Clarification on Estimated Returns on Petrobras Projects

Instant Max AI

(Petrobras, 9.May.2016) – Petrobras said it periodically analyzes the economic performance of its projects. The results are consolidated in a corporate document entitled Post-EVTE Study (Post Economic and Technical Feasibility Study), which details the integrated economic impact of the company’s projects, using well-defined assumptions and methodological guidelines.

This process aims to assess the economic effectiveness of the project portfolio, assessing and improving the estimates for time and costs by measuring their variances, which contributes to capital discipline while identifying and organizing lessons learned.

The Post-EVTE assessment tool aims to continuously improve the project management process and has contributed to:

— improving of the Corporate Investment Project Systematics, a document establishing the rules governing project planning, approval, monitoring and reassessment, incorporating best management practices;

— adopting sensitivity analyses and scenarios to assess the robustness of the projects under less favorable conditions;

— improving cost and deadline contingencies.

Any significant variances in the manageable variables do not necessarily mean that project planning is overly optimistic, since these variables are influenced by external factors, such as the capacity of the supply chain to meet deadlines, quality and expected costs with regard to the required domestic content, the training of the available manpower, and the greater complexity of the environments in which the projects are carried out, among others.

It is worth noting that the 2014 World Economic Forum (WEF) addressed the complexities of investment in the Exploration & Production segment worldwide and found the following factors were seen from a sample of 100 projects implemented by 35 companies in 28 countries:

— 82 percent of the projects went over budget, with an average variance of 52 percent;

— 56 percent went over deadlines, with an average delay of 39.5 percent.

Also, regarding possible variation in project investment, Petrobras adopts the criteria issued by the American National Standards Institute – ANSI Standard Z94.0 and the Association for the Advancement of Cost Engineering – AACE International Recommended Practice in the basic project approval phase, in which errors in the estimates typically vary between -5 percent and +15 percent after applying contingencies.

It should be noted the same Post-EVTE study indicated an overall 135 percent increase in the Net Present Value (NPV) of the project analyzed, or $36.9 billion (from $ 27.2 billion to $ 64.1 billion) considering all the variation factors, showing that the added value was higher than expected when the projects were approved.

Petrobras has faced complexities relating to the implementation of oil and gas projects, and is always looking to improve the project management while acting with social and environmental responsibility and with capital discipline.

Finally, it is worth clarifying that economic performance analysis of the company’s projects is a normal part of the management activity.

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