exchange control regulations, 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, may be satisfied in reais  at the rate of exchange, as determined by the Central Bank of Brazil, in effect on the date of payment. Further authorization by the Central Bank of Brazil would be required for the conversion of such real-denominated amount into foreign currency and for its remittance abroad.

PGF’s obligation to make payments on the notes is guaranteed by Petrobras. Petrobras has been advised by its external U.S. counsel that the guaranties are valid and enforceable in accordance with the laws of the State of New York.

In addition, Petrobras has been advised by its general counsel that the laws of Brazil do not prevent the guaranties from being valid, binding and enforceable against Petrobras in accordance with their terms. In the event that U.S. federal fraudulent conveyance or similar laws are applied to a guaranty, and Petrobras, at the time it issued the relevant guaranty:

·         was or is insolvent or rendered insolvent by reason of its entry into such guaranty;

·         was or is engaged in business or transactions for which the assets remaining with it constituted unreasonably small capital; or

·         intended to incur or incurred, or believed or believes that it would incur, debts beyond its ability to pay such debts as they mature; and

·         in each case, intended to receive or received less than reasonably equivalent value or fair consideration therefor,

then Petrobras’ obligations under such guaranty could be avoided, or claims with respect to such guaranty could be subordinated to the claims of other creditors. Among other things, a legal challenge to a guaranty on fraudulent conveyance grounds may focus on the benefits, if any, realized by Petrobras as a result of PGF’s issuance of the series of the notes supported by such guaranty. To the extent that either guaranty is held to be a fraudulent conveyance or unenforceable for any other reason, the holders of the series of PGF notes supported by such guaranty would not have a claim against Petrobras under such guaranty and will solely have a claim against PGF. Petrobras cannot assure you that, after providing for all prior claims, there will be sufficient assets to satisfy the claims of the PGF holders relating to any avoided portion of the relevant guaranty.

Holders in some jurisdictions may not receive payment of gross-up amounts for withholding in compliance with the European Council Directive on taxation of savings income.

Austria and Luxembourg have opted out of certain provisions of the European Council Directive regarding taxation of savings income (the “Directive”) and are instead, during a transitional period, applying a withholding tax on payments of interest, at a rate of up to 35%, unless the holder opts for exchange of information as required under the Directive.  Neither we nor the paying agent (nor any other person) would be required to pay additional amounts in respect of the notes as a result of the imposition of withholding tax by any member state of the European Union (“Member State”) or another country or territory which has opted for a withholding system. For more information, see “Description of the Notes—Covenants—Additional Amounts” and under “Taxation—The Directive” in this prospectus supplement.  An investor should consult a tax adviser to determine the tax consequences of holding the notes for such investor.

Risks Relating to PGF

PGF’s operations and debt servicing capabilities are dependent on Petrobras.

PGF’s financial position and results of operations are directly affected by Petrobras’ decisions. PGF is an indirect, wholly-owned finance subsidiary of Petrobras incorporated in The Netherlands as a private company with limited liability.  PGF does not currently have any operations, revenues or assets other than those related to its primary business of raising money for the purpose of on-lending to Petrobras and other subsidiaries of Petrobras.  PGF’s ability to satisfy its obligations under the notes will depend on payments made to PGF by Petrobras and other subsidiaries of Petrobras under the loans made by PGF.  The notes and all debt securities issued by PGF will be fully and unconditionally guaranteed by Petrobras.  Petrobras’ financial condition and results of operations, as well as Petrobras’ financial support of PGF, directly affect PGF’s operational results and debt servicing capabilities.

USE OF PROCEEDS

The net proceeds from the sale of the notes, after payment of underwriting discounts but before expenses, are expected to be approximately U.S.$8,458 million.  PGF intends to use the net proceeds from the sale of the notes to finance Petrobras’ planned capital expenditures under its 2014-2018 Business Plan and for general corporate purposes.                                                                       

RATIO OF EARNINGS TO FIXED CHARGES

The following table contains the consolidated ratios of earnings to fixed charges of Petrobras for the years ended December 31, 2009, 2010, 2011, 2012 and 2013, determined in accordance with IFRS.

RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS 

The following table contains the consolidated ratios of earnings to fixed charges and preferred dividends of Petrobras for the years ended December 31, 2009, 2010, 2011, 2012 and 2013, determined in accordance with IFRS.

SELECTED FINANCIAL AND OPERATING INFORMATION

S-25

Income Statement Data

(1)           Pre-tax.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion of our financial condition and results of operations together with our Audited Financial Statements, which can be found in our Report on Form 6-K furnished to the SEC on February 26, 2014 and our related amendment on Form 6-K/A furnished to the SEC on March 10, 2014, which are incorporated by reference in this prospectus supplement.  

Overview

We earn income from:

·         domestic sales, which consist of sales of oil products (such as diesel, gasoline, jet fuel, naphtha, fuel oil and liquefied petroleum gas), natural gas, ethanol, electricity and petrochemical products;

·         export sales, which consist primarily of sales of crude oil and oil products;

·         international sales (excluding export sales), which consist of sales of crude oil, natural gas and oil products that are purchased, produced and refined abroad; and

·         other sources, including services, interest income from investments, share of profit of investees, foreign exchange variation and inflation indexation gains on financial instruments.

Our expenses include:

·         costs of sales (comprised of direct labor expenses, operating costs and purchases of crude oil and oil products); property, plant and equipment maintenance and repairs; depreciation and amortization of fixed assets; depletion of oil fields; and oil and gas exploration costs;

·         selling (which include expenses for transportation and distribution of our products), general and administrative expenses;

·         research and development and other operating expenses; and

·         interest expense, inflation indexation and foreign exchange variation losses on debt and other financial instruments.

Fluctuations in our financial condition and results of operations are driven by a combination of factors, including:

·         the volume of crude oil, oil products and natural gas we produce and sell;

·         changes in international prices of crude oil and oil products (denominated in U.S. dollars);

·         related changes in the domestic prices of crude oil and oil products (denominated in reais); 

·         the demand for oil products in Brazil and the amount of imports required to meet the domestic demand;

·         fluctuations in the Brazilian real (the “real”) vs. U.S. dollar exchange rates and, to a lesser degree, other currencies, as set out in note 34.2.2 (c) to our Audited Financial Statements; and

·         the amount of production taxes from our operations that we are required to pay.

The profitability of our operations in any particular accounting period is related to the sales volume of, and prices for, the crude oil, oil products, natural gas and biofuels that we sell and the relationship of these prices to international prices.  Our consolidated net sales in 2013 totaled approximately 1,384,616 thousand barrels of crude oil equivalent, representing U.S.$141,462 million in sales revenues, compared to 1,385,917 thousand barrels of crude oil equivalent, representing U.S.$144,103 million in sales revenues in 2012, and 1,355,309 thousand barrels of crude oil equivalent, representing U.S.$145,915 million in sales revenues in 2011.

As a vertically integrated company, we process most of our crude oil production in our refineries and sell the refined oil products primarily in the Brazilian domestic market.  Therefore, the price of oil products in Brazil has a more significant impact in our financial results than crude oil prices.  International oil product prices vary over time as the result of many factors, including the price of crude oil.  Over the long term, we intend to sell our products in Brazil at parity with international product prices, however we do not adjust our prices for gasoline, diesel and certain other oil products to reflect short-term volatility in the international markets.  As a result, our downstream margins may be significantly different than those of other integrated international oil companies within a given financial reporting period due to material rapid or sustained increases or decreases in the international price of crude oil and oil products, or in the real  vs. U.S. dollar exchange rate.

The average prices of Brent crude, an international benchmark oil, were approximately U.S.$108.66 per barrel in 2013, U.S.$111.58 per barrel in 2012 and U.S.$111.27 per barrel in 2011.  In December 2013, Brent crude oil prices averaged U.S.$110.81 per barrel. However, due to the devaluation of the real  throughout the year of 2013, the average price of the Brent crude, when expressed in reais, went from R$217.47 per barrel during 2012 to R$234.52 per barrel during 2013.

In November 2011, we announced price increases at the refinery gate (the wholesale price we sell to distributors) of 10% for gasoline and 2% for diesel to partially adjust to higher international oil product prices. During 2012, we announced further price increases at the refinery gate totaling 7.8% for gasoline and 10.2% for diesel when compared to December 31, 2011 prices. The effect of these price increases to retail customers was partially offset by the reduction by the Brazilian federal government of the CIDE tax rate for gasoline and diesel, that currently is reduced to 0% for both oil products. During 2013, we announced further price increases at the refinery gate totaling 10.9% for gasoline and 19.6% for diesel when compared to December 31, 2012 prices.

                In November 2013, our board of directors announced our diesel and gasoline pricing policy. Such policy aims at achieving the following principles and objectives:

·         Ensure that our indebtedness and leverage ratios return to the limits established under our 2013 - 2017 Business and Management Plan no later than December 2015, considering the growth of our oil production and the application of our diesel and gasoline pricing policy;

·         Achieve, in a compatible time period, an alignment between Brazilian and international diesel and gasoline prices; and

·         Prevent transferring the volatility of diesel and gasoline international prices to the domestic consumer.

During 2013, approximately 75.3% of our sales revenues were derived from sales of oil products, natural gas and other products in Brazil, compared to 69.7% in 2012 and 67.8% in 2011.         

(1)   Net average price calculated by dividing sales revenues by the volume for the year.

Effect of Taxes on Our Income

In addition to taxes paid on behalf of consumers to federal, state and municipal governments, such as the Domestic value-added tax (Imposto sobre Circulação de Mercadorias e Serviços, or ICMS), we are required to pay three principal charges on our oil production activities in Brazil: royalties, special participation and retention bonuses.

These charges imposed by the Brazilian federal government are included in our cost of goods sold. In addition, we are subject to tax on our income at an effective rate of 25% and a social contribution tax at an effective rate of 9%, the standard corporate tax rate in Brazil. 

For further information related to income taxes, other taxes payable, deferred income taxes and a reconciliation between income taxes calculated by applying a statutory tax rate and our tax expense, see note 21 to our Audited Financial Statements.

Inflation and Exchange Rate Variation

Inflation

Since the introduction of the real as the Brazilian currency in July 1994, inflation in Brazil has remained relatively stable.  Inflation was 5.91% in 2013, 5.84% in 2012 and 6.50% in 2011 as measured by IPCA, the National Consumer Price Index.  Inflation has had, and may continue to have, effects on our financial condition and results of operations, including an increase in finance expenses, as part of our indebtedness is inflation-indexed.

Exchange Rate Variation

Our functional currency is the real  and our presentation currency is the U.S. dollar. Therefore, we maintain our financial records in reais, and translate our financial statements into U.S. dollars for presentation purposes based on the average exchange rates prevailing during the period or at the balance sheet date, pursuant to the criteria set out in IAS 21 – “The effects of changes in foreign exchange rates.”

When the real appreciates relative to the U.S. dollar the effect is to generally increase both revenues and expenses when expressed in U.S. dollars.  When the real  depreciates relative to the U.S. dollar the effect is to generally decrease revenues and expenses when expressed in U.S. dollars.

From 2003 to 2011, considering the average exchange rates prevailing throughout the year, the U.S. dollar depreciated against the real  each year, except for 2009. In 2013, the U.S. dollar appreciated 10.4% against the real, compared to an appreciation of 14.3% in 2012 and a depreciation of 5.1% in 2011.

Fluctuations in exchange rate have multiple effects in our results of operations in reais. The relative pace at which our total revenues and expenses in reais  increase or decrease with the exchange rate, and its impact upon our margins, is affected by our pricing policy in Brazil.  When the real appreciates against the U.S. dollar and we do not adjust our price in Brazil, our margins generally improve. When the real  depreciates against the U.S. dollar and we do not adjust our prices, margins generally decline.

                The foreign exchange variations on foreign-denominated assets and liabilities of entities for which the real  is the functional currency are recorded in profit or loss, while the foreign exchange variations on the translation of foreign subsidiaries are recognized in other comprehensive income in shareholders’ equity. As our net debt denominated in other currencies increases, the negative impact of a depreciation of the real  on our results and net income when expressed in reais  also increases, thereby reducing the earnings available for distribution. Note 32.2.2(c) to our Audited Financial Statements provides further information on our foreign exchange exposure related to assets and liabilities.

                Effective mid-May 2013, we designated cash flow hedging relationships in which (a) the hedged items are portions of our highly probable future monthly export revenues in U.S. dollars, (b) the hedging instruments are portions of our long-term debt obligations denominated in U.S. dollars, and (c) the risk hedged is the effect of changes in exchange rates between the U.S. dollar and Petrobras’ functional currency, the real. Both long-term debt obligations (hedging instruments) and future exports (hedged items) are exposed to the Real/U.S. dollar foreign currency risks at their respective spot exchange rate. Cash flow hedge accounting permits that gains and losses arising from the effect of changes in the foreign currency exchange rate on the hedging instruments not be immediately recognized as profits or losses, but rather in other comprehensive income in shareholder’s equity and then reclassified from equity to profit or loss in the periods during which the hedged transactions occur. See notes 3.3.6 and 34.2.2 to our Audited Financial Statements for further information about our cash flow hedge.

            To the extent that our indebtedness in long-term debt obligations denominated in U.S. dollars continues to increase, we will only be able to create additional cash flow hedging relationships with such additional debt if we are capable of increasing our production, and subsequently, our highly probable future monthly export revenues in U.S. dollars.

Exchange rate variation also affects the amount of retained earnings available for distribution by us when expressed in U.S. dollars.  Amounts reported as available for distribution in our statutory accounting records are calculated in reais  and prepared in accordance with the IFRS and they may increase or decrease when expressed in U.S. dollars as the real appreciates or depreciates against the U.S. dollar.                 

RESULTS OF OPERATIONS

The differences in our operating results from year to year occur as a result of a combination of factors, including primarily: the volume of crude oil, oil products and natural gas we produce and sell; the price at which we sell our crude oil, oil products and natural gas and the relationship of this price to the international prices; the level and cost of imports and exports needed to satisfy our demand; production taxes; and the differential between Brazilian and international inflation rates, adjusted by the depreciation or appreciation of the real  against the U.S. dollar.

The table below shows the amount by which each of these variables has changed during the last three years.  Production volumes presented in this table are prepared in accordance with Society of Petroleum Engineers (SPE) criteria, which are the criteria we apply to analyze our operating results:

(1)   Non-consolidated companies in Venezuela and, as from June 2013, companies in Africa, as set out in note 10 to our Audited Financial Statements.

(2)   Amounts were converted from bbl to cubic feet in accordance with the following scale: 1 bbl = 6 cubic feet.

(3)   Based on year-end exchange rate (U.S.$/real).  

(4)   Based on average exchange rate for the year (U.S.$/real). 

Virtually all of our revenues and expenses for our Brazilian operations are denominated and payable in reais. When the U.S. dollar strengthens relative to the real, as it did in 2013 and 2012 (with an appreciation of 10.4% and 14.3%, respectively), revenues and expenses decrease when translated into U.S. dollars. The appreciation of the U.S. dollar against the real  affects the line items discussed below in different ways. As a consequence, the following comparisons between our results of operations in 2013 and in 2012, and between our results of operations in 2012 and 2011, are impacted by the depreciation of the real  against the U.S. dollar during that period. See note 2 to our Audited Financial Statements for the year ended December 31, 2013, for more information about the translation of real  amounts into U.S. dollars.                                                                                         

Results of operations—2013 compared to 2012

Sales Revenues

Sales revenues decreased by 2% to U.S.$141,462 million from U.S.$144,103 in 2012, driven primarily by foreign currency translation effects (the appreciation of the U.S. dollar against the real). Excluding foreign currency exchange effects, local currency sales revenues increased by 8%, primarily driven by:

·      Higher oil product prices in the domestic market mainly derived from adjustments in gasoline and diesel prices, higher electricity prices and impact of the appreciation of the U.S. dollar (10%) on oil product prices that are adjusted to reflect international prices;

·      A 4% increase in domestic oil product sales volumes, mainly of diesel (5%), gasoline (4%) and fuel oil (17%), offset by lower crude oil export volumes (43%), attributable to lower production levels and higher feedstock processed.

Cost of Sales

Cost of sales increased by 1% to U.S.$108,254 million from U.S.$107,534 million in 2012, due to:

·      A 4% increase in domestic sales volumes of oil products, met by higher oil product output from our refineries;

·      An increase in natural gas imports volumes to meet thermoelectric demand and higher crude oil import volumes attributable to the increase in feedstock processed in our refineries, along with the impact of the appreciation of the U.S. dollar on our unit costs;

·      Increased crude oil production costs, attributable to the higher number of well interventions and to the production start-up of new systems, which are still not producing in full capacity;

·      Excluding foreign currency translation effects, the local currency cost of sales was 11% higher in 2013.

Selling Expenses

Selling expenses were relatively flat in 2013 (U.S.$4,904 million) when compared to 2012 (U.S.$4,927 million) expressed in U.S. dollars. Excluding foreign currency translation effects, local currency selling expenses were 10% higher in 2013, primarily as a result of higher freight expenses, driven by increased domestic sales volumes.

General and Administrative Expenses

General and administrative expenses decreased by 1% to U.S.$4,982 million in 2013 from U.S.$5,034 million in 2012. Excluding foreign currency translation effects, local currency general and administrative expenses increased by 9%, mainly as a result of higher employee compensation expenses arising from the 2012 and 2013 Collective Bargaining Agreements.

Exploration Costs

Exploration costs were 26% lower in 2013 (U.S.$2,959 million) when compared to 2012 (U.S.$3,994 million), primarily due to lower write-offs of dry or sub-commercial wells. A breakdown of exploration costs by nature is set out in note 15 to our Audited Financial Statements.                                                                                               

Research and Development Expenses

Research and development expenses remained relatively flat in 2013 (U.S.$1,132 million) when compared to 2012 (U.S.$1,143 million).

Other Operating Income and Expenses

The 47% decrease in our net other operating expenses in 2013 when compared to 2012 (U.S.$ 2,237 million vs. U.S.$4,185 million) is attributable to gains on disposal of assets, including the disposal of 50% of our interest in assets in Africa and of block BC-10, as set out in note 10 to our Audited Financial Statements.

Net finance income (expense)

Net finance expense was U.S.$2,791 million in 2013, a U.S.$865 million increase compared to 2012, resulting from:

·       Lower finance income compared to 2012, when we benefited from the positive impact of gains on disposal of government bonds (National Treasury Notes – B Series) and interest income over judicial deposits (U.S.$1,280 million);

·       Higher finance expense due to higher debt; and

·       The settlement of certain of our tax debts and disputes through our participation in the federal tax settlement program (REFIS).

The increase in net finance expense was partially offset by lower exchange variation losses (U.S.$1,636 million) attributable to the extension of our cash flow hedge accounting, reducing by U.S.$5,924 million the impact of foreign currency effects on our finance expenses. For further information about our cash flow hedge accounting, see notes 3.3.6 and 34.2.2 (a) to our Audited Financial Statements.

Income taxes

Income taxes were U.S.$984 million lower in 2013, when compared to 2012, due to the lower income before taxes and the impact of different jurisdictional tax rates applied for companies domiciled abroad, attributable to the disposal (and loss of control) of assets in Africa.

Net Income (Loss) by Business Segment

We measure performance at the business segment level based on net income.  The following is a discussion of the net income of our six business segments for 2013, compared to 2012. See note 3.2 to our Audited Financial Statements for more information about our business segments.

Exploration and Production

Exploration and Production (E&P) net income decreased by 17% in 2013, when compared to 2012, primarily due to a decrease in crude oil and NGL production (2%) resulting from the natural decline of fields (slightly offset by the production start-up of new systems), higher equipment depreciation costs, increased freight costs for oil platforms, higher employee compensation costs and higher well interventions and maintenance costs.

Higher domestic crude oil prices (sale/transfer, when expressed in reais), lower write-offs of dry or sub-commercial wells and a gain on the disposal of our total interest in block BC-10 partially offset this decrease in net income.

The spread between the average domestic oil price (sale/transfer) and the average Brent price increased to U.S.$10.47/bbl in 2013 from U.S.$6.98/bbl in 2012.

Refining, Transportation and Marketing

Refining, Transportation and Marketing (RTM) purchases crude oil from E&P and imports oil to blend with our domestic oil.  Additionally, RTM purchases oil products in the international markets to meet excess product demand in the domestic market.  Those purchases are made at international prices, either from E&P or from international markets, and the products are sold in Brazil at a price that we expect will converge to international prices in the long run. For some of our products, mainly gasoline, diesel and residential LPG, however, the prices in Brazil can lag the international markets. Depending on the impact of this lag effect, RTM’s earnings may differ from international refining margins.

In 2013, our RTM segment net losses decreased by 30% when compared to 2012, reflecting the diesel and gasoline price adjustments in the domestic market beginning in June 2012, and the higher feedstock processed in our refineries, reducing the share of oil product imports in our sales mix, partially offset by higher crude oil acquisition/transfer costs (when expressed in reais). 

Gas and Power

Our Gas and Power segment net income decreased by 27% in 2013 due to higher LNG and natural gas import costs necessary to meet higher thermoelectric demand. This decrease was partially offset by higher thermoelectricity generation and higher average electricity prices, mainly attributable to lower water reservoir levels of hydroelectric power plants located in Brazil (caused by low rainfall), and thus increased difference settlement prices.

Biofuel

Biofuel net losses increased by 4% in 2013, driven by lower biodiesel average sales prices (which fell by 11% compared to 2012). These net losses were partially offset by a decrease in our share of losses from ethanol investments, attributable to increases in ethanol, electricity and sugar sales volumes, as well as the higher average sales prices of ethanol and electricity.

Distribution

Our Distribution segment net income decreased by 4% in 2013 compared to 2012. Excluding foreign currency translation effects, local currency net income for our distribution segment increased due to a 7% increase in the average trade margins and a 4% increase in sales volumes. This increase was partially offset by higher selling and administrative expenses.

Distribution sales volumes increased in the fourth quarter of 2013, however we lost market share in 2013 (37.5%) when compared to 2012 (38.1%) due to a shift in our sales mix in order to achieve higher margins.

International

Our International segment net income increased by 140% due to gains on disposal of assets in accordance with PRODESIN, our divestment program, mainly in Africa and in the United States, and to the recognition of tax credits in the Netherlands. Lower exploration costs and write-offs of wells also had a positive impact. This net income increase was partially offset by lower crude oil and NGL production.

See note 30 to our Audited Financial Statements for further information regarding our business segments.

Results of operations—2012 compared to 2011

                A comparison of our 2012 and 2011 results of operations can be found in our annual report on Form 20-F for the year ended December 31, 2012, filed with the SEC on April 29, 2013 and incorporated by reference herein.

Liquidity and Capital Resources

Overview

Our principal uses of funds are for capital expenditures, dividend payments and repayment of debt.  In 2011 and 2012, we met these requirements with internally generated funds, long-term debt, divestments and short-term debt. In 2013, the need for resources to fund our capital expenditures was also met by a reduction in our cash and cash equivalents, as of December 31, 2013.  In 2014, our major cash needs are for our budgeted capital expenditures, the announced dividends for the year ended December 31, 2013 of U.S.$3,970 million as well as principal and interest payments of U.S.$12,283 million on our long-term debt.

Financing Strategy

The objective of our financing strategy is to fund the capital expenditures needed to achieve the targets set forth in our 2014-2018 Plan, released on February 25, 2014. The 2014-2018 Plan calls for expenditures of U.S.$220.6 billion during that period, of which U.S.$206.8 billion is for projects already being implemented or under a bidding process, and the remaining U.S.$13.8 billion is for the portfolio under evaluation with projects that are still in the planning phase of development and subject to further approvals by our management. 

In order to reach the targets set forth in our 2014-2018 Plan, we will continue to raise debt capital through a variety of medium and long-term financing arrangements, including the issuance of bonds in the international capital markets, supplier financing and bank financing. We plan to maintain our current debt maturity profile.

In 2013, a portion of our funding requirements was met by the disposal of assets through our divestment program (PRODESIN). Proceeds from disposals of assets amounted to U.S.$3,820 million in 2013, and we expect to receive additional proceeds in 2014 from transactions pending completion.  See note 10 to our Audited Financial Statements for further information regarding such disposals of assets.

For 2014, we intend to meet our funding requirements through a combination of new debt from a broad range of traditional funding sources, including international debt capital markets, export credit agencies, non-Brazilian government development banks, the BNDES, and Brazilian and international commercial banks, drawing down our year-end cash balances and existing credit facilities. As of March 7, 2014, we have financed part of our needs (in a total amount of U.S.$11.6 billion) from various funding sources, including commercial banks, capital markets and the BNDES.

Government Regulation

We are required to submit our annual capital expenditures budget (Plano de Dispêndio Global, or PDG) to the Brazilian Ministry of Planning, Budget and Management, and the MME.  Following review by these agencies, the Brazilian Congress must approve the budget.  Although the total level of our annual capital expenditures is regulated, the specific application of funds is left to our discretion.                                                                                      

The Brazilian Ministry of Planning, Budget and Management controls the total amount of medium and long-term debt that we and our Brazilian subsidiaries can incur through the annual budget approval process.  Before issuing medium and long-term debt, we and our Brazilian subsidiaries must also obtain the approval of the National Treasury Secretariat.  Borrowings that exceed the approved budgeted amount for any year also require approval of the Brazilian Senate.  All of our foreign currency denominated debt, as well as the foreign currency denominated debt of our Brazilian subsidiaries, requires registration with the Central Bank.   

However, the issuance of debt by our non-Brazilian subsidiaries, including PifCo and PGF, is not subject to registration with the Central Bank or approval by the National Treasury Secretariat. All issuances of medium and long-term notes and debentures require the approval of our board of directors.

Sources of Funds

Our Cash Flow

In 2013, the resources needed to fund our capital expenditures (U.S.$45,163 million) and payment of dividends (U.S.$2,656 million) were met by cash flow from operations (U.S.$26,289 million), net proceeds from long-term financing (U.S.$16,021 million), cash provided by the disposal of assets (U.S.$3,820 million), as well as a reduction in our balance of government bonds with maturities of more than 90 days (U.S.$6,334 million).

Net cash provided by operating activities in 2013 increased by 4% in local currency (excluding the foreign currency translation effect), as a result of increases in diesel and gasoline prices in the domestic market during 2013 and the increase in outputs of refined products (6%), which contributed to a reduction in oil product import volumes. These effects were partially offset by the impact of the depreciation of the real  on import costs and by lower crude oil export volumes. When translated into U.S. dollars, cash provided by operations decreased from U.S.$27,888 million in 2012 to U.S.$26,289 million in 2013. 

Proceeds from long-term financing, net of repayments, totaled U.S.$16,021 million in 2013, an increase of U.S.$6,935 million when compared to 2012. The principal sources of long-term financing were the issuance of six series of U.S. dollar bonds totaling approximately U.S.$11 billion in the capital markets in May 2013, and long-term financing from foreign and Brazilian financial institutions.

Proceeds from disposals of assets throughout 2013 totaled U.S.$ 3,820 million. These divestments were the result of our PRODESIN divestment program, with the majority of the proceeds coming from the disposal of 50% of our interest in operations in Africa (through the formation and partial sale of a joint venture combining our African assets) and the disposal of our interest in block BC-10, located in Brazil.

The uses of cash were primarily for capital expenditures and investments in operating units, which totaled U.S.$45,163 million in 2013 compared to U.S.$40,706 million in 2012. Higher expenditures in E&P (U.S.$5,200 million), including U.S.$2.6 billion related to acquisition costs of rights over the Libra block in the pre-salt area, were largely responsible for the increase.

Payment of dividends during 2013 totaled U.S.$ 2,656 million.

As of December 31, 2013, our balance of cash and cash equivalents amounted to U.S.$15,868 million, compared to U.S.$13,520 million as of December 31, 2012. Our balance of government bonds with maturities of more than 90 days decreased from U.S.$10,212 million as of December 31, 2012 to U.S.$3,878 million as of December 31, 2013.

Short-Term Debt

Our outstanding short-term debt serves mainly to support our working capital and our imports of crude oil and oil products. As of December 31, 2013, our total short-term debt amounted to U.S.$3,654 million and the current portion of our long-term debt amounted to U.S.$3,118 million, compared to U.S.$3,666 million and U.S.$2,795 million as of December 31, 2012, respectively.                                                                                      

Long-Term Debt

Our outstanding long-term debt consists primarily of securities issued in the international capital markets, funding from development banks (such as the BNDES), loans from Brazilian and international commercial banks and amounts outstanding under facilities guaranteed by export credit agencies and multilateral agencies.  The non-current portion of our total long-term debt amounted to U.S.$106,235 million as of December 31, 2013, compared to U.S.$88,484 million as of December 31, 2012.  This increase was primarily due to funding from the domestic and international banking markets and from the issuance of U.S. dollar bonds. These financial resources will be used primarily for the development of projects related to oil and gas production, for the construction of vessels and pipelines, as well as for the construction and expansion of industrial plants.  See note 17 to our Audited Financial Statements for a breakdown of our debt by source and other information. 

Included in these figures at December 31, 2013 are the following international debt issues:

(*) Petrobras fully and unconditionally guarantees the notes issued by PGF and PifCo.

(**) On January 14, 2014, PGF issued four tranches of notes totaling U.S.$5.09 billion (after expenses) (€3.05 billion and £600 million aggregate principal amounts of guaranteed senior notes).

(1) Issued by PifCo on September 27, 2006 in the amount of ¥ 35 billion, with support from Petrobras through a standby purchase agreement.

(2) Floating rate equal to a three-month U.S. dollar LIBOR plus 1.620%.

(3) Issued by PifCo on December 9, 2011 in the amount of €1.25 billion.

(4) Issued by PGF on October 1, 2012 in the amount of €1.3 billion.

(5) Floating rate equal to a three-month U.S. dollar LIBOR plus 2.140%

(6) Issued by PifCo on December 9, 2011 in the amount of €600 million.

(7) Issued by PGF on October 1, 2012 in the amount of €700 million.

(8) Issued by PifCo on December 12, 2011 in the amount of £700 million.

(9) Issued by PGF on October 1, 2012 in the amount of £450 million.

Off Balance Sheet Arrangements

As of December 31, 2013, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.                                                                                 

Uses of Funds

Capital Expenditures and Investments

We invested a total of U.S.$48,097 million in 2013, a 12% increase, when compared to our investments of U.S.$42,949 million in 2012. Our investments in 2013 were primarily directed toward increasing oil and gas production, as well as modernizing and expanding our refineries. Of our total capital expenditures in 2013, U.S.$27,566 million was invested in exploration and development projects in Brazil.

The following table sets forth our consolidated capital expenditures for each of our business segments for 2013, 2012 and 2011:

On February 25, 2014, we announced our 2014-2018 Plan, which contemplates total budgeted capital expenditures of U.S.$220.6 billion from 2014 to 2018, U.S.$206.8 billion of which is for projects already being implemented or under a bidding process, while U.S.$13.8 billion is for the portfolio under evaluation with projects that are still in the planning phase of development and subject to further approvals by our management. 

We expect that U.S.$153.9 billion of the capital expenditures in our 2014-2018 Plan will be directed towards exploration and production segment in Brazil, totaling U.S.$162.9 billion when also considering our activities abroad. Our capital expenditure budget for 2014, including our project financings, is U.S.$42.4 billion.

We plan to meet our budgeted capital expenditures primarily through internally generated cash, issuances in the international capital markets, structured facilities and project finance loans, commercial bank loans, divestments and other sources of capital.  Our actual capital expenditures may vary substantially from the projected numbers set forth above as a result of market conditions and the cost and availability of the necessary funds.

Dividends

Interest on capital will be indexed based on the SELIC rate from December 31, 2013 to the date of payment, which will be voted on at our 2014 annual general shareholders’ meeting.

Contractual Obligations

The following table summarizes our outstanding contractual obligations and commitments at December 31, 2013:

(1)          Excludes U.S.$35,308 million related to our pension and medical benefits obligations, which are partially funded by U.S.$22,735 million in plan assets and U.S.$7,133 million related to our provision for decommissioning costs. Information on employees’ postretirement benefit plans (including the expected maturity analysis of pension and medical benefits, set out on note 22.5 (c) to our Audited Financial Statements), and on the provision for decommissioning costs are set forth in notes 22 and 20, respectively, to our Audited Financial Statements.

(2)          Includes accrued interest, short-term debt and long-term debt (current and noncurrent portions).

(3)          Amounts assume that the counterparty would not fulfill certain precedent conditions in the agreement.

Critical accounting policies and estimates

Information about those areas that require the most judgment or involve a higher degree of complexity in the application of the accounting policies that currently affect our financial condition and results of operations is provided on note 4 to our Audited Financial Statements (comprising oil and gas reserves, depreciation and impairment; pension and other post-retirement obligations; contingent liabilities and provisions; derivative financial instruments and hedge accounting). Certain information about dismantling of areas and environmental remediation, as well as pension and medical benefits, are set out below and additional information about our accounting policies and new amendments and standards are provided on notes 3 and 5 to our Audited Financial Statements. Further information on impairment of assets is provided on note 14 to our Audited Financial Statements. Additionally, we have expanded the discussion of some of the items addressed in the financial statements for certain topics.

The accounting estimates we make in these contexts require us to make assumptions about matters that are highly uncertain. The aforementioned notes address only those estimates that we consider most important based on the degree of uncertainty and the likelihood of a material impact if we used a different estimate.  There are many other areas in which we use estimates about uncertain matters, but the reasonably likely effect of changed or different estimates is not material to our financial presentation.

Dismantling of Areas and Environmental Remediation

Under various contracts, permits and regulations, we have material legal obligations to remove equipment and restore the land or seabed at the end of operations at production sites.  Our most significant asset removal obligations involve removal and disposal of offshore oil and gas wells and production facilities worldwide.  We accrue the estimated discounted decommissioning costs (for dismantling and removing these facilities) at the time of installation of the assets.  We also estimate costs for future environmental clean-up and remediation activities based on current information on costs and expected plans for remediation.  Estimating asset retirement, removal and environmental remediation costs requires performing complex calculations that necessarily involve significant judgment because our obligations are many years in the future, the contracts and regulation have vague descriptions

of what removal and remediation practices and criteria will have to be met when the removal and remediation events actually occur and asset removal technologies and costs are constantly changing, along with political, environmental, safety and public relations considerations.  Consequently, the timing and amounts of future cash flows are subject to significant uncertainty.

In 2013, our provision for decommissioning costs decreased by U.S.$2.30 billion due to the annual revision and to payments of decommissioning made.

We reviewed and revised our estimated costs associated with well abandonment and the demobilization of oil and gas production areas. As a result, for 2013, there was a U.S.$0.9 billion decrease in the amounts related to the revision of the provision, attributable to:

a)  a U.S.$1.63 billion decrease attributable to an increase in our risk-adjusted discount rate (from 2.31% p.a. at December 31, 2012 to 3.03% p.a. at December 31, 2013) used for discounting future obligations to present value; and

b) a U.S.$0.7 billion decrease attributable to revised abandonment estimates, which incorporate recent technologies and procedures in the industry, including the adoption of the light workover technique to abandon part of offshore wells.

Those effects were partially offset by a U.S.$1.21 billion increase attributable to the devaluation of the real  in relation to the U.S dollar (from R$ 2.0435 in December 31, 2012 to R$ 2.3426 in December 31, 2013).

Petrobras regularly conducts studies to incorporate the most recent technologies and procedures to optimize the abandonment of areas, considering industry best practices and previous experiences with respect to costs incurred.

For more information about the annual changes in the decommissioning provisions, please refer to note 20 to our Audited Financial Statements.

Pension and Medical Benefits

                Changes in actuarial assumptions, including changes in the discount rate used, may significantly impact our pension obligations. Nominal discount rates (before adjustments for inflation) for our pension plans Petros and Petros 2, and for our health care plan (AMS) have increased from 9.35%, 9.35% and 9.42% in 2012 to 12.88%, 12.97% and 12.90% in 2013, respectively, following an increase in interest rates in Brazil. See note 22.5 (c) to our Audited Financial Statements for a sensitivity analysis of the impact of a 100 basis point change in actuarial assumptions over our pension obligations.

Research and Development

We are deeply committed to research and development as a means to extend our reach to new production frontiers and achieve continuous improvement in operations.  We have a history of successfully developing and implementing innovative technologies, including the means to drill, complete and produce wells in increasingly deep water.  We are one of the largest investors in research and development among the world’s major oil companies, and we spend a large percentage of revenues in research and development.  Our Brazilian oil and gas concession agreements require us to spend at least 1% of our gross revenues originating from high productivity oil fields on research and development, of which up to half is invested in our research facilities in Brazil and the remainder is invested in research and development in Brazilian universities and institutions registered with the ANP for this purpose.

In 2013, we spent U.S.$1,132 million on research and development, equivalent to 0.8% of our sales revenues, while in 2012, we spent U.S.$1,143 million, equivalent to 0.8% of our sales revenues, and in 2011, we spent U.S.$1,454 million, equivalent to 1.0% of our sales revenues.

Our research and development activities focus on three main goals:

(1)           Expansion of our current businesses through the:

(a) discovery of new exploratory frontiers through comprehensive, basin-scale geological and geophysical investigations of Brazilian frontier areas, both onshore and offshore, and implementation of innovative seismic processing and inversion algorithms;

(b) enhancement of oil and gas final recovery by the use of innovative sea water, CO₂ and polymer injection systems;

(c) enhancement of the pre-salt production systems and its reservoirs’ final recovery by intensive usage of compact subsea solutions, injection systems and the capacity enhancement of the new pre-salt FPSO units;

(d) development of new or enhanced subsea production systems and equipment for deep and ultra-deep waters based on compact subsea oil/water/gas separation, sea floor produced water re-injection, improved gas-lift technology, sea floor oil boosting and gas compression and a new generation of electrical submersible pumps;

(e) optimization and development of drilling and production solutions for unconventional reservoirs, shale gas, gas hydrates, coal bed methane, tight gas and shale oil, by geophysical investigations of the Brazilian onshore frontier areas and well design optimization through cost effective and currently available technologies;

(f) optimization of our natural gas logistics and final usage, through the development of solutions for offshore and stranded gas, such as chemical conversion, compression and subsea to shore, and the optimization of our onshore assets;

(g) application of available up-to-date logistic technologies to improve our integrated offshore operations;

(h) optimization of the Brazilian oil and derivatives supply and the exportation of oil and its derivatives;

(i) development of technologies and mixing devices to optimize the refining processes for pre-salt oils, such as desalter operation, and;

(j) development of technologies to enhance the flexibility of middle distillates or gasoline, in order to meet market demands;

(2)           Providing a mix of products compatible with the energy demands of the future through the:

(a) development of new fuels, lubricants and special product formulations such as podium diesel and podium gasoline;

(b) development of new technologies for petrochemical activities such as catalyst systems for polypropylene and ethylene production from olefins and polystyrene and polyester (raw materials and polymers) from both fossil and renewable sources;

(c) optimization of our ammonia and urea production plants through advanced real-time process control optimization and development of new technologies for urea based fertilizers and ruminant feedstock, through mixed fertilizer formulations with micronutrients;

(e) development of competitive second generation biofuel production processes, which use residual biomass as feedstock, through biochemical and thermochemical routes such as pyrolysis and gasification, and;

(f) optimization of our thermoelectric power plants, with emphasis on operation and maintenance cost reduction, and research and development on renewable energy technologies, such as concentrated solar, photovoltaic and wind power;                                                                   

(3)           Ensuring that our activities are environmentally sustainable. We aim throughout our entire business to:

(a) reduce water consumption and the volume and toxicity of wastewater discharges, by the selection and development of new chemical products and formulations and by water re-use increase through an extensive portfolio of primary, secondary and tertiary treatment routes;

(b) reduce our emissions of air pollutants, CO₂ and other greenhouse gases based on intensive re-injection of CO₂ into our production reservoirs, selection and development of technologies for pollutants abatement and carbon capture storage and sequestration;      

(c) increase the energy efficiency of our processes and products through research and development in combustion, heat transfer processes and advanced thermal cycles;       

(d) prevent and mitigate the environmental impact of our activities through extensive offshore research in deepwater biodiversity characterization and the development of innovative operation standards, and;

(e) ensure the integrity, safety and reliability of all our industrial facilities, by the development and implementation of new materials and process equipment, online process and equipment integrity monitoring and diagnosis, inspection techniques, new process tuning systems, advanced control tools, real-time optimization and simulators for design and process analysis.

In the three-year period ended December 31, 2013, our research and development operations were awarded 97 patents in Brazil and 139 overseas. Our portfolio of patents covers all of our areas of activities.

We have operated a dedicated research and development facility in Rio de Janeiro, Brazil since 1966.  As a result of its expansion in 2010, this is one of the largest facilities of its kind in the energy sector and the largest in the southern hemisphere, with laboratories especially dedicated to pre-salt technologies.  As of December 31, 2013, this facility had 1,959 employees, 91.3% of which are exclusively dedicated to research, development and basic engineering.

We also have several semi-industrial scale prototype plants throughout Brazil that are in proximity to our industrial facilities and that are aimed at scaling up new industrial technologies at reduced costs.  In 2013, we conducted research and development through joint research projects with more than 100 universities and research centers in Brazil and abroad and participated in technology exchange and assistance partnerships with several oilfield service companies, small technology companies and other operators. 

Trends

We plan to continue expanding all segments of operations in our target markets in accordance with our 2014-2018 Plan.  In support of this goal, we plan total capital expenditures of U.S.$220.6 billion over 2014-2018, U.S.$206.8 billion of which is for projects already being implemented or under a bidding process, while U.S.$13.8 billion is for the portfolio under evaluation with projects that are still in the planning phase of development and subject to further approvals by our management.  Of this total, approximately 70% is in the exploration and production segment (Brazil and abroad), where constant investment in exploration and development is needed to exploit newly discovered resources and offset natural declines in production from existing fields as they mature.                                                                             

CAPITALIZATION

The following table sets out the consolidated debt and capitalization of Petrobras under IFRS as of December 31, 2013, excluding accrued interest, and as adjusted to give effect to the issue of the notes offered hereby.

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(1)           Long-term debt does not include additional indebtedness incurred by Petrobras after December 31, 2013, consisting of amounts totaling approximately U.S.$11.6 billion.

(2)           Comprising (a) 7,442,454,142 shares of common stock and (b) 5,602,042,788 shares of preferred stock, in each case with no par value and in each case which have been authorized and issued.                        

DESCRIPTION OF THE NOTES

The following description of the terms of the notes supplements and modifies the description of the general terms and provisions of debt securities and the indenture set forth in the accompanying prospectus, which you should read in conjunction with this prospectus supplement. In addition, we urge you to read the indenture, the fourteenth supplemental indenture in connection with the 2017 Notes, the fifteenth supplemental indenture in connection with the 2020 Notes, the sixteenth supplemental indenture in connection with the 2024 Notes, the seventeenth supplemental indenture in connection with the 2044 Notes, the eighteenth supplemental indenture in connection with the 2017 Floating Rate Notes and the nineteenth supplemental indenture in connection with the 2020 Floating Rate Notes, because they will define your rights as holders of the 2017 Notes, the 2020 Notes, the 2024 Notes, the 2044 Notes, the 2017 Floating Rate Notes and the 2020 Floating Rate Notes, respectively. If the description of the terms of the notes in this prospectus supplement differs in any way from that in the accompanying prospectus, you should rely on the information contained in this prospectus supplement. You may obtain copies of the indenture, the fourteenth supplemental indenture, the fifteenth supplemental indenture, the sixteenth supplemental indenture, the seventeenth supplemental indenture, the eighteenth supplemental indenture and the nineteenth supplemental indenture upon written request to the trustee or with the SEC at the addresses set forth under “Where You Can Find More Information.”

The Fourteenth Supplemental Indenture, the Fifteenth Supplemental Indenture, the Sixteenth Supplemental Indenture, the Seventeenth Supplemental Indenture, the Eighteenth Supplemental Indenture and the Nineteenth Supplemental Indenture

PGF will issue the notes under an indenture dated as of August 29, 2012 between PGF and The Bank of New York Mellon, a New York banking corporation, as trustee, as supplemented by the fourteenth supplemental indenture in the case of the 2017 Notes, the fifteenth supplemental indenture in the case of the 2020 Notes, the sixteenth supplemental indenture in the case of the 2024 Notes, the seventeenth supplemental indenture in the case of the 2044 Notes, the eighteenth supplemental indenture in the case of the 2017 Floating Rate Notes and the nineteenth supplemental indenture in the case of the 2020 Floating Rate Notes, each dated as of the closing date, among PGF, Petrobras and The Bank of New York Mellon, as trustee, which provide the specific terms of the notes offered by this prospectus supplement, including granting holders rights against Petrobras under the respective guaranties. Whenever we refer to the indenture in this prospectus supplement, we are referring to the indenture as supplemented by the fourteenth supplemental indenture in the case of the 2017 Notes, the fifteenth supplemental indenture in the case of the 2020 Notes, the sixteenth supplemental indenture in the case of the 2024 Notes, the seventeenth supplemental indenture in the case of the 2044 Notes, the eighteenth supplemental indenture in the case of the 2017 Floating Rate Notes and the nineteenth supplemental indenture in the case of the 2020 Floating Rate Notes.

Fixed Rate Notes

The 2017 Notes

The 2017 Notes will be general, senior, unsecured and unsubordinated obligations of PGF having the following basic terms:

The title of the 2017 Notes will be the 3.250% Global Notes due 2017;

The 2017 Notes will:

·         be issued in an aggregate principal amount of U.S.$1,600,000,000; and

·         mature on March 17, 2017;

•      bear interest at a rate of 3.250% per annum from March 17, 2014, the date of issuance of the 2017 Notes, until maturity or early redemption and until all required amounts due in respect of the 2017 Notes have been paid;

•       be issued in global registered form without interest coupons attached;

•       be issued and may be transferred only in principal amounts of U.S.$2,000 and in integral multiples of U.S.$1,000 in excess thereof; and

•       be unconditionally guaranteed by Petrobras pursuant to a guaranty described below under “Guaranties”;

All payments of principal and interest on the 2017 Notes will be paid in U.S. dollars;

Interest on the 2017 Notes will be paid semi-annually on March 17 and September 17 of each year (each of which we refer to as an “interest payment date”), commencing on September 17, 2014 and the regular record date for any interest payment date will be the business day preceding that date; and

In the case of amounts not paid by PGF under the indenture and the 2017 Notes (or Petrobras under the guaranty for the 2017 Notes), interest will continue to accrue on such amounts at a default rate equal to 0.5% in excess of the interest rate on the 2017 Notes, from and including the date when such amounts were due and owing and through and excluding the date of payment of such amounts by PGF or Petrobras.

Despite the Brazilian government’s ownership interest in Petrobras, the Brazilian government is not responsible in any manner for PGF’s obligations under the 2017 Notes or Petrobras’ obligations under the guaranty for the 2017 Notes.

The 2020 Notes

The 2020 Notes will be general, senior, unsecured and unsubordinated obligations of PGF having the following basic terms:

The title of the 2020 Notes will be the 4.875% Global Notes due 2020;

The 2020 Notes will:

·         be issued in an aggregate principal amount of U.S.$1,500,000,000; and

·         mature on March 17, 2020;

•      bear interest at a rate of 4.875% per annum from March 17, 2014, the date of issuance of the 2020 Notes, until maturity or early redemption and until all required amounts due in respect of the 2020 Notes have been paid;

•      be issued in global registered form without interest coupons attached;

•      be issued and may be transferred only in principal amounts of U.S.$2,000 and in integral multiples of U.S.$1,000 in excess thereof; and

•      be unconditionally guaranteed by Petrobras pursuant to a guaranty described below under “Guaranties”;

All payments of principal and interest on the 2020 Notes will be paid in U.S. dollars;

Interest on the 2020 Notes will be paid semi-annually on March 17 and September 17 of each year (each of which we refer to as an “interest payment date”), commencing on September 17, 2014 and the regular record date for any interest payment date will be the business day preceding that date; and

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If any interest payment date, other than the maturity date, for any series of floating rate notes would fall on a day that is not a business day, the interest payment date will be postponed to the next succeeding business day, except that if that business day falls in the next succeeding calendar month, the interest payment date will be the immediately preceding business day. If the maturity date for any series of floating rate notes would fall on a day that is not a business day, the payment of interest and principal will be made on the next succeeding business day, and no interest will accrue after such maturity date.

                The calculation agent for the floating rate notes is The Bank of New York Mellon. The calculation agent will determine the initial interest rate for the floating rate notes by reference to LIBOR on the second LIBOR business day preceding the issue date for each series of floating rate notes and the interest rate for each succeeding interest reset period by reference to LIBOR on the second LIBOR business day preceding the applicable interest reset date (each, an “interest determination date”). Promptly upon such determination, the calculation agent will notify the issuer and the trustee (if the calculation agent is not the trustee) of the new interest rate. Upon the request of the Holder of any floating rate note, the calculation agent will provide the interest rate then in effect and, if determined, the interest rate that will become effective on the next interest reset date. “LIBOR business day” means a day on which commercial banks are open for business (including dealings in U.S. dollar LIBOR) in the City of London, England.

                “LIBOR” will be determined by the calculation agent in accordance with the following provisions:

                (1)     With respect to any interest determination date, LIBOR will be the rate (expressed as a percentage per annum) for deposits in U.S. dollars having a maturity of three months commencing on the related interest reset date that appears on Bloomberg L.P.’s page “BBAM”  as of 11:00 a.m., London time, on that interest determination date. If no such rate appears, then LIBOR, in respect of that interest determination date, will be determined in accordance with the provisions described in (2) below.

                (2)     With respect to an interest determination date on which no rate appears on Bloomberg L.P.’s page “BBAM”, the calculation agent will request the principal London offices of each of four major reference banks in the London interbank market (which may include affiliates of the underwriters), as selected by the calculation agent (after consultation with us), to provide its offered quotation (expressed as a percentage per annum) for deposits in U.S. dollars for the period of three months, commencing on the related interest reset date, to prime banks in the London interbank market at approximately 11:00 a.m., London time, on that interest determination date and in a principal amount that is representative for a single transaction in U.S. dollars in that market at that time. If at least two quotations are provided, then LIBOR on that interest determination date will be the arithmetic mean of those quotations. If fewer than two quotations are provided, then LIBOR on the interest determination date will be the arithmetic mean of the rates quoted at approximately 11:00 a.m., in the City of New York, on the interest determination date by three major banks in The City of New York (which may include affiliates of the underwriters) selected by the calculation agent (after consultation with us) for loans in U.S. dollars to leading European banks, for a period of three months, commencing on the related interest reset date, and in a principal amount that is representative for a single transaction in U.S. dollars in that market at that time. If at least two such rates are so provided, LIBOR on the interest determination date will be the arithmetic mean of such rates. If fewer than two such rates are so provided, LIBOR on the interest determination date will be LIBOR in effect with respect to the immediately preceding interest determination date.

“Bloomberg L.P.’s page “BBAM”” means the display that appears on Bloomberg L.P.’s page “BBAM” or any page as may replace such page on such service (or any successor service) for the purpose of displaying London interbank offered rates of major banks for U.S. dollars.

All percentages resulting from any calculation of any interest rate for the floating rate notes will be rounded, if necessary, to the nearest one hundred thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) would be rounded to 9.87655% (or .0987655)), and all U.S. dollar amounts would be rounded to the nearest cent, with one-half cent being rounded upward.

·         PGF does not pay interest or other amounts, including any additional amounts, on the notes within 30 calendar days of their due date and the trustee has not received such amounts from Petrobras under the relevant guaranty by the end of that 30-day period.

·         PGF or Petrobras remains in breach of any covenant or any other term in respect of the notes of such series issued under the Indenture or guaranty for such series for 60 calendar days after receiving a notice of default stating that it is in breach. The notice must be sent by either the trustee or holders of 25% of the principal amount of such series of the notes.

·         The maturity of any indebtedness of PGF or Petrobras or a material subsidiary in a total aggregate principal amount of U.S.$200,000,000 (or its equivalent in another currency) or more is accelerated in accordance with the terms of that indebtedness, it being understood that prepayment or redemption by us or a material subsidiary of any indebtedness is not acceleration for this purpose.

·         PGF or Petrobras or any material subsidiary stops paying or is generally unable to pay its debts as they become due, except in the case of a winding-up, dissolution or liquidation for the purpose of and followed by a consolidation, spin-off, merger, conveyance or transfer duly approved by the note holders of that series.

·         In the case PGF or Petrobras or any material subsidiary, if proceedings are initiated against it under any applicable liquidation, insolvency, composition, reorganization, winding up or any other similar laws, or under any other law for the relief of, or relating to, debtors, and such proceeding is not dismissed or stayed within 90 calendar days.

·         An administrative or other receiver, manager or administrator, or any such or other similar official is appointed in relation to, or a distress, execution, attachment, sequestration or other process is levied or put in force against, the whole or a substantial part of the undertakings or assets of PGF or Petrobras or any material subsidiary and is not discharged or removed within 90 calendar days.

·         PGF or Petrobras or any material subsidiary voluntarily commences proceedings under any applicable liquidation, insolvency, composition, reorganization or any other similar laws, PGF or Petrobras or any material subsidiary enters into any composition or other similar arrangement with our creditors under applicable Brazilian law (such as a recuperação judicial or extrajudicial, which is a type of liquidation agreement).

·         PGF or Petrobras or any material subsidiary files an application for the appointment of an administrative or other receiver, manager or administrator, or any such or other similar official, in relation to PGF or Petrobras or any material subsidiary, or PGF or Petrobras or any material subsidiary takes legal action for a readjustment or deferment of any part of our indebtedness.

·         An effective resolution is passed, or any authorized action is taken by any court of competent jurisdiction, directing PGF or Petrobras or any material subsidiary’s winding-up, dissolution or liquidation, except for the purpose of and followed by a consolidation, merger, conveyance or transfer duly approved by the note holders of that series.

·         The notes of such series, the indenture, the relevant guaranty or any part of those documents cease to be in full force and effect or binding and enforceable against PGF or Petrobras, or it becomes unlawful for PGF or Petrobras to perform any material obligation under any of the foregoing documents to which it is a party.

·         PGF or Petrobras contests the enforceability of the notes, the indenture or the guaranties, or denies that it has liability under any of the foregoing documents to which it is a party.

·         Petrobras fails to retain at least 51% direct or indirect ownership of the outstanding voting and economic interests (equity or otherwise) of and in PGF.

For purposes of the events of default:

·         “indebtedness” means any obligation (whether present or future, actual or contingent and including any guaranty) for the payment or repayment of money which has been borrowed or raised (including money raised by acceptances and all leases which, under IFRS, would be a capital lease obligation).

·         “material subsidiary” means a subsidiary of Petrobras which on any given date of determination accounts for more than 15% of Petrobras’ total consolidated assets (as set forth on Petrobras’ most recent balance sheet prepared in accordance with IFRS).

Covenants

PGF will be subject to the following covenants with respect to the notes:

Payment of Principal and Interest

PGF will duly and punctually pay the principal of and any premium and interest and other amounts (including any additional amounts in the event withholding and other taxes are imposed in Brazil or the jurisdiction of incorporation of PGF) on the notes in accordance with the notes and the indenture.

Maintenance of Corporate Existence

PGF will maintain its corporate existence and take all reasonable actions to maintain all rights, privileges and the like necessary or desirable in the normal conduct of business, activities or operations, unless PGF’s board of directors determines that maintaining such rights and privileges is no longer desirable in the conduct of PGF’s business and is not disadvantageous in any material respect to holders.

Maintenance of Office or Agency

So long as notes are outstanding, PGF will maintain in the Borough of Manhattan, the City of New York, an office or agency where notices to and demands upon it in respect of the indenture and the notes may be served.

Initially, this office will be located at 570 Lexington Avenue, 43^rd Floor, New York, New York 10022-6837. PGF will not change the designation of the office without prior written notice to the trustee and designating a replacement office in the same general location.

Ranking

PGF will ensure that the notes will at all times constitute its general senior, unsecured and unsubordinated obligations and will rank pari passu, without any preferences among themselves, with all of its other present and future unsecured and unsubordinated obligations (other than obligations preferred by statute or by operation of law).

Use of Proceeds

PGF intends to use the net proceeds from the sale of the notes to finance Petrobras’ planned capital expenditures under its 2014-2018 Business Plan and for general corporate purposes.

Statement by Managing Directors as to Default

PGF will deliver to the trustee, within 90 calendar days after the end of its fiscal year, a directors’ certificate, stating whether or not to the best knowledge of its signers thereof there is an event of default in connection with the performance and observance of any of the terms, provisions and conditions of the indenture or the notes and, if there is such an event of default by PGF, specifying all such events of default and their nature and status of which the signers may have knowledge.

Provision of Financial Statements and Reports

In the event that PGF files any financial statements or reports with the SEC or publishes or otherwise makes such statements or reports publicly available in The Netherlands, the United States or elsewhere, PGF will furnish a copy of the statements or reports to the trustee within 15 calendar days of the date of filing or the date the information is published or otherwise made publicly available.  As long as the financial statements or reports are publicly available and accessible electronically by the trustee, the filing or electronic publication of such financial statements or reports will comply with PGF’s obligation to deliver such statements and reports to the trustee.  PGF will provide to the trustee with prompt written notification at such time that PGF becomes or ceases to be a reporting company.  The trustee will have no obligation to determine if and when PGF’s financial statements or reports, if any, are publicity available and accessible electronically.

Along with each such financial statement or report, if any, PGF will provide a directors’ certificate stating (i) that a review of PGF’s activities has been made during the period covered by such financial statements with a view to determining whether PGF has kept, observed, performed and fulfilled its covenants and agreements under this indenture; and (ii) that no event of default, has occurred during that period or, if one or more have actually occurred, specifying all those events and what actions have been taken and will be taken with respect to that event of default.

Delivery of these reports, information and documents to the trustee is for informational purposes only and the trustee’s receipt of any of those will not constitute constructive notice of any information contained in them or determinable from information contained in them, including PGF’s compliance with any of its covenants under the indenture (as to which the trustee is entitled to rely exclusively on directors’ certificates).

Appointment to Fill a Vacancy in Office of Trustee

PGF, whenever necessary to avoid or fill a vacancy in the office of trustee, will appoint a successor trustee in the manner provided in the indenture so that there will at all times be a trustee with respect to the notes.

Payments and Paying Agents