Edgar Filing: PETROBRAS - PETROLEO BRASILEIRO SA

6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of the

Securities Exchange Act of 1934

For the month of November, 2016

Commission File Number 1-15106

PETRÓLEO BRASILEIRO S.A. – PETROBRAS

(Exact name of registrant as specified in its charter)

Brazilian Petroleum Corporation – PETROBRAS

(Translation of Registrant’s name into English)

Avenida República do Chile, 65

20031-912—Rio de Janeiro, RJ

Federative Republic of Brazil

(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.


Form 20-F X		Form 40-F

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.


Yes		No X

FINANCIAL

STATEMENTS

Quarterly Information

At September 30, 2016 and report on

review of Quarterly Information

Petróleo Brasileiro S.A. – Petrobras

Index


Consolidated Statement of Financial Position		4
Consolidated Statement of Income		5
Consolidated Statement of Comprehensive Income		6
Consolidated Statement of Cash Flows		7
Consolidated Statement of Changes in Shareholders’ Equity		8
1.	The Company and its operations	9
2.	Basis of preparation of unaudited interim financial information	9
3.	The “Lava Jato (Car Wash) Operation” and its effects on the Company	9
4.	Basis of consolidation	10
5.	Summary of significant accounting policies	10
6.	Cash and cash equivalents and Marketable securities	10
7.	Trade and other receivables	11
8.	Inventories	14
9.	Disposal of Assets	14
10.	Investments	16
11.	Property, plant and equipment	18
12.	Intangible assets	20
13.	Impairment	21
14.	Exploration for and evaluation of oil and gas reserves	28
15.	Trade payables	28
16.	Finance debt	28
17.	Leases	31
18.	Related-party transactions	32
19.	Provision for decommissioning costs	33
20.	Taxes	34
21.	Employee benefits (Post-Employment)	38
22.	Shareholders’ equity	39
23.	Sales revenues	40
24.	Other expenses, net	40
25.	Costs and Expenses by nature	41
26.	Net finance income (expense)	41
27.	Supplemental information on statement of cash flows	42
28.	Segment information	43
29.	Provisions for legal proceedings	46
30.	Collateral for crude oil exploration concession agreements	53
31.	Risk management	53
32.	Fair value of financial assets and liabilities	59
33.	Subsequent events	59
34.	Information Related to Guaranteed Securities Issued by Subsidiaries	60

Petróleo Brasileiro S.A. – Petrobras

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

Petróleo Brasileiro S.A.—Petrobras

We have reviewed the accompanying condensed consolidated statement of financial position of Petróleo Brasileiro S.A.—Petrobras and its subsidiaries as of September 30, 2016, and the related condensed consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2016 and September 30, 2015 and the condensed consolidated statements of cash flows and changes in shareholders’ equity for the nine-month periods ended September 30, 2016 and September 30, 2015. This interim financial information is the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial information for it to be in conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

As discussed in Note 3 to the condensed consolidated interim financial information, during the third quarter of 2014, the Company wrote off US$ 2,527 million of overpayments on the acquisition of property plant and equipment incorrectly capitalized, according to testimony obtained from Brazilian criminal investigations.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position as of December 31, 2015, and the related consolidated statements of income, comprehensive income, cash flows (not presented herein) and changes in shareholders’ equity for the year then ended, and in our report dated March 21, 2016, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2015, is fairly stated in all material respects in relation to the consolidated statement of financial position from which it has been derived.

/s/

PricewaterhouseCoopers

Auditores Independentes

Rio de Janeiro, Brazil

November 10, 2016

Petróleo Brasileiro S.A. – Petrobras

Consolidated Statement of Financial Position

September 30, 2016 and December 31, 2015

(Expressed in millions of US Dollars, unless otherwise indicated)


Assets	Note		09.30.2016		12.31.2015		Liabilities	Note		09.30.2016			12.31.2015
Current assets							Current liabilities
Cash and cash equivalents		6		21,582		25,058	Trade payables		15		5,339			6,373
Marketable securities		6		783		780	Finance debt		16		11,412			14,683
Trade and other receivables, net		7		5,222		5,803	Finance lease obligations		17.1		17			19
Inventories		8		8,511		7,441	Income taxes payable		20.1		200			105
Recoverable income taxes		20.1		628		983	Other taxes payable		20.1		2,965			3,365
Other recoverable taxes		20.1		2,055		1,765	Payroll and related charges				2,545			1,302
Advances to suppliers				188		108	Pension and medical benefits		21		848			655
Other current assets				1,734		1,338	Others				2,043			1,946

				40,703		43,276					25,369			28,448
Assets classified as held for sale		9.6		3,888		152	Liabilities on assets classified as held for sale		9.6		145			125

				44,591		43,428					25,514			28,573

Non-current assets							Non-current liabilities
Long-term receivables							Finance debt		16		111,130			111,482
Trade and other receivables, net		7		3,684		3,669	Finance lease obligations		17.1		97			78
Marketable securities		6		91		88	Deferred income taxes		20.3		274			232
Judicial deposits		29.2		3,534		2,499	Pension and medical benefits		21		15,873			12,195
Deferred income taxes		20.3		3,556		6,016	Provisions for legal proceedings		29.1		3,939			2,247
Other tax assets		20.1		3,340		2,821	Provision for decommissioning costs		19		9,406			9,150
Advances to suppliers				1,434		1,638	Others				481			509

Others				3,221		2,446					141,200			135,893

				18,860		19,177
							Total liabilities				166,714			164,466

							Shareholders’ equity
Investments		10		3,991		3,527	Share capital (net of share issuance costs)		22.1		107,101			107,101
Property, plant and equipment		11		176,633		161,297	Change in interest in subsidiaries				327			321
Intangible assets		12		3,354		3,092	Profit reserves				52,388			57,977

				202,838		187,093	Accumulated other comprehensive (deficit)		22.2		(79,865	)		(100,163	)

							Attributable to the shareholders of Petrobras				79,951			65,236
							Non-controlling interests				764			819

							Total equity				80,715			66,055

Total assets				247,429		230,521	Total liabilities and shareholder’s equity				247,429			230,521

The notes form an integral part of these financial statements.

Petróleo Brasileiro S.A. – Petrobras

Consolidated Statement of Income

September 30, 2016 and 2015

(Expressed in millions of US Dollars, unless otherwise indicated)


	Note		Jan-Sep/2016			Jan-Sep/2015			3Q-2016			3Q-2015
Sales revenues		23		60,002			75,167			21,693			23,179
Cost of sales				(40,940	)		(52,325	)		(14,506	)		(16,484	)

Gross profit				19,062			22,842			7,187			6,695

Income (expenses)
Selling expenses				(3,037	)		(2,954	)		(1,027	)		(1,087	)
General and administrative expenses				(2,425	)		(2,622	)		(937	)		(776	)
Exploration costs		14		(1,333	)		(1,435	)		(572	)		(630	)
Research and development expenses				(424	)		(553	)		(151	)		(157	)
Other taxes				(454	)		(2,413	)		(188	)		(861	)
Impairment of assets		13		(5,122	)		(419	)		(4,710	)		(419	)
Other expenses, net		24		(5,536	)		(3,125	)		(3,003	)		(1,063	)

				(18,331	)		(13,521	)		(10,588	)		(4,993	)

Income before finance income (expense), share of earnings in equity-accounted investments and income taxes				731			9,321			(3,401	)		1,702

Finance income				811			982			366			526
Finance expenses				(5,221	)		(4,904	)		(1,900	)		(1,805	)
Foreign exchange gains (losses) and inflation indexation charges				(1,733	)		(3,236	)		(659	)		(1,947	)

Net finance income (expense)		26		(6,143	)		(7,158	)		(2,193	)		(3,226	)
Share of results in equity-accounted investments		10.1		169			171			(43	)		56

Income before income taxes				(5,243	)		2,334			(5,637	)		(1,468	)

Income taxes		20.4		64			(1,877	)		298			49

Net income (loss)				(5,179	)		457			(5,339	)		(1,419	)

Net income (loss) attributable to:
Shareholders of Petrobras				(5,592	)		971			(5,380	)		(1,062	)
Non-controlling interests				413			(514	)		41			(357	)

Net income (loss)				(5,179	)		457			(5,339	)		(1,419	)

Basic and diluted earnings (loss) per weighted-average of common and preferred share—in U.S. dollars		22.3		(0.43	)		0.07			(0.41	)		(0.09	)

The notes form an integral part of these financial statements.

Petróleo Brasileiro S.A. – Petrobras

Consolidated Statement of Comprehensive Income

September 30, 2016 and 2015

(Expressed in millions of US Dollars, unless otherwise indicated)


	Jan-Sep/2016			Jan-Sep/2015			3Q-2016			3Q-2015
Net income (loss)		(5,179	)		457			(5,339	)		(1,419	)
Unrealized gains / (losses) on cash flow hedge—highly probable future exports
Recognized in shareholders’ equity		11,072			(22,131	)		(674	)		(13,988	)
Reclassified to the statement of income		2,111			1,304			658			525
Deferred income tax		(4,483	)		7,083			4			4,578

		8,700			(13,744	)		(12	)		(8,885	)
Unrealized gains / (losses) on cash flow hedge—others
Recognized in shareholders’ equity		5			1			3			—

		5			1			3			—
Cumulative translation adjustments (*)
Recognized in shareholders’ equity		9,834			(29,739	)		(628	)		(15,644	)
Reclassified to the statement of income		1,428			—			1,428			—

		11,262			(29,739	)		800			(15,644	)
Share of other comprehensive income (losses) in equity-accounted investments		347			(781	)		(8	)		(481	)

Total other comprehensive income (loss):		20,314			(44,263	)		783			(25,010	)

Total comprehensive income (loss)		15,135			(43,806	)		(4,556	)		(26,429	)

Comprehensive income (loss) attributable to:
Shareholders of Petrobras		14,709			(43,418	)		(4,604	)		(26,167	)
Non-controlling interests		426			(388	)		48			(262	)

Total comprehensive income (loss)		15,135			(43,806	)		(4,556	)		(26,429	)

(*)	Includes US$ 365(US$ 915 as of September 30, 2015) of cumulative translation adjustments in associates and joint ventures.

The notes form an integral part of these financial statements.

Petróleo Brasileiro S.A. – Petrobras

Consolidated Statement of Cash Flows

September 30, 2016 and 2015

(Expressed in millions of US Dollars, unless otherwise indicated)


	Jan-Sep/2016			Jan-Sep/2015
Cash flows from Operating activities
Net income (loss)		(5,179	)		457
Adjustments for:
Pension and medical benefits (actuarial expense)		1,700			1,613
Share of results in equity-accounted investments		(169	)		(171	)
Depreciation, depletion and amortization		10,555			8,580
Impairment of property, plant and equipment, intangible and other assets		5,122			420
Exploration expenditures written off		966			1,050
(Gains) losses on disposal of assets, write-offs of assets, E&P areas returned and cancelled projects, net		267			274
Foreign exchange, indexation and finance charges		6,247			7,100
Deferred income taxes, net		(1,338	)		1,011
Allowance (reversals) for impairment of trade receivables		479			141
Inventory write-down to net realizable value		305			258
Reclassification of cumulative translation adjustment—CTA		1,428			—
Decrease (Increase) in assets
Trade and other receivables, net		801			64
Inventories		(300	)		(379	)
Judicial deposits		(493	)		(568	)
Other assets		(553	)		(721	)
Increase (Decrease) in liabilities
Trade payables		(1,411	)		(839	)
Other taxes payable		164			1,890
Pension and medical benefits		(491	)		(510	)
Income taxes paid		(254	)		(512	)
Other liabilities		1,059			178

Net cash provided by operating activities		18,905			19,336

Cash flows from Investing activities
Capital expenditures		(10,267	)		(16,915	)
Investment in investees		(120	)		(81	)
Proceeds from disposal of assets		739			215
Divestment in marketable securities		209			7,610
Dividends received		230			171

Net cash used in investing activities		(9,209	)		(9,000	)

Cash flows from Financing activities
Investments by non-controlling interest		2			119
Financing and loans, net:
Proceeds from financing		12,496			15,830
Repayment of principal		(20,925	)		(11,682	)
Repayment of interest		(5,308	)		(4,889	)

Net cash used in financing activities		(13,735	)		(622	)

Effect of exchange rate changes on cash and cash equivalents		563			(1,231	)

Net decrease in cash and cash equivalents		(3,476	)		8,483

Cash and cash equivalents at the beginning of the year		25,058			16,655

Cash and cash equivalents at the end of the period		21,582			25,138

The notes form an integral part of these financial statements.

Petróleo Brasileiro S.A. – Petrobras

Consolidated Statement of Changes in Shareholders’ Equity

September 30, 2016 and 2015

(Expressed in millions of US Dollars, unless otherwise indicated)


	Share capital (net of share issuance costs)							Accumulated other comprehensive income (deficit) and deemed cost												Profit Reserves
	Share Capital		Share issuance costs			Change in interest in subsidiaries		Cumulative translation adjustment			Actuarial gains (losses) on defined benefit pension plans			Cash flow hedge - highly probable future exports			Other comprehensive income (loss) and deemed cost			Legal		Statutory		Tax incentives		Profit retention		Retained earnings			Shareholders’ equity attributable to shareholders of Petrobras			Non-controlling interests			Total consolidated shareholders’ equity
		107,380		(279	)		148		(41,968	)		(7,295	)		(7,699	)		(438	)		7,919		2,182		720		55,602		—			116,272			706			116,978

Balance at January 1, 2015				107,101			148											(57,400	)										66,423			116,272			706			116,978

Realization of deemed cost		—		—			—		—			—			—			(3	)		—		—		—		—		3			—			—			—
Change in interest in subsidiaries		—		—			—		—			—			—			—			—		—		—		—		—			—			119			119
Net income (loss)		—		—			—		—			—			—			—			—		—		—		—		971			971			(514	)		457
Other comprehensive income (loss)		—		—			—		(29,865	)		—			(13,744	)		(780	)		—		—		—		—		—			(44,389	)		126			(44,263	)
Appropriations:
Dividends		—		—			—		—			—			—			—			—		—		—		—		—			—			(49	)		(49	)

		107,380		(279	)		148		(71,833	)		(7,295	)		(21,443	)		(1,221	)		7,919		2,182		720		55,602		974			72,854			388			73,242

Balance at September 30, 2015				107,101			148											(101,792	)										67,397			72,854			388			73,242

		107,380		(279	)		321		(71,220	)		(7,362	)		(20,288	)		(1,293	)		7,919		2,182		720		47,156		—			65,236			819			66,055

Balance at January 1, 2016				107,101			321											(100,163	)										57,977			65,236			819			66,055

Realization of deemed cost		—		—			—		—			—			—			(3	)		—		—		—		—		3			—			—			—
Change in interest in subsidiaries		—		—			6		—			—			—			—			—		—		—		—		—			6			(453	)		(447	)
Net income (loss)		—		—			—		—			—			—			—			—		—		—		—		(5,592	)		(5,592	)		413			(5,179	)
Other comprehensive income (loss)		—		—			—		11,249			—			8,700			352			—		—		—		—		—			20,301			13			20,314
Appropriations:
Dividends		—		—			—		—			—			—			—			—		—		—		—		—			—			(28	)		(28	)

		107,380		(279	)		327		(59,971	)		(7,362	)		(11,588	)		(944	)		7,919		2,182		720		47,156		(5,589	)		79,951			764			80,715

Balance at September 30, 2016				107,101			327											(79,865	)										52,388			79,951			764			80,715

The notes form an integral part of these financial statements.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

1.	The Company and its operations

Petróleo Brasileiro S.A.—Petrobras is dedicated, directly or through its subsidiaries (referred to jointly as “Petrobras”, “the Company”, or “Petrobras Group”) to prospecting, drilling, refining, processing, trading and transporting crude oil from producing onshore and offshore oil fields and from shale or other rocks, as well as oil products, natural gas and other liquid hydrocarbons. In addition, Petrobras carries out energy related activities, such as research, development, production, transport, distribution and trading of all forms of energy, as well as other related or similar activities. The Company’s head office is located in Rio de Janeiro – RJ, Brazil.

2.	Basis of preparation of unaudited interim financial information

The unaudited consolidated interim financial information has been prepared and is being presented in accordance with IAS 34 – “Interim Financial Reporting” as issued by the International Accounting Standards Board (IASB). The information is presented in U.S. dollars.

This unaudited interim financial information presents the significant changes in the period, avoiding repetition of certain notes to the financial statements previously reported. Hence it should be read together with the Company’s annual financial statements for the year ended December 31, 2015, which include the full set of notes.

Petrobras has selected the U.S. Dollar as its presentation currency. The financial statements have been translated from the functional currency (Brazilian Real) into the presentation currency (U.S. Dollar) in accordance with IAS 21 – “The effects of changes in foreign exchange rates”. All assets and liabilities are translated into U.S. dollars at the closing exchange rate at the date of the financial statements; income and expenses, as well as cash flows are translated into U.S. dollars using the average exchange rates prevailing during the period. All exchange differences arising from the translation of the consolidated financial statements from the functional currency into the presentation currency are recognized as cumulative translation adjustments (CTA) within accumulated other comprehensive income in the consolidated statements of changes in shareholders’ equity.


Brazilian Real x U.S. Dollar	Mar 2016		Jun 2016		Sep 2016		Mar 2015		Jun 2015		Sep 2015		Dec 2015
Quarterly average exchange rate		3.91		3.51		3.25		2.86		3.07		3.55		3.84
Period-end exchange rate		3.56		3.21		3.25		3.21		3.10		3.97		3.90

The Company’s Board of Directors in a meeting held on November 10, 2016 authorized the issuance of these consolidated interim financial information.

2.1.

Accounting estimates

The preparation of interim financial information requires the use of estimates and assumptions for certain assets, liabilities and other transactions. These estimates include: oil and gas reserves, depreciation, depletion and amortization, impairment of assets, pension and medical benefits liabilities, provisions for legal proceedings, dismantling of areas and environmental remediation, deferred income taxes, cash flow hedge accounting and allowance for impairment of trade receivables. Although our management uses assumptions and judgments that are periodically reviewed, the actual results could differ from these estimates.

3.	The “Lava Jato (Car Wash) Operation” and its effects on the Company

In the third quarter of 2014, the Company wrote off US$ 2,527 of capitalized costs representing amounts that Petrobras overpaid for the acquisition of property, plant and equipment in prior years. For further information see note 3 to the Company’s December 31, 2015 audited consolidated financial statements.

In preparing its financial statements for the period ended September 30, 2016, the Company considered all available information and did not identify any additional information in the investigations related to the “Lava Jato” (Car Wash) Operation by the Brazilian authorities or by the independent law firms conducting an internal investigation that could materially impact or change the methodology adopted to recognize the write-off taken in the third quarter of 2014. The Company will continuously monitor the investigations for additional information and will review its potential impacts on the adjustment made.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

On July 15, 2016, the Ministry of Transparency, Oversight and Control (Ministério da Transparência, Fiscalização e Controle – MTFC), the Public Prosecutor’s Office (Ministério Público Federal – MPF), the General Counsel for the Republic (Advocacia Geral da União – AGU) and SBM Offshore, signed a leniency agreement through which SBM Offshore would pay compensation of US$ 342, of which US$ 328 will be reimbursed to Petrobras. Pursuant to the terms of this agreement, the Public Prosecutor’s Office submitted the latter to the Fifth Chamber for Coordination and Review and Anti-Corruption of the Public Prosecutor’s Office, which in turn decided on September 1, 2016 to request adjustments in certain clauses of this leniency agreement. The General Counsel for the Republic and the Public Prosecutor’s Office has filed complaints challenging this decision, which are still under assessment.

Pursuant to a new leniency agreement, the Company recognized the amount of US$ 69 as compensation for damages relating to “Lava Jato” Operation (US$ 72 in 2015), of which US$ 24 has been transferred to the Company and US$ 45 were accounted for as receivable as of September 30, 2016 (received on November 07, 2016). These amounts were accounted for as other expenses, net.

To the extent that any of the proceedings resulting from the Lava Jato investigation involve new leniency agreements with cartel members or plea agreements with individuals pursuant to which they agree to return funds, Petrobras may be entitled to receive a portion of such funds and will recognize them as other income when received.

4.	Basis of consolidation

The consolidated interim financial information includes the interim information of Petrobras, its subsidiaries, joint operations and consolidated structured entities.

There were no significant changes in the Company’s basis of consolidation of entities in the nine-month period ended September 30, 2016, except for the disposal of the subsidiary Petrobras Argentina S.A. – PESA, on July 27, 2016 as set out in note 9.2.

5.	Summary of significant accounting policies

The same accounting policies and methods of computation were followed in these consolidated interim financial statements as those followed in the preparation of the annual financial statements of the Company for the year ended December 31, 2015.

6.	Cash and cash equivalents and Marketable securities

Cash and cash equivalents


	09.30.2016		12.31.2015
Cash at bank and in hand		407		808
Short-term financial investments
- In Brazil
Single-member funds (Interbank Deposit) and other short-term deposits		2,564		922
Other investment funds		18		11

		2,582		933
- Abroad
Time deposits		4,236		13,276
Automatic investing accounts and interest checking accounts		9,922		8,828
Treasury bonds		3,099		—
Other financial investments		1,336		1,213

		18,593		23,317
Total short-term financial investments		21,175		24,250

Total cash and cash equivalents		21,582		25,058

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

Short-term financial investments in Brazil comprise investment in funds, with maturities of three months or less, holding Brazilian Federal Government Bonds. Short-term financial investments abroad comprise time deposits with maturities of three months or less, highly-liquid automatic investing accounts, interest checking accounts and other short-term fixed income instruments, including U.S. Treasury bonds.

Marketable securities


					09.30.2016						12.31.2015
	In Brazil		Abroad		Total		In Brazil		Abroad		Total
Trading securities		783		—		783		779		—		779
Available-for-sale securities		2		—		2		5		1		6
Held-to-maturity securities		89		—		89		69		14		83

Total		874		—		874		853		15		868

Current		783		—		783		779		1		780
Non-current		91		—		91		74		14		88

Trading securities refer mainly to investments in Brazilian Federal Government Bonds. These financial investments have maturities of more than three months and are mostly classified as current assets due to their maturity or the expectation of their realization in the short term.

7.	Trade and other receivables

7.1.

Trade and other receivables, net


	09.30.2016			12.31.2015
Trade receivables
Third parties		6,379			7,262
Related parties
Investees (note 18.1)		535			533
Receivables from the electricity sector (note 7.4)		4,878			3,415
Petroleum and alcohol accounts -receivables from Brazilian Government		268			219
Other receivables		1,652			1,699

		13,712			13,128
Allowance for impairment of trade receivables		(4,806	)		(3,656	)

Total		8,906			9,472

Current		5,222			5,803
Non-current		3,684			3,669

7.2.

Trade receivables overdue—Third parties


	09.30.2016		12.31.2015
Up to 3 months		171		315
From 3 to 6 months		92		180
From 6 to 12 months		433		803
More than 12 months		2,598		1,735

Total		3,294		3,033

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

7.3.

Changes in the allowance for impairment of trade receivables


	09.30.2016			12.31.2015
Opening balance		3,656			3,372
Additions		619			2,060
Write-offs		(3	)		(17	)
Reversals		(116	)		(788	)
Cumulative translation adjustment		650			(971	)

Closing balance		4,806			3,656

Current		1,983			1,690
Non-current		2,823			1,966

7.4.

Trade receivables – electricity sector (isolated electricity system in the northern region of Brazil)


												Allowance for impairment of trade receivables
	As of 12.31.2015			Sales		Amounts received			*Transfers ()**			Recognition			Reversals		*Transfers ()**			Inflation indexation		CTA			As of 09.30.2016
Related parties (Eletrobras Group)
AME (**)		1,996			365		(552	)		669			(307	)		22		(358	)		201		411			2,447
Ceron(***)		285			47		(59	)		—			—			—		—			32		58			363
Others		76			71		(76	)		—			(17	)		11		—			9		20			94

Subtotal		2,357			483		(687	)		669			(324	)		33		(358	)		242		489			2,904

Third parties
Cigás		143			497		(172	)		(669	)		(39	)		—		358			—		28			146
Others		43			237		(268	)		—			(53	)		45		—			—		1			5

Subtotal		186			734		(440	)		(669	)		(92	)		45		358			—		29			151

Trade receivables, net		2,543			1,217		(1,127	)		—			(416	)		78		—			242		518			3,055

Trade receivables—Eletrobras Group		3,415			483		(687	)		669			—			—		—			242		756			4,878
(-) Allowance for impairment of trade receivables		(1,058	)		—		—			—			(324	)		33		(358	)		—		(267	)		(1,974	)

Subtotal		2,357			483		(687	)		669			(324	)		33		(358	)		242		489			2,904

Trade receivables—Third parties		773			734		(440	)		(669	)		—			—		—			—		131			529
(-) Allowance for impairment of trade receivables		(587	)		—		—			—			(92	)		45		358			—		(102	)		(378	)

Subtotal		186			734		(440	)		(669	)		(92	)		45		358			—		29			151

Trade receivables— Total		4,188			1,217		(1,127	)		—			—			—		—			242		887			5,407
(-) Allowance for impairment of trade receivables		(1,645	)		—		—			—			(416	)		78		—			—		(369	)		(2,352	)

Trade receivables, net		2,543			1,217		(1,127	)		—			(416	)		78		—			242		518			3,055

(*)	Cigás assigned receivables overdue from Amazonas Distribuidora de Energia to Petrobras, pursuant to the purchase and sale agreement of natural gas (upstream and downstream) entered into by Petrobras, Cigás and AME.

(**)	Amazonas Distribuidora de Energia.

(***)

Centrais Elétricas do Norte.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

The Company supplies fuel oil, natural gas, and other products to entities that operate in the isolated electricity system in the northern region of Brazil, such as thermoelectric power plants controlled by Eletrobras, state-owned natural gas distribution companies and independent electricity producers (Produtores Independentes de Energia – PIE). The isolated electricity system in the northern region of Brazil provides electricity distribution in areas not connected to the Brazilian National Interconnected Power Grid (Sistema Interligado Nacional) due to technical or economic reasons.

A significant portion of the funds used by those companies to pay for products supplied by the Company came from the Fuel Consumption Account (Conta de Consumo de Combustível – CCC), which provides funds to cover a portion of the costs related to the supply of fuel to thermoelectric power plants located in the northern region of Brazil (operating in the isolated electricity system). However, as a result of changes in the CCC regulations over time, principally relating to the Provisional Measure 579/2012 which significantly changed the sources of funds that were used to cover the cost of electricity generated in the Isolated Electricity System, funds transferred from the CCC to these electricity companies have not been sufficient for them to meet their financial obligations and, as a result, some have not been able to pay the total amount for the products supplied by the Company, increasing the default rate of those customers to the Company.

The Company put pressure on the negotiations with the state-owned natural gas distribution companies, the independent electricity producers (PIEs), other private companies and entities controlled by Eletrobras. As a result, on December 31, 2014, the Company entered into a debt acknowledgement agreement with subsidiaries of Eletrobras with respect to the balance of its receivables as of November 30, 2014. Eletrobras acknowledged it owed US$ 2,202 to the Company, of which US$ 1,889 were collateralized. This amount has been adjusted by the Selic interest rate (Brazilian short-term interest rate) on a monthly basis. Under this agreement, the first of 120 monthly installments was paid in February 2015 and these payments have continued.

In order to reduce the level of the defaults, which were deteriorating, on September 1, 2015 the Brazilian National Electricity Agency (Agência Nacional de Energia Elétrica—ANEEL) enacted the Normative Instruction 679 enabling the Company to receive funds directly from the CCC, as these funds would be paid directly from the CCC for products supplied in the prior month with a limit of 75% of the average payments made by the CCC in the previous three months.

The Company had expected that the abovementioned rule would have strengthened the financial situation of the companies in the electricity sector. However, this has not occurred and the level of these defaults increased. Accordingly, in 2015 the Company recognized US$ 564 as allowance for impairment of trade receivables (net of reversals) with respect to uncollateralized receivables outstanding as of December 31, 2015.

In the nine-month period ended September 30, 2016, the Company recognized an allowance for impairment of trade receivables (net of reversals) in the amount of US$ 338 mainly related to new supplies of: (i) fuel oil by legal enforcement (injunction) in the first quarter of 2016; and (ii) natural gas, mainly in the second and third quarter of 2016. Accordingly, the Company has adopted the following measures:

•

judicial collection of overdue receivables with respect to natural gas supplied to Amazonas Distribuidora de Energia (AME), Eletrobras and Cigás;

•

judicial collection of overdue receivables with respect to fuel oil supplied by the wholly owned subsidiary BR Distribuidora to companies of Eletrobras Group (Amazonas, Acre, Rondônia and Roraima);

•

partial suspension of gas supply;

•

suspension of fuel oil supply in installments, except when legally enforced; and

•

registration of entities controlled by Eletrobras as delinquent companies in the Brazilian Central Bank files and registration of AME as a delinquent company in ANEEL files.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

8.	Inventories


	09.30.2016		12.31.2015
Crude oil		3,381		2,895
Oil products		2,698		2,206
Intermediate products		725		612
Natural gas and LNG (*)		97		253
Biofuels		188		158
Fertilizers		26		61

Total products		7,115		6,185
Materials, supplies and others		1,410		1,272

Total		8,525		7,457

Current		8,511		7,441
Non-current		14		16

(*)	Liquid Natural Gas.

Inventories are presented net of a US$ 19 allowance reducing inventories to net realizable value (US$ 155 as of December 31, 2015), mainly due to changes in international prices of crude oil and oil products. In the nine-month period ended September 30, 2016, the Company recognized as cost of sales a US$ 305 allowance charge (net of reversals) reducing inventories to net realizable value (US$ 257 in the same period of 2015).

A portion of the crude oil and/or oil products inventories have been pledged as security for the Terms of Financial Commitment (TFC) signed by Petrobras and Petros in the amount of US$ 1,977 (US$ 1,719 as of December 31, 2015), as set out in note 21.1.

9.	Disposal of Assets

The Company’s Business and Management Plan forecasts a dynamic portfolio of partnerships and divestments subject to market and business conditions during the negotiations, which can change in accordance with the ongoing Company’s business analysis and also due to the external environment. Accordingly, the conditions to recognize assets and liabilities as held for sale are achieved only when the Board of Directors approves the disposal.

9.1.

Termination of the contract for the sale of Bijupirá and Salema fields (BJS)

On February 26, 2016, Petro Rio S.A. terminated the contracts signed with the Company on July 1, 2015, for the sale of 20% interest in Bijupirá and Salema concessions (BJS) and in the Dutch joint operation BJS Oil Operations B.V. (BJSOO BV). Accordingly, the amounts related to these fields were reclassified from assets and liabilities held for sale back to property, plant and equipment (US$ 148) and to provision for decommissioning costs (US$ 126), respectively, plus interest.

Due to the aforementioned reclassification, the respective assets were depreciated based on their historical data and their recoverable amounts were reassessed. As a result, the Company recognized, in the first quarter of 2016, an impairment loss as set out in note 13.

9.2.

Sale of Petrobras Argentina

On May 12, 2016, the Board of Directors approved the disposal of the Company’s entire 67.19% interest in Petrobras Argentina—PESA, owned through the subsidiary Petrobras Participaciones S.L. (“PPSL”), to Pampa Energía.

On July 27, 2016, pursuant to the disbursement of US$ 897 (still subject to price adjustments), the Company recognized a gain of US$ 207 on this sale, as other expenses, net. In addition, the amount of US$ 1,428 was reclassified from shareholders equity to the other expenses within income statement, reflecting the reclassification of cumulative translation adjustment resulting from the depreciation of Argentinian Peso against the U.S Dollar from the acquisition of this investment to its disposal (see note 22.2).

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

On October 28, 2016, as expected, the Company concluded this transaction with the acquisition of 33.6% of the concession of Rio Neuquén in Argentina and 100% of Colpa Caranda asset in Bolivia for the amount of US$ 56, after adjustments relating to Colpa Caranda asset.

9.3.

Disposal of distribution assets in Chile

On July 22, 2016, the Company signed a sale and purchase agreement with the Southern Cross Group for the sale of 100% of Petrobras Chile Distribución Ltda (PCD), held through Petrobras Caribe Ltda.

The estimated proceed from this deal is US$ 464, considering funds from distribution of cash surplus before the transaction closing, payments to be made by Southern Cross on the closing day and estimated price adjustments within 65 working days after closing.

Pursuant to this disposal approval by the Board of Directors, the respective assets were reclassified as held for sale and measured at their estimated exit price and, as a result, the Company recognized impairment charges as set out in note 13.1.1 (j).

The deal’s completion is subject to certain customary conditions precedent established in the agreement and expected to occur in three or four months.

9.4.

Disposal of interest in exploratory block BM-S-8

On July 28, 2016 the Board of Directors of Petrobras approved the disposal of the Company’s 66% interest in the exploratory block BM – S-8 to Statoil Brasil Óleo e Gás Ltda, which includes the Carará area located in the pre-salt of Santos Basin, for the amount of US$ 2.5 billion. The amount of US$ 1.25 billion (50%) will be received at the closing of this transaction and the remaining amount through contingent payments related to future events, such as the unitization agreement signing. The Brazilian Antitrust Regulator (Conselho Administrativo de Defesa Econômica – CADE) and the Brazilian Agency of Petroleum, Natural Gas and Biofuels (Agência Nacional de Petróleo, Gás Natural e Biocombustíveis) – ANP approved this transaction on September 8, 2016 and November 10, 2016, respectively.

9.5.

Disposal of interest in Nova Transportadora do Sudeste (NTS)

On September 22, 2016, the Company’s Board of Directors approved the sale of 90% interest in Nova Transportadora do Sudeste (NTS), after a corporate restructuring intended to concentrate the transportation assets of the southeastern region in NTS (Rio de Janeiro, Minas Gerais and São Paulo), to Brookfield Infrastructure Partners (BIP) and its affiliates, through a Private Equity Investment Fund (FIP) whose other shareholders are British Columbia Investment Management Corporation (BCIMC), CIC Capital Corporation (wholly-owned subsidiary of China Investment Corporation—CIC) and GIC Private Limited (GIC).

This deal amounted to US$ 5.19 billion, of which US$ 3.55 billion correspond to a 90% interest in NTS and US$ 1.64 billion correspond to the NTS debt settlement with the Company’s wholly-owned subsidiary PGT. FIP will subscribe convertible debentures issued by NTS to the replacement of this debt. The first installment, in the amount of US$ 4.34 billion (84% of the total amount), will be paid at the closing of the transaction, and the remaining amount (US$ 850) will be paid in the fifth year, bearing annual interests at a fixed rate, as established in the purchase and sale agreement.

The completion of the transaction is subject to Shareholder´s General Meeting approval and to certain usual conditions precedent, including approval by relevant regulators.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

9.6.

Assets classified as held for sale


							09.30.2016		12.31.2015
	E&P		Distribution		Gas & Power		Total		Total
*Assets classified as held for sale ()**
Cash and Cash Equivalents		—		197		—		197		3
Trade receivables		—		68		—		68		11
Inventories		—		63		—		63		—
Investments		—		27		—		27		—
Property, plant and equipment		416		186		2,870		3,472		138
Others		—		25		36		61		—

Total		416		566		2,906		3,888		152

*Liabilities on assets classified as held for sale ()**
Trade Payables		—		69		—		69		—
Finance debt		—		—		—		—		125
Provision for decommissioning costs		—		9		—		9		—
Others		—		23		44		67		—

Total		—		101		44		145		125

(*)	As of September 30, 2016, the amounts mainly refer to assets and liabilities transferred by the disposal of Petrobras Chile Distribución LTDA (PCD), Nova Transportadora do Sudeste and Block BM-S-8.

10.

Investments

10.1.

Investments in associates and joint ventures


	Balance at 12.31.2015		Investments		Share of results in investments (*)			CTA			OCI			Dividends			Restructu ring, capital decrease and others			Balance at 09.30.2016
Petrobras Oil & Gas B.V.—PO&G		1,545		—		44			(1	)		—			(50	)		—			1,538
Braskem S.A.		805		—		96			214			276			(26	)		—			1,365
State-controlled natural gas distributors		251		—		52			52			—			(22	)		—			333
Investees in Venezuela		218		—		(2	)		2			—			—			(218	)		—
Guarani S.A.		194		70		(101	)		49			72			—			(25	)		259
Nova Fronteira Bionergia		119		—		22			27			—			—			—			168
Other petrochemical investees		45		—		12			10			—			(6	)		—			61
Compañia Mega S.A.—MEGA		45		—		16			(2	)		—			(31	)		—			28
Compañia de Inversiones de Energia S.A.—CIESA		44		—		3			(4	)		—			(1	)		(42	)		—
UEG Araucária		43		—		4			9			—			(7	)		—			49
Other associates		206		21		14			7			(1	)		(21	)		(52	)		174
Other investees		12		—		—			2			—			—			2			16

Total		3,527		91		160			365			347			(164	)		(335	)		3,991

(*)	Does not include US$ 9 related to PESA investees disposed of as set out in note 9.2.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

10.2.

Investments in listed companies


	Thousand-share lot						Quoted stock exchange prices (US$ per share)				Market value
	09.30.2016		12.31.2015		Type		09.30.2016		12.31.2015		09.30.2016		12.31.2015
Company
Indirect subsidiary
Petrobras Argentina S.A. (*)		—		1,356,792		Common		—		0.61		—		827

														827

Associate
Braskem S.A.		212,427		212,427		Common		7.08		4.07		1,505		866
Braskem S.A.		75,762		75,762		Preferred A		7.74		7.07		586		536

												2,091		1,402

(*)	Investment disposed of as set out in note 9.2.

The market value of these shares does not necessarily reflect the realizable value upon sale of a large block of shares.

Braskem S.A.—Investment in publicly traded associate

Braskem’s shares are publicly traded on stock exchanges in Brazil and abroad. As of September 30, 2016 the quoted market value of the Company’s investment in Braskem was US$ 2,091 based on the quoted values of both Petrobras’ interest in Braskem’s common stock (47% of the outstanding shares), and preferred stock (22% of the outstanding shares). However, there is extremely limited trading of the common shares, since non-signatories of the shareholders’ agreement hold only approximately 3% of the common shares.

Given the operational relationship between Petrobras and Braskem, at December 31, 2015, the recoverable amount of the investment for impairment testing purposes was determined based on value in use, considering future cash flow projections and the manner in which the Company can derive value from this investment via dividends and other distributions to arrive at its value in use. As the recoverable amount was higher than the carrying amount, no impairment losses were recognized for this investment.

The main assumptions on which cash flow projections were based to determine Braskem’s value in use are set out in note 14 to the Company’s consolidated financial statements for the year ended December 31, 2015.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

11.

Property, plant and equipment

11.1.

By class of assets


	Land, buildings and improvement			Equipment and other assets			Assets under construction (*)			Exploration and development costs (oil and gas producing properties)			Total
Balance at January 1, 2015		8,035			97,996			52,943			59,756			218,730

Additions		210			1,296			18,349			512			20,367
Additions to / review of estimates of decommissioning costs		—			—			—			4,147			4,147
Capitalized borrowing costs		—			—			1,768			—			1,768
Write-offs		(8	)		(56	)		(1,797	)		(407	)		(2,268	)
Transfers		1,153			8,726			(16,477	)		8,468			1,870
Depreciation, amortization and depletion		(468	)		(6,374	)		—			(4,596	)		(11,438	)
Impairment recognition		(238	)		(3,837	)		(3,008	)		(5,220	)		(12,303	)
Impairment reversal		—			11			5			23			39
Cumulative translation adjustment		(2,584	)		(23,869	)		(14,173	)		(18,989	)		(59,615	)

Balance at December 31, 2015		6,100			73,893			37,610			43,694			161,297

Cost		8,595			112,307			37,610			67,220			225,732
Accumulated depreciation, amortization and depletion		(2,495	)		(38,414	)		—			(23,526	)		(64,435	)

Balance at December 31, 2015		6,100			73,893			37,610			43,694			161,297

Additions		19			728			8,430			109			9,286
Additions to / review of estimates of decommissioning costs		—			—			—			(468	)		(468	)
Capitalized borrowing costs		—			—			1,279			—			1,279
Write-offs		(2	)		(17	)		(915	)		(52	)		(986	)
Transfers (***)		565			3,265			(11,372	)		4,173			(3,369	)
Depreciation, amortization and depletion		(289	)		(5,595	)		—			(4,557	)		(10,441	)
Impairment recognition		(341	)		(3,612	)		(407	)		(1,334	)		(5,694	)
Impairment reversal		—			494			—			145			639
Cumulative translation adjustment		1,225			10,412			5,169			8,284			25,090

Balance at September 30, 2016		7,277			79,568			39,794			49,994			176,633

Cost		10,408			127,400			39,794			78,250			255,852
Accumulated depreciation, amortization and depletion		(3,131	)		(47,832	)		—			(28,256	)		(79,219	)

Balance at September 30, 2016		7,277			79,568			39,794			49,994			176,633

Weighted average of useful life in years		40 (25 to 50 (except land	) )		20 (3 to 31) (**)						Units of production method

(*)	See note 28 for assets under construction by business area.

(**)	Includes exploration and production assets depreciated based on the units of production method.

(***)

Includes amounts transferred to assets held for sale as set out in note 9.

As of September 30, 2016, property, plant and equipment include assets under finance leases of US$ 58 (US$ 48 as of December 31, 2015).

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

11.2.

Concession for exploration of oil and natural gas—Assignment Agreement (“Cessão Onerosa”)

Petrobras and the Brazilian Federal Government entered into the Assignment Agreement in 2010, which grants the Company the right to carry out prospection and drilling activities for oil, natural gas and other liquid hydrocarbons located in the pre-salt area limited to the production of five billion barrels of oil equivalent in up to 40 years and renewable for a further five years subject to certain conditions. As of September 30, 2016, the Company’s property, plant and equipment includes the amount of US$ 23,045 related to the Assignment Agreement (US$ 19,158 as of December 31, 2015).

Petrobras has already declared commerciality in fields of all six blocks in the scope of this agreement: Franco (Búzios), Florim (Itapu), Nordeste de Tupi (Sépia), Entorno de Iara (Norte de Berbigão, Sul de Berbigão, Norte de Sururu, Sul de Sururu, Atapu), Sul de Guará (Sul de Sapinhoá) and Sul de Tupi (Sul de Lula).

The agreement establishes that the review procedures of the agreement will commence immediately after the declaration of commerciality for each area and must be based on reports by independent experts engaged by Petrobras and by the ANP. The review of the Assignment Agreement will be concluded after the assessment of all the areas.

If the review of the Assignment Agreement determines that the value of acquired rights is greater than initially paid, the Company may be required to pay the difference to the Federal Government, or may proportionally reduce the total volume of barrels acquired under the agreement. If the review determines that the value of the acquired rights is lower than initially paid by the Company, the Federal Government will reimburse the Company for the difference by delivering cash or bonds or equivalent means of payment, subject to budgetary regulations.

The formal review procedures for each block are based on costs incurred through the exploration stage and estimated costs and production levels included in the independent experts reports. The review of the Assignment Agreement may result in changes in: (i) the amount of the agreement; (ii) the total volume (in barrels of oil) to be produced; (iii) the term of the agreement; and (iv) the minimum percentages of local content.

Currently, the settlement form and the final amount to be established for this agreement are not defined. The beginning of negotiation with the Brazilian Federal Government still depends on the conclusion of the appraisals by independent experts engaged by both parties, and the issuance of the respective reports.

With respect to the negotiation with the Brazilian Federal Government, on October 21, 2016 the Company’s Board of Directors approved the creation of the minority shareholders committee responsible for monitoring the agreement review process and providing support to the board decisions through opinions about related matters. This committee will be composed of two members nominated by the minority shareholders and an independent member with recognized expertise in technical-financial analysis of investment projects.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

12.

Intangible assets

12.1.

By class of assets


				Software
	Rights and Concessions			Acquired			Developed in-house			Goodwill			Total
Balance at January 1, 2015		3,592			119			432			366			4,509

Addition		17			22			78			—			117
Capitalized borrowing costs		—			—			5			—			5
Write-offs		(163	)		—			(2	)		—			(165	)
Transfers		71			6			11			—			88
Amortization		(23	)		(33	)		(97	)		—			(153	)
Impairment recognition		(32	)		—			—			—			(32	)
Cumulative translation adjustment		(1,024	)		(34	)		(137	)		(82	)		(1,277	)

Balance at December 31, 2015		2,438			80			290			284			3,092

Cost		2,696			435			963			284			4,378
Accumulated amortization		(258	)		(355	)		(673	)		—			(1,286	)

Balance at December 31, 2015		2,438			80			290			284			3,092

Addition		6			10			42			—			58
Capitalized borrowing costs		—			—			4			—			4
Write-offs		(130	)		—			(1	)		—			(131	)
Transfers		(3	)		1			(1	)		(25	)		(28	)
Amortization		(18	)		(24	)		(72	)		—			(114	)
Impairment recognition		(18	)		(4	)		—			(49	)		(71	)
Cumulative translation adjustment		440			13			54			37			544

Balance at September 30, 2016		2,715			76			316			247			3,354

Cost		2,922			523			1,196			247			4,888
Accumulated amortization		(207	)		(447	)		(880	)		—			(1,534	)

Balance at September 30, 2016		2,715			76			316			247			3,354

Estimated useful life in years		(	*)		5			5			Indefinite

(*)	Mainly comprised of assets with indefinite useful lives, which are reviewed annually to determine whether events and circumstances continue to support an indefinite useful life assessment.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

13.

Impairment

The Company’s assets are tested for impairment on December 31, annually, or when there is an indication that their carrying amount may not be recoverable. During September 2016 such indication was identified for some assets due to changes in the Company’s Business and Management Plan (2017-2021 BMP) which was finalized and approved during the third quarter. These changes included: decreased future capital expenditures which was driven by the company’s desire to reduce current debt levels and optimize their investment portfolio, as well as adjustments in mid and long term assumptions, which are the basis of cash flow projections, mainly caused by changes in the Brazilian political/economic scenarios and a slower recovery of oil prices.

Additionally, the changes in the Brazilian economic and political environment also resulted in increases in discount rates as of September 30, 2016.

For 2015, impairment losses were mainly recognized in its fourth quarter pursuant to the annual tests based on the macroeconomic assumptions in the former 2015-2019 Business and Management Plan. Therefore, the Company is presenting the impairment losses for the year ended December 31, 2015 for comparative purposes.

13.1.

Property, plant and equipment and intangible assets

For impairment testing purposes, the Company uses the value in use of its property, plant and equipment and intangible assets (individually or grouped into cash-generating units—CGUs) as their recoverable amount. In measuring value in use the Company bases its cash flow projections on:

•

The estimated useful life of the asset or assets grouped into the CGU, based on the expected use of those assets and, considering the Company’s maintenance policy;

•

Assumptions and financial budgets/forecasts approved by Management for the period corresponding to the expected life cycle of each different business; and

•

A pre-tax discount rate, which is derived from the Company’s post-tax weighted average cost of capital (WACC).

The cash flow projections used to measure the value in use of the CGUs were mainly based on the following assumptions:


	2017		Long term Average
Average Brent (US$/bbl)		48		68
Average Brazilian Real (excluding inflation )—Real /U.S. dollar exchange rate		3.46		3.36

As set out in note 5.2 to the Company’s audited consolidated financial statements ended December 31, 2015, identifying cash-generating units (CGUs) requires management assumptions and judgment, based on the Company’s business and management model.

Some events occurred in the third quarter of 2016, such as (i) changes in investment portfolio projections, concluded in the context of the 2017-2021 BMP, (ii) the approval of the disposal of 90% interest in subsidiary NTS, (iii) the decision to discontinue operations of Quixadá Biofuel Plant in the state of Ceará and (iv) the removal of support vessels relating to Hidrovias project from the Transportation CGU due to postponement and suspensions, which triggered the review of CGUs relating to Exploration and Production, Gas & Power, Biofuels and Transpetro’s fleet of vessels, respectively. Accordingly, certain assets that were aggregated for these CGUs have changed as described below:

a)	Exploration and Production CGUs

Crude oil and natural gas producing properties CGU: comprised of exploration and development assets related to crude oil and natural gas fields and groups of fields in Brazil and abroad. In September 2016, the aggregations of assets for Fazenda Cedro and Lagoa Suruaca groups, both located in Espírito Santo, were reviewed and impairment tests were run separately for those individual fields due to the discontinuation of a relevant shared infrastructure in the production process, as approved in 2017-2021 BMP. Despite the change in aggregation of assets for these CGUs, there were no material impairment losses or reversals recognized regarding these fields, amounting to US$ 4.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

b)	Gas & Power CGUs

Natural gas CGU: comprises natural gas pipelines and natural gas processing plants, except for Unidade de Fertilizantes Nitrogenados III (UFN III) and Unidade de Fertilizantes Nitrogenados V (UFN V) which are assessed for impairment separately. In September 2016, the Board of Directors approved the disposal of interest in the subsidiary NTS and, as a consequence, its pipelines were removed from of this CGU since then and no impairment losses or reversals attributable to this change were recognized. For further information on disposal of NTS see note 9.5.

c)	Biofuels CGU

Biodiesel CGU: an integrated unit of biodiesel plants defined based on the production planning and operation process, considering domestic market conditions, the production capacity of each plant, as well as the results of biofuels auctions and raw materials supply. Due to the decision to discontinue operations of Quixadá Biofuel Plant, as approved by the Board of Directors of the subsidiary Petrobras Biocombustível in September 2016, impairment test for this Biofuel Plant was run separately and the Company wrote-off US$ 28 as a result.

d)	Transportation CGU

Transportation CGU: comprises assets relating to Transpetro’s fleet of vessels. Recurrent delays in the construction of support vessels for transporting ethanol over the Tietê River led the management of the wholly-owned subsidiary Transpetro, in the third quarter of 2016, to terminate the construction contracts for a new group of support vessels in the scope of Hidrovias project. As a result, this project was postponed and its completed assets were reviewed and tested for impairment separately, and no impairment charges were recognized for them. However, impairment losses were recognized for the Transportation CGU as set out in note 13.1.1 (i).

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

13.1.1.

Impairment of property, plant and equipment and intangible assets

In September 2016, the Company tested certain assets and CGUs for impairment and impairment losses and reversals were recognized in the statement of income as follows:


	Carrying amount		Recoverable amount		Impairment () / (*)		Business segment		Comments
									Jan-Sep 2016
Assets or CGU by nature
Producing properties: assets related to Oil and gas activities in Brazil (several CGUs)		11,272		9,367		1,829		E&P—Brazil		item (a1)
Oil and gas production and drilling equipment in Brazil		917		64		853		E&P—Brazil		item (b1)
Second refining unit in RNEST		2,488		1,708		780		RTM—Brazil		item (c)
Suape Petrochemical Complex		1,099		480		619		RTM—Brazil		item (d1)
Comperj		365		—		365		RTM—Brazil		item (e1)
Fertilizer Plant—UFN III		523		370		153		Gas & Power—Brazil		item (f1)
Thermoelectric power generation plants		2,695		2,551		145		Gas & Power—Brazil		item (g)
Araucária		197		57		140		Gas & Power—Brazil		item (h)
Transpetro’s fleet of vessels		1,751		1,645		106		RTM—Brazil		item (i)
Distribution assets in Chile		562		464		98		Distribution—Abroad		item (j)
Usina de Quixada—CE		28		—		28		Biofuel, Brazil
Others		308		253		10		Several Segments

Total		22,205		16,959		5,126

									Jan-Dec 2015***
Producing properties: assets related to E&P activities in Brazil (several CGUs)		21,251		12,139		8,653		E&P—Brazil		item (a2)
Comperj		1,586		234		1,352		RTM—Brazil		item (e2)
Oil and gas producing properties abroad		1,548		918		637		E&P—Abroad		item (k)
Oil and gas production and drilling equipment		750		243		507		E&P—Brazil		item (b2)
UFN III		935		434		501		Gas & Power—Brazil		item (f2)
Suape Petrochemical Complex		1,143		943		200		RTM—Brazil		item (d2)
Nitrogen Fertilizer Plant—UFN-V		190		—		190		Gas & Power—Brazil
Biodiesel plants		134		88		46		Biofuel—Brazil
Others		341		156		210		Several segments

Total		27,878		15,155		12,296

(*)	Impairment losses and reversals.

(**)	Does not include impairment reversal on assets classified as held for sale of US$ 4 in 2016 (Impairment losses US$ 3 in 2015).

(***)

For the nine-month period ended September 30, 2015, the Company recognized impairment losses in the amount of US$ 419. See note 13.1 to the interim financial information at September 30, 2015.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

a1)

Producing properties in Brazil – Jan-Sep 2016

Impairment losses of US$ 1,829 were recognized in the nine-month period ended September 30, 2016 for certain oil and gas fields in Brazil under E&P concessions. Cash flow projections were based on: financial budgets/forecasts approved by Management; and a 9.1% p.a. post-tax discount rate (excluding inflation) derived from the WACC for the E&P business. The impairment losses were related primarily to the following fields and groups of fields: North group (US$ 1,221), Uruguá group (US$ 170), Maromba (US$ 86), Bijupirá and Salema (US$ 82), Dourado (US$ 77), Papa-Terra (US$ 72) and Pampo (US$ 67). These impairment losses were mainly due to the appreciation of the Brazilian Real against the U.S. Dollar, price assumptions review, as well a higher discount rate following the increase in Brazil’s risk premium. In addition, an impairment reversal relating to Centro Sul group, amounting to US$ 415, was recognized due to lower operating expenses estimates based on a review of its fields operations, as set forth in 2017-2021 BMP, considering the decommissioning of a unit and replacing another unit with a new processing plant.

a2)

Producing properties in Brazil—2015

In 2015, impairment losses of US$ 8,653 were recognized for certain oil and gas fields in Brazil under E&P concessions. Cash flow projections were based on: financial budgets/forecasts approved by Management; and an 8.3% p.a. post-tax discount rate (excluding inflation) derived from the WACC for the E&P business. The impairment losses were related primarily to the following fields: Papa-Terra (US$ 2,234), Centro Sul group (US$ 1,179), Uruguá group (US$ 986), Espadarte (US$ 593), Linguado (US$ 489), CVIT – Espírito Santo group (US$ 375), Piranema (US$ 341), Lapa (US$ 317), Bicudo (US$ 240), Frade (US$ 198), Badejo (US$ 190), Pampo (US$ 91) and Trilha (US$ 84). These impairment losses are mainly due to the impact of the decline in international crude oil prices on the Company’s price assumptions, the use of a higher discount rate, as well as the geological revision of Papa-Terra reservoir.

b1)

Oil and gas production and drilling equipment in Brazil—Jan-Sep 2016

Impairment losses of US$ 853 were recognized in the nine-month period ended September 30, 2016 for oil and gas production and drilling equipment which were not directly related to oil and gas producing properties. Cash flow projections were based on: financial budgets/forecasts approved by Management; and an 11.9% p.a. post-tax discount rate (excluding inflation) derived from the WACC for the oil and gas services and equipment industry. These impairment losses were mainly related to uncertainties over the ongoing hulls construction of the FPSOs P-71, P-72 and P-73, amounting to US$ 593 as set out in note 13.3.

b2)

Oil and gas production and drilling equipment in Brazil—2015

In 2015, impairment losses of US$ 507 were recognized for oil and gas production and drilling equipment which were not directly related to oil and gas producing properties. Cash flow projections were based on: financial budgets/forecasts approved by Management; and a 9.2% p.a. post-tax discount rate (excluding inflation) derived from the WACC for the oil and gas services and equipment industry. The impairment losses were mainly related to the planned idle capacity of two drilling rigs in the future and the use of a higher discount rate.

c)	Second refining unit in RNEST—Jan-Sep 2016

An impairment loss of US$ 780 was recognized in the nine-month period ended September 30, 2016 for the second refining unit in RNEST. Cash flow projections were based on: financial budgets/forecasts approved by Management; and an 8.7% p.a. (8.1% p.a. in 2015) post-tax discount rate (excluding inflation) derived from the WACC for the refining business, reflecting a specific risk premium for the postponed project. The impairment loss was mainly attributable to: (i) the use of a higher discount rate and (ii) a delay in expected future cash inflows to 2023 resulting from postponing the project, considering the completion of this project with the Company’s owns capital resources as set forth in 2017-2021 Business and Management Plan.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

d1)

Suape Petrochemical Complex—Jan-Sep 2016

An impairment loss of US$ 619 was recognized in the nine-month period ended September 30, 2016 for Companhia Integrada Têxtil de Pernambuco S.A.—CITEPE and Companhia Petroquímica de Pernambuco S.A. – PetroquímicaSuape. Cash flow projections were based on: financial budgets/forecasts approved by Management; and a 7.5% p.a. post-tax discount rate (excluding inflation) derived from the WACC for the petrochemical business. The impairment loss was mainly attributable to lower market projections and the appreciation of Brazilian real against the U.S. dollar.

d2)

Suape Petrochemical Complex—2015

In 2015, an impairment loss of US$ 200 was recognized for Companhia Integrada Têxtil de Pernambuco S.A.—CITEPE and Companhia Petroquímica de Pernambuco S.A. – PetroquímicaSuape. Cash flow projections were based on: financial budgets/forecasts approved by Management; and a 7.2% p.a. post-tax discount rate (excluding inflation) derived from the WACC for the petrochemical business. The impairment loss was mainly attributable to changes in market and prices assumptions resulting from a decrease in economic activity in Brazil, a reduction in the spread for petrochemical products in the international market and the use of a higher discount rate.

e1)

Comperj—Jan-Sep 2016

In the second quarter of 2016, a reassessment of this project confirmed its postponement until December 2020 (first refining unit), with continuous efforts to seek new partnerships to resumption the project. The construction of Comperj facilities related to natural gas processing plant (UPGN) will be continued, since they are part of the infrastructure for transporting and processing natural gas from the pre-salt layer in Santos Basin. The estimated costs and period of time to complete these facilities constructions were revised and, therefore, the Company recognized US$ 365 as impairment charge of the project remaining balance as of September 30, 2016.

e2)

Comperj—2015

In 2015, an impairment loss of US$ 1,352 was recognized for refining assets of Comperj. Cash flow projections were based on: financial budgets/forecasts approved by Management, and; an 8.1% p.a. post-tax discount rate (excluding inflation) derived from the WACC for the refining business reflecting a specific risk premium for the postponed projects. This impairment loss was mainly attributable to: (i) the use of a higher discount rate; (ii) the delay in expected future cash inflows resulting from postponing construction.

f1)

Fertilizer Plant—UFN III—Jan-Sep 2016

An impairment loss of US$ 153 was recognized in the nine-month period ended September 30, 2016 for the fertilizer plant UFN III (Unidade de Fertilizantes e Nitrogenados III), located on Três Lagoas (state of Mato Grosso do Sul). Cash flow projections were based on: financial budgets/forecasts approved by Management; and an 8.3% p.a. post-tax discount rate (excluding inflation) derived from the WACC for the fertilizer business, reflecting a specific risk premium for the postponed projects. This impairment loss mainly relates to: (i) the use of a higher discount rate, (ii) the appreciation of Brazilian Real against the US Dollar.

f2)

Fertilizer Plant—UFN III—2015

In 2015, an impairment loss of US$ 501 was recognized for the fertilizer plant UFN III (Unidade de Fertilizantes e Nitrogenados III), located on Três Lagoas (state of Mato Grosso do Sul). Cash flow projections were based on: financial budgets/forecasts approved by Management; and a 7.1% p.a. post-tax discount rate (excluding inflation) derived from the WACC for the Gas & Power business, reflecting a specific risk premium for the postponed projects. The impairment losses were mainly related to: (i) the use of a higher discount rate; and (ii) the delay in expected future cash inflows resulting from postponing the project.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

g)	Thermoelectric power generation plants—Jan-Sep 2016

An impairment loss of US$ 145 was recognized in the nine-month period ended September 30, 2016 for thermoelectric power generation plants. Cash flow projections were based on: financial budgets/forecasts approved by Management; and an 5.5% p.a. (5.0% p.a. in 2015) post-tax discount rate (excluding inflation) derived from the WACC for the electricity industry. This impairment loss mainly relates to: (i) the use of a higher discount rate, (ii) a decrease in electricity dispatch projections and (iii) an increase in estimated production costs in the long run.

h)	Araucaria—Jan-Sep 2016

An impairment loss of US$ 140 was recognized in the nine-month period ended September 30, 2016 for Araucária Nitrogenados S.A. Cash flow projections were based on: financial budgets/forecasts approved by Management; and a 7.8% p.a. post-tax discount rate (excluding inflation) derived from the WACC for the fertilizer business (6.6% p.a. in 2015). The impairment loss was mainly attributable to (i) the use of a higher discount rate, (ii) the appreciation of Brazilian Real against the U.S. Dollar and (iii) an increase in estimated production costs.

i)	Transpetro’s fleet of vessels—Jan-Sep 2016

An impairment loss of US$ 106 was recognized in the nine-month period ended September 30, 2016 for the fleet of vessels. Cash flow projections were based on: financial budgets/forecasts approved by Management; and post-tax discount rates (excluding inflation) ranging from 4.3% p.a. to 9.05% p.a. (3.92% p.a. to 8.92% p.a. in 2015) derived from the WACC for the transportation industry, considering financial leverage and the respective tax benefits. This impairment loss mainly relates to: (i) group of support vessels of Hidrovias project that were moved from this CGU due to postponements and suspension of constructions projects and (ii) the use of a higher discount rate.

j)	Distribution assets in Chile—Jan-Sep 2016

Impairment loss of US$ 98 was recognized in the nine-month period ended September 30, 2016 for distribution assets in Chile, as the exit price (less costs to sell) of this disposal was lower than the respective carrying amount when reclassified as held for sale. For further information on disposal of distribution assets in Chile see note 9.3.

k)	Producing properties abroad—2015

In 2015, impairment losses of US$ 637 were recognized in E&P assets abroad. Cash flow projections were based on: financial budgets/forecasts approved by Management; and 5.6% p.a. to 10.4% p.a. post-tax discount rates (excluding inflation) derived from the WACC for the E&P business in different countries. The impairment losses were mainly in producing properties located in the United States (US$ 448) and Bolivia (US$ 157), attributable to the decline in international crude oil prices.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

13.2.

Impairment losses on equity-method investments

An impairment loss on equity-method investments in the amount of US$ 128 (US$ 550 in 2015) was recognized in the statement of income as share of earnings in equity-accounted investments, substantially attributable to the biofuels segment, mainly relating to the associated Guarani S.A (US$ 111) and the joint venture BSBIOS (US$ 14). This loss was primarily due to: (i) an increase in post-tax discount rate (excluding inflation) from 9.3% p.a. in 2015 to 10.2% p.a. in September 2016 and (ii) lower sugar prices forecasts. This loss partially comprises goodwill relating to the BSBIOS S.A. investee (US$ 14).

13.3.

Construction of platform hulls by Ecovix and Enseada shipyards

The Company entered into contracts with the suppliers Ecovix-Engevix Construções Oceânicas S.A and Enseada Industria Naval S.A. for supplying eight hulls for the FPSOs P-66 to P-73 and for hulls conversion of four FPSOs (P-74 to P-77), respectively.

Considering the relevance of these assets in the context of the Business and Management Plan and due to the financial difficulties faced by the suppliers, escrow accounts relating to these projects were created in the last quarter of 2015 in order to ensure the ongoing services hired.

These escrow accounts comprised funds transferred in advance for payments to be made by the shipyards, restricted to the scope of the contracts and limited to their total balance. The deposits would be offset to the extent that services rendered or equipment delivered, with the remaining balance being reimbursed. At September 30, 2016, the Company had advances to these suppliers amounting to US$ 347.

This strategy was considered effective as the projects achieved significant progress up to September 2016, enabling the delivery of P-67 hull to shipyard in China for integration services, the recommence of the work in progress of P-69 hull also in China, the continuity of the work in progress of P-68 hull in Rio Grande shipyard, as well as the progress on priority activities for the conclusion of minimum scope of P-74 and P-76 hulls, delivering these units to shipyards in China for integration services and for setting up topsides.

During the third quarter of 2016, the Company reassessed the progress of the hulls project and the continuity of the specific accounts related to the projects. Consequently, the Company concluded that this strategy, which in its beginning avoided the work in progress discontinuation, was not effective as it was previously.

Accordingly, based on management judgement the Company wrote-off US$ 347 in the third quarter of 2016 regarding the remaining balance of advances to these suppliers in the context of the escrow accounts, and legal procedures to recover these receivables are being assessed.

Negotiations with Enseada

As part of strategy of ensuring the continuity of FPSOs P-75 and P-77 hulls construction, the Company approved the transfer of the contract entered into Enseada and the Chinese shipyard COSCO (Dalian) Shipyard Co., Ltd to its wholly-owned subsidiary Petrobras Netherlands B.V. (PNBV), resulting in the recognition of payables in the scope of this contract. As a result, the Company recognized a provision in the amount of US$ 103 within other expenses in the third quarter of 2016.

Considering the escrow accounts and the aforementioned payments, the Company eliminated any risk of P-74 to P-77 hulls non-deliver.

Negotiations with Ecovix

The Company is also negotiating debt acknowledgments relating to Ecovix debts with Chinese shipyards, with respect to P-69 and P-70 hulls. As a result, a provision in the amount of US$ 184 within other expenses was recognized in the third quarter of 2016.

Regarding the negotiations with Ecovix for delivering hulls of some platforms, there are risks related to the term of their transfer to the Company, despites the significant physical progress and the current continuity scenario of their constructions, and of topsides integration and set up. The Company is taking into account all measures in order to mitigate these risks.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

Due to uncertainties regarding the FPSOs P-71, P-72 and P-73 hulls construction, the Company also recognized impairment charges amounting to US$ 593 as set out in note 13.1.1 (b1). Impacts in the Company’s production curve are not expected in case of the discontinuation of this work in progress, as the 2017-2021 Business and Management Plan includes other options and additional budget funds.

14.

Exploration for and evaluation of oil and gas reserves

The exploration and evaluation activities include the search for oil and gas reserves from obtaining the legal rights to explore a specific area to the declaration of the technical and commercial viability of the reserves.

Changes in the balances of capitalized costs directly associated with exploratory wells pending determination of proved reserves and the balance of amounts paid for obtaining rights and concessions for exploration of oil and natural gas (capitalized acquisition costs) are set out in the following table:


*Capitalized Exploratory Well Costs / Capitalized Acquisition Costs ()**	09.30.2016			12.31.2015
Property plant and equipment
Opening Balance		5,201			7,000
Additions to capitalized costs pending determination of proved reserves		784			2,282
Capitalized exploratory costs charged to expense		(894	)		(882	)
Transfers upon recognition of proved reserves		(926	)		(960	)
Cumulative translation adjustment		1,084			(2,239	)

Closing Balance		5,249			5,201

Intangible Assets		2,394			2,048

Capitalized Exploratory Well Costs / Capitalized Acquisition Costs		7,643			7,249

(*)	Amounts capitalized and subsequently expensed in the same period have been excluded from this table.

Exploration costs recognized in the statement of income and cash used in oil and gas exploration and evaluation activities are set out in the following table:


Exploration costs recognized in the statement of income	Jan-Sep/2016		Jan-Sep/2015
Geological and geophysical expenses		299		334
Exploration expenditures written off (includes dry wells and signature bonuses)		966		1,050
Other exploration expenses		68		51

Total expenses		1,333		1,435


Cash used in :	Jan-Sep/2016		Jan-Sep/2015
Operating activities		324		385
Investment activities		845		2,178

Total cash used		1,169		2,563

15.

Trade payables


	09.30.2016		12.31.2015
Third parties in Brazil		2,978		3,331
Third parties abroad		2,018		2,566
Related parties		343		476

Balance on current liabilities		5,339		6,373

16.

Finance debt

The Company obtains funding through debt financing for capital expenditures to develop crude oil and natural gas producing properties, construct vessels and pipelines, construct and expand industrial plants, among other uses.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

The Company has covenants that were not in default at September, 30 2016 in its loan agreements and notes issued in the capital markets requiring, among other obligations, the presentation of interim financial statements within 90 days of the end of each quarter (not reviewed by independent auditors) and audited financial statements within 120 days of the end of each fiscal year. Non-compliance with these obligations do not represent immediate events of default and the grace period in which the Company has to deliver these financial statements ranges from 30 to 60 days, depending on the agreement. The Company also has covenants with respect to debt level in some of its loan agreements with the Brazilian Development Bank (Banco Nacional de Desenvolvimento—BNDES).

A roll-forward schedule of non-current debt is set out as follows:


	Export Credit Agencies			Banking Market			Capital Market			Others			Total
Non-current
In Brazil
Opening balance at January 1, 2015		—			29,288			1,301			28			30,617
Additions (new funding obtained)		—			4,918			989			—			5,907
Interest incurred during the period		—			289			—			—			289
Foreign exchange/inflation indexation charges		—			3,001			80			2			3,083
Transfer from long-term to short-term		—			(2,389	)		(149	)		(4	)		(2,542	)
Cumulative translation adjustment (CTA)		—			(10,410	)		(496	)		(9	)		(10,915	)

Balance as of December 31, 2015		—			24,697			1,725			17			26,439

Abroad
Opening balance at January 1, 2015		5,244			29,898			53,810			649			89,601
Additions (new funding obtained)		163			5,753			2,045			—			7,961
Interest incurred during the period		5			34			48			8			95
Foreign exchange/inflation indexation charges		442			1,342			(1,092	)		56			748
Transfer from long-term to short-term		(767	)		(4,183	)		(5,770	)		(45	)		(10,765	)
Cumulative translation adjustment (CTA)		(442	)		(1,877	)		(222	)		(56	)		(2,597	)

Balance as of December 31, 2015		4,645			30,967			48,819			612			85,043

Total Balance as of December 31, 2015		4,645			55,664			50,544			629			111,482

Non-current
In Brazil
Opening balance at January 1, 2016		—			24,697			1,725			17			26,439
Additions (new funding obtained)		—			368			—			—			368
Interest incurred during the period		—			218			—			—			218
Foreign exchange/inflation indexation charges		—			(1,519	)		47			1			(1,471	)
Transfer from long-term to short-term		—			(2,000	)		(64	)		(1	)		(2,065	)
Cumulative translation adjustment (CTA)		—			4,541			345			3			4,889

Balance as of September 30, 2016		—			26,305			2,053			20			28,378

Abroad
Opening balance at January 1, 2016		4,645			30,967			48,819			612			85,043
Additions (new funding obtained)		—			1,143			9,759			—			10,902
Interest incurred during the period		3			13			46			6			68
Foreign exchange/inflation indexation charges		(171	)		(1,037	)		(83	)		(23	)		(1,314	)
Transfer from long-term to short-term		(716	)		(1,459	)		(10,145	)		(37	)		(12,357	)
Transfer to liabilities associated with assets classified as held for sale		—			—			(302	)		—			(302	)
Cumulative translation adjustment (CTA)		169			740			(220	)		23			712

Balance as of September 30, 2016		3,930			30,367			47,874			581			82,752

Total Balance as of September 30, 2016		3,930			56,672			49,927			601			111,130

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)


Current	09.30.2016		12.31.2015
Short-term debt		388		1,523
Current portion of long-term debt		9,222		11,500
Accrued interest		1,802		1,660

Total		11,412		14,683

16.1.

Summarized information on current and non-current finance debt


Maturity in	2016			2017			2018			2019			2020			2021 and onwards			*Total ()**			Fair value
Financing in Brazilian Reais (R$):		2,155			2,019			2,447			4,131			5,792			8,121			24,665			23,459

Floating rate debt		1,849			1,585			1,989			3,685			5,366			5,931			20,405
Fixed rate debt		306			434			458			446			426			2,190			4,260
Average interest rate		12.5	%		14.5	%		12.1	%		11.3	%		10.5	%		9.7	%		11.1	%
Financing in U.S.Dollars (US$):		2,814			5,217			8,678			14,901			9,698			38,685			79,993			77,713

Floating rate debt		1,400			3,752			7,735			11,496			5,712			9,190			39,285
Fixed rate debt		1,414			1,465			943			3,405			3,986			29,495			40,708
Average interest rate		4.0	%		3.8	%		3.5	%		4.0	%		4.6	%		5.9	%		5.0	%
Financing in R$ indexed to US$:		55			714			704			701			701			5,423			8,298			8,449

Floating rate debt		6			23			22			19			19			35			124
Fixed rate debt		49			691			682			682			682			5,388			8,174
Average interest rate		7.1	%		7.0	%		7.1	%		7.0	%		7.1	%		7.0	%		7.0	%
Financing in Pound Sterling (£):		46			36			—			—			—			2,229			2,311			2,114

Fixed rate debt		46			36			—			—			—			2,229			2,311
Average interest rate		5.7	%		5.5	%		—			—			—			6.0	%		6.0	%
Financing in Japanese Yen (¥):		52			102			102			—			—			—			256			260

Floating rate debt		52			102			102			—			—			—			256
Average interest rate		0.6	%		0.5	%		0.4	%		—			—			—			0.4	%
Financing in Euro (€):		6			162			1,262			1,469			221			3,892			7,012			6,837

Floating rate debt		6			12			12			12			176			—			218
Fixed rate debt		—			150			1,250			1,457			45			3,892			6,794
Average interest rate		1.6	%		3.5	%		3.8	%		3.8	%		4.1	%		4.4	%		4.1	%
Financing in other currencies:		—			7			—			—			—			—			7			7

Fixed rate debt		—			7			—			—			—			—			7
Average interest rate		—			14.0	%		—			—			—			—			14.0	%
Total as of September 30, 2016		5,128			8,257			13,193			21,202			16,412			58,350			122,542			118,839

Average interest rate		7.6	%		6.7	%		5.3	%		5.5	%		6.8	%		6.5	%		6.3	%
Total as of December 31, 2015		14,683			11,397			16,091			22,596			15,537			45,861			126,165			98,600

Average interest rate		5.9	%		6.4	%		5.6	%		5.8	%		6.9	%		6.7	%		6.3	%

*	The average maturity of outstanding debt as of September 30, 2016 is 7.33 years (7.14 years as of December 31, 2015).

The fair value of the Company’s finance debt is determined primarily by quoted prices in active markets for identical liabilities (level 1), when applicable, amounting to US$ 49,755 as of September 30, 2016. When a quoted price for an identical liability is not available, the finance debt is fair valued by a discounted cash flow based on a theoretical curve derived from the yield curve of the Company’s most liquid bonds (level 2), amounting to US$ 69,084 as of September 30, 2016.

The sensitivity analysis for financial instruments subject to foreign exchange variation is set out in note 31.2.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

16.2.

Capitalization rate used to determine the amount of borrowing costs eligible for capitalization

The capitalization rate used to determine the amount of borrowing costs eligible for capitalization was the weighted average of the borrowing costs applicable to the borrowings that were outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. For the nine-month period ended September 30, 2016 the capitalization rate was 5.67% p.a. (4.99% p.a. for the same period in 2015).

16.3.

Lines of credit

Amount

Company

Financial institution

Date

Maturity

Available
(Lines of Credit)

Used

Balance

Abroad

Petrobras

JBIC

7/16/2013

12/31/2018

1,500

—

1,500

PGT BV

UKEF—JPMORGAN

12/17/2015

12/22/2016

500

409

Total

2,000

409

1,591

In Brazil

Petrobras

FINEP

4/16/2014

12/26/2017

PNBV

BNDES

9/3/2013

3/26/2018

3,043

656

2,387

Transpetro

BNDES

1/31/2007

Not defined

1,504

168

1,336

Transpetro

Banco do Brasil

7/9/2010

4/10/2038

Transpetro

Caixa Econômica Federal

11/23/2010

Not defined

101

—

101

Total

4,776

900

3,876

16.4.

Collateral

Most of the Company’s debt is unsecured, however, collaterals are granted to financial institutions if required.

The loans obtained by structured entities are collateralized based on the projects’ assets, as well as liens on receivables of the structured entities. Certain wholly-owned subsidiaries issue securities that are fully and unconditionally guaranteed by Petrobras, as set out in note 34.

The global notes issued by the Company in the capital market through its wholly-owned subsidiary Petrobras Global Finance B.V. – PGF are unsecured. However, Petrobras fully, unconditionally and irrevocably guarantees these notes. In addition, there were no changes in the structure of collateralization with respect to the last global notes offering in the international capital market occurred in July 2016.

17.

Leases

17.1.

Future minimum lease payments / receipts – finance leases


	Receipts							Payments
Estimated lease payments / receivable	Future value		Annual interest			Present value		Future value		Annual interest			Present value
2016		89		(57	)		32		12		(5	)		7
2017—2020		784		(449	)		335		111		(45	)		66
2021 and thereafter		1,564		(445	)		1,119		238		(197	)		41

As of September 30, 2016		2,437		(951	)		1,486		361		(247	)		114

Current							82							17
Non-current							1,404							97

As of September 30, 2016							1,486							114

Current (*)							66							19
Non-current (*)							1,393							78

As of December 31, 2015							1,459							97

(*)	For comparative purposes, the present value of payments in the amount of US$ 7 was reclassified from trade payables in current liabilities and the amount of US$ 46 was reclassified from others in non-current liabilities.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

17.2.

Future minimum lease payments – operating leases

Operating leases mainly include oil and gas production units, drilling rigs and other exploration and production equipment, vessels and support vessels, helicopters, land and building leases.


2016			3,339
2017—2020			33,526
2021 and thereafter			61,642

As of September 30, 2016			98,507

As of December 31, 2015			99,194

As of September 30, 2016, the balance of estimated future minimum lease payments under operating leases includes US$ 52,257 (US$ 60,628 as of December 31, 2015) with respect to assets under construction, for which the lease term has not commenced.

In the nine-month period ended September 30, 2016, the Company recognized expenditures of US$ 7,222 (US$ 7,849 in the same period of 2015) for operating leases installments.

18.

Related-party transactions

The Company has a related-party transactions policy, approved by its Board of Directors, which establishes rules to ensure that all decisions involving related parties and potential conflicts of interest take into account applicable laws in the countries in which the Company operates and the parties involved in negotiations.

18.1.

Transactions with joint ventures, associates, government entities and pension funds

The balances of significant transactions are set out in the following table:


	Jan-Sep/2016			09.30.2016				Jan-Sep/2015			12.31.2015
	Income (expense)			Assets		Liabilities		Income (expense)			Assets		Liabilities
Joint ventures and associates
State-controlled gas distributors		1,309			236		73		2,444			255		72
Petrochemical companies		2,524			130		33		3,041			144		45
Other associates and joint ventures		336			169		279		423			134		453

Subtotal		4,169			535		385		5,908			533		570

Government entities
Government bonds		102			985		—		317			1,115		—
Banks controlled by the Brazilian Government		(2,362	)		3,703		26,828		(3,489	)		2,607		24,336
Receivables from the Electricity sector (note 7.4)		725			4,878		8		1,458			3,415		—
Petroleum and alcohol account—receivables from Brazilian Government		4			268		—		—			219		—
Others		198			292		313		33			306		316

Subtotal		(1,333	)		10,126		27,149		(1,681	)		7,662		24,652

Pension plans		—			98		62		—			36		110

Total		2,836			10,759		27,596		4,227			8,231		25,332

Revenues, mainly sales revenues		4,808			—		—		7,243			—		—
Foreign exchange and inflation indexation charges, net		(271	)		—		—		(1,585	)		—		—
Finance income (expenses), net		(1,701	)		—		—		(1,431	)		—		—
Current assets		—			2,902		—		—			2,255		—
Non-current assets		—			7,857		—		—			5,976		—
Current liabilities		—			—		4,520		—			—		3,248
Non-current liabilities		—			—		23,076		—			—		22,084

Total		2,836			10,759		27,596		4,227			8,231		25,332

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

18.2.

Compensation of key management personnel

The total compensation of Petrobras’ key management personnel is set out as follows:


	Jan-Sep/ 2016						Jan-Sep/ 2015
	Board						Board
	Officers		(members and alternates)		Total		Officers		(members and alternates)		Total
Wages and short-term benefits		2.4		0.3		2.7		3		0.3		3.3
Social security and other employee-related taxes		0.7		—		0.7		0.8		0.1		0.9
Post-employment benefits (pension plan)		0.3		—		0.3		0.3		—		0.3
Benefits due to termination of tenure		0.1		—		0.1		—		—		0

Total compensation recognized in the statement of income		3.5		0.3		3.8		4.1		0.4		4.5

Total compensation paid		3.5		0.3		3.8		4.1		0.4		4.5
Average number of members in the period (*)		7.56		11.67		19.23		8.00		12.56		20.56
Average number of paid members in the period (**)		7.56		9.78		17.34		8.00		10.89		18.89

(*)	Monthly average number of members.

(**)	Monthly average number of paid members.

In the nine-month period ended September 30, 2016 the board members and executive officers of the Petrobras group received US$ 15.6 as compensation (US$ 15.8 in the nine-month period ended September, 30 2015).

The compensation of the Advisory Committees to the Board of Directors is apart from the fixed compensation set for the Board members and, therefore, has not been classified under compensation of Petrobras’ key management personnel.

The alternates of Board members, who were also members of these committees up to April 2016, received the amount of US$ 14 thousand as compensation in 2016 (US$ 17 thousand including related charges).

19.

Provision for decommissioning costs


Non-current liabilities	09.30.2016			12.31.2015
Opening balance		9,150			8,267
Adjustment to provision		(1,470	)		4,493
Transfers related to liabilities held for sale (*)		17			(125	)
Payments made		(574	)		(1,242	)
Interest accrued		482			231
Others		(41	)		121
Cumulative translation adjustment		1,842			(2,595	)

Closing balance		9,406			9,150

(*)	Includes US$ 126 related to the termination of sales contract of Bijupira and Salema fields in February 2016 and US$ 109 transferred pursuant to the sale of the subsidiary PESA.

The estimates for abandonment and dismantling of oil and natural gas producing properties areas are revised annually, simultaneously with the annual certification process of oil and gas reserves.

However, due to the review of assumptions related to foreign exchange rate, discount rate and economic feasibility of E&P projects, based on the 2017-2021 Business and Management Plan, the Company reassessed its provision for decommissioning costs in order to reflect its best estimate at the end of this quarter.

The main impacts in this reassessment, when compared to December 31, 2015, are attributable to a higher risk-adjusted discount rate and the appreciation of the Brazilian Real against the U.S. Dollar.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

The adjustment made to the provision for decommissioning at September 30, 2016 in the amount of US$ 1,470 deducted the cost of assets of the respective fields (US$ 472) and positively impacted the income statement (US$ 998 within other expenses, net) as this adjustment exceeded the carrying amount of some of these fields.

20.

Taxes

20.1.

Income taxes and other taxes

Income taxes

Current assets

Current liabilities

09.30.2016

12.31.2015

09.30.2016

12.31.2015

Taxes in Brazil

622

959

187

Taxes abroad

Total

628

983

200

105


Other taxes	Current assets				Non-current assets				Current liabilities				*Non-current liabilities ()**
	09.30.2016		12.31.2015		09.30.2016		12.31.2015		09.30.2016		12.31.2015		09.30.2016		12.31.2015
Taxes in Brazil
Current / Deferred ICMS (VAT)		976		807		713		605		1,064		1,045		—		—
Current / Deferred PIS and COFINS		871		746		2,445		2,026		492		487		—		—
CIDE		15		18		—		—		118		115		—		—
Production taxes		—		—		—		—		586		622		—		—
Withholding income taxes		—		—		—		—		389		435		—		15
REFIS and PRORELIT		—		—		—		—		—		274		—		11
Others		172		150		170		184		284		244		—		—

Total in Brazil		2,034		1,721		3,328		2,815		2,933		3,222		—		26
Taxes abroad		21		44		12		6		32		143		—		—

Total		2,055		1,765		3,340		2,821		2,965		3,365		—		26

(*)	Other non-current taxes are classified as other non-current liabilities.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

20.2.

Brazilian Tax Law

On December 30, 2015, the state of Rio de Janeiro enacted two laws that increased the tax burden on the oil industry from March 2016, as follows:

•

Law No. 7,182 – establishes a Rate Control, Monitoring and Supervision of Research, Mining, Oil and Gas Exploration and Utilization Activities tax (Taxa de Controle, Monitoramento e Fiscalização das Atividades de Pesquisa, Lavra, Exploração e Aproveitamento de Petróleo e Gás – TFPG) over each barrel of crude oil or equivalent unit of natural gas extracted in the State of Rio de Janeiro, and

•

Law No. 7,183 – establishes a VAT (ICMS) tax over transactions involving crude oil operations.

The Company believes that the taxation established by both laws is not legally justifiable, and therefore, the Company has supported the Brazilian Association of Companies for the Exploration and Production of Oil and Gas (ABEP—Associação Brasileira de Empresas de Exploração e Produção de Petróleo e Gás), which has filed complaints challenging the constitutionality of such laws before the Brazilian Supreme Court.

The Brazilian Federal Attorney has expressed favorable opinions regarding the basis of the ABEP complaints and the granting of judicial injunctions in favor of the oil and gas industry, to avoid the associated tax burden on it.

The Brazilian Supreme Court is currently analyzing the ABEP request for formal injunctions in both actions.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

20.3.

Deferred income taxes—non-current

Income taxes in Brazil comprise corporate income tax (IRPJ) and social contribution on net income (CSLL). Brazilian statutory corporate tax rates are 25% and 9%, respectively. The changes in the deferred income taxes are presented as follows:


	Property, Plant and Equipment
	Oil and gas exploration costs			Others (*)			Loans, trade and other receivables / payables and financing			Finance leases			Provision for legal proceedings			Tax losses			Inventories			Employee Benefits			Others			Total
Balance at January 1, 2015		(13,647	)		(224	)		3,823			(592	)		526			5,718			490			2,022			(141	)		(2,025	)

Recognized in the statement of income for the year		(1,284	)		1,382			(525	)		44			471			2,166			42			(157	)		(96	)		2,043
Recognized in shareholders’ equity		—			14			6,490			(14	)		—			(152	)		—			(14	)		65			6,389
Cumulative translation adjustment		4,608			223			(2,275	)		206			(204	)		(2,019	)		(182	)		(645	)		180			(108	)
Use of tax credits—REFIS and PRORELIT		—			—			—			—			—			(521	)		—			—			—			(521	)
Others		—			(104	)		100			6			(1	)		23			3			(7	)		(14	)		6

Balance at December 31, 2015		(10,323	)		1,291			7,613			(350	)		792			5,215			353			1,199			(6	)		5,784

Recognized in the statement of income for the period		996			(649	)		251			24			265			174			(54	)		336			(5	)		1,338
Recognized in shareholders’ equity		—			—			(4,483	)		—			—			(3	)		—			—			—			(4,486	)
Cumulative translation adjustment		(2,005	)		108			933			(74	)		185			1,125			56			247			(5	)		570
Others (**)		—			39			20			—			9			(2	)		—			(13	)		23			76

Balance at September 30, 2016		(11,332	)		789			4,334			(400	)		1,251			6,509			355			1,769			7			3,282

Deferred tax assets																													6,016
Deferred tax liabilities																													(232	)

Balance at December 31, 2015																													5,784

Deferred tax assets																													3,556
Deferred tax liabilities																													(274	)

Balance at September 30, 2016																													3,282

(*)	Mainly includes impairment adjustments and capitalized borrowing costs.

(**)	Includes US$ 82 transferred to liabilities associated with assets held for sale due to the disposal of subsidiary PESA.

The Company recognizes the deferred tax assets based on projections of taxable profits in future periods that are revised annually. The deferred tax assets will be realized in a ten years perspective to the extent of provisions realization and final resolution of future events, both based on Business and Management Plan – BMP assumptions.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

20.4.

Reconciliation between statutory tax rate and effective tax expense rate

The following table provides the reconciliation of Brazilian statutory tax rate to the Company’s effective rate on income before income taxes:


	Jan-Sep/2016			Jan-Sep/2015
Income before income taxes		(5,243	)		2,334
Nominal income taxes computed based on Brazilian statutory corporate tax rates (34%)		1,784			(794	)
Adjustments to arrive at the effective tax rate:		—			—
· Different jurisdictional tax rates for companies abroad		(250	)		640
. Brazilian income taxes on income of companies incorporated outside Brazil (*)		(125	)		(629	)
· Tax incentives		37			6
· Tax loss carryforwards (unrecognized tax losses)		(447	)		(478	)
· Non-taxable income (non-deductible expenses), net (**)		(814	)		(587	)
· Others		(121	)		(35	)

Income taxes benefit (expense)		64			(1,877	)

Deferred income taxes		1,338			(1,011	)
Current income taxes		(1,274	)		(866	)

Total		64			(1,877	)

Effective tax rate of income taxes		1.2	%		80.4	%

(*)	Relates to Brazilian income taxes on earnings of offshore investees generated up to september 30, 2016, as established by Law No. 12,973/2014.

(**)	Includes results in equity-accounted investments and CTA transfered to income statement due to the disposal of Pesa as set out in note 9.2.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

21.

Employee benefits (Post-Employment)

21.1.

Pension and medical benefits

The Company sponsors defined benefit and variable contribution pension plans in Brazil and abroad, as well as defined-benefit medical plans for employees in Brazil (active and retirees) and their dependents. See note 22 to the consolidated financial statement for the year ended December 31, 2015 for detailed information about pension and medical benefits sponsored by the Company.

Changes in the pension and medical defined benefits to employees are set out as follows:


	Pension Plans						Medical Plan
	Petros			Petros 2			AMS			Other Plans			Total
Balance at January 1, 2015		7,874			287			9,019			107			17,287
(+) Remeasurement effects recognized in OCI		152			(180	)		92			(11	)		53
(+) Costs incurred in the year		878			64			991			27			1,960
(-) Contributions paid		(193	)		—			(349	)		(7	)		(549	)
(-) Payments related to the Term of Financial Commitment (TFC)		(165	)		—			—			—			(165	)
Others		—			—			—			10			10
Cumulative translation adjustment		(2,609	)		(100	)		(3,000	)		(37	)		(5,746	)

Balance at December 31, 2015		5,937			71			6,753			89			12,850

Current		368			—			285			2			655
Non-current		5,569			71			6,468			87			12,195

Balance at December 31, 2015		5,937			71			6,753			89			12,850

(+)Costs incurred in the period		756			26			899			19			1,700
(-) Contributions paid		(131	)		—			(257	)		(8	)		(396	)
(-) Payments related to the Term of Financial Commitment (TFC)		(94	)		—			—			—			(94	)
Others		—			—			—			(50	)		(50	)
Cumulative translation adjustment		1,253			15			1,429			14			2,711

Balance at September 30, 2016		7,721			112			8,824			64			16,721

Current		504			—			342			2			848
Non-current		7,217			112			8,482			62			15,873

Balance at September 30, 2016		7,721			112			8,824			64			16,721

Pension and medical benefit expenses, net recognized in the statement of income are set out as follows:


	Pension Plans				Medical Plan
	Petros		Petros 2		AMS		Other Plans		Total
Current service cost		61		17		95		5		178
Net interest cost over net liabilities / (assets)		695		9		804		14		1,522

Net costs for Jan-Sep/2016		756		26		899		19		1,700

Related to active employees:
Included in the cost of sales		189		13		211		2		415
Included in operating expenses		93		9		114		17		233
Related to retired employees		474		4		574		—		1,052

Net costs for Jan-Sep/2016		756		26		899		19		1,700

Net costs for Jan-Sep/2015		693		61		838		21		1,613

As of September 30, 2016, the Company had pledged crude oil and/or oil products totaling US$ 1,977 (still under review) as collateral for the Terms of Financial Commitment (TFC) signed by Petrobras and Petros in 2008 (US$ 1,719 as of December 31, 2015).

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

In the nine-month period ended September 30, 2016, the Company’s contribution to the defined contribution portion of the Petros Plan 2 was US$ 175 (US$ 203 in the nine-month period ended September 2015) recognized in the results of the period.

21.2.

Voluntary Separation Incentive Plan

From February 2014 to September 30, 2016 the Company implemented voluntary separation incentive plans (PIDV) as described below:

•

Petrobras (PIDV 2014) – the enrollment period lasted from February 12 to March 31, 2014. This plan was re-opened for eligible employees from November 30 to December 18, 2015, resulting in 6,829 separations of 7,219 total enrollments up to September 30, 2016;

•

Petrobras Distribuidora S.A. (PIDV BR 2014) – the enrollment period lasted from February 12 to March 31, 2014 resulting in 656 separations of 658 total enrollments up to September 30, 2016;

•

Petrobras Distribuidora S.A. (PIDV BR 2015) – the enrollment period lasted from October 13 to December 30, 2015 resulting in 316 separations of 317 total enrollments up to September 30 2016; and

•

Petrobras PIDV 2016 – the enrollment period lasted from April 1, 2016 to August 31, 2016 resulting in 3,199 separations of 11,720 total enrollments as of September 30, 2016.

Accordingly, 11,000 voluntary separations of employees who enrolled in these plans were made.

Changes in the provision during the nine-month period ended September 30, 2016 are set out as follows:


Balance as of December 31,2015	199
New enrolments PIDV Petrobras 2016	1,103
Revision of provisions	4
Separations in the period	(388	)
Cumulative translation adjustment	(14	)

Balance as of September 30, 2016	904

Current	904
Non-current	—

22.

Shareholders’ equity

22.1.

Share capital (net of share issuance costs)

As of September 30, 2016 subscribed and fully paid share capital was US$ 107,380 and share issuance costs were US$ 279, represented by 7,442,454,142 outstanding common shares and 5,602,042,788 outstanding preferred shares, all of which are registered, book-entry shares with no par value.

Preferred shares have priority on returns of capital, do not grant any voting rights and are non-convertible into common shares.

22.2.

Other comprehensive income

In the nine-month period ended September 30, 2016 the Company principally recognized as other comprehensive income the following effects:

Cumulative translation adjustment of US$ 11,262. As set out in note 9.2, this amount was impacted by the disposal of the Company’s interests in the subsidiary Petrobras Participaciones S.L. (“PPSL”) that triggered the reclassification of US$ 1,428 to income statement within other expenses, net of the cumulative translation adjustment resulted from the depreciation of Argentinian Peso against the U.S Dollar since the acquisition of this investment to its disposal.

Foreign exchange variation gains of US$ 8,700 (US$ 11,588 after taxes and amounts reclassified to the statement of income) recognized in the Company’s shareholders’ equity during the nine-month period ended September 30, 2016, as a result of its cash flow hedge accounting policy, as set out in note 31.2.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

22.3.

Earnings (losses) per share


	Jan-Sep/2016			Jan-Sep/2015
Net income (loss) attributable to shareholders of Petrobras		(5,592	)		971
Weighted average number of common and preferred shares outstanding		13,044,496,930			13,044,496,930
Basic and diluted earnings (losses) per common and preferred share (US$ per share)		(0.43	)		0.07

23.

Sales revenues


	Jan-Sep/2016			Jan-Sep/2015
Gross sales		76,090			94,177
Sales taxes (*)		(16,088	)		(19,010	)

Sales revenues ()**		60,002			75,167

Diesel		19,548			23,669
Automotive gasoline		11,897			12,404
Jet fuel		1,875			2,595
Liquefied petroleum gas		2,260			2,218
Naphtha		1,753			2,128
Fuel oil (including bunker fuel)		825			1,854
Other oil products		2,503			2,739

Subtotal oil products		40,661			47,607

Natural gas		2,948			4,608
Ethanol, nitrogen products and renewables		2,787			2,912
Electricity, services and others		1,989			3,774

Domestic market		48,385			58,901

Exports		5,605			7,571
Sales abroad(***)		6,012			8,695

Foreign market		11,617			16,266

Sales revenues ()**		60,002			75,167

(*)	Includes, mainly, CIDE, PIS, COFINS and ICMS (VAT).

(**)	Sales revenues by business segment are set out in note 28.

(***)

Sales revenues from operations outside of Brazil, including trading and excluding exports.

24.

Other expenses, net


	Jan-Sep/ 2016			Jan-Sep/2015
Unscheduled stoppages and pre-operating expenses		(1,530	)		(843	)
Gains / (losses) related to legal, administrative and arbitration proceedings		(1,521	)		(893	)
Reclassification of cumulative translation adjustments—CTA		(1,428	)		—
Voluntary Separation Incentive Plan—PIDV		(1,107	)		(35	)
Pension and medical benefits—retirees		(1,051	)		(904	)
Provision for debt acknowledgments of suppliers with subcontractors		(287	)		—
Gains / (losses) on disposal/write-offs of assets, areas returned and cancelled projects (*)		(267	)		(274	)
Institutional relations and cultural projects		(179	)		(337	)
Operating expenses with thermoelectric power plants		(77	)		(97	)
Health, safety and environment		(59	)		(75	)
Allowance on losses on fines		(44	)		(289	)
Amounts recovered relating to Lava Jato Operation		69			72
Government grants		121			11
Agreement of Ship/Take or Pay with gas distributors		194			147
Expenses/Reimbursements from E&P partnership operations		465			303
Gains / (losses) on decommissioning of returned/abandoned areas		998			(43	)
Others		167			132

Total		(5,536	)		(3,125	)

(*)	Includes the write-off related to advances to suppliers in the amount of US$ 347, as set out note 13.3.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

25.

Costs and Expenses by nature


	Jan-Sep/2016			Jan-Sep/2015
Raw material and products for resale		(14,002	)		(24,679	)
Materials, third-party services, freight, rent and other related costs		(11,393	)		(14,719	)
Depreciation, depletion and amortization		(10,555	)		(8,580	)
Employee compensation		(7,562	)		(7,238	)
Impairment (losses) / reversals		(5,122	)		(419	)
Production taxes		(3,103	)		(5,023	)
Unscheduled stoppages and pre-operating expenses		(1,530	)		(843	)
(Losses) /Gains on legal, administrative and arbitration proceedings		(1,521	)		(893	)
Reclassification of cumulative translation adjustment		(1,428	)		—
Exploration expenditures written off (includes dry wells and signature bonuses)		(966	)		(1,050	)
Allowance for impairment of trade receivables		(479	)		(141	)
Other taxes		(454	)		(2,413	)
Changes in inventories		(433	)		766
Provision for debt acknowledgments of suppliers with subcontractors		(287	)		—
Gains / (losses) on disposal/write-offs of assets, areas returned and cancelled projects		(267	)		(274	)
Institutional relations and cultural projects		(179	)		(337	)
Health, safety and environment		(59	)		(75	)
Amounts recovered relating to Lava Jato Operation		69			72

Total		(59,271	)		(65,846	)

In the Statement of income
Cost of sales		(40,940	)		(52,325	)
Selling expenses		(3,037	)		(2,954	)
General and administrative expenses		(2,425	)		(2,622	)
Exploration costs		(1,333	)		(1,435	)
Research and development expenses		(424	)		(553	)
Other taxes		(454	)		(2,413	)
Impairment		(5,122	)		(419	)
Other expenses, net		(5,536	)		(3,125	)

Total		(59,271	)		(65,846	)

26.

Net finance income (expense)


	Jan-Sep/2016			Jan-Sep/2015
Debt interest and charges		(5,800	)		(5,104	)
Foreign exchange gains (losses) and inflation indexation charges on net debt (*)		(2,300	)		(3,482	)
Income from investments and marketable securities (Brazilian Government Bonds)		407			523

Financial result on net debt		(7,693	)		(8,063	)

Capitalized borrowing costs		1,283			1,376
Gains (losses) on derivatives		(86	)		150
Interest income from marketable securities		4			25
Other foreign exchange gains (losses) and indexation charges, net		623			223
Other finance expenses and income, net		(274	)		(869	)

Net finance income (expenses)		(6,143	)		(7,158	)

Income		811			982
Expenses		(5,221	)		(4,904	)
Foreign exchange gains (losses) and inflation indexation charges		(1,733	)		(3,236	)

Total		(6,143	)		(7,158	)

(*)	Includes debt raised in Brazil (in Brazilian reais) indexed to the U.S. dollar.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

27.

Supplemental information on statement of cash flows


	Jan-Sep/2016			Jan-Sep/2015
Additional information on cash flows:
Amounts paid/received during the period:
Withholding income tax paid on behalf of third-parties		747			836

Capital expenditures and financing activities not involving cash
Purchase of property, plant and equipment on credit		71			125
Provision/(reversals) for decommissioning costs		(468	)		(14	)
Use of deferred tax and judicial deposit for the payment of contingency		83			103

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

28.

Segment information

The Extraordinary General Meeting held on April 28, 2016 approved adjustments to the Company’s organization structure and governance and management model, aiming to align the organization with the new conditions faced by the oil and gas industry and to prioritize profitability and capital discipline. The new model does not propose discontinuing operations, however, it does consider merge of operations.

The current business segment information is reported in a manner in which the Company’s senior management assesses business performances, as well as makes decisions regarding investments and resources allocation. Due to adjustments in the organization structure and governance and management model, the Company may reassess its business segment report in order to improve management business analysis.


	Exploration and Production		Refining, Transportation & Marketing		Gas & Power		Biofuels		Distribution		Corporate		Eliminations			Total
Consolidated assets by Business Area — 09.30.2016
Current assets		4,968		10,178		4,300		59		2,983		26,531		(4,428	)		44,591
Non-current assets		133,140		42,157		15,811		544		3,250		9,280		(1,344	)		202,838

Long-term receivables		7,445		3,263		1,030		4		1,064		7,348		(1,294	)		18,860
Investments		1,574		1,447		510		439		15		6		—			3,991
Property, plant and equipment		121,716		37,226		13,947		101		1,947		1,746		(50	)		176,633
Operating assets		89,062		32,725		11,963		98		1,662		1,379		(50	)		136,839
Under construction		32,654		4,501		1,984		3		285		367		—			39,794
Intangible assets		2,405		221		324		—		224		180		—			3,354

Total Assets		138,108		52,335		20,111		603		6,233		35,811		(5,772	)		247,429


Consolidated assets by Business Area — 12.31.2015
Current assets		3,639		9,027		2,663		45		2,299		28,866		(3,111	)		43,428
Non-current assets		120,157		36,465		16,806		437		2,972		10,589		(333	)		187,093

Long-term receivables		6,467		2,384		1,358		3		859		8,398		(292	)		19,177
Investments		1,807		879		456		343		34		8		—			3,527
Property, plant and equipment		109,724		33,032		14,674		91		1,868		1,949		(41	)		161,297
Operating assets		79,585		28,803		12,193		81		1,581		1,485		(41	)		123,687
Under construction		30,139		4,229		2,481		10		287		464		—			37,610
Intangible assets		2,159		170		318		—		211		234		—			3,092

Total Assets		123,796		45,492		19,469		482		5,271		39,455		(3,444	)		230,521

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

Consolidated Statement of Income by Business Area


	Jan-Sep/2016
	Exploration and Production			Refining, Transportation & Marketing			Gas & Power			Biofuels			Distribution			Corporate			Eliminations			Total
Sales revenues		23,758			46,141			7,032			171			20,836			—			(37,936	)		60,002

Intersegments		22,656			12,994			1,812			164			310			—			(37,936	)		—
Third parties		1,102			33,147			5,220			7			20,526			—			—			60,002
Cost of sales		(18,312	)		(35,075	)		(5,176	)		(192	)		(19,280	)		—			37,095			(40,940	)

Gross profit (loss)		5,446			11,066			1,856			(21	)		1,556			—			(841	)		19,062
Income (expenses)		(6,224	)		(4,056	)		(1,365	)		(53	)		(1,509	)		(5,189	)		65			(18,331	)
Selling		(110	)		(1,370	)		(633	)		(1	)		(999	)		5			71			(3,037	)
General and administrative		(266	)		(303	)		(161	)		(18	)		(188	)		(1,489	)		—			(2,425	)
Exploration costs		(1,333	)		—			—			—			—			—			—			(1,333	)
Research and development		(185	)		(40	)		(12	)		(1	)		—			(186	)		—			(424	)
Other taxes		(75	)		(45	)		(166	)		(3	)		(25	)		(140	)		—			(454	)
Impairment of assets		(2,727	)		(1,845	)		(445	)		(7	)		(98	)		—			—			(5,122	)
Other expenses, net		(1,528	)		(453	)		52			(23	)		(199	)		(3,379	)		(6	)		(5,536	)

Net income / (loss) before financial results and income taxes		(778	)		7,010			491			(74	)		47			(5,189	)		(776	)		731
Net finance income (expenses)		—			—			—			—			—			(6,143	)		—			(6,143	)
Share of earnings in equity-accounted investments		48			136			97			(120	)		8			—			—			169

Net income / (loss) before income taxes		(730	)		7,146			588			(194	)		55			(11,332	)		(776	)		(5,243	)
Income taxes		265			(2,383	)		(166	)		25			(16	)		2,076			263			64

Net income (loss)		(465	)		4,763			422			(169	)		39			(9,256	)		(513	)		(5,179	)

Net income (loss) attributable to:
Shareholders of Petrobras		(419	)		4,836			331			(169	)		39			(9,697	)		(513	)		(5,592	)
Non-controlling interests		(46	)		(73	)		91			—			—			441			—			413

Net income (loss)		(465	)		4,763			422			(169	)		39			(9,256	)		(513	)		(5,179	)

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

Consolidated Statement of Income by Business Area (*)


	Jan-Sep/2015
	Exploration and Production			Refining, Transportation & Marketing			Gas & Power			Biofuels			Distribution			Corporate			Eliminations			Total
Sales revenues		28,438			57,609			10,369			164			26,017			—			(47,430	)		75,167

Intersegments		27,320			17,902			1,620			153			435			—			(47,430	)		—
Third parties		1,118			39,707			8,749			11			25,582			—			—			75,167
Cost of sales		(19,682	)		(47,120	)		(8,373	)		(184	)		(24,073	)		—			47,107			(52,325	)

Gross profit (loss)		8,756			10,489			1,996			(20	)		1,944			—			(323	)		22,842
Income (expenses)		(2,894	)		(3,267	)		(1,092	)		(37	)		(1,602	)		(4,791	)		162			(13,521	)
Selling		(169	)		(1,519	)		(139	)		(2	)		(1,301	)		11			165			(2,954	)
General and administrative		(323	)		(312	)		(186	)		(23	)		(215	)		(1,562	)		(1	)		(2,622	)
Exploration costs		(1,435	)		—			—			—			—			—			—			(1,435	)
Research and development		(220	)		(91	)		(45	)		(8	)		—			(189	)		—			(553	)
Other taxes		(133	)		(624	)		(337	)		(1	)		(27	)		(1,291	)		—			(2,413	)
Impairment of assets		(110	)		(119	)		(190	)		—			—			—			—			(419	)
Other expenses, net		(504	)		(602	)		(195	)		(3	)		(59	)		(1,760	)		(2	)		(3,125	)

Net income / (loss) before financial results and income taxes		5,862			7,222			904			(57	)		342			(4,791	)		(161	)		9,321
Net finance income (expenses)		—			—			—			—			—			(7,158	)		—			(7,158	)
Share of earnings in equity-accounted investments		(104	)		329			98			(110	)		(5	)		(37	)		—			171

Net income / (loss) before income taxes		5,758			7,551			1,002			(167	)		337			(11,986	)		(161	)		2,334
Income taxes		(1,995	)		(2,456	)		(307	)		19			(116	)		2,924			54			(1,877	)

Net income (loss)		3,763			5,095			695			(148	)		221			(9,062	)		(107	)		457

Net income (loss) attributable to:
Shareholders of Petrobras		3,755			5,098			616			(148	)		221			(8,464	)		(107	)		971
Non-controlling interests		8			(3	)		79			—			—			(598	)		—			(514	)

Net income (loss)		3,763			5,095			695			(148	)		221			(9,062	)		(107	)		457

(*)	For comparative purposes, consolidated statement, for the period ended on September 30, 2015, is adjusted in accordance with note 4.2 of the consolidated financial statements as of December 31, 2015.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

Breakdown of the activities abroad


	Exploration and Production			Refining, Transportation &Marketing			Gas & Power		Distribution
Assets as of 09.30.2016		6,399			955			71		873
Statement of income—Jan-Sep/2016
Sales revenues		1,078			2,325			391		2,493

Intersegments		506			1,946			20		2
Third parties		572			379			371		2,491
Gross profit (loss)		353			57			61		265
Net income (loss) before financial results and income taxes		(80	)		(7	)		37		(19	)
Net income (loss) attributable to shareholders of Petrobras		(71	)		(7	)		67		(24	)


	Exploration and Production		Refining, Transportation &Marketing		Gas & Power		Distribution
Assets as of 12.31.2015		8,114		1,398		404		783
Statement of income—Jan-Sep/2015
Sales revenues		1,443		3,209		408		3,159

Intersegments		745		816		26		2
Third parties		698		2,393		382		3,157
Gross profit (loss)		491		216		70		290
Net income (loss) before financial results and income taxes		268		96		49		66
Net income (loss) attributable to shareholders of Petrobras		286		95		69		56

29.

Provisions for legal proceedings

29.1.

Provisions for legal proceedings, judicial deposits and contingent liabilities

The Company recognizes provisions based on the best estimate of the costs of proceedings for which it is probable that an outflow of resources embodying economic benefits will be required and that can be reliably estimated. These proceedings mainly include:

•

Labor claims, in particular: (i) a review of the methodology by which the minimum compensation based on an employee’s position and work schedule (Remuneração Mínima por Nível e Regime—RMNR) is calculated; (ii) lawsuits relating to overtime pay and (iii) individual actions of outsourced employees;

•

Tax claims including: (i)claims relating to Brazilian federal and state tax credits applied that were disallowed; (ii) demands relating to the VAT (ICMS) tax collection on jet fuel sales and (iii) alleged misappropriation of VAT (ICMS) tax credits on import of platforms.

•

Civil claims relating to: (i) losses and damages proceedings resulting from the cancellation of an assignment of excise tax (IPI) credits to a third party; (ii) royalties collection over the shale extraction; (iii) non-compliance with contractual terms relating to oil platform construction; (iv) reached and ongoing agreements to settle Opt-out Claims filed before the United States District Court for the Southern District of New York and (v) compensation relating to an easement over a property.

•

Environmental claims regarding fishermen seeking indemnification from the Company for a January 2000 oil spill in the State of Rio de Janeiro.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

Provisions for legal proceedings are set out as follows:


	09.30.2016		12.31.2015
Non-current liabilities
Labor claims		1,181		851
Tax claims		1,385		791
Civil claims		1,269		530
Environmental claims		60		72
Other claims		44		3

Total		3,939		2,247


	09.30.2016			12.31.2015
Opening Balance		2,247			1,540
Additions		1,117			1,490
Use of provision		(198	)		(272	)
Accruals and charges		284			100
Others		(36	)		(13	)
Cumulative translation adjustment		525			(598	)

Closing Balance		3,939			2,247

29.2.

Judicial deposits

Judicial deposits made in connection with legal proceedings are set out in the table below according to the nature of the corresponding lawsuits:


	09.30.2016		12.31.2015
Non-current assets
Tax		1,532		1,044
Civil		898		690
Labor		992		684
Environmental		107		78
Others		5		3

Total		3,534		2,499

29.3.

Contingent liabilities

Contingent liabilities for which either the Company is unable to make a reliable estimate of the expected financial effect that might result from resolution of the proceeding, or a cash outflow is not probable, are not recognized as liabilities in the financial statements but are disclosed in the notes to the financial statements, unless the likelihood of any outflow of resources embodying economic benefits is considered remote.

The estimated contingent liabilities for legal proceedings as of September 30, 2016, for which the possibility of loss is not considered remote are set out in the following table:


Nature
Tax			40,080
Labor			6,649
Civil—General			8,181
Civil—Environmental			2,132
Others			10

Total			57,052

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

A brief description of the nature of the main contingent liabilities (tax, civil, environmental and labor) is set out in the following table:


Description of tax matters	Estimate
Plaintiff: Secretariat of the Federal Revenue of Brazil
1) Withholding income tax (IRRF), Contribution of Intervention in the Economic Domain (CIDE), Social Integration Program (PIS) and Contribution to Social Security Financing (COFINS) on remittances for payments of vessel charters.
Current status: This claim involves lawsuits in different administrative and judicial stages.		10,563

2) Immediate deduction from the basis of calculation of taxable income (income tax—IRPJ and social contribution—CSLL) of crude oil production development costs in 2009, 2010 and 2011.
Current status: This claim involves lawsuits in administrative stages.		6,213

3) Requests to compensate federal taxes disallowed by the Brazilian Federal Tax Authority.
Current status: This claim involves lawsuits in different administrative and judicial stages.		2,949

4) Deduction from the basis of calculation of taxable income (income tax—IRPJ and social contribution—CSLL) of amounts payed to Petros Plan, as well as several expenses occurred in 2007 and 2008, related to employee benefits and Petros.
Current status: This claim involves lawsuits in different administrative and judicial stages.		2,321

5) Income from subsidiaries and associates located outside Brazil, from 2005 to 2010, not included in the basis of calculation of taxable income (IRPJ and CSLL).
Current status: Awaiting the hearing of an appeal at the administrative level.		2,132

6) Incidence of social security contributions over contingent bonuses paid to employees.
Current status: Awaiting the hearing of an appeal at the administrative level.		796

7) Collection of Contribution of Intervention in the Economic Domain (CIDE) from March 2002 to October 2003 on transactions with fuel retailers and service stations protected by judicial injunctions determining that fuel sales were made without gross-up of such tax.
Current status: This claim involves lawsuits in judicial stages.		649

Plaintiff: State of São Paulo Finance Department
8) Penalty for the absence of a tax document while relocating a rig to an exploratory block, and on the return of this vessel, as well as collection of the related VAT (ICMS), as a result of the temporary admission being unauthorized, because the customs clearance has been done in Rio de Janeiro instead of São Paulo.
Current status: This claim involves lawsuits in judicial stages.		1,680

9) Deferral of payment of VAT (ICMS) taxes on B100 Biodiesel sales and the charge of a 7% VAT rate on B100 on Biodiesel inter-state sales, including states in the Midwest, North and Northeast regions of Brazil and the State of Espírito Santo.
Current status: This claim involves lawsuits at administrative level.		814

Plaintiff: States of RJ and BA Finance Departments
10) VAT (ICMS) on dispatch of liquid natural gas (LNG) and C5+ (tax document not accepted by the tax authority), as well as challenges on the rights to this credit.
Current status: This claim involves lawsuits in different administrative and judicial stages.		1,327

Plaintiff: Municipal governments of the cities of Anchieta, Aracruz, Guarapari, Itapemirim, Marataízes, Linhares, Vila Velha and Vitória
11) Alleged failure to withhold and pay tax on services provided offshore (ISSQN) in favor of some municipalities in the State of Espírito Santo, under the allegation that the service was performed in their “respective coastal waters”.
Current status: This claim involves lawsuits in administrative and judicial stages.		1,116

Plaintiff: States of SP, RS and SC Finance Departments
12) Collection of VAT (ICMS) related to natural gas imports from Bolivia, alleging that these states were the final destination (consumers) of the imported gas.
Current status: This claim involves lawsuits in different administrative and judicial stages, as well as three civil lawsuits in the Federal Supreme Court.		820

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)


Plaintiff: States of RJ, RN, AL, AM, PA, BA, GO, MA and SP Finance Departments
13) Alleged failure to write-down VAT (ICMS) credits related to exemption or non-taxable sales made by the Company’s customers.
Current status: This claim involves lawsuits in different administrative and judicial stages.			734

Plaintiff: States of RJ, SP, PR, RO and MG Finance Departments
14) Additional VAT (ICMS) due to differences in rates on jet fuel sales to airlines in the domestic market.
Current status: This claim involves lawsuits in different administrative and judicial stages.			1,037

Plaintiff: States of PR, AM, BA, ES, PA, PE and PB Finance Departments
15) Incidence of VAT (ICMS) over alleged differences in the control of physical and fiscal inventories.
Current status: This claim involves lawsuits in different administrative and judicial levels.			542

Plaintiff: States of SP, CE, PB, RJ, BA and PA Finance Departments
16) VAT (ICMS) and VAT credits on internal consumption of bunker fuel and marine diesel, destined to chartered vessels.
Current status: This claim involves several tax notices from the states in different administrative and judicial stages.			453

Plaintiff: States of RJ, SP, SE and BA Finance Departments
17) Use of VAT (ICMS) credits on the purchase of drilling rig bits and chemical products used in formulating drilling fluid.
Current status: This claim involves lawsuits in different administrative and judicial stages.			405

Plaintiff: States of RJ, SP, ES and BA Finance Departments
18) Misappropriation of VAT tax credit (ICMS) on the acquisitions of goods that, per the tax authorities, are not related to property, plant and equipment.
Current status: This claim involves lawsuits in different administrative and judicial stages.			375

Plaintiff: States of MG, MT, GO, RJ, PA, CE, BA, PR, SE, AL AND RN Finance Departments
19) Misappropriation of VAT tax credit (ICMS) on the acquisitions of goods that, per the tax authorities, are not related to inventories.
Current status: This claim involves lawsuits in different administrative and judicial stages.			308

Plaintiff: State of Pernambuco Finance Department
20) Alleged incorrect application of VAT (ICMS) tax base with respect to interstate sales of natural gas transport through city-gates in the State of Pernambuco destined to the distributors in that State. The Finance Department of the State of Pernambuco understands that activity as being an industrial activity which could not be characterized as an interstate sale transaction (considering that the Company has facilities located in Pernambuco), and consequently charging the difference on the tax levied on the sale and transfer transactions.
Current status: This claim involves lawsuits in different administrative and judicial stages.			307

21) Other tax matters			4,539

Total for tax matters			40,080


Description of labor matters	Estimate
Plaintiff : Sindipetro of ES, RJ, BA, MG, SP, PE, SE, RN, CE, PR, SC and RS.
1) Class actions requiring a review of the methodology by which the minimum compensation based on an employee’s position and work schedule (Remuneração Mínima por Nível e Regime—RMNR) is calculated.
Current status: The Company filed its collective bargaining agreement with the Superior Labor Court and, on October 19, 2015, the Court ruled in favor of the Company and notified the Regional Labor Courts of its understanding of the matter.		4,196

Plaintiff : Sindipetro of Norte Fluminense – SINDIPETRO/NF
2) The plaintiff claims Petrobras failed to pay overtime for standby work exceeding 12-hours per day. It also demands that the Company respects a 12-hour limit per workday, subject to a daily fine.
Current status: Awaiting the Superior Labor Court to judge appeals filed by both parties.		363

Plaintiff : Sindipetro of ES, RJ, BA, MG, SP, PR, CE, SC,SE, PE and RS
3) Class Actions regarding wage underpayments to certain employees due to alleged changes in the methodology used to factor overtime into the calculation of paid weekly rest, allegedly computed based on ratios that are higher than those established by Law No. 605/49.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)


Current status: The Superior Labor Court (“Tribunal Superior do Trabalho—TST”) unified a favorable understanding to the Company’s opinion. There are TST decisions favorable to the plaintiffs on individual and collective proceedings judged before the mentioned unification. With respect to the claim filed by Sindipetro Norte Fluminense (NF): (i) the Company has filed an appeal in the TST to overturn a decision and is awaiting judgment; and (ii) The Regional Labor Court (“Tribunal Regional do Trabalho—TRT”) from the First Region issued an opinion favorable to the Company in its review appeal. The court stated that the enforceable title changed the factors used on the calculation of extra hour, increasing it and resulting in a considerable decrease in the estimated amount.			336

4) Other labor matters			1,754

Total for labor matters			6,649


Description of civil matters	Estimate
Plaintiff: Agência Nacional de Petróleo, Gás Natural e Biocombustíveis—ANP
1) Proceedings challenging an ANP order requiring Petrobras to unite Lula and Cernambi fields on the BM-S-11 joint venture; to unite Baúna and Piracicaba fields; to unite Tartaruga Verde and Mestiça fields; and to unite Baleia Anã, Baleia Azul, Baleia Franca, Cachalote, Caxaréu, Jubarte and Pirambu, in the Parque das Baleias complex, which would cause changes in the payment of special participation charges.
Current status: The claims are being disputed in court and in arbitration proceedings. As a result of judicial decisions, the arbitrations have been suspended. On the Lula and Cernanbi proceeding, for the alleged differences on the special participation, the Company made judicial deposits. However, with the cancellation of the favorable injunction, currently the payment of these alleged differences have been made directly to ANP, until a final judicial decision is handed down. On the Baúna and Piracicaba proceeding, Petrobras made court-ordered judicial deposits. On the Baleia Anã, Baleia Azul, Baleia Franca, Cachalote, Caxaréu, Jubarte and Pirambu, in the Parque das Baleias complex proceeding, as a result of a judicial decision and of a Chamber of Arbitration ruling, the collection of the alleged differences has been suspended. On the Tartaruga Verde and Mestiça proceeding, the arbitration is suspended by judicial decision and, so far, there has been no additional collection of special participation due to the unification.		1,796

2) Administrative proceedings challenging an ANP order requiring Petrobras to pay special participation fees and royalties (government take) with respect to several fields and alleged failure to comply with the minimum exploration activities program, as well as alleged irregularities related to compliance with the oil and gas industry regulation.
Current status: This claim involves lawsuits in different administrative and judicial stages.		1,651

Plaintiff: Several plaintiffs in Brazil and EIG Management Company in USA
3) Arbitration in Brazil and lawsuit in the USA regarding Sete Brasil.
Current status: The arbitrations in Brazil are at an early stage and a Chamber of Arbitration has not yet been established. The lawsuit filed by EIG and affiliates alleges that the Company committed fraud by inducing plaintiffs to invest in Sete Brasil Participações SA (“Sete”) through communications that failed to disclose the alleged corruption scheme. The Company has been allowed a period to present its initial position before the federal court in Washington, DC.		1,559

Plaintiff: Refinaria de Petróleo de Manguinhos S.A.
4) Lawsuit seeking to recover damages for alleged anti-competitive practices with respect to gasoline, diesel and LPG sales in the domestic market.
Current status: This claim is in the judicial stage and was ruled in favor of the plaintiff in the first stage. The Company is taking legal actions to ensure its rights. The Brazilian Antitrust regulator (CADE) has analyzed this claim and did not consider the Company’s practices to be anti-competitive.		564

Plaintiff: Vantage Deepwater Company e Vantage Deepwater Drilling Inc.
5) Arbitration in the United States for unilateral termination of the drilling service contract tied to ship-probe Titanium Explorer.
Current status: The arbitration panel has been established and the parties will discuss the schedule of the proceeding.		400

6) Other civil matters		2,211

Total for civil matters		8,181

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)


Description of environmental matters	Estimate
Plaintiff: Ministério Público Federal, Ministério Público Estadual do Paraná, AMAR—Associação de Defesa do Meio Ambiente de Araucária, IAP—Instituto Ambiental do Paraná and IBAMA—Instituto Brasileiro de Meio Ambiente e Recursos Naturais Renováveis.
1) Legal proceeding related to specific performance obligations, indemnification and compensation for damages related to an environmental accident that occurred in the State of Paraná on July 16, 2000.
Current status: The court partially ruled in favor of the plaintiff, however both parties (the plaintiff and the Company) filed an appeal.		835

Plaintiff: Instituto Brasileiro de Meio Ambiente—IBAMA and Ministério Público Federal
2) Administrative proceedings arising from environmental fines related to exploration and production operations (Upstream) contested because of disagreement over the interpretation and application of standards by IBAMA, as well as a public civil action filed by the Ministério Público Federal for alleged environmental damage due to the accidental sinking of P-36 Platform.
Current status: A number of defense trials and the administrative appeal regarding the fines are pending, and others are under judicial discussion. With respect to the civil action, the Company appealed the ruling that was unfavorable in the lower court and monitors the use of the procedure that will be judged by the Regional Federal Court.		382

3) Other environmental matters		915

Total for environmental matters		2,132

29.4.

Class action and related proceedings

Between December 8, 2014 and January 7, 2015, five putative securities class action complaints were filed against the Company in the United States District Court for the Southern District of New York (SDNY). These actions were consolidated on February 17, 2015 (the “Consolidated Securities Class Action”). The Court appointed a lead plaintiff, Universities Superannuation Scheme Limited (“USS”), on March 4, 2015. USS filed a consolidated amended complaint (“CAC”) on March 27, 2015 that purported to be on behalf of investors who:

a)	purchased or otherwise acquired Petrobras securities traded on the NYSE or pursuant to other transactions in the U.S. during the period January 22, 2010 and March 19, 2015, inclusive (the “Class Period”), and were damaged thereby;

b)	purchased or otherwise acquired during the Class Period certain notes issued in 2012 pursuant to a registration statement filed with the SEC filed in 2009 , or certain notes issued in 2013 or 2014 pursuant to a registration statement filed with the SEC in 2012 , and were damaged thereby; and

c)	purchased or otherwise acquired Petrobras securities on the Brazilian stock exchange during the Class Period, who also purchased or otherwise acquired Petrobras securities traded on the NYSE or pursuant to other transactions in the U.S. during the same period.

The CAC alleged, among other things, that in the Company’s press releases, filings with the SEC and other communications, the Company made materially false and misleading statements and omissions regarding the value of its assets, the amounts of the Company’s expenses and net income, the effectiveness of the Company’s internal controls over financial reporting, and the Company’s anti-corruption policies, due to alleged corruption purportedly in connection with certain contracts, which allegedly artificially inflated the market value of the Company’s securities.

On April 17, 2015, Petrobras, Petrobras Global Finance—PGF and the underwriters of notes issued by PGF (the “Underwriter Defendants”) filed a motion to dismiss the CAC.

On July 9, 2015, the judge presiding over the Consolidated Securities Class Action ruled on the motion to dismiss, partially granting the Company’s motion. Among other decisions, the judge dismissed claims relating to certain debt securities issued in 2012 under the Securities Act of 1933, as time barred by the Securities Act’s statute of repose and ruled claims relating to securities purchased on the Brazilian stock exchange must be arbitrated, as established in the Company’s bylaws. The judge rejected other arguments presented in the motion to dismiss the CAC and, as a result, the Consolidated Securities Class Action continued with respect to other claims.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

As allowed by the judge, a second consolidated amended complaint was filed on July 16, 2015, a third consolidated amended complaint was filed on September 1, 2015, among other things extending the Class Period through July 28, 2015 and adding Petrobras America, Inc. as a defendant, and a fourth consolidated amended complaint (“FAC”) was filed on November 30, 2015. The FAC, brought by lead plaintiff and three other plaintiffs – Union Asset Management Holding AG (“Union”), Employees’ Retirement System of the State of Hawaii (“Hawaii”), and North Carolina Department of State Treasurer (“North Carolina”) (collectively, “class plaintiffs”) – brings those claims alleged in the CAC that were not dismissed or were allowed to be re-pleaded under the judge’s July 9, 2015 ruling.

On October 1^st and December 7, 2015, Petrobras, PGF, Petrobras America, Inc. and the Underwriter Defendants filed a motion to dismiss the FAC.

On December 20, 2015, the judge ruled on the motion to dismiss the FAC, partially granting the motion. Among other decisions, the judge dismissed the claims of USS and Union based on their purchases of notes issued by PGF for failure to plead that they purchased the notes in U.S. transactions. The judge also dismissed claims under the Securities Act of 1933 for certain purchases for which class plaintiffs had failed to plead the element of reliance. The judge rejected other arguments presented in the motion to dismiss the FAC and, as a result, the Consolidated Securities Class Action continued with respect to the remaining claims.

On October 15, 2015, class plaintiffs filed a motion for class certification in the Consolidated Securities Class Action, and on November 6, 2015, Petrobras, PGF, Petrobras America, Inc. and the Underwriter Defendants opposed the motion. On February 2, 2016, the judge granted plaintiffs’ motion for class certification, certifying a Securities Act Class represented by Hawaii and North Carolina and an Exchange Act Class represented by USS. On June 15, 2016, the United States Court of Appeals for the Second Circuit (“Second Circuit”) granted Petrobras’s motion requesting interlocutory appellate review of the class certification decision. The parties completed briefing the appeal on September 8, 2016. Petrobras and the other defendants moved in district court for a stay of all district court proceedings pending the Second Circuit’s decision on the merits of the appeal of the class certification. While on June 24, 2016, the district judge denied the motion, on August 2, 2016, the Second Circuit granted Defendants’ motion before it to stay all district court proceedings pending a decision on the appeal of the class certification decision. Oral argument regarding the appeal was held before the Second Circuit on November 2, 2016.

On June 27, 2016, the parties filed motions for summary judgment. Further summary judgment briefing is stayed pursuant to the Second Circuit’s Order.

In addition to the Consolidated Securities Class Action, to date, 30 lawsuits (the “Opt-out Claims”) have been filed by individual investors before the same judge in the SDNY (three of which have been stayed), and one has been filed in the United States District Court for the Eastern District of Pennsylvania, consisting of allegations similar to those in the Consolidated Securities Class Action. On August 21, 2015, Petrobras, PGF and underwriters of notes issued by PGF filed a motion to dismiss certain of the Opt-out Claims, and on October 15, 2015, the judge ruled on the motion to dismiss, partially granting the motion. Among other decisions, the judge dismissed several Exchange Act, Securities Act and state law claims as barred by the relevant statutes of repose. The judge denied other portions of the motion to dismiss and, as a result, these actions continued with respect to other claims brought by these plaintiffs.

On October 31, 2015, the judge ordered that the Opt-out Claims before him in the SDNY and the Consolidated Securities Class Action shall be tried together in a single trial that will not exceed a total of eight weeks.

On November 5, 2015, the judge scheduled the trial to begin on September 19, 2016; however, the trial is now stayed due to the stay imposed by the Second Circuit decision on August 2, 2016. On November 18, 2015, the judge ordered that any Opt-out Claim filed after December 31, 2015 will be stayed in all respects until after the completion of the trial.

In October 2016, the Company reached agreements to settle Opt-out Claims in four cases: Dodge & Cox Int’l Stock Fund, et al. v. Petróleo Brasileiro S.A. – Petrobras, et al., No. 15-cv-10111 (JSR), Janus Overseas Fund, et al. v. Petróleo Brasileiro S.A. – Petrobras, et al., No. 15-cv-10086 (JSR),PIMCO Funds: PIMCO Total Return Fund, et al. v. Petróleo Brasileiro S.A. – Petrobras, et al., No. 15-cv-08192 (JSR) and Al Shams Investments Ltd., et al. v. Petroleo Brasileiro S.A. – Petrobras, et al., No. 15-cv-6243 (JSR). The terms of the settlements are confidential. The Company is also in settlement discussions with certain plaintiffs in other Opt-out Claims. Based on the settlements reached, and the status of certain other Opt-out Claims, the Company recognized a provision of US$364 at September 30, 2016.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

The Consolidated Securities Class Action and certain Opt-out Claims involve highly complex issues that are subject to substantial uncertainties and depend on a number of factors such as the novelty of the legal theories, the information produced in discovery, the timing of court decisions, discovery from adverse parties or third parties, rulings by the court on key issues, analysis by retained experts, and the possibility that the parties negotiate in good faith toward a resolution.

In addition, the claims asserted are broad, span a multi-year period and involve a wide range of activities, and the contentions of the plaintiffs in the Consolidated Securities Class Action and certain Opt-out Claims concerning the amount of alleged damages are varied and, at this stage, their impact on the course of the litigation is complex and uncertain. The uncertainties inherent in all such matters affect the amount and timing of the ultimate resolution of these actions. As a result, the Company is unable to make a reliable estimate of eventual loss arising from the Consolidated Securities Class Action and certain Opt-out Claims.

Depending on the outcome of the litigation, we may be required to pay substantial amounts, which could have a material adverse effect on the Company’s financial condition, its consolidated results of operations or its consolidated cash flows for an individual reporting period.

The Company has engaged a U.S. firm as legal counsel and intends to defend these actions vigorously.

30.

Collateral for crude oil exploration concession agreements

The Company has granted collateral to the Brazilian Agency of Petroleum, Natural Gas and Biofuels (Agência Nacional de Petróleo, Gás Natural e Biocombustíveis -ANP) in connection with the performance of the Minimum Exploration Programs established in the concession agreements for petroleum exploration areas in the total amount of US$ 2,435 of which US$ 977 were still in force as of September 30, 2016, net of commitments undertaken. The collateral comprises crude oil from previously identified producing fields, pledged as collateral, amounting to US$ 800 and bank guarantees of US$ 177.

31.

Risk management

The Company is exposed to a variety of risks arising from its operations, including price risk (related to crude oil and oil products prices), foreign exchange rates risk, interest rates risk, credit risk and liquidity risk. Corporate risk management is part of the Company’s commitment to act ethically and comply with the legal and regulatory requirements of the countries where it operates. To manage market and financial risks the Company preferably takes structuring measures through an adequate capital and leverage management. The Company takes account of risks in its business decisions and manages any such risk in an integrated manner in order to enjoy the benefits of diversification.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

A summary of the derivative financial instruments positions held by the Company and recognized in other current assets and liabilities as of September 30, 2016, as well as the amounts recognized in the statement of income and other comprehensive income and the guarantees given is set out as follows:


	Statement of Financial Position
	Notional value				Fair value Asset Position (Liability)				Maturity
	09.30.2016		12.31.2015		09.30.2016		12.31.2015
Derivatives not designated for hedge accounting
Future contracts—total (*)		(808)		(5,694)		(24)		38

Long position/Crude oil and oil products		91,027		53,735		—		—		2017
Short position/Crude oil and oil products		(91,835)		(59,429)		—		—		2017
Options—total (*)		(115)		123		(1)		10

Call/Crude oil and oil products		(70)		—		—		—		2017
Put/Crude oil and oil products		(45)		123		(1)		—		2017
Forward contracts—total						3		6.3

Long position/Foreign currency forwards (BRL/USD)(**)		US$ 144		US$ 217		2		6		2016
Short position/Foreign currency forwards (BRL/USD)(**)		US$ 49		US$ 50		1		0.3		2016
Derivatives designated for hedge accounting
Swap—total						(15)		(33)

Foreign currency / Cross-currency Swap (**)		US$ 0		US$ 298		—		(16)		2016
Interest – Libor / Fixed rate (**)		US$ 371		US$ 396		(15)		(17)		2019

Total recognized in the Statement of Financial Position						(37)		21.3

(*)	Notional value in thousands of bbl.

(**)	Amounts in US$ are presented in million.


	Gains/ (losses) recognized in the statement of income (*)						Gains/(losses) recognized in the Shareholders’ Equity (**)					Guarantees given as collateral
	Jan-Sep/2016			Jan-Sep/2015			Jan-Sep/2016		Jan-Sep/2015			09.30.2016		12.31.2015
Commodity derivatives		(30	)		135			—		—			74		9
Foreign currency derivatives		(50	)		21			6		4			—		—
Interest rate derivatives		(6	)		(6	)		—		(3	)		—		—

		(86	)		150			6		1			74		9
Cash flow hedge on exports (***)		(2,111	)		(1,304	)		13,183		(20,827	)		—		—

Total		(2,197	)		(1,154	)		13,189		(20,826	)		74		9

(*)	Amounts recognized in finance income in the period.

(**)	Amounts recognized as other comprehensive income in the period.

(***)

Using non-derivative financial instruments as designated hedging instruments, as set out in note 31.2.

A sensitivity analysis of the derivative financial instruments for the different types of market risks as of September 30, 2016 is set out following:

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)


Financial Instruments	Risk		Probable Scenario*			Stressed Scenario (D of 25%)			Stressed Scenario (D of 50%)
Derivatives not designated for hedge accounting
Future contracts		Crude oil and oil products—price changes		—			(94	)		(188	)
Forward contracts		Foreign currency—depreciation BRL x USD		—			(24	)		(48	)
Options		Crude oil and oil products—price changes		—			(1.8	)		(3.7	)

				—			(119.8	)		(239.7	)
Derivatives designated for hedge accounting
Swap				1			(2	)		(2	)
Debt		Interest—LIBOR increase		(1	)		2			2

Net effect				—			—			—

(*)

The probable scenario was computed based on the following risks: oil and oil products prices: fair value on September 30, 2016; R$ x U.S. Dollar—a 0.1% depreciation of the Real; Japanese Yen x U.S. Dollar—a 2.7% depreciation of the Japanese Yen/LIBOR Forward Curve—a 0.07% increase throughout the curve. Source: Focus and Bloomberg.

31.1.

Risk management of price risk (related to crude oil and oil products prices)

Petrobras does not regularly use derivative instruments to hedge exposures to commodity price cycles related to products purchased and sold to fulfill operational needs. Derivatives are used as hedging instruments to manage the price risk of certain short-term commercial transactions.

31.2.

Foreign exchange risk management

Petrobras seeks to identify and manage foreign exchange rate risks based on an integrated analysis of its businesses with the benefits of diversification. The Company’s short-term risk management involves choosing the currency in which to hold cash, such as the Brazilian Real, U.S. dollar or other currency. The foreign exchange risk management strategy may involve the use of derivative financial instruments to hedge certain liabilities, minimizing foreign exchange rate risk exposure.

a)	Cash Flow Hedge involving the Company’s future exports

The Company designates hedging relationships to account for the effects of the existing hedge between a portion of its long-term debt obligations (denominated in U.S. dollars) and its highly probable U.S. dollar denominated future export revenues, so that gains or losses associated with the hedged transaction (the highly probable future exports) and the hedging instrument (debt obligations) are recognized in the statement of income in the same periods.

A portion of principal amounts and accrued interest (non-derivative financial instruments), as well as foreign exchange rate forward contracts (derivative financial instruments) have been designated as hedging instruments. Derivative financial instruments expired during the year were replaced by principal and interest amounts in the hedging relationships for which they had been designated.

Individual hedging relationships were designated in a one-to-one proportion, meaning that a portion of the highly probable future exports for each month will be the hedged transaction of an individual hedging relationship, hedged by a portion of the company’s long-term debt. Only a portion of the Company’s forecast exports are considered highly probable.

Whenever a portion of future exports for a certain period for which a hedging relationship has been designated is no longer highly probable, the Company revokes the designation and the cumulative foreign exchange gains or losses that have been recognized in other comprehensive income remain separately in equity until the forecast exports occur.

If a portion of future exports for which a hedging relationship has been designated is no longer expected to occur, any related cumulative foreign exchange gains or losses that have been recognized in other comprehensive income from the date the hedging relationship was designated to the date the Company revoked the designation is immediately recycled from equity to the statement of income.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

Mainly due to the decrease in international oil prices, a portion of future exports for which a hedging relationship had been designated was no longer expected to occur or did not occur in the nine-month period ended September 30, 2016. Therefore, hedging relationship was revoked and a portion was reclassified to the statement of income in the amount of US$ 271 in the nine-month period ended September 30, 2016.

The carrying amounts, the fair value as of September 30, 2016, and a schedule of expected reclassifications to the statement of income of cumulative losses recognized in other comprehensive income (shareholders’ equity) based on a US$ 1.00 / R$ 3.2462 exchange rate are set out below:

Hedging Instrument

Hedged Transactions

Nature of the Risk

Maturity Date

Principal
Amount
(US$
million)

Carrying
amount as of
September 30,
2016 (R$
million)

Non-derivative financial instruments (debt: principal and interest)

Portion of highly probable

future monthly exports revenues

Foreign Currency

– Real vs U.S. Dollar

Spot Rate

October 2016 to March 2027

59,132

191,954


Changes in the reference value (principal and interest)	US$			R$ million
Amounts designated as of December 31, 2015		61,520			240,222

Additional hedging relationships designated, designations revoked and hedging instruments re-designated		7,945			28,636
Exports affecting the statement of income		(2,150	)		(7,548	)
Principal repayments / amortization		(8,183	)		(28,062	)
Foreign exchange variation		—			(41,294	)

Amounts designated as of September 30, 2016		59,132			191,954

The ratio of highly probable future exports to debt instruments for which a hedging relationship has been designated in future periods is set out below:


	2016		2017		2018		2019		2020		2021		2022		2023		2024 to 2027		Average
Hedging instruments designated / Highly probable future exports (%)		38		42		85		93		84		85		80		73		80		78

A roll-forward schedule of cumulative foreign exchange losses recognized in other comprehensive income as of September 30, 2016 is set out below:


	Exchange rate			Tax effect			Total
Balance at December 31, 2015		(30,739	)		10,451			(20,288	)
Recognized in shareholders’ equity		11,072			(3,764	)		7,308
Reclassified to the statement of income—occurred exports		1,840			(626	)		1,214
Reclassified to the statement of income—exports no longer expected or not occurred		271			(93	)		178

Balance at September 30, 2016		(17,556	)		5,968			(11,588	)

Additional hedging relationships may be revoked or additional reclassification adjustments from equity to the statement of income may occur as a result of changes in forecast export prices and export volumes following a review in the Company’s business plan. Based on a sensitivity analysis considering a US$ 10/barrel decrease in Brent prices stress scenario, when compared to the Brent price projections in our most recent update of the 2017-2021 Business and Management Plan (Plano de Negócios e Gestão –PNG), a US$ 5 reclassification adjustment from equity to the statement of income would occur.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

A schedule of expected reclassification of cumulative foreign exchange losses recognized in other comprehensive income to the statement of income as of September 30, 2016 is set out below:


	2016			2017			2018			2019			2020			2021			2022			2023			2024 to 2027		Total
Expected realization		(1,035	)		(4,493	)		(4,666	)		(3,195	)		(2,344	)		(1,966	)		(2,257	)		(1,064	)		3,464		(17,556	)

b)	Cash flow hedges involving swap contracts – Yen x Dollar

The Company had cross currency swap to fix in U.S. dollars the payments related to bonds denominated in Japanese yen, which matured on September 23, 2016.The relationship between the derivative and the bonds was designated for cash flow hedge accounting.

c)	Sensitivity analysis for foreign exchange risk on financial instruments

A sensitivity analysis is set out below, showing the probable scenario for foreign exchange risk on financial instruments, computed based on external data along with stressed scenarios (a 25% and a 50% change in the foreign exchange rates), except for assets and liabilities of foreign subsidiaries, when transacted in a currency equivalent to their respective functional currencies.


Financial Instruments	Exposure at 09.30.2016			Risk		Probable Scenario (*)			Stressed Scenario (D of 25%)			Stressed Scenario (D of 50%)
Assets		3,734			Dollar/Real		4			933			1,867
Liabilities		(63,055	)				(74	)		(15,764	)		(31,527	)
Cash flow hedge on exports		59,132					69			14,783			29,566

		(189	)				(1	)		(48	)		(94	)
Liabilities		(263	)		Yen/Dollar		7			(66	)		(132	)

		(263	)				7			(66	)		(132	)
Assets		9			Euro/Real		—			2			5
Liabilities		(53	)				1			(13	)		(26	)

		(44	)				1			(11	)		(21	)
Assets		7,093			Euro/Dollar		(151	)		1,773			3,547
Liabilities		(14,092	)				300			(3,523	)		(7,046	)

		(6,999	)				149			(1,750	)		(3,499	)
Assets		3			Pound Sterling/Real		—			1			2
Liabilities		(21	)				—			(5	)		(11	)

		(18	)				—			(4	)		(9	)
Assets		2,407			Pound Sterling/Dollar		(40	)		602			1,204
Liabilities		(4,752	)				79			(1,188	)		(2,376	)

		(2,345	)				39			(586	)		(1,172	)

Total		(9,858	)				195			(2,465	)		(4,927	)

(*) On September 30, 2016, the probable scenario was computed based on the following risks: R$ x U.S. Dollar—a 0.1% depreciation of the Real/ Japanese Yen x U.S. Dollar—a 2.7% depreciation of the Japanese Yen/ Euro x U.S. Dollar: an 2.1% depreciation of the Euro / Pound Sterling x U.S. Dollar: a 1.7% depreciation of the Pound Sterling/ Real x Euro—a 2% appreciation of the Real / Real x Pound Sterling— 1.5% appreciation of the Real. Source: Focus and Bloomberg.

31.3.

Interest rate risk management

The Company considers that interest rate risk does not create a significant exposure and therefore, preferably does not use derivative financial instruments to manage interest rate risk, except for specific situations encountered by certain subsidiaries of Petrobras.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

31.4.

Credit risk

Credit risk management in Petrobras aims at minimizing risk of not collecting receivables, financial deposits or collateral from third parties or financial institutions through efficient credit analysis, granting and management based on quantitative and qualitative parameters that are appropriate for each market segment in which the Company operates.

The commercial credit portfolio is broad and diversified and comprises clients from the domestic market and from foreign markets. Credit granted to financial institutions is related to collaterals received, cash surplus invested and derivative financial instruments. It is spread among “investment grade” international banks rated by international rating agencies and Brazilian banks.

31.5.

Liquidity risk

Liquidity risk is represented by the possibility of a shortage of cash or other financial assets in order to settle the Company’s obligations on the agreed dates and is managed by the Company based on policies such as: centralized cash management, optimization of the level of cash and cash equivalents held and reduction of the working capital; maintaining an adequate cash balance to ensure that cash needed for investments and short-term obligations is met even in adverse market conditions; increase in funding sources from domestic and international markets, developing a strong presence in the capital markets and also searching for new funding sources (such as new markets and financial products), as well as funds under the venture and divestment program.

Until the end of the third quarter of 2016, the Company used traditional funding sources (export credit agencies – ECAs, banking market, capital markets and development banks) to obtain the necessary funding to repay debt and fund its capital expenditures. The Company raised approximately US$ 11.3 billion through proceeds from long-term financing (mainly from the international capital markets), of which US$ 9.3 billion were used to repurchase global notes previously issued.

A term sheet signed in first quarter of 2016 with the China Development Bank CDB to obtain US$ 10 billion through financing agreements is still being negotiated.

A maturity schedule of the Company’s finance debt (undiscounted), including face value and interest payments is set out following:


Maturity	2016		2017		2018		2019		2020		2021 and thereafter		Balance at September 30, 2016		Balance at December 31, 2015
Principal		3,664		7,862		13,514		21,370		16,599		60,701		123,710		127,354
Interest		2,098		7,130		6,756		5,884		4,533		34,926		61,326		59,038

Total		5,762		14,992		20,270		27,254		21,132		95,627		185,036		186,392

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

32.

Fair value of financial assets and liabilities

Fair values are determined based on market prices, when available, or, in the absence thereof, on the present value of expected future cash flows.

The hierarchy of the fair values of the financial assets and liabilities, recorded on a recurring basis, is set out below:

-	Level 1: inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.

-	Level 2: inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

-	Level 3: inputs are unobservable inputs for the asset or liability.


	Fair value measured based on
	Level I			Level II			Level III		Total fair value recorded
Assets
Marketable securities		785			—			—		785
Foreign currency derivatives		—			3			—		3

Balance at September 30, 2016		785			3			—		788

Balance at December 31, 2015		833			6.3			—		839.3

Liabilities
Commodity derivatives		(25	)		—			—		(25	)
Interest derivatives		—			(15	)		—		(15	)

Balance at September 30, 2016		(25	)		(15	)		—		(40	)

Balance at December 31, 2015		—			(33	)		—		(33	)

There are no material transfers between levels.

The estimated fair value for the Company’s long term debt as of September 30, 2016, computed based on the prevailing market rates is set out in note 16.1.

The fair values of cash and cash equivalents, short-term debt and other financial assets and liabilities are equivalent or do not differ significantly from their carrying amounts.

33.

Subsequent events

Voluntary Separation Incentive Plan (PIDV) – PIDV BR 2016

On October 11, 2016, the Company’s wholly-owned subsidiary Petrobras Distribuidora S.A. launched a new voluntary separation incentive plan (PIDV BR 2016) in order to adjust the size of its workforce taking into account the divestment program and also the 2017-2021Business and Management Plan goals, also considering the expectation of the employees, safeguard of knowledge and the ability to continue as a going concern.

Irrespective of position or eligibility to retire under the Brazilian Social Security National Institute rules, the PIDV BR 2016 will be open from November 1^st, 2016 to December 31, 2016 for all employees of at least ten years in this subsidiary workforce by December 30, 2016. It is expected 499 employee enrollments in this program and its implementation will costs approximately US$ 64 due to this expectation.

Petróleo Brasileiro S.A. – Petrobras

Notes to the financial statements

(Expressed in millions of US Dollars, unless otherwise indicated)

New diesel and gasoline pricing policy

On October 14, 2016, the board of executive officers of the Company approved the implementation of a new pricing policy for diesel and gasoline commercialized in its refineries. This pricing policy considers the following principles: the alignment with international prices (Import Parity Price—IPP), a margin reflecting the risks related to the operations, and also related taxes.

This policy foresees prices reviews, at least once a month, following international prices trends. Accordingly, refinery gate prices may increase, decrease or even be maintained.

Disposal of Nansei Seikyu (NSS)

On October 17, 2016 the Company’s Board of Directors approved the disposal of the Company’s interest in Nansei Seikyu (NSS) to Taiyo Oil Company in the amount of US$ 129.3. This amount will be totally disbursed pursuant to the transaction closing expected to occur in December 2016.

Share Capital increase in NTS

The Extraordinary General Meeting of NTS, held on October 21, 2016, approved the proposal of its share capital increase in the amount of US$ 711, based on independent expert report dated on October 14, 2016, through net assets of the Company’s subsidiary TAG. This capital increase approval depended on ANP permission through the issuance of Permissions of Provisional Operation (Autorizações de Operação Provisórias), as occurred on October 24, 2016.

Share capital reduction in TAG

The Extraordinary General Meeting of the TAG, held on October 21, 2016, approved its share capital reduction, via capital surplus, in the amount of its investment in NTS (US$ 800) and transfer of all its interest in NTS to Petrobras, as occurred on October 24, 2016 pursuant to Permissions of Provisional Operation (Autorizações de Operação Provisórias) issued by ANP.

Funding through banking market (Banco Santander Brasil S.A.)

On October 28, 2016, the wholly-owned subsidiary Petrobras Global Trading B.V. – PGT raised funds through an unsecured loan with Banco Santander (Brasil) S.A. in the amount of US$ 1.2 billion and maturing in 2023.

The proceeds will be used to pay an existing debt, maturing in 2017 and amounting to US$ 800, with this financial institution. The remaining amount has already been used to prepay other bank debts.

34.

Information Related to Guaranteed Securities Issued by Subsidiaries

34.1.

Petrobras Global Finance B.V. (PGF)

Petróleo Brasileiro S.A.—Petrobras fully and unconditionally guarantees the debt securities issued by Petrobras Global Finance B.V. (PGF), a 100-percent-owned finance subsidiary of Petrobras. There are no significant restrictions on the ability of Petrobras to obtain funds from PGF.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 14, 2016


PETRÓLEO BRASILEIRO S.A—PETROBRAS

By:		/s/ Ivan de Souza Monteiro
		Name: Ivan de Souza Monteiro Title: Chief Financial Officer and Investor Relations Officer

LOGO

Securities and Exchange Commission

100 F Street, N.E.

Washington, DC 20549

November 10, 2016

Commissioners:

We are aware that our report dated November 10, 2016 on our review of interim financial information of Petróleo Brasileiro S.A. – Petrobras, for the nine month periods ended September 30, 2016 and 2015, included in the Company’s quarterly report on Form 6-K for the quarter ended September 30, 2016 and 2015, is incorporated by reference in the Registration Statement on Form F-3 (No. 333-206660) of the Company, dated August 28, 2015.

/s/

PricewaterhouseCoopers

Auditores Independentes

Rio de Janeiro – Brazil

(DC2) Uso Restrito na PwC– Confidencial